ITEM 1. INTERIM FINANCIAL STATEMENTS
CHINA HGS REAL ESTATE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
June 30
|
|
|
September 30
|
|
|
|
2016
|
|
|
2015
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
2,085,365
|
|
|
$
|
1,333,919
|
|
Restricted cash
|
|
|
1,498,730
|
|
|
|
1,715,268
|
|
Cost and earnings in excess of billings
|
|
|
10,647,842
|
|
|
|
11,825,036
|
|
Real estate property development completed
|
|
|
65,629,882
|
|
|
|
75,391,512
|
|
Real estate property under development
|
|
|
48,766,106
|
|
|
|
55,154,153
|
|
Other current assets
|
|
|
5,509,313
|
|
|
|
228,223
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
134,137,238
|
|
|
|
145,648,111
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
695,857
|
|
|
|
780,038
|
|
Real estate property development completed, net of current portion
|
|
|
1,896,673
|
|
|
|
2,140,271
|
|
Security deposits for land use right
|
|
|
2,932,377
|
|
|
|
3,146,237
|
|
Real estate property under development, net of current portion
|
|
|
182,557,600
|
|
|
|
143,660,781
|
|
Due from local government for real estate property development completed
|
|
|
3,010,099
|
|
|
|
3,065,000
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
325,229,844
|
|
|
$
|
298,440,438
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Bank loan
|
|
$
|
-
|
|
|
$
|
6,292,474
|
|
Other loans
|
|
|
6,149,632
|
|
|
|
5,674,239
|
|
Accounts payable
|
|
|
24,877,120
|
|
|
|
41,501,682
|
|
Other payables
|
|
|
9,810,636
|
|
|
|
12,676,362
|
|
Construction deposits
|
|
|
896,572
|
|
|
|
1,959,706
|
|
Billings in excess of cost and earnings
|
|
|
1,680,886
|
|
|
|
3,315,302
|
|
Customer deposits
|
|
|
19,508,249
|
|
|
|
17,387,969
|
|
Shareholder loan
|
|
|
1,810,000
|
|
|
|
1,810,000
|
|
Accrued expenses
|
|
|
3,440,961
|
|
|
|
4,855,891
|
|
Taxes payable
|
|
|
15,448,779
|
|
|
|
15,830,886
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
83,622,835
|
|
|
|
111,304,511
|
|
Deferred tax liabilities
|
|
|
4,882,100
|
|
|
|
4,711,161
|
|
Customer deposits, net of current portion
|
|
|
10,149,810
|
|
|
|
8,246,004
|
|
Other loans, less current portion
|
|
|
70,212,895
|
|
|
|
15,731,186
|
|
Construction deposits, net of current portion
|
|
|
700,921
|
|
|
|
972,432
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
169,568,561
|
|
|
|
140,965,294
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Common stock, $01 par value, 100,000,000 shares
|
|
|
|
|
|
|
|
|
authorized, 45,050,000 shares issued and outstanding
|
|
|
|
|
|
|
|
|
June 30, 2016 and September 30, 2015
|
|
|
45,050
|
|
|
|
45,050
|
|
Additional paid-in capital
|
|
|
17,809,016
|
|
|
|
17,764,316
|
|
Statutory surplus
|
|
|
16,439,333
|
|
|
|
16,439,333
|
|
Retained earnings
|
|
|
124,839,624
|
|
|
|
119,668,198
|
|
Accumulated other comprehensive income
|
|
|
(3,471,740
|
)
|
|
|
3,558,247
|
|
Total stockholders' equity
|
|
|
155,661,283
|
|
|
|
157,475,144
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
325,229,844
|
|
|
$
|
298,440,438
|
|
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
CHINA HGS REAL ESTATE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
INCOME AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
|
|
Three months ended June 30,
|
|
|
Nine months ended 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate sales
|
|
$
|
12,497,413
|
|
|
$
|
26,014,516
|
|
|
$
|
25,205,879
|
|
|
$
|
60,138,945
|
|
Less: Sales tax
|
|
|
(847,938
|
)
|
|
|
(1,655,046
|
)
|
|
|
(1,741,251
|
)
|
|
|
(3,892,435
|
)
|
Cost of real estate sales
|
|
|
(8,183,462
|
)
|
|
|
(9,347,052
|
)
|
|
|
(15,520,371
|
)
|
|
|
(27,702,998
|
)
|
Gross profit
|
|
|
3,466,013
|
|
|
|
15,012,418
|
|
|
|
7,944,257
|
|
|
|
28,543,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and distribution expenses
|
|
|
71,959
|
|
|
|
211,558
|
|
|
|
288,138
|
|
|
|
804,700
|
|
General and administrative expenses
|
|
|
609,428
|
|
|
|
427,363
|
|
|
|
1,668,790
|
|
|
|
1,636,889
|
|
Total operating expenses
|
|
|
681,387
|
|
|
|
638,921
|
|
|
|
1,956,928
|
|
|
|
2,441,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
2,784,626
|
|
|
|
14,373,497
|
|
|
|
5,987,329
|
|
|
|
26,101,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(29,917
|
)
|
|
|
(22,540
|
)
|
|
|
(203,057
|
)
|
|
|
(54,300
|
)
|
Income before income taxes
|
|
|
2,754,709
|
|
|
|
14,350,957
|
|
|
|
5,784,272
|
|
|
|
26,047,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
310,548
|
|
|
|
641,368
|
|
|
|
612,846
|
|
|
|
1,441,943
|
|
Net income
|
|
|
2,444,161
|
|
|
|
13,709,589
|
|
|
|
5,171,426
|
|
|
|
24,605,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(4,745,409
|
)
|
|
|
306,940
|
|
|
|
(7,029,987
|
)
|
|
|
1,086,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
(2,301,248
|
)
|
|
$
|
14,016,529
|
|
|
$
|
(1,858,561
|
)
|
|
$
|
25,692,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.05
|
|
|
|
$
0. 30
|
|
|
$
|
0.11
|
|
|
$
|
0.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
45,050,000
|
|
|
|
45,050,000
|
|
|
|
45,050,000
|
|
|
|
45,050,000
|
|
Diluted
|
|
|
45,050,000
|
|
|
|
45,075,821
|
|
|
|
45,050,000
|
|
|
|
45,089,819
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
CHINA HGS REAL ESTATE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(Unaudited)
|
|
Nine months ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,171,426
|
|
|
$
|
24,605,680
|
|
Adjustments to reconcile net income to net cash providing by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Deferred tax provision
|
|
|
383,850
|
|
|
|
1,369,997
|
|
Stock based compensation
|
|
|
44,700
|
|
|
|
-
|
|
Depreciation
|
|
|
59,658
|
|
|
|
63,137
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Due from local government for real estate property development completed
|
|
|
-
|
|
|
|
815,661
|
|
Cost and earnings in excess of billings
|
|
|
681,609
|
|
|
|
942,175
|
|
Real estate property development completed
|
|
|
6,811,151
|
|
|
|
1,915,343
|
|
Real estate property under development
|
|
|
(42,105,175
|
)
|
|
|
6,547,520
|
|
Other current assets
|
|
|
(5,418,847
|
)
|
|
|
955,405
|
|
Accounts payables
|
|
|
(15,187,183
|
)
|
|
|
(25,674,976
|
)
|
Other payables
|
|
|
(2,373,223
|
)
|
|
|
886,212
|
|
Billings in excess of cost and earnings
|
|
|
(1,526,997
|
)
|
|
|
4,786,440
|
|
Customer deposits
|
|
|
5,257,341
|
|
|
|
(7,585,864
|
)
|
Construction deposits
|
|
|
(1,236,962
|
)
|
|
|
12,902
|
|
Accrued expenses
|
|
|
(1,248,883
|
)
|
|
|
1,126,826
|
|
Taxes payable
|
|
|
310,218
|
|
|
|
2,471,784
|
|
Net cash (used in) providing by operating activities
|
|
|
(50,377,317
|
)
|
|
|
13,238,242
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase of fixed assets
|
|
|
(8,010
|
)
|
|
|
-
|
|
Net cash used in investing activities
|
|
|
(8,010
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
145,758
|
|
|
|
(181,039
|
)
|
Proceeds from shareholder loan
|
|
|
840,077
|
|
|
|
10,500,816
|
|
Repayment of shareholder loan
|
|
|
(840,077
|
)
|
|
|
(12,084,829
|
)
|
Repayment of bank loans
|
|
|
(6,165,703
|
)
|
|
|
(6,525,285
|
)
|
Proceeds from other loans
|
|
|
62,793,918
|
|
|
|
9,787,928
|
|
Repayment of other loans
|
|
|
(5,559,922
|
)
|
|
|
(12,094,617
|
)
|
Net cash provided by (used in) financing activities
|
|
|
51,214,051
|
|
|
|
(10,597,026
|
)
|
|
|
|
|
|
|
|
|
|
Effect of changes of foreign exchange rate on cash
|
|
|
(77,278
|
)
|
|
|
17,623
|
|
Net increase in cash
|
|
|
751,446
|
|
|
|
2,658,839
|
|
Cash, beginning of period
|
|
|
1,333,919
|
|
|
|
1,125,545
|
|
Cash, end of period
|
|
$
|
2,085,365
|
|
|
$
|
3,784,384
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
2,843,145
|
|
|
$
|
1,355,741
|
|
Income taxes paid
|
|
$
|
369,885
|
|
|
$
|
102,337
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
China HGS Real Estate, Inc. (“China
HGS” or the “Company” or “we”, “us”, “our”), through its subsidiaries and
variable interest entity (“VIE”), engages in real estate development, and the construction and sales of residential
apartments, parking space and commercial properties in Tier 3 and Tier 4 cities and counties in China.
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with the U.S. generally accepted accounting principles (“GAAP”)
for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only
of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three
and nine months ended June 30, 2016 and 2015 are not necessarily indicative of the results that may be expected for the full year.
The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial
Condition and Results of Operations and the financial statements and notes thereto included in the Company’s Annual Report
on Form 10-K for the fiscal year ended September 30, 2015 filed with the SEC on December 18, 2015.
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Principles of consolidation
The unaudited condensed consolidated financial
statements include the financial statements of China HGS Real Estate Inc. (the “Company” or “China HGS”),
China HGS Investment Inc. (“HGS Investment”), Shaanxi HGS Management and Consulting Co., Ltd. (“Shaanxi HGS”)
and its variable interest entity (“VIE”), Shaanxi Guangsha Investment and Development Group Co., Ltd. (“Guangsha”).
All inter-company transactions and balances between the Company and its subsidiaries have been eliminated upon consolidation.
Use of estimates
The preparation of financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes, and disclosure of contingent liabilities at the date of the consolidated
financial statements. Estimates are used for, but not limited to, the assumptions and estimates used by management in recognizing
development revenue under the percentage of completion method, the selection of the useful lives of property and equipment, provision
necessary for contingent liabilities, revenue recognition, taxes, budgeted costs, share-based compensation and other similar charges.
Management believes that the estimates utilized in preparing its consolidated financial statements are reasonable and prudent.
Actual results could differ from these estimates.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
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
condensed consolidated balance sheets for cash, restricted cash and all other current assets, security deposits for land use rights,
loans and all current liabilities approximate their fair value based on the short-term maturity of these instruments. The fair
value of the long term customer, construction and security deposits approximate their carrying amounts because the deposits are
received in cash. It was impractical to estimate the fair value of the amount due from the local government and the long term other
loans payable.
