The accompanying notes are an integral part
of these consolidated financial statements
The accompanying notes are an integral part
of these consolidated financial statements
* For the year ended September 30, 2016,
Shaanxi Guangsha Investment and Development Group Co., Ltd (“Guangsha”), the VIE of the Company, had a recapitalization.
The VIE’s accumulated retained earnings and statutory reserve were reclassified to additional paid – in capital in
the consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statement
The accompanying notes are an integral
part of these consolidated financial statements
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
China HGS Real Estate Inc. (the “Company”
or “China HGS” or “we”, “our”, “us”) is a corporation organized under the
laws of the State of Florida.
China HGS does not conduct any substantive
operations of its own. Instead, through its subsidiary, Shaanxi HGS Management and Consulting Co., Ltd (“Shaanxi HGS”),
it entered into certain exclusive contractual agreements with the management of the Company’s PRC operating subsidiary, Shaanxi
Guangsha Investment and Development Group Co., Ltd (“Guangsha”). Pursuant to these agreements, Shaanxi HGS is obligated
to absorb a majority of the risk of loss from Guangsha’s activities and entitles Shaanxi HGS to receive a majority of Guangsha’s
expected residual returns. In addition, Guangsha’s shareholders have pledged their equity interest in Guangsha to Shaanxi
HGS, irrevocably granted Shaanxi HGS an exclusive option to purchase, to the extent permitted under PRC Law, all or part of the
equity interests in Guangsha and agreed to entrust all the rights to exercise their voting power to the person(s) appointed by
Shaanxi HGS.
Based on these contractual arrangements,
management believes that Guangsha should be considered a “Variable Interest Entity” (“VIE”) under ASC 810
“Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”, because the equity investors in Guangsha
no longer have the characteristics of a controlling financial interest, and the Company, through Shaanxi HGS, is the primary beneficiary
of Guangsha. Accordingly, Guangsha has been consolidated under ASC 810.
The Company, through its subsidiaries and
VIE, engages in real estate development, in the construction and sale of residential apartments, parking lots and commercial properties.
Total assets and liabilities presented on the consolidated balance sheets and sales, cost of sales, net income presented on Consolidated
Statement of Income and Comprehensive Income as well as the cash flow from operation, investing and financing activities presented
on the Consolidated Statement of Cash Flows are substantially the financial position, operation and cash flow of Guangsha. The
Company has not provided any financial support to Guangsha for the years ended September 30, 2016 and 2015.
The following assets and liabilities of
the consolidated VIE are included in the accompanying consolidated financial statements of the Company as of September 30, 2016
and 2015:
|
|
Balance as of
|
|
|
|
September 30,
2016
|
|
|
September 30,
2015
|
|
Current assets
|
|
$
|
135,675,587
|
|
|
$
|
145,628,992
|
|
Non-current assets
|
|
|
220,295,366
|
|
|
|
152,360,755
|
|
Total assets
|
|
|
355,970,953
|
|
|
|
297,989,747
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
83,547,250
|
|
|
|
110,515,207
|
|
Non-current liabilities
|
|
|
116,968,207
|
|
|
|
29,660,783
|
|
Total liabilities
|
|
$
|
200,515,457
|
|
|
$
|
140,175,990
|
|
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The Company’s consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”).
The consolidated financial statements include
the accounts of China HGS Real Estate Inc. (the “Company” or “China HGS”), China HGS Investment Inc. (“HGS
Investment”), Shaanxi HGS Management and Consulting Co., Ltd. (“Shaanxi HGS”) and its variable interest entity
(“VIE”), Shaanxi Guangsha Investment and Development Group Co., Ltd. (“Guangsha”). All inter-company transactions
and balances between the Company and its subsidiaries have been eliminated upon consolidation.
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 by the percentage
of completion method on the sale of individual units when all the following criteria are met:
|
a.
|
Construction is beyond a preliminary stage.
|
|
b.
|
The buyer is committed to the extent of being unable to require a refund except for non-delivery of the unit or interest.
|
|
c.
|
Sufficient units have already been sold to assure that the entire property will not revert to rental property.
|
|
d.
|
Sales prices are collectible.
|
|
e.
|
Aggregate sales proceeds and costs can be reasonably estimated.
|
If any of the above criteria is not met,
proceeds shall be accounted for as deposits until the criteria are met.