Revenue recognition
Percentage of Completion method
Real estate sales for the long term real
estate projects are recognized under percentage completion method in accordance with the provisions of ASC 360-20-40D “Sale
of Condominium Units”. Revenue and profit from the sales of long term development properties is recognized under 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.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Revenue recognition - continued
Percentage of Completion method
Under the percentage of completion method,
revenues from condominium units sold and related costs are recognized over the course of the construction period, based on the
completion progress of a project. 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.
Full accrual method
Revenue from the sales of short term development
properties, where the construction period is expected to be 18 months or less is recognized by the full accrual method at the time
of the closing of an individual unit sale. This occurs when title to or possession of the property is transferred to the buyer.
A sale is not considered consummated until (a) the parties are bound by the terms of a contract, (b) all consideration
has been exchanged, (c) any permanent financing for which the seller is responsible has been arranged, (d) all conditions
precedent to closing have been performed, (e) the seller does not have substantial continuing involvement with the property,
and (f) the usual risks and rewards of ownership have been transferred to the buyer. Further, the buyer’s initial and
continuing investment is adequate to demonstrate a commitment to pay for the property.
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 receives 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.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition - continued
Full accrual method
For municipal road construction projects,
fees are generally recognized under the full accrual method at the time the projects are completed.
Foreign currency translation
The Company’s financial information
is presented in U.S. dollars. The functional currency of the Company’s operating subsidiaries is Renminbi (“RMB”),
the currency of the PRC. The financial statements of the Company have been translated into U.S. dollars in accordance with ASC
830-30 “Translation of Financial Statements”. The financial information is first prepared in RMB and then is translated
into U.S. dollars at year-end exchange rates as to assets and liabilities and average exchange rates as to revenue and expenses.
Stockholders’ equity accounts are translated at their historical exchange rates when the capital transactions occurred. The
effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income in stockholders’
equity.
|
|
For nine months
ended June 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
Period end RMB : USD exchange rate
|
|
|
6.6443
|
|
|
|
6.1088
|
|
|
|
6.3568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months average RMB : USD exchange rate
|
|
|
6.4875
|
|
|
|
6.1300
|
|
|
|
6.1653
|
|
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 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. The Company maintains bank accounts in the PRC. Cash balances in bank accounts in
PRC are not insured by the Federal Deposit Insurance Corporation or other programs.
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 risks.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
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 deposits
held by the PRC government for the purchase of land use rights and other 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 transfer 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.
Real estate property development completed
and real estate property under development are reclassified on the balance sheet into current and non-current portions based on
the estimated date of construction completion and sales. The real estate property development completed classification is based
on the estimated date that each property is expected to be sold within the Company’s normal operating cycle of the business
and the Company’s sales plan. Real estate property development completed is classified as a current asset if the property
is expected to be sold within the normal operating cycle of the business. Otherwise, it is classified as a non-current asset. Real
estate property under development is classified as a current asset, if the property is reasonably expected to be completed within
the Company’s normal operating cycle of the business. Otherwise, it is classified as a non-current asset. The majority of
real estate projects the Company has completed in the past were multi-layer or sub-high-rise real estate projects. The Company
considers its normal operating cycle is 12 months.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Real estate property development completed
and under development (continued)
In accordance with ASC 360, “Property,
Plant and Equipment” (“ASC 360”), real estate property development completed and under development are subject
to valuation adjustments when the carrying amount exceeds fair value. An impairment loss is recognized only if the carrying amount
of the assets is not recoverable and exceeds fair value. The carrying amount is not recoverable if it exceeds the sum of the undiscounted
cash flows expected to be generated by the assets. The Company reviewed all of its real estate projects for future losses and impairment
by comparing the estimated future undiscounted cash flows for each project to the carrying value of such project. For the three
and nine months ended June 30, 2016 and 2015, the Company did not recognize any impairment for real estate property under development
and completed.
Capitalization of Interest
Interest incurred during and directly related
to real estate development projects is capitalized to the related real estate property under development during the active
development period, which generally commences when borrowings are used to acquire real estate assets and ends when the properties
are substantially complete or the property becomes inactive. Interest is capitalized based on the interest rate applicable to specific
borrowings or the weighted average of the rates applicable to other borrowings during the period. Interest capitalized to real
estate property under development is expensed as a component of cost of real estate sales when related units are sold. All
other interest is expensed as incurred. For the three and nine months ended June 30, 2016, the total interest capitalized in the
real estate property development was $746,851 and $1,639,256, respectively. For the three and nine months ended June 30, 2015,
the total interest capitalized in the real estate property under development was $631,886 and $2,600,199.
Impairment of long-lived assets
In accordance with ASC 360, "Accounting
for the Impairment or Disposal of Long-Lived Assets", the Company is required to review its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated
undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists,
an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.
Assets are grouped and evaluated at the
lowest level for their identifiable cash flows that are largely independent of the cash flows of other groups of assets. The Company
considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying
amount of the asset to the future estimated cash flows expected to result from the use of the asset. If the carrying amount of
the asset exceeds estimated expected undiscounted future cash flows, the Company measures the amount of impairment by comparing
the carrying amount of the asset to its fair value. The estimation of fair value is generally determined by using the asset's expected
future discounted cash flows or market value. The Company estimates fair value of the assets based on certain assumptions such
as budgets, internal projections, and other available information as considered necessary. There is no impairment of long-lived
assets during the three and nine months ended June 30, 2016 and 2015.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
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 warranty
The Company provides its customers with
warranties which cover major defects of 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 three and nine months periods ended June 30, 2016 and
2015, 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.
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.
Share-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 are 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 CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Income taxes
Deferred tax assets and liabilities are
for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this
method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets
and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable
to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.
ASC 740-10-25 prescribes a more-likely-than-not
threshold for consolidated financial statement recognition and measurement of a tax position taken (or expected to be taken) in
a tax return. It also provides guidance on the recognition of income tax assets and liabilities, classification of current and
deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, years open for
tax examination, accounting for income taxes in interim periods and income tax disclosures. There are no material uncertain tax
positions as of June 30, 2016 and September 30, 2015.
The Company is a corporation organized under the laws of the
State of Florida. However, all of the Company’s operations are conducted solely by its subsidiaries in the PRC. No
income is earned in the United States and the management does not repatriate any earnings outside the PRC. As a result,
the Company did not generate any U.S. taxable income for the three and nine months ended June 30, 2016 and 2015, respectively.
As of June 30, 2016, the tax years ended
September 30, 2007 through December 31, 2015 for the Company’s PRC entities remain open for statutory examination by PRC
tax authorities. The parent Company China HGS Real Estate Inc.’s tax years ended September 30, 2011 through December 31,
2015 remains open for statutory examination by U.S. tax authorities.
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, Nandajie 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%.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
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) during the three and nine months ended June 30, 2016 and 2015
were net income and foreign currency translation adjustments.
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.
Advertising expenses
Advertising costs are expensed as incurred. For the three and
nine months ended June 30, 2016, the Company recorded advertising expenses of $10,465 and $53,881, respectively (2015 - $42,720
and $196,763).
Concentration risk
The Company's operations are carried out
in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political,
economic and legal environment in the PRC, and by the general state of the PRC's economy. The Company's operations in the PRC are
subject to specific considerations and significant risks not typically associated with companies in North America. The Company's
results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures,
currency conversion and remittance abroad, and rates and methods of taxation, among other things. Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. All of the Company’s
cash is maintained with state-owned banks within the People’s Republic of China of which no deposits are covered by insurance.
The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.
The Company is dependent on third-party
sub-contractors, manufacturers, and distributors for all construction services and supply of construction materials. For the three
months ended June 30, 2016, two suppliers accounted for over 39% and 14% of the Company’s total project expenditures, respectively.
For the three months ended June 30, 2015, four suppliers accounted for 22%, 20%, 19% and 16% of project expenditures, respectively.
For the nine months ended June 30, 2016, two suppliers accounted for 46% and 13% of the Company’s the project expenditures.
For the nine Months Ended June 30, 2015, three suppliers accounted for 25%, 22% and 10% of project expenditures, respectively.
Reclassification
Restricted cash in 2015 cash flows have been reclassified as cash flow from financing activities to conform
to the current period presentation. This reclassification has no effect on the accompanying condensed consolidated cash flows.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Recent Accounting Pronouncements
In January 2016, the FASB has issued Accounting
Standards Update (ASU) No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial
Assets and Financial Liabilities. The new guidance is intended to improve the recognition and measurement of financial instruments.
The new guidance makes targeted improvements to existing U.S. GAAP by: (1) requiring equity investments (except those accounted
for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value
with changes in fair value recognized in net income. Requiring public business entities to use the exit price notion when measuring
the fair value of financial instruments for disclosure purposes; (2) Requiring separate presentation of financial assets and financial
liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet
or the accompanying notes to the financial statements; (3) Eliminating the requirement for public business entities to disclose
the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments
measured at amortized cost on the balance sheet; and. (4) Requiring a reporting organization to present separately in other comprehensive
income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit
risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in
accordance with the fair value option for financial instruments. The new guidance is effective for public companies for fiscal
years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is evaluating the effect,
if any, this update will have on the Company's unaudited condensed consolidated financial position, results of operations and cash
flows.
In February 2016, the FASB issued ASU 2016-02, Leases
(Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees
to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in this ASU are effective
for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted
for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the
date of initial application, with an option to elect to use certain transition relief. The Company is currently evaluating the
impact of this new standard on its unaudited condensed consolidated financial statements.
In April 2016, the FASB released ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU includes multiple
provisions intended to simplify various aspects of the accounting for share-based payments. While aimed at reducing the cost and
complexity of the accounting for share-based payments, the amendments are expected to significantly impact net income, EPS, and
the statement of cash flows. Implementation and administration may present challenges for companies with significant share-based
payment activities. This ASU is effective for public companies in annual periods beginning after December 15, 2016, and interim
periods within those years. The Company is currently evaluating the impact of this new standard on its unaudited condensed consolidated
financial statements.
In April 2016, FASB issued Accounting Standards
Update No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments
clarify the following two aspects of Topic 606: (a) identifying performance obligations; and (b) the licensing implementation
guidance. The amendments do not change the core principle of the guidance in Topic 606. The effective date and transition requirements
for the amendments are the same as the effective date and transition requirements in Topic 606. Public entities should apply the
amendments for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein (i.e., January
1, 2018, for a calendar year entity). Early application for public entities is permitted only as of annual reporting periods beginning
after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating
the impact of this new standard on its unaudited condensed consolidated financial statements.
In May 2016, the FASB issued ASU No. 2016-11
Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815); Rescission of SEC Guidance Because of Accounting Standards
Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting, which is rescinding certain SEC
Staff Observer comments that are codified in Topic 605, Revenue Recognition, and Topic 932, Extractive Activities—Oil and
Gas, effective upon adoption of Topic 606. The Company is assessing the impact of the adoption of this ASU on its unaudited condensed
consolidated financial statements, disclosure requirements and methods of adoption.
In May 2016, FASB issued ASU No. 2016-12—Revenue
from Contracts with Customers (Topic 606); Narrow-Scope Improvements and Practical Expedients, which is intended to not change
the core principle of the guidance in Topic 606, but rather affect only the narrow aspects of Topic 606 by reducing the potential
for diversity in practice at initial application and by reducing the cost and complexity of applying Topic 606 both at transition
and on an ongoing basis. The Company is assessing the impact of the adoption of this ASU on its unaudited condensed consolidated
financial statements, disclosure requirements and methods of adoption.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 3. REAL ESTATE PROPERTY DEVELOPMENT
COMPLETED AND UNDER DEVELOPMENT
The following summarizes the components of real estate property
development completed and under development as of June 30, 2016 and September 30, 2015:
|
|
June 30, 2016
|
|
|
September 30, 2015
|
|
Development completed
|
|
|
|
|
|
|
|
|
Hanzhong City Mingzhu Garden Phase I
|
|
$
|
1,042,161
|
|
|
$
|
1,146,277
|
|
Hanzhong City Mingzhu Garden Phase II
|
|
|
57,622,592
|
|
|
|
66,070,589
|
|
Hanzhong City Nan Dajie (Mingzhu Xinju)
|
|
|
1,376,980
|
|
|
|
1,439,257
|
|
Yang County Yangzhou Pearl Garden Phase I
|
|
|
2,961,051
|
|
|
|
3,419,273
|
|
Yang County Yangzhou Pearl Garden Phase II
|
|
|
4,523,771
|
|
|
|
5,456,387
|
|
Real estate property development completed
|
|
|
67,526,555
|
|
|
|
77,531,783
|
|
Less: Real estate property completed –short-term
|
|
|
65,629,882
|
|
|
|
75,391,512
|
|
Real estate property completed –long-term
|
|
$
|
1,896,673
|
|
|
$
|
2,140,271
|
|
Under development:
|
|
|
|
|
|
|
|
|
Hanzhong City Oriental Pearl Garden (a)
|
|
$
|
48,766,119
|
|
|
$
|
55,154,153
|
|
Yang County Yangzhou Palace
|
|
|
69,154,951
|
|
|
|
47,843,166
|
|
Hanzhong City Shijin Project
|
|
|
7,290,118
|
|
|
|
7,619,829
|
|
Hanzhong City Liangzhou Road and related projects (b)
|
|
|
103,047,597
|
|
|
|
85,069,755
|
|
Hanzhong City Hanfeng Beiyuan East (c)
|
|
|
562,550
|
|
|
|
587,993
|
|
Hanzhong City Beidajie (e)
|
|
|
75,328
|
|
|
|
78,735
|
|
Yang County East 2
nd
Ring Road (d)
|
|
|
2,427,043
|
|
|
|
2,461,303
|
|
Real estate property under development
|
|
|
231,323,706
|
|
|
|
198,814,934
|
|
Less: Short-term portion
|
|
|
48,766,106
|
|
|
|
55,154,153
|
|
Real estate property under development –long-term
|
|
$
|
182,557,600
|
|
|
$
|
143,660,781
|
|
|
(a)
|
The Company recognized $5,789,026 and $8,709,207 of development cost in cost of real estate sales
under the percentage of completion method for the three and nine months ended June 30, 2016 (2015 - $1,940,411 and $8,559,833).
The Company was in the process of finalizing landscaping and underground structure and expected to complete the construction before
September 30, 2016.
|
|
(b)
|
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. Due to the extension, the Company expected the road construction to be completed
in late 2016. 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.
|
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 3. REAL ESTATE PROPERTY DEVELOPMENT
COMPLETED AND UNDER DEVELOPMENT
As of June 30, 2016, the actual
costs incurred by the Company were $103,047,597 (September 30, 2015- $85,069,755) 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. For the three and nine months
ended June 30, 2016 and 2015, the Company did not receive government’s subsidies for its Shanty Area Reform Project surrounding
Liang Zhou Road located in Hantai District, Hanzhong City, respectively. As of June 30, 2016, the Company borrowed $64,322,132
loan from Hanzhong Urban Construction Investment Development Co., Ltd to develop Liangzhou road and related project. .
|
(c)
|
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 year
ended September 30, 2014. As of June 30, 2016, the Company still waited for the local government to finalize the budget for the
project.
|
|
(d)
|
The Company was engaged by the Yang County local government to construct the East 2nd Ring Road
with a total length of 2.15 kilometers and a budgeted price of approximately $25.3 million (or RMB168 million), which was approved
by the local Yang County government in March 2014. The local government is required to repay the Company’s project investment
costs within 3 years with interest at the interest rate based on the commercial borrowing rate with the similar term published
by China construction bank (June 30, 2016 -5% and September 30, 2015 – 5%). The local government has approved a refund to
the Company by reducing local surcharges or taxes otherwise required in the real estate development. The load construction is expected
to be completed by late 2016 or early 2017.
|
|
(e)
|
For the three and nine months ended June 30, 2016, the Company received government’s subsidies
in the amount of $Nil and $3,160,604 for its Shanty Area Reform Project surrounding Beidajie Project located in Hantai District,
Hanzhong City, respectively. For the three and nine months ended June 30, 2015, the Company did not receive related government
subsidies. Since the Company has not met the performance requirement, the Company included the subsidies received in the liability.
|
As of June 30, 2016 and September 30, 2015,
land use rights included in real estate property under development totaled $37,035,962 and $39,929,072, respectively.
NOTE 4. BANK LOAN
On August 23, 2013, the Company entered
into a project finance loan agreement (the "Loan Agreement") with China Construction Bank, Hanzhong Branch (the “Bank")
for development of the Company’s Mingzhu Beiyuan project and was fully repaid at June 30, 2016.
The average interest rate of the loan was
5.5% as of June 30, 2016 and September 30, 2015. For the three and nine months ended June 30, 2016, total loan interest was $Nil
and $131,952, which was included in the interest expense for the period, because the Mingzhu Beiyuan project has been completed
by September 30, 2015. For the three and nine months ended June 30, 2015, the total loan interest was $216,515 and $822,843, which
was capitalized in to the development cost of Mingzhu Garden – Mingzhu Beiyuan project Phase II.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 5. OTHER LOANS
|
|
June 30, 2016
|
|
|
September 30, 2015
|
|
Loan A (i)
|
|
$
|
-
|
|
|
$
|
954,883
|
|
Loan B (ii)
|
|
|
-
|
|
|
|
4,719,356
|
|
Loan C (iii)
|
|
|
64,322,132
|
|
|
|
15,731,186
|
|
Loan D (iv)
|
|
|
12,040,395
|
|
|
|
-
|
|
|
|
|
76,362,527
|
|
|
|
21,405,425
|
|
Less: current maturities of other loans
|
|
|
6,149,632
|
|
|
|
5,674,239
|
|
Other loans-long term portion
|
|
$
|
70,212,895
|
|
|
$
|
15,731,186
|
|
|
(i)
|
A working capital finance agreement with a local investment company in Hanzhong was fully repaid
in fiscal 2016. The loan carried a fixed interest of 10% per year. For the three and nine months ended June 30, 2016, total interest
was $Nil and $23,526 (2015 - $245,227 and $961,501) respectively, which was capitalized in to the development cost of Liangzhou
road project.
|
|
(ii)
|
A line of credit with a financial institution was fully repaid in fiscal 2016. The line of credit
carried a fixed interest of 20% per year. For the three and nine months ended June 30, 2016, the interest was $Nil and $107,900
(2015 - $82,418 and $532,898), respectively, which was capitalized in to the development cost of Oriental Pearl Garden real estate
project.
|
|
(iii)
|
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 $116,641,336 (RMB 775,000,000) for a
long term loan at 4.245% interest to develop Liang Zhou Road Project. As of June 30, 2016, the Company borrowed $64,322,132 under
this credit line. The loan is guaranteed by Hanzhong City Hantai District Municipal Government and pledged by the Company’s
Yang County Palace project with carrying value of $69,154,951 as of June 30, 2016. For the three and nine months ended June 30,
2016, total interest was $652,422 and $1,305,307 (2015- $Nil) respectively, which was capitalized in to the development cost of
Liangzhou road project. The combined loan repayment schedule assuming all loan proceeds are borrowed are listed below:
|
|
|
Repayment in USD
|
|
|
Repayment in RMB
|
|
29-May-2017
|
|
|
6,149,632
|
|
|
|
40,860,000
|
|
20-November-2017
|
|
|
6,149,632
|
|
|
|
40,860,000
|
|
20-April -2018
|
|
|
13,167,678
|
|
|
|
87,490,000
|
|
20-May-2018
|
|
|
6,256,491
|
|
|
|
41,570,000
|
|
20-November-2018
|
|
|
6,256,491
|
|
|
|
41,570,000
|
|
20-April-2019
|
|
|
13,167,678
|
|
|
|
87,490,000
|
|
20-May-2019
|
|
|
6,406,996
|
|
|
|
42,570,000
|
|
20-October-2019
|
|
|
13,167,678
|
|
|
|
87,490,000
|
|
29-November-2019
|
|
|
6,406,996
|
|
|
|
42,570,000
|
|
20-April-2020
|
|
|
13,172,193
|
|
|
|
87,520,000
|
|
20-October-2020
|
|
|
13,167,678
|
|
|
|
87,490,000
|
|
20-October-2021
|
|
|
13,172,193
|
|
|
|
87,520,000
|
|
Total
|
|
|
116,641,336
|
|
|
|
775,000,000
|
|
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 5. OTHER LOANS (continued)
|
(iv)
|
On January 8, 2016, the Company signed a loan agreement with Hanzhong Municipal Housing Provident
Fund Management Center (“Housing Fund”) to borrow up to approximately $12,040,395 (RMB 80,000,000) on development of
Oriental Garden related projects. The loan carries interest at is 3.575% and is due in January 2019. Our major shareholder Mr.
Xiaojun Zhu and his wife Ms. Jianhong Liu pledged their personal assets as collateral for the loan. As of June 30, 2016, the Company
received all the proceeds from Housing Fund. The progress repayment is required based on certain sales milestones or a fixed repayment
schedule starting in July 2018. The Housing Fund has rights to monitor the project’s future cash flow. For the three and
nine months ended June 30, 2016, total interest was $112,429 and $180,013 (2015- $Nil) respectively, which was capitalized in to
the development cost of Oriental Garden project. The full amount of loan has following repayment schedule:
|
|
|
Repayment in USD
|
|
|
Repayment in RMB
|
|
|
|
|
|
|
|
|
Earlier of July 2018 or 60% sales completed
|
|
|
3,101,099
|
|
|
|
20,000,000
|
|
Earlier of October 2018 or 70% sales completed
|
|
|
4,515,148
|
|
|
|
30,000,000
|
|
Earlier of January 2019 or 75% sales completed
|
|
|
4,515,148
|
|
|
|
30,000,000
|
|
Total
|
|
|
12,040,395
|
|
|
|
80,000,000
|
|
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 6. CUSTOMER DEPOSITS
Customer deposits consist of amounts received from customers
for the pre-sale of residential units. The detail of customer deposits is as follows:
|
|
June 30, 2016
|
|
|
September 30, 2015
|
|
Customer deposits by real estate projects
|
|
|
|
|
|
|
|
|
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan) Phase I and II
|
|
$
|
10,182,279
|
|
|
$
|
7,832,619
|
|
Hanzhong City Oriental Pearl Garden
|
|
|
5,746,658
|
|
|
|
7,220,575
|
|
Liangzhou road and related projects
|
|
|
2,746,715
|
|
|
|
2,035,615
|
|
Yang County Palace
|
|
|
3,579,312
|
|
|
|
6,210,389
|
|
Yangzhou Pearl Garden Phase I and II
|
|
|
7,403,095
|
|
|
|
2,334,775
|
|
Total
|
|
|
29,658,059
|
|
|
|
25,633,973
|
|
|
|
|
|
|
|
|
|
|
Less Customer deposits -short-term
|
|
|
19,508,249
|
|
|
|
17,387,969
|
|
Customer deposits - long-term
|
|
$
|
10,149,810
|
|
|
$
|
8,246,004
|
|
Customer deposits are typically 10%-20%
of the unit price for those customers who purchase properties in cash and 20%-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 June 30, 2016 and September
30, 2015, approximately $1.5 million and $1.7 million was guaranteed by the Company, respectively.