Under the percentage of completion method,
revenues from 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.
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Revenue recognition (continued)
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 30%-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 refund 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 had to refund 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
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.
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
EFFECT OF CHANGE IN ESTIMATE
Changes of estimated gross profit margins
related to revenue recognized under the percentage of completion method are made in the period in which circumstances requiring
the revisions become known. For the year end September 30, 2016, real estate development projects with gross profits recognized
in 2015 had changes in their estimated revenue and related gross profit margins. The Company reduced its prior estimates related
to selling prices and total estimated sales values which led to an increase in the recognized costs of sales under percentage completion
revenue recognition approach. As a result of these changes in gross profit margins, net income for the year ended September 30,
2016 decreased by $3,940,964 (2015 – $1,500,119) and basic and diluted earnings per share for the year ended September 30,
2016 decreased by $0.09 (2015 - $0.03).
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 on what assumptions the market participants would use in pricing the
asset or liability based on the best available information.
The carrying amounts of cash, restricted cash and all other
current assets, security deposits for land use rights, loans and all current liabilities approximate their fair value based on
the short-term maturity of these instruments. The fair value of the long term customer, construction and security deposits approximate
their carrying amounts because the deposits are received in cash. It was impractical to estimate the fair value of the amount due
from the local government and the long term other loans payable.
Foreign currency translation
The Company’s financial information
is presented in U.S. dollars. The functional currency of the Company’s operating subsidiaries is Renminbi (“RMB”),
the currency of the PRC. The consolidated financial statements of the Company have been translated into U.S. dollars in accordance
with ASC 830-30 “Translation of Financial Statements”. The financial information is first prepared in RMB and then
is translated into U.S. dollars at year-end exchange rates as to assets and liabilities and average exchange rates as to revenue
and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The effects
of foreign currency translation adjustments are included as a component of accumulated other comprehensive income in stockholders’
equity.
|
|
2016
|
|
|
2015
|
|
Year end RMB : USD exchange rate
|
|
|
6.6702
|
|
|
|
6.3568
|
|
Annual average RMB : USD exchange rate
|
|
|
6.5326
|
|
|
|
6.1653
|
|
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Foreign currency translation (continued)
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.
Advances to vendors
Advances to vendors consist of balances
paid to contractors and vendors for services and materials that have not been provided or received and generally relate to the
development and construction of residential and commercial units in the PRC. Advances to vendors are reviewed periodically to determine
whether their carrying value has become impaired. Historically, the Company has not experienced any losses as a result of these
advances.
Security deposits for land use rights
Security deposits for land use rights consist
of the deposit held by the PRC government for the purchase of land use rights and the deposit held by an unrelated party to transfer
its land use rights to the Company. The deposits will be reclassified to real estate property under development upon the transfers
of legal title.
Real estate property development completed
and under development
Real estate property consists of finished
residential unit sites, commercial offices and residential unit sites under development. The Company leases the land for the residential
unit sites under land use right leases with various terms from the PRC government. The cost of land use rights is included in the
development cost and allocated to each project. Real estate property development completed and real estate property under development
are stated at the lower of cost or fair value.
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Real estate property development completed
and under development (continued)
Expenditures for land development, including
cost of land use rights, deed tax, pre-development costs, and engineering costs, exclusive of depreciation, are capitalized and
allocated to development projects by the specific identification method. Costs are allocated to specific units within a project
based on the ratio of the sales area of units to the estimated total sales area of the project (or phase of the project) multiplied
by the total cost of the project (or phase of the project).
Cost of amenities transferred to buyers
is allocated to specific units as a component of total construction cost. The amenity cost includes landscaping, road paving, etc.
Once the projects are completed, the amenities are under control of the property management companies. Real estate property development
completed and real estate property under development are reclassified on the balance sheet into current and non-current portions
based on the estimated date of construction completion and sales. The real estate property development completed classification
is based on the estimated date that each property is expected to be sold within the Company’s normal operating cycle of the
business and the Company’s sales plan. Real estate property development completed is classified as a current asset if the
property is expected to be sold within the normal operating cycle of the business. Otherwise, it is classified as a non-current
asset. The majority of real estate projects the Company has completed in the past were multi-layer or sub-high-rise real estate
projects. The Company considers its normal operating cycle is 12 months.