NOTE 7. RELATED PARTY LOANS
|
|
June 30, 2016
|
|
|
September 30,
2015
|
|
Shareholder loan – USD loan (a)
|
|
$
|
1,810,000
|
|
|
$
|
1,810,000
|
|
Shareholder loan – RMB loan (b)
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
1,810,000
|
|
|
$
|
1,810,000
|
|
|
a.
|
The Company has a one year loan agreement (“USD Loan Agreement”) with Mr. Xiaojun Zhu, the 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 loan was renewed on July 31, 2016 with the same term. The Company recorded interest of $18,100 and $54,300 for the three and nine months ended June 30, 2016 (2015 -$18,100 and $54,300). The Company has not yet paid this interest and it is recorded in accrued expenses in the accompanying condensed consolidated balance sheets as of June 30, 2016 and September 30, 2015.
|
|
b.
|
On December 31, 2013, Shaanxi Guangsha Investment and Development Group Co., Ltd. (the “Guangsha”), the Company's PRC operating subsidiary, entered into a loan agreement with the Chairman (the “Shareholder RMB Loan Agreement”), pursuant to which Guangsha is able to borrow from Mr. Zhu in order to support the Company’s Liang Shan Road construction project development and the Company’s working capital needs. The Loan Agreement has a one-year term, and has been renewed with a new expiration date of June 30, 2017, with at an interest rate of 5.5% as of June 30, 2016 and September 30, 2015. The Company repaid full loan balance as of June 30, 2016 and September 30, 2015, respectively. The Company recorded interest of $Nil and $22,510 for the three and nine months ended June 30, 2016 (2015 - $87,726 and $282,957), respectively, which is capitalized in the development cost of Liangzhou road project.
|
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 8. STOCK OPTIONS
On August 22, 2015, the Company’s
Board of Directors granted stock options to two new independent directors to repurchase up to an aggregate of 120,000 shares of
the Company’s common stock (“2015 Stock Options”). The shares underlying the options become excisable
during the following 36 months period at the end of each quarter. The exercise price of the options is $1.89 per share. As of June
30, 2016 and September 30, 2015, 27.8% and 2.8% of the option awards have vested, respectively. The assumptions used in calculating
the fair value of options granted using the Black-Scholes option pricing model are as follows:
The assumptions used in calculating the fair
value of options granted using the Black-Scholes
option pricing model are as follows:
|
|
Options
granted in
August 2015
|
|
Risk-free interest rate
|
|
|
0.95
|
%
|
Expected life of the options
|
|
|
3 year
|
|
Expected volatility
|
|
|
143
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
Fair value
|
|
$
|
178,800
|
|
The Company uses the Black-Scholes option-pricing model, which
incorporates various assumptions including volatility, expected life and interest rates to determine fair value. The Company’s
expected volatility assumption is based on the historical volatility of Company’s stock. The expected life assumption is
primarily based on the simplified method due to the Company’s limited option exercise behavior. The risk-free interest rate
for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The following
table summarizes the stock option activities of the Company:
|
|
Number of
options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Life in Years
|
|
|
Aggregate
intrinsic
value
|
|
Outstanding, September 30, 2015
|
|
|
130,000
|
|
|
$
|
1.93
|
|
|
|
2.71
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(10,000
|
)
|
|
|
1.31
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, June 30, 2016
|
|
|
120,000
|
|
|
$
|
1.89
|
|
|
|
2.14
|
|
|
$
|
-
|
|
Exercisable, June 30, 2016
|
|
|
33,333
|
|
|
$
|
1.89
|
|
|
|
2.14
|
|
|
$
|
-
|
|
The Company recorded $14,900 and $44,700
stock-based compensation expense for the three and nine months ended June 30, 2016 (2015 - $Nil), respectively. Since the average
share price for the three and nine months ended June 30, 2016 was below the exercise price of the above options, these options
were anti-dilutive at June 30, 2016 and therefore would not be included in the diluted shares calculation.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 9. 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 June 30, 2016, the Company had business sales tax payable of $13,194,895
(September 30, 2015- $13,306,414), 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 all its exiting real estate project based on the local tax authority’s practice.
B) Corporate income taxes (“CIT”)
The Company’s PRC subsidiaries and
VIE are governed by the Income Tax Law of the People’s Republic of China concerning the privately run enterprises, which
are generally subject to income tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate
tax adjustments.
However, as approved by the local tax authority
of Hanzhong City, the Company’s CIT was assessed annually at a pre-determined fixed rate as an incentive to stimulate the
local economy and encourage entrepreneurship. The local income tax rate in Hanzhong is 2.5% and in Yang County is 1.25% on revenue.
For the three and nine months ended June 30, 2016 the Company’s income taxes were $310,548 and $612,846 (2015 - $641,368
and $1,441,943), respectively.
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.
Income tax expense for the three and nine
months ended June 30, 2016 and 2015 is summarized as follows:
|
|
Three months ended June
30,
|
|
|
Nine months ended June
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Current tax provision
|
|
$
|
81,316
|
|
|
$
|
5,778
|
|
|
$
|
228,996
|
|
|
$
|
71,946
|
|
Deferred tax provision
|
|
|
229,232
|
|
|
|
635,590
|
|
|
|
383,850
|
|
|
|
1,369,997
|
|
Income tax provision
|
|
$
|
310,548
|
|
|
$
|
641,368
|
|
|
$
|
612,846
|
|
|
$
|
1,441,943
|
|
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 9. TAXES (continued)
The parent Company China HGS Real Estate
Inc. is incorporated in the United States. Net operating loss carry forwards for United States income tax purposes approximated
to $500,160 and $401,000 as of June 30, 2016 and September 30, 2015, respectively, which are available to reduce future years’
taxable income. These carry forwards will expire in 2035. However, the change in control resulting from the reverse merger in 2009
limits the amount of loss to be utilized each year. Management doesn’t expect to remit any of its net income back to the
United States in the foreseeable future. Accordingly, the Company recorded a full valuation allowance as of June 30, 2016 and September
30, 2015. The components of deferred taxes as of June 30, 2016 and September 30, 2015 consist of the following:
|
|
June 30,
2016
|
|
|
September 30,
2015
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Deferred tax assets from net operating loss carry-forwards for U.S. parent company
|
|
$
|
170,054
|
|
|
$
|
136,394
|
|
Valuation allowance
|
|
|
(170,054
|
)
|
|
|
(136,394
|
)
|
Deferred tax asset-net
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability
|
|
|
|
|
|
|
|
|
Revenue recognized based on percentage of completion
|
|
$
|
4,882,100
|
|
|
$
|
4,711,161
|
|
Deferred tax liability- long term
|
|
$
|
4,882,100
|
|
|
$
|
4,711,161
|
|
The valuation allowance increased $11,220
and $33,660 for the three and nine months ended June 30, 2016 (2015 -$6,154 and $18,462), respectively.
(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 June 30, 2016, the outstanding LAT payable was $954,159 with respect to completed real estate properties sold up to June 30,
2016. As at September 30, 2015, the outstanding LAT payable balance was $752,664 with respect to completed real estate properties
sold up to September 30, 2015.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 9. TAXES (continued)
(D) Taxes payable consisted of the following:
|
|
June 30, 2016
|
|
|
September 30,
2015
|
|
|
|
|
|
|
|
|
CIT
|
|
$
|
622,826
|
|
|
$
|
794,780
|
|
Business tax
|
|
|
13,194,895
|
|
|
|
13,306,414
|
|
Other tax and fees
|
|
|
1,631,058
|
|
|
|
1,729,692
|
|
Total taxes payable
|
|
$
|
15,448,779
|
|
|
$
|
15,830,886
|
|
NOTE 10. COMMITMENTS AND CONTINGENCY
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. The Company
has made necessary reserves in its restricted cash account to cover any potential mortgage defaults as required by the mortgage
lenders. The Company has not experienced any losses related to this guarantee and believes that such reserves are sufficient. As
of June 30, 2016 and September 30, 2015, the amount of security deposit provided for these guarantees was approximately $1.5 million
and $1.7 million respectively.
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion and analysis
of financial condition and results of operations relates to the operations and financial condition reported in the unaudited condensed
consolidated financial statements of China HGS Real Estate, Inc. for the three and nine months ended June 30, 2016 and 2015 and
should be read in conjunction with such financial statements and related notes included in this report.
As used in this report, the terms “Company,”
“we,” “our,” “us” and “HGS” refer to China HGS Real Estate, Inc. and its subsidiaries.
Preliminary Note Regarding Forward-Looking Statements.
We make forward-looking statements in
Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report based
on the beliefs and assumptions of our management and on information currently available to us. Forward-looking statements include
information about our possible or assumed future results of operations which follow under the headings “Business Overview,”
“Liquidity and Capital Resources,” and other statements throughout this report preceded by, followed by or that include
the words “believes,” “expects,” “anticipates,” “intends,” “plans,”
“estimates” or similar expressions.
Forward-looking statements are subject
to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in these forward-looking
statements, including the risks and uncertainties described below and other factors we describe from time to time in our periodic
filings with the U.S. Securities and Exchange Commission (the “SEC”). We therefore caution you not to rely unduly on
any forward-looking statements. The forward-looking statements in this report speak only as of the date of this report, and we
undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments
or otherwise.
These forward-looking statements include, among other things, statements relating to:
|
•
|
our ability to sustain our project development
|
|
•
|
our ability to obtain additional land use rights at favorable prices;
|
|
•
|
the market for real estate in Tier 3 and 4 cities and counties;
|
|
•
|
our ability to obtain additional capital in future years to fund our planned expansion; or
|
|
•
|
economic, political, regulatory, legal and foreign exchange risks associated with our operations.
|
Business Overview
We conduct substantially all of our business
through Shaanxi Guangsha Investment and Development Group Co., Ltd, in Hanzhong, Shaanxi Province. Since the inception of our business,
we have been focused on expanding our business in certain Tier 3 and Tier 4 cities and counties in China.
For the nine months ended June 30, 2016,
our sales, gross profit and net income were $25,205,879, $7,944,257 and $5,171,426, respectively, representing an approximate 58.1%,
72.2% and 79.0% decrease in sales, gross profit and net income from nine months ended June 30, 2015, respectively. The decreases
mainly resulted from a slowdown of contracted sales achieved in the first nine months of fiscal 2016. Since the construction of
our real estate property under developments for our Oriental Pearl Garden has not been completed and other under development projects
are not available for sales due to sales permits have not been obtained, we realized decreased contract sales for revenue recognized
under the percentage of completion method for the three and nine months ended June 30, 2016. On the other hand, we strengthened
the sales promotion and efforts to sell completed units in order to consume the large inventory balance carried from prior year.
The Company adopted the percentage of completion
method to account for real estate sales from large high rise residential projects with construction periods over 18 to 24 months.
Total revenue recognized under the percentage of completion method for the nine months ended June 30, 2016 was $15,353,987 (2015-
$56,248,205), representing 60.9% (2015 – 93.5%) of total revenue for the period, with related costs of these real estate
sales was $8,709,207 (2015 - $25,787,655), representing 56.1% (2015 – 93.1%) of the real estate costs in the period. The
gross profit before sales tax from the percentage of completion method was $6,644,780 (2015 - $30,460,550), representing 68.6%
(2015 – 93.9%) of the total gross profit for the quarter.
For the nine months ended June 30, 2016,
our average selling price (“ASP”) for real estate projects (excluding sales of parking spaces) located in Yang County
was approximately $345.1 per square meter, a decrease of 23.9% from the ASP of $453.2 per square meter for the nine months ended
June 30, 2015. The higher ASP in the same period of last year was due to more commercial units with higher selling price sold.
The ASP of our Hanzhong real estate projects (excluding sales of parking spaces) was approximately $568.7 per square meter, a 5.7%
decrease from the ASP of $603.1 per square meter for the nine months ended June 30, 2015.
Market Outlook
In early 2016, China’s central bank
cut the minimum mortgage down payment for first-time buyers from 25% to 20%, allowed people to buy multiple homes, provided a further
incentive for rural-urban migration and granted real estate developer access to China’s onshore bond markets. These
policies aim to resolve the housing inventory problem and may lead to strong real estate sales in 2016.
Our customers have a constant growth in
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 in the process of diversifying its revenue and developing
more commercial and municipal projects. The Company plans to build a commercial plaza, consisting shopping mall, apartment and
office buildings well as hotels in the Liangzhou road area. The Company is finalizing the planning of this project as of June 30,
2016. The construction of this project will anticipate to start in the end of 2016 or beginning of 2017, but could be delayed due
to the relocation of existing residences in the Liangzhou Road area, which is currently handling by local government. These new
project initiatives will support the Company’s growth in the long run.
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:
Oriental Pearl Garden
The project is located in downtown of Hanzhong
City. It consists of 1 multi-layer residential building and 12 high-rise residential buildings with commercial shops on the first
and second floors with an estimated GFA of 273,787 square meters. The Company started construction in the third quarter of fiscal
2012. The pre-sale license was obtained in November 2013. The Company is in the process of finalizing landscaping and underground
structure and expected to complete the construction before September 30, 2016. Meantime, the Company is planning to build an extension
Phase (or Phase II) of Oriental Garden project. The construction of Phase II of Oriental Garden project is estimated to start in
the end of 2016.
Mingzhu Beiyuan
The project is located in the south west
part of Hanzhong City. It includes 17 high-rise residential buildings with an estimated 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. The
pre-sale license was obtained in April 2013. As of June 30, 2016, approximately 60% of GFA excluding parking space has been sold.
Yangzhou Pearl Garden
The project included 5 high-rise residential
buildings and 1 multi-layer residential building with total GFA of 67,653 square meters located in Yang County and the construction
was completed in the last quarter of fiscal 2015. The related pre-sales licenses were obtained in February 2013. As of June 30,
2016, approximately 85% of GFA excluding parking space has been sold.
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 285,244
square meters in Yangzhou Palace located in Yang County. The construction started in the fourth quarter of fiscal 2013 and is expected
to be completed by the early of 2017. The Company has not obtained pre-sale license as of June 30, 2016.
Road Construction
Liangzhou Road and related project
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
relocate 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 relocation of residences in
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. Due to the extension, the
Company expected the road construction to be completed in the end of 2016. 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 June 30, 2016, the actual costs incurred
by the Company were $103,047,597 (September 30, 2015 - $85,069,755) and the incremental cost related to residence relocation was
approved by the local government. The Company determined that the Company’s Investment in Liangzhou Road Project in exchange
for interests in future land use rights is a barter transaction with commercial substance. For the three and nine months ended
June 30, 2016 and 2015, the Company did not receive government’s subsidies for its Shanty Area Reform Project surrounding
Liang Zhou Road located in Hantai District, Hanzhong City, respectively.
Other road constructions
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 2.15km and a budgeted price of approximately $25.3 million (or RMB168 million),
which was approved by the local Yang County government in March 2014. The local government is required to repay the Company’s
project investment costs within 3 years with interest at the interest rate based on the commercial borrowing rate with the similar
term published by China construction bank (June 30, 2016 -5% and September 30, 2015 – 5%). The local government has approved
a refund to the Company by reducing local surcharges or taxes otherwise required in the real estate development. The load construction
is expected to be completed by late 2016 or beginning of 2017.
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. As of June
30, 2016, the Company was in discussion with the local government to finalize the budget for the project.
We expect these initiatives will help us
to strengthen our financial performance and better position us to capitalize on opportunities from a future market upturn.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial
condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States. The preparation of these unaudited condensed consolidated
financial statements requires us to make estimates and judgments that affect our reported assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis and use them on historical
experience and various other assumptions that are believed to be reasonable under the circumstances as the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ
from these estimates because of different assumptions or conditions.
We believe the following critical accounting
policies affect our significant estimates and judgments used in the preparation of our unaudited condensed consolidated financial
statements. These policies should be read in conjunction with Note 2 of the notes to unaudited condensed consolidated financial
statements.
Revenue recognition
Percentage of Completion method
Real estate sales for the long term real
estate projects are recognized under percentage completion method in accordance with the provisions of ASC 360-20-40D “Sale
of Condominium Units”. Revenue and profit from the sales of long term development properties is recognized under 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 condominium units sold and related costs are recognized over the course of the construction period, based on the
completion progress of a project. 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.
Revenue recognized to date in excess of
amounts received from customers is classified as current assets under cost and earnings in excess of billings. Amounts received
from customers in excess of revenue recognized to date are classified as current liabilities under billings in excess of cost and
earnings.
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.
Full accrual method
Revenue from the sales of short term development
properties, where the construction period is expected to 18 months or less is recognized by the full accrual method at the time
of the closing of an individual unit sale. This occurs when title to or possession of the property is transferred to the buyer.
A sale is not considered consummated until (a) the parties are bound by the terms of a contract, (b) all consideration
has been exchanged, (c) any permanent financing for which the seller is responsible has been arranged, (d) all conditions
precedent to closing have been performed, (e) the seller does not have substantial continuing involvement with the property,
and (f) the usual risks and rewards of ownership have been transferred to the buyer. Further, the buyer’s initial and
continuing investment is adequate to demonstrate a commitment to pay for the property.
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 receives 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.
For municipal road construction projects,
fees are generally recognized by the full accrual method at the time of the projects are completed.
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
unaudited condensed consolidated financial statements and accompanying notes, and disclosure of contingent liabilities at the date
of the unaudited condensed 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, income taxes, budgeted costs, share-based
compensation and other similar charges. Management believes that the estimates utilized in preparing its unaudited condensed consolidated
financial statements are reasonable and prudent. Actual results could differ from these estimates.
Real estate property development completed
and under development
Real estate property consists of finished
residential unit sites, commercial offices and residential unit sites under development. The Company leases the land for the residential
unit sites under land use right leases with various terms from the PRC government. The cost of land use rights is included in the
development cost and allocated to each project. Real estate property development completed and real estate property under development
are stated at the lower of cost or fair value.
Expenditures for land development, including
cost of land use rights, deed tax, pre-development costs, and engineering costs, exclusive of depreciation, are capitalized and
allocated to development projects by the specific identification method. Costs are allocated to specific units within a project
based on the ratio of the sales area of units to the estimated total sales area of the project (or phase of the project) multiplied
by the total cost of the project (or phase of the project).
Cost of amenities transferred to buyers
is allocated to specific units as a component of total construction cost. The amenity cost includes landscaping, road paving, etc.
Once the projects are completed, the amenities are under control of the property management companies.
Real estate property development completed
and real estate property under development are reclassified on the balance sheet into current and non-current portions based on
the estimated date of construction completion and sales. The real estate property development completed classification is based
on the estimated date that each property is expected to be sold within the Company’s normal operating cycle of the business
and the Company’s sales plan. Real estate property development completed is classified as a current asset if the property
is expected to be sold within the normal operating cycle of the business. Otherwise, it is classified as a non-current asset. Real
estate property under development is classified as a current asset, if the property is reasonably expected to be completed within
the Company’s normal operating cycle of the business. Otherwise, it is classified as a non-current asset. The majority of
real estate projects the Company has completed in the past were multi-layer or sub-high-rise real estate projects. The Company
considers its normal operating cycle is 12 months.
In accordance with ASC 360, “Property,
Plant and Equipment” (“ASC 360”), real estate property development completed and under development are subject
to valuation adjustments when the carrying amount exceeds fair value. An impairment loss is recognized only if the carrying amount
of the assets is not recoverable and exceeds fair value. The carrying amount is not recoverable if it exceeds the sum of the undiscounted
cash flows expected to be generated by the assets. The Company reviewed all of its real estate projects for future losses and impairment
by comparing the estimated future undiscounted cash flows for each project to the carrying value of such project. For the three
and nine months ended June 30, 2016 and 2015, the Company did not recognize any impairment for real estate property under development
and completed. If we had to recognize an impairment loss, it would have affected our net income and earnings per share.
RESULTS OF OPERATIONS
Three Months Ended June 30,
2016 compared to Three Months Ended June 30, 2015
Revenues
The following is a breakdown of revenue:
|
|
For Three Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Revenue recognized under full accrual method
|
|
$
|
3,328,150
|
|
|
$
|
458,727
|
|
Revenue recognized under percentage of completion method
|
|
|
9,169,263
|
|
|
|
25,555,789
|
|
Total
|
|
$
|
12,497,413
|
|
|
$
|
26,014,516
|
|
Revenues recognized under full accrual method
The following table summarizes our revenue generated by different
projects:
|
|
|
For Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
Variance
|
|
|
|
|
Revenue
|
|
|
|
%
|
|
|
|
Revenue
|
|
|
|
%
|
|
|
|
Amount
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan)
|
|
|
3,177,130
|
|
|
|
95.5
|
%
|
|
|
-
|
|
|
|
---
|
|
|
|
3,177,130
|
|
|
|
100
|
%
|
Yangzhou Pearl Garden
|
|
|
151,020
|
|
|
|
4.5
|
%
|
|
|
458,727
|
|
|
|
100
|
%
|
|
|
(307,707
|
)
|
|
|
(67.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Real Estate Sales before Sales Tax
|
|
|
3,328,150
|
|
|
|
100
|
%
|
|
|
458,727
|
|
|
|
100
|
%
|
|
|
2,869,423
|
|
|
|
625.5
|
%
|
Sales Tax
|
|
|
(232,370
|
)
|
|
|
|
|
|
|
(23,062
|
)
|
|
|
|
|
|
|
(209,308
|
)
|
|
|
907.6
|
%
|
Revenue net of sales tax
|
|
$
|
3,095,780
|
|
|
|
|
|
|
$
|
435,665
|
|
|
|
|
|
|
|
2,660,115
|
|
|
|
610.6
|
%
|
Our revenues are derived from the sale
of residential buildings, commercial front-stores and parking space in projects that we have developed. Our sales of completed
real estate projects were consistent from the same period of last year. Revenues before sales tax increased by 625.5% to approximately
$3.3 million for the three months ended June 30, 2016 from approximately $0.5 million for the same period last year. The total
GFA sold during the three months ended June 30, 2016 was 6,749 square meters. The total GFA sold during the three months ended
June 30, 2015 was 1,315 square meters, an increase of 5,454 square meters. For the completed real estate properties, we only have
limited models are available for customer selection. In order to promote the sales of the remaining units, we lowered our selling
price during the quarter ended June 30, 2016, which led to more GFA sold during the quarter than in the same period of 2015.