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 years
ended September 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 years ended September 30, 2016 and 2015, the total interest capitalized in the
real estate property development was $3,410,529 and $3,064,621, respectively.
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Property, Plant and equipment, net
Property, plant and equipment are recorded
at cost less accumulated depreciation and any impairment losses. The cost of an asset comprises its purchase price and
any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditure
incurred after the fixed assets have been put into operation, such as repairs and maintenance and overhaul costs, is normally expensed
in the year in which it is incurred.
Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, less any estimated residual value. Estimated useful lives of the
assets are as follows:
Buildings
|
|
39 years
|
Machinery and office equipment
|
|
5-10 years
|
Vehicles
|
|
8 years
|
Any gain or loss on disposal or retirement
of a fixed asset is recognized in the profit and loss account and is the difference between the net sales proceeds and the net
carrying amount of the asset. When property and equipment are retired or otherwise disposed of, the asset and accumulated depreciation
are removed from the accounts and the resulting profit or loss is reflected in income.
Maintenance, repairs and minor renewals
are charged directly to expense as incurred unless such expenditures extend the useful life or represent a betterment, in which
case they are capitalized.
Impairment of long-lived assets
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 for the years ended September 30, 2016 and 2015.
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.
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
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 years ended September 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.
Stock-based compensation
Share-based payment transactions are measured
based on the grant-date fair value of the equity instrument issued and recognized as compensation expense over the requisite service
period, or vesting period.
Forfeitures to be estimated at the time
of grant and revised, if necessary, in the subsequent period if actual forfeitures differ from initial estimates. Forfeiture rate
is estimated based on historical and future expectation of employee turnover rate and are adjusted to reflect future change in
circumstances and facts, if any. Share-based compensation expense is recorded net of estimated forfeitures such that expense was
recorded only for those stock options and common stock awards that are expected to vest.
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 September 30, 2016 and 2015.
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Income taxes (continued)
The Company is a corporation organized
under the laws of the State of Florida. However, all of the Company’s operations are conducted solely by its subsidiaries
in the PRC. No income is earned in the United States and the management does not repatriate any earnings outside the
PRC. As a result, the Company did not generate any U.S. taxable income for the years ended September 30, 2016 and 2015.
As of September 30, 2016, the Chinese entities’ income tax returns filed in China for the years ended December 31, 2015,
2014, 2013, 2012 and 2011 are subject to examination by the Chinese taxing authorities.
As of September 30, 2016, the tax years
ended September 30, 2008 through September 30, 2016 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, 2012 through September
30, 2016 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%.
Comprehensive income
In accordance with ASC 220-10-55, comprehensive
income (loss) is defined as all changes in equity except those resulting from investments by owners and distributions to owners.
The Company’s only components of comprehensive income (loss) for the years ended September 30, 2016 and 2015 were net income
and foreign currency translation adjustments.
Advertising expenses
Advertising costs are expensed as incurred.
For the years ended September 30, 2016 and 2015, the Company recorded advertising expenses of $591,390 and $338,115, respectively.
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
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.
The following table presents a reconciliation
of basic and diluted net income per share:
|
|
For the years ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Net income attributable to common share holders
|
|
$
|
5,018,940
|
|
|
$
|
31,427,626
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares used in Basic computation
|
|
|
45,050,000
|
|
|
|
45,050,000
|
|
Effect of diluted stock options
|
|
|
-
|
|
|
|
2,252
|
|
Weighted average common shares used in Diluted computation
|
|
|
45,050,000
|
|
|
|
45,052,252
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - Basic
|
|
$
|
0.11
|
|
|
$
|
0.70
|
|
Earnings per share - Diluted
|
|
$
|
0.11
|
|
|
$
|
0.70
|
|
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 year
ended September 30, 2016, two suppliers accounted for 22% and 17% of the total project expenditure, respectively. For the year
ended September 30, 2015, three suppliers accounted for 23%, 21% and 17% of the total project expenditure, respectively.
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 currently evaluating
the impact of this update on its consolidated financial statements.
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 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. The 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 consolidated financial statements.
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 the ASU on its unaudited financial statements,
disclosure requirements and methods of adoption.