Sales tax for the three months ended June
30, 2016 and 2015 consisted of a business tax, 5% of the revenue, an urban construction tax, 7% of business tax, an education surcharge
tax, 3% of business tax, and land appreciation tax. Land appreciation tax for the three months ended June 30, 2016 and 2015 was
assessed at the rate of 0.5% of the customer deposits in Yang County and 1% of the customer deposits in Hanzhong. The sales tax
for the three months ended June 30, 2016 increased by 907.6% from the same period last year, primarily as a result of
the increase in our revenue. 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 all its exiting real estate project based on the
local tax authority’s practice. As our revenue is reported net of VAT, the Company does not expect the overall gross margin
for the existing real estate properties will be significantly affected by the change from business tax to VAT.
Revenue recognized under percentage completion method
|
|
|
|
|
For the three months ended June 30, 2016
|
|
|
|
Total GFA
|
|
|
Average
Percentage of Completion
(1)
|
|
|
Qualified Contract Sales
(2)
|
|
|
Revenue Recognized under Percentage of Completion
|
|
|
Accumulated Revenue recognized under Percentage of completion
|
|
Real estate properties under development located in Hanzhong
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oriental Garden
|
|
|
273,787
|
|
|
|
91
|
%
|
|
$
|
97,546,861
|
|
|
$
|
9,169,263
|
|
|
$
|
94,135,830
|
|
|
(1)
|
Percentage of Completion is calculated by dividing total costs incurred by total estimated costs
for the relevant buildings in the each real estate building , estimated as of the time of preparation of our financial statements
as of and for the year indicated.
|
|
(2)
|
Qualified contract sales only include all contract sales with customer deposits balance as of June
30, 2016 equal or greater than 30% of contract sales amount and related individual of buildings were sold over 20%.
|
|
|
|
|
|
For the three months ended June 30, 2015
|
|
|
|
Total GFA
|
|
|
Average
Percentage of Completion
|
|
|
Qualified Contract Sales
(1)
|
|
|
Revenue Recognized under Percentage of Completion
|
|
|
Accumulated Revenue recognized under Percentage of completion
|
|
Real estate properties under development located in Hanzhong
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mingzhu Garden – Mingzhu Beiyuan
|
|
|
355,321
|
|
|
|
91
|
%
|
|
$
|
93,927,283
|
|
|
$
|
19,293,714
|
|
|
$
|
90,863,721
|
|
Oriental Garden
|
|
|
273,693
|
|
|
|
83
|
%
|
|
|
85,002,706
|
|
|
|
5,997,621
|
|
|
|
75,660,419
|
|
Real estate properties under development located in Yang County
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yangzhou Pearl Garden
|
|
|
64,854
|
|
|
|
96
|
%
|
|
|
18,682,289
|
|
|
|
264,454
|
|
|
|
18,127,286
|
|
Total
|
|
|
693,868
|
|
|
|
|
|
|
$
|
197,612,278
|
|
|
$
|
25,555,789
|
|
|
$
|
184,651,426
|
|
|
(1)
|
Qualified contract sales only include all contract sales with customer deposits balance as of June
30, 2015 equal or greater than 30% of contract sales amount and related individual of buildings were sold over 20%.
|
Both Mingzhu Garden Phase II and Yangzhou
Pear Garden Phase II projects were completed by September 30, 2015, therefore the related revenue was not included in the above
table for the three months ended June 30, 2016. For Oriental Garden real estate property under development, total contract sales
as of June 30, 2016 were $98,100,268 (September 30, 2015 - $95,518,605). Total GFA sold under contract sales as of June 30, 2016
was 132,989 square meters (September 30, 2015 – 119,353). The average unit price under contract sales was $733.5 per square
meters (September 30, 2015 - $800). For the purpose of percentage of completion calculation, the qualified contract sales amount
was approximately $97,546,861 for the three months ended June 30, 2016 (September 30, 2015 - $92,093,999).
Cost of Sales
The following table sets forth a breakdown of our cost of sales:
|
|
|
For Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
Variance
|
|
|
|
|
Cost
|
|
|
|
%
|
|
|
|
Cost
|
|
|
|
%
|
|
|
|
Amount
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land use rights
|
|
|
688,081
|
|
|
|
8.4
|
%
|
|
|
483,363
|
|
|
|
5.2
|
%
|
|
|
204,718
|
|
|
|
42.4
|
%
|
Construction cost
|
|
|
7,495,381
|
|
|
|
91.6
|
%
|
|
|
8,863,689
|
|
|
|
94.8
|
%
|
|
|
(1,368,308
|
)
|
|
|
(15.4
|
%)
|
Total cost
|
|
|
8,183,462
|
|
|
|
100
|
%
|
|
|
9,347,052
|
|
|
|
100
|
%
|
|
|
(1,163,590
|
)
|
|
|
(12.4
|
%)
|
Our cost of sales consists of costs associated
with land use rights and construction costs. Cost of sales are capitalized and allocated to development projects using 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) times the total cost of the project (or phase of the project).
Cost of sales was approximately $8.2 million
for the three months ended June 30, 2016 compared to $9.3 million for the three months ended June 30, 2015. The $1.2 million decrease
in cost of sales was mainly attributable to the decrease in total GFA sold during the quarter ended June 30, 2016 under percentage
of completion method which led to decreased revenue and cost of sales during this quarter.
In addition, since most
of the real estate properties sold were commercial properties with higher margin during the three months ended June 30, 2015, the
total cost of sales for the three months ended June 30, 2016 only decreased approximately $1.2 million from the same period of
last year, while the total revenue decreased approximately $13.5 million from the same period of last year.
Land use rights cost
: The cost of
land use rights includes the land premium we pay to acquire land use rights for our property development sites, plus taxes. Our
land use rights cost varies for different projects according to the size and location of the site and the minimum land premium
set for the site, all of which are influenced by government policies, as well as prevailing market conditions. Costs for land use
rights for the three months ended June 30, 2016 were approximately $0.7 million, as compared to $0.5 million for the three months
ended June 30, 2015, representing an increase of approximately $0.2 from the same quarter last year, because the Company sold higher
margin parking lots and commercial properties with lower land cost component for the three months ended June 30, 2015.
Construction cost:
We outsource
the construction of all of our projects to third party contractors, whom we select through a competitive tender process. Our construction
contracts provide a fixed payment which covers substantially all labor, materials and equipment costs, subject to adjustments for
some types of excess, such as design changes during construction or changes in government-suggested steel prices. Our construction
costs consist primarily of the payments to our third-party contractors, which are paid over the construction period based on specified
milestones. In addition, we purchase and supply a limited range of fittings and equipment, including elevators, window frames and
door frames. Our construction costs for the three months ending June 30, 2016 were approximately $7.5 million as compared to approximately
$8.9 million for the three months ended June 30, 2015, representing a decrease of $1.4 million. The decrease in construction cost
was due to decrease in units sold under percentage of completion method during the quarter ended June 30, 2016.
The total cost of sales as a percentage
of real estate sales before sales tax for the three months ended June 30, 2016 increased to 65.5% from 35.9% for the three months
ended June 30, 2015, which was mainly attributable to the fact the Company sold lots parking space and commercial units during
the three months ended June 30, 2015 with higher margins.
Gross Profit
Gross profit was approximately $3.5 million
for the three months ended June 30, 2016 as compared to approximately $15.0 million for the three months ended June 30, 2015, representing
a decrease of $11.5 million, which was mainly attributable to decreased revenue recognized under the percentage of completion method
in the current quarter and lower gross margins from majority sales of residential properties. The overall gross profit as a percentage
of real estate sales before sales tax decreased to 27.7% during the three months ended June 30, 2016 from 57.7% for the same quarter
last year, mainly due to higher margin parking space and commercial units sold during the three months ended June 30, 2015. During
the quarter ended June 30, 2016, only 7.8% of revenue were from sales of commercial properties and parking lots, while 61.5% of
revenue were from sales of commercial properties and parking lots in the same period of last year. Generally, the gross margins
for sales of commercial properties ranged from 60% to 85% and the gross margins for sales of residential properties ranged from
25% to 35%. In addition, the Company adopted more flexible selling price on the residential units in the Mingzhu Garden project
and Yangzhou Pearl Garden project, the lower selling price also resulted in a decrease in the gross margin. The overall decrease
in gross profit margin for the three months ended June 30, 2016 reflected the above factors.
The following table sets forth the gross margin of each of our
projects:
|
|
For Three Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Gross Profit
|
|
|
Percentage of Revenue
|
|
|
Gross Profit
|
|
|
Percentage of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan)
|
|
|
907,188
|
|
|
|
28.6
|
%
|
|
|
12,328,048
|
|
|
|
63.9
|
%
|
Oriental Garden
|
|
|
3,380,237
|
|
|
|
36.9
|
%
|
|
|
4,057,210
|
|
|
|
67.6
|
%
|
Yangzhou Pearl Garden
|
|
|
26,526
|
|
|
|
17.6
|
%
|
|
|
282,206
|
|
|
|
39.0
|
%
|
Sales Tax
|
|
|
(847,938
|
)
|
|
|
|
|
|
|
(1,655,046
|
)
|
|
|
|
|
Total Gross Profit
|
|
|
3,466,013
|
|
|
|
27.7
|
%
|
|
|
15,012,418
|
|
|
|
57.7
|
%
|
Total Real Estate Sales before Sales Tax
|
|
$
|
12,497,413
|
|
|
|
|
|
|
$
|
26,014,516
|
|
|
|
|
|
Operating Expenses
Total operating expenses increased by 6.6%
or $42,466 to $681,387 for the three months ended June 30, 2016 from $638,921 for the three months ended June 30, 2015 as a result
of an increase in general administrative expense of $182,065, offset by a decrease of $139,599 in selling expense. The increase
in general administrative expense was mainly due to higher listing maintenance cost compared to the same period of last year. The
decrease in selling expenses for three months ended June 30, 2016 was primarily attributed to decrease of commission paid to salesforce
and marketing activities.
|
|
For Three Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
$
|
71,959
|
|
|
$
|
211,558
|
|
General and administrative expenses
|
|
|
609,428
|
|
|
|
427,363
|
|
Total operating expenses
|
|
$
|
681,387
|
|
|
$
|
638,921
|
|
Percentage of Real Estate Sales before Sales Tax
|
|
|
5.5
|
%
|
|
|
2.5
|
%
|
Income Taxes
U.S. Taxes
China HGS is a Florida corporation. However,
all of our operations are conducted solely by our subsidiaries in the PRC. No income is earned in the United States and we do not
repatriate any earnings outside the PRC. As a result, we did not generate any U.S. taxable income for the three months ended June
30, 2016 and 2015.
PRC Taxes
Our Company is governed by the Income Tax
Law of the People’s Republic of China concerning private-run enterprises, which are generally subject to tax at a statutory
rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments.
However, the local tax authority of Hanzhong
City has the power to assess corporate taxes annually on local enterprises at a pre-determined fixed rate as an incentive to stimulate
the local economy and encourage entrepreneurship. The tax authority assessed us for income taxes at the rate of 1.25% on revenue
in Yang County and 2.5% on our revenue in Hanzhong, instead of statutory rate of 25% on the income before income tax. Income tax
provision for the three months ended June 30, 2016 was $310,548 compared to $641,368 for the three months ended June 30, 2015 as
a result of the decrease in our revenue.
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. Management believes
that the possibility of any reevaluation of income taxes is remote based on the fact that the Company has obtained the written
tax clearance from the local tax authority. Thus, no additional taxes payable have been recorded for the difference between the
taxes due based on taxable income calculated according to statutory taxable income method and the taxes due based on the fixed
rate method. It is the Company’s policy that if such reevaluation of income taxes becomes probable and the amount of additional
taxes due can be reasonably estimated, additional taxes shall be recorded in the period in which the amount can be reasonably estimated
and shall not be charged retroactively to an earlier period.
Net Income
We reported net
income of $2,444,161 for the three months ended June 30, 2016, as compared to net income of $13,709,589 for the three months ended
June 30, 2015. The decrease of $11.3 million in our net income was primarily due to the lower revenue and gross profit as discussed
above under Revenues and Gross Profit.
Other Comprehensive Income (“OCI”)
We operate primarily in the PRC and the
functional currency of our operating subsidiary is the Chinese Renminbi (”RMB”). RMB is not freely convertible
into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation
is made that RMB amounts could have been, or could be, converted into USD at the rates used in translation.
Translation adjustments resulting from
this process amounted to a reduction of OCI of $4,745,409 and $306,940 for the three months ended June 30, 2016 and 2015, respectively. The
significant negative effect of the foreign exchange translation adjustment for the three months ended June 30, 2016 was due to
the significant depreciation of RMB to USD foreign exchange rates. The balance sheet amounts with the exception of equity at June
30, 2016 were translated at 6.6443 RMB to 1 USD as compared to 6.3568 RMB to 1 USD at September 30, 2015. The equity accounts were
stated at their historical rate. The average translation rates applied to the income statements accounts for the periods ended
June 30, 2016 and 2015 were 6.4875 RMB and 6.1547 RMB, respectively.
Nine months Ended June 30,
2016 compared to Nine months Ended June 30, 2015
Revenues
The following is a breakdown of revenue:
|
|
For Nine months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Revenue recognized under full accrual method
|
|
$
|
9,851,892
|
|
|
$
|
3,890,740
|
|
Revenue recognized under percentage of completion method
|
|
|
15,353,987
|
|
|
|
56,248,205
|
|
Total
|
|
$
|
25,205,879
|
|
|
$
|
60,138,945
|
|
Revenues recognized under full accrual method
The following table summarizes our revenue generated by different
projects:
|
|
|
For Nine months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
Variance
|
|
|
|
|
Revenue
|
|
|
|
%
|
|
|
|
Revenue
|
|
|
|
%
|
|
|
|
Amount
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan)
|
|
|
8,467,820
|
|
|
|
86.0
|
%
|
|
|
714,538
|
|
|
|
18.4
|
%
|
|
|
7,753,282
|
|
|
|
1,085.1
|
%
|
Yangzhou Pearl Garden
|
|
|
1,384,072
|
|
|
|
14.0
|
%
|
|
|
2,025,794
|
|
|
|
52.1
|
%
|
|
|
(641,722
|
)
|
|
|
(31.7
|
)%
|
NanDajie (Mingzhu Xinju)
|
|
|
-
|
|
|
|
-
|
%
|
|
|
171,615
|
|
|
|
4.4
|
%
|
|
|
(171,615
|
)
|
|
|
(100
|
)%
|
MinPing
|
|
|
-
|
|
|
|
-
|
%
|
|
|
978,793
|
|
|
|
25.1
|
%
|
|
|
(978,793
|
)
|
|
|
(100
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Real Estate Sales before Sales Tax
|
|
|
9,851,892
|
|
|
|
100
|
%
|
|
|
3,890,740
|
|
|
|
100
|
%
|
|
|
5,961,152
|
|
|
|
153.2
|
%
|
Sales Tax
|
|
|
(615,889
|
)
|
|
|
|
|
|
|
(260,862
|
)
|
|
|
|
|
|
|
(335,027
|
)
|
|
|
136.1
|
%
|
Revenue net of sales tax
|
|
$
|
9,236,003
|
|
|
|
|
|
|
$
|
3,629,878
|
|
|
|
|
|
|
|
5,606,125
|
|
|
|
154.4
|
%
|
Our revenues are derived from the sale
of residential buildings, commercial front-stores and parking space in projects that we have developed. Our sales of completed
real estate projects almost doubled from the sales in the same period of last year. Revenues before sales tax increased by 153.2%
to approximately $9.9 million for the nine months ended June 30, 2016 from approximately $3.9 million for the same period last
year. The total GFA sold during the nine months ended June 30, 2016 was 19,324 square meters. The total GFA sold during the
nine months ended June 30, 2015 was 4,903 square meters. For the completed real estate properties, we only limited have models
are available for customer selection. In order to promote the sales of the remaining units, we lowered our selling price during
the nine months ended June 30, 2016, which led to more GFA sold during the nine months ended June 30, 2016 than in the same period
of 2015.
Sales tax for the nine months ended June
30, 2016 and 2016 consisted of a business tax, 5% of the revenue, an urban construction tax, 7% of business tax, an education surcharge
tax, 3% of business tax, and land appreciation tax. Land appreciation tax for the nine months ended June 30, 2016 and 2015 was
assessed at the rate of 0.5% of the customer deposits in Yang County and 1% of the customer deposits in Hanzhong. The sales tax
for the nine months ended June 30, 2016 increased by 136.1% from the same period last year, primarily as a result of
the increase in our revenue. 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 all its exiting real estate project based
on the local tax authority’s practice. As our revenue is reported net of VAT, the Company does not expect the overall gross
margin for the existing real estate properties will be significantly affected by the change from business tax to VAT.
Revenue recognized under percentage completion method
|
|
|
|
|
For the nine months ended June 30, 2016
|
|
|
|
Total GFA
|
|
|
Average
Percentage of Completion
(1)
|
|
|
Qualified Contract Sales
(2)
|
|
|
Revenue Recognized under Percentage of Completion
|
|
|
Accumulated Revenue recognized under Percentage of completion
|
|
Real estate properties under development located in Hanzhong
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oriental Garden
|
|
|
273,787
|
|
|
|
91
|
%
|
|
$
|
97,546,861
|
|
|
$
|
15,353,987
|
|
|
$
|
94,135,830
|
|
|
(1)
|
Percentage of Completion is calculated by dividing total costs incurred by total estimated costs
for the relevant buildings in the each real estate building , estimated as of the time of preparation of our financial statements
as of and for the year indicated.
|
|
(2)
|
Qualified contract sales only include all contract sales with customer deposits balance as of June
30, 2016 equal or greater than 30% of contract sales amount and related individual of buildings were sold over 20%.
|
|
|
|
|
|
For the nine months ended June 30, 2015
|
|
|
|
Total GFA
|
|
|
Average
Percentage of Completion
|
|
|
Qualified Contract Sales
(3)
|
|
|
Revenue Recognized under Percentage of Completion
|
|
|
Accumulated Revenue recognized under Percentage of completion
|
|
Real estate properties under development located in Hanzhong
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mingzhu Garden – Mingzhu Beiyuan
|
|
|
355,321
|
|
|
|
91
|
%
|
|
$
|
93,927,283
|
|
|
$
|
32,327,131
|
|
|
$
|
90,863,721
|
|
Oriental Garden
|
|
|
273,693
|
|
|
|
83
|
%
|
|
|
85,002,706
|
|
|
|
21,024,387
|
|
|
|
75,660,419
|
|
Real estate properties under development located in Yang County
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yangzhou Pearl Garden
|
|
|
64,854
|
|
|
|
96
|
%
|
|
|
18,682,289
|
|
|
|
2,896,687
|
|
|
|
18,127,286
|
|
Total
|
|
|
693,868
|
|
|
|
|
|
|
$
|
197,612,278
|
|
|
$
|
56,248,205
|
|
|
$
|
184,651,426
|
|
|
(3)
|
Qualified contract sales only include all contract sales with customer deposits balance as of June
30, 2015 equal or greater than 30% of contract sales amount and related individual of buildings were sold over 20%.
|
Both Mingzhu Garden Phase II and Yangzhou
Pear Garden Phase II projects were completed by September 30, 2015, therefore the related revenue was not included in the above
table for the nine months ended June 30, 2016. For Oriental Garden real estate property under development, total contract sales
as of June 30, 2016 were $98,100,268 (September 30, 2015 - $95,518,605). Total GFA sold under contract sales as of June 30, 2016
was 132,989 square meters (September 30, 2015 – 119,353). The average unit price under contract sales was $733.5 per square
meters (September 30, 2015 - $800). For the purpose of percentage of completion calculation, the qualified contract sales amount
was approximately $97,546,861 for the nine months ended June 30, 2016 (September 30, 2015 - $92,093,999).
Cost of Sales
The following table sets forth a breakdown of our cost of sales:
|
|
|
For Nine months Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
Variance
|
|
|
|
|
Revenue
|
|
|
|
%
|
|
|
|
Revenue
|
|
|
|
%
|
|
|
|
Amount
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land use rights
|
|
|
1,213,547
|
|
|
|
7.8
|
%
|
|
|
1,437,014
|
|
|
|
5.2
|
%
|
|
|
(223,467
|
)
|
|
|
(15.6
|
%)
|
Construction cost
|
|
|
14,306,824
|
|
|
|
92.2
|
%
|
|
|
26,265,984
|
|
|
|
94.8
|
%
|
|
|
(11,959,160
|
)
|
|
|
(45.5
|
%)
|
Total cost
|
|
|
15,520,371
|
|
|
|
100
|
%
|
|
|
27,702,998
|
|
|
|
100
|
%
|
|
|
(12,182,627
|
)
|
|
|
(44.0
|
%)
|
Our cost of sales consists of costs associated
with land use rights and construction costs. Cost of sales are capitalized and allocated to development projects using 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) times the total cost of the project (or phase of the project).
Cost of sales was approximately $15.5 million
for the nine months ended June 30, 2016 compared to $27.7 million for the nine months ended June 30, 2015. The $12.2 million decrease
in cost of sales was mainly attributable to the decrease in total GFA sold during the nine months ended June 30, 2016 under percentage
of completion method which led to decreased revenue and cost of sales during this period.
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 nine months ended June 30, 2016 were approximately $1.2 million, as compared to $1.4 million for the nine months
ended June 30, 2015, representing a decrease of $0.2 million from the same period last year. The decrease was consistent with the
fact that total GFA sold under percentage completion method for the nine months ended June 30, 2016 was lower than the same period
of 2015.
Construction cost:
We outsource
the construction of all of our projects to third party contractors, whom we select through a competitive tender process. Our construction
contracts provide a fixed payment which covers substantially all labor, materials and equipment costs, subject to adjustments for
some types of excess, such as design changes during construction or changes in government-suggested steel prices. Our construction
costs consist primarily of the payments to our third-party contractors, which are paid over the construction period based on specified
milestones. In addition, we purchase and supply a limited range of fittings and equipment, including elevators, window frames and
door frames. Our construction costs for the nine months ending June 30, 2016 were approximately $14.3 million as compared to approximately
$26.3 million for the nine months ended June 30, 2015, representing a decrease of $12.0 million. The decrease in construction cost
was due to decrease in units sold under percentage of completion method during the nine months ended June 30, 2016
The total cost of sales as a percentage
of real estate sales before sales tax for the nine months ended June 30, 2016 increased to 61.6% from 46.1% for the nine months
ended June 30, 2015, which was mainly attributable to the fact the Company sold more parking space and certain commercial units
with higher margin in the same period of last year.
Gross Profit
Gross profit was approximately $7.9 million
for the nine months ended June 30, 2016 as compared to approximately $28.5 million for the nine months ended June 30, 2015, representing
a decrease of $20.6 million, which was mainly attributable to less revenue recognized in the current period. The overall gross
profit as a percentage of real estate sales before sales tax decreased to 31.5% during the nine months ended June 30, 2016 from
47.5% for the same period last year, mainly due to the Company sold more parking space and certain commercial units with higher
margin in the same period of last year. During the nine months ended June 30, 2016, only 14.9% of revenue were from sales of commercial
properties and parking lots, while 46.9% of revenue were from sales of commercial properties and parking lots in the same period
of last year. Generally, the gross margins for sales of commercial properties ranged from 60% to 85% and the gross margins for
sales of residential properties ranged from 30% to 35%. In addition, the Company adopted more flexible selling price on the residential
units in the Mingzhu Garden project and Yangzhou Pearl Garden project, the lower selling price also resulted in a decrease in the
gross margin. The overall decrease in gross profit margin for the nine months ended June 30, 2016 reflected the above factors.
The following table sets forth the gross margin of each of our
projects:
|
|
For nine months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Gross Profit
|
|
|
Percentage of Revenue
|
|
|
Gross Profit
|
|
|
Percentage of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan)
|
|
|
2,687,781
|
|
|
|
31.7
|
%
|
|
|
17,931,076
|
|
|
|
54.3
|
%
|
Oriental Garden
|
|
|
6,644,780
|
|
|
|
43.3
|
%
|
|
|
12,464,553
|
|
|
|
59.3
|
%
|
Yangzhou Pearl Garden
|
|
|
352,947
|
|
|
|
25.5
|
%
|
|
|
1,660,644
|
|
|
|
33.7
|
%
|
NanDajie
|
|
|
-
|
|
|
|
-
|
|
|
|
51,765
|
|
|
|
30.2
|
%
|
MingPing
|
|
|
-
|
|
|
|
-
|
|
|
|
327,909
|
|
|
|
33.5
|
%
|
Road Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Tax
|
|
|
(1,741,251
|
)
|
|
|
|
|
|
|
(3,892,435
|
)
|
|
|
|
|
Total Gross Profit
|
|
|
7,944,257
|
|
|
|
31.5
|
%
|
|
|
28,543,512
|
|
|
|
47.5
|
%
|
Total Real Estate Sales before Sales Tax
|
|
$
|
25,205,879
|
|
|
|
|
|
|
$
|
60,138,945
|
|
|
|
|
|
Operating Expenses
Total operating expenses decreased by 19.9%
or $484,661 to $1,956,928 for the nine months ended June 30, 2016 from $2,441,589 for the nine months ended June 30, 2015 as a
result of a significant decrease in selling expense of $516,562. The decrease in selling expenses for nine months ended June 30,
2016 was primarily attributed to decrease of commission paid to salesforce and marketing activities.
|
|
For Nine months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
$
|
288,138
|
|
|
$
|
804,700
|
|
General and administrative expenses
|
|
|
1,668,790
|
|
|
|
1,636,889
|
|
Total operating expenses
|
|
$
|
1,956,928
|
|
|
$
|
2,441,589
|
|
Percentage of Real Estate Sales before Sales Tax
|
|
|
7.8
|
%
|
|
|
4.1
|
%
|
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 nine months ended June
30, 2016 and 2015.
PRC Taxes
Our Company is governed by the Income Tax
Law of the People’s Republic of China concerning private-run enterprises, which are generally subject to tax at a statutory
rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments.
However, the local tax authority of Hanzhong
City has the power to assess corporate taxes annually on local enterprises at a pre-determined fixed rate as an incentive to stimulate
the local economy and encourage entrepreneurship. The tax authority assessed us for income taxes at the rate of 1.25% on revenue
in Yang County and 2.5% on our revenue in Hanzhong, instead of statutory rate of 25% on the income before income tax. Income tax
provision for the nine months ended June 30, 2016 were $612,846 compared to $1,441,943 for the nine months ended June 30, 2015
as a result of the decrease in our revenue.
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. Management believes
that the possibility of any reevaluation of income taxes is remote based on the fact that the Company has obtained the written
tax clearance from the local tax authority. Thus, no additional taxes payable have been recorded for the difference between the
taxes due based on taxable income calculated according to statutory taxable income method and the taxes due based on the fixed
rate method. It is the Company’s policy that if such reevaluation of income taxes becomes probable and the amount of additional
taxes due can be reasonably estimated, additional taxes shall be recorded in the period in which the amount can be reasonably estimated
and shall not be charged retroactively to an earlier period.
Net Income
We reported net
income of approximately $5.2 million for the nine months ended June 30, 2016, as compared to net income of approximately $24.6
for the nine months ended June 30, 2015. The decrease of $19.4 million in our net income was primarily due to the lower revenue
and gross profit as discussed above under Revenues and Gross Profit.
Other Comprehensive Income
We operate primarily in the PRC and the
functional currency of our operating subsidiary is the Chinese Renminbi (”RMB”). RMB is not freely convertible
into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation
is made that RMB amounts could have been, or could be, converted into USD at the rates used in translation.
Translation adjustments resulting from
this process amounted to a reduction of OCI of $7,029,987 and $1,086,967 for the nine months ended June 30, 2016 and 2015, respectively. The
significant effect of the foreign exchange translation adjustment for the three months ended June 30, 2016 was due to the significant
depreciation of RMB to USD foreign exchange rates. The balance sheet amounts with the exception of equity at June 30, 2016 were
translated at 6.6443 RMB to 1 USD as compared to 6.3568 RMB to 1 USD at September 30, 2015. The equity accounts were stated at
their historical rate. The average translation rates applied to the income statements accounts for the periods ended June 30, 2016
and 2015 were 6.4875 RMB and 6.1547 RMB, respectively.
Liquidity and Capital Resources
Current Assets and Liabilities
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. In the past, we mainly financed our operations primarily through cash flows from operations, bank borrowings and
loan from financial institutions and borrowings from our principal shareholder.
As of June 30, 2016, the Company had approximately
$50.5 million in working capital, an increase of $16.2 million as compared to $34.3 million as of September 30, 2015. Our total
cash and restricted cash balance were consistently maintained at approximately $3.6 million and $3.0 million as of June 30, 2016
and September 30, 2015, respectively. Since most of our current real estate development is completed, we are expecting to collect
the full purchase price from our existing customers in the coming period.
In addition, 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 $116,641,336 (RMB 775,000,000) long term loan at 4.245% interest
to develop Liang Zhou Road Project. As of June 30, 2016, the Company borrowed $64,322,132 from this credit line. The loan is
guaranteed by Hanzhong City Hantai District Municipal Government and pledged by the Company’s Yang County Palace
project with carrying value of $69,154,951 as of June 30, 2016. Furthermore, On January 8, 2016, the Company signed a loan
agreement with Hanzhong Municipal Housing Provident Fund Management Center to borrow up to $$12,040,395 (RMB 80,000,000) for
development of Oriental Garden project. The loan carries interest at is 3.575% and is due in January 2019. The repayment is
required based on certain sales milestones or a fixed repayment schedule starting in July 2018. Our major shareholder and his
wife pledged their assets for the loan. The Housing Fund has rights to monitor the project’s future cash flow.
With respect to capital funding requirements,
the Company budgeted capital spending based on an ongoing assessment of needs to maintain adequate cash. Due to the long term relationship
with our construction suppliers, we were able to effectively manage cash spending on construction. Also, our major shareholder,
Mr. Xiaojun Zhu has agreed to provide his personal funds, if necessary, to support on an as needed basis. In addition, the Company’s
cash flows from pre-sales and current sales should provide financial support for our current developments and operations.
In order to fully implement our business
plan and sustain continued growth, we may also need to raise capital from outside investors. Our expectation, therefore, is that
we will seek to access the capital markets in both the U.S. and China to obtain the funds as needed. At the present time, however,
we do not have commitments of funds from any third party.
Cash Flow
Comparison of cash flows results is summarized as follows:
|
|
Nine months ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Net cash (used in) provided by operating activities
|
|
$
|
(50,377,317
|
)
|
|
$
|
13,238,242
|
|
Net cash used in investing activities
|
|
|
(8,010
|
)
|
|
|
-
|
|
Net cash provided by (used in) financing activities
|
|
|
51,214,050
|
|
|
|
(10,597,026
|
)
|
Effect of change of foreign exchange rate on cash
|
|
|
(77,277
|
)
|
|
|
17,623
|
|
Net cash increase (decrease) in cash
|
|
|
751,446
|
|
|
|
2,658,839
|
|
Cash, beginning of period
|
|
|
1,333,919
|
|
|
|
1,125,545
|
|
Cash, end of period
|
|
$
|
2,085,365
|
|
|
$
|
3,784,384
|
|
Operating Activities
Net cash used in operating activities during
the nine months ended June 30, 2016 was $50.4 million, compared to net cash provided by the operating activities of $13.1 million
for the same period of last year, the significant increase in spending for the nine months ended June 30, 2016 was mainly due to
$42.1 million expenditure on the Liang zhou road related projects and the Company’s net income decreased by approximately
$19.4 million compared to the same period of last year. In addition, for the nine months ended June 30, 2016, the Company repaid
accounts payable of $15.2 million, spent $5.4 million in other assets, repaid accrued expense of $1.2 million and construction
deposits of $1.2 million, which was offset by collection totaling $5.3 million of new customer deposits.
Investing Activities
The Company spent $8,010 in purchase of
fixed assets during the nine months ended June 30, 2016, while there was no such spending in the same period of last year.
Financing Activities
Net cash flows provided by financing activities
amounted to approximately $51.2 million for the nine months ended June 30, 2016, compared to net cash used in financing activities
of $10.4 million for the nine months ended June 30, 2015. The Company borrowed $62.8 million from various lenders to develop the
Liang Zhou Road related project, while the Company made net loan repayment of $10.6 million in the same period of last year.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Inflation
Inflation has not had a material impact
on our business and we do not expect inflation to have a material impact on our business in the near future.