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Recent Accounting Pronouncements – continued
In August 2016, the FASB issued ASU No.
2016 15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to provide guidance
on
the presentation and classification of certain cash receipts and cash payments on the statement of cash flows. The guidance specifically
addresses cash flow issues with the objective of reducing the diversity in practice. The guidance will be effective for the Company
in fiscal year 2018, but early adoption is permitted. The Company is currently evaluating the impact of this new standard on its
consolidated financial statements and related disclosures.
In
October 2016, the FASB issued ASU No. 2016-17, Consolidation (Topic 810): Interest Held through Related Parties That Are under
Common Control, to provide guidance on the evaluation of whether a reporting entity is the primary beneficiary of a VIE by amending
how a reporting entity, that is a single decision maker of a VIE, treats indirect interests in that entity held through related
parties that are under common control. The amendments are effective for public business entities for fiscal years beginning after
December 15, 2016, including interim periods within those fiscal years. For all other entities, the amendments are effective for
fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Early
adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of this new standard
on its consolidated financial statements and related disclosures.
In
November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows: Restricted Cash". The amendments address diversity
in practice that exists in the classification and presentation of changes in restricted cash on the statement of cash flows. The
amendment is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within
those fiscal years. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.
NOTE 3. REAL ESTATE PROPERTY
COMPLETED AND UNDER DEVELOPMENT
The following summarizes the components
of real estate property completed and under development as of September 30, 2016 and 2015:
|
|
Balance as of
|
|
|
|
September 30,
2016
|
|
|
September 30,
2015
|
|
Development completed:
|
|
|
|
|
|
|
|
|
Hanzhong City Mingzhu Garden Phase I
|
|
$
|
952,066
|
|
|
$
|
1,146,277
|
|
Hanzhong City Mingzhu Garden Phase II
|
|
|
54,933,680
|
|
|
|
66,070,589
|
|
Hanzhong City Nan Dajie (Mingzhu Xinju)
|
|
|
1,371,633
|
|
|
|
1,439,257
|
|
Hanzhong City Oriental Pearl Garden (a)
|
|
|
50,643,258
|
|
|
|
-
|
|
Yang County Yangzhou Pearl Garden Phase I
|
|
|
2,396,420
|
|
|
|
3,419,273
|
|
Yang County Yangzhou Pearl Garden Phase II
|
|
|
4,545,927
|
|
|
|
5,456,387
|
|
Real estate property development completed
|
|
$
|
114,842,984
|
|
|
$
|
77,531,783
|
|
Less: Real estate property completed – short-term
|
|
|
113,185,929
|
|
|
|
75,391,512
|
|
Real estate property completed – long-term
|
|
$
|
1,657,055
|
|
|
$
|
2,140,271
|
|
Under development:
|
|
|
|
|
|
|
|
|
Hanzhong City Oriental Pearl Garden (a)
|
|
$
|
-
|
|
|
$
|
55,154,153
|
|
Yang County Yangzhou Palace
|
|
|
76,618,856
|
|
|
|
47,843,166
|
|
Hanzhong City Shijin Project
|
|
|
7,261,811
|
|
|
|
7,619,829
|
|
Hanzhong City Liangzhou Road and related projects (b)
|
|
|
117,226,429
|
|
|
|
85,069,755
|
|
Hanzhong City Hanfeng Beiyuan East (c)
|
|
|
657,706
|
|
|
|
587,993
|
|
Hanzhong City Beidajie (e)
|
|
|
3,228,580
|
|
|
|
78,735
|
|
Yang County East 2
nd
Ring Road (d)
|
|
|
2,390,633
|
|
|
|
2,461,303
|
|
Real estate property under development
|
|
$
|
207,384,015
|
|
|
$
|
198,814,934
|
|
Less: Short-term portion
|
|
|
-
|
|
|
|
55,154,153
|
|
Real estate property under development –long-term
|
|
$
|
207,384,015
|
|
|
$
|
143,660,781
|
|
|
(a)
|
The Company recognized $18,777,470 of development cost
in the cost of real estate sales under the percentage of completion method for the year ended September 30, 2016 (2015 - $12,168,108).
The project was completed as of 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 and approved by the local government in the early 2017.
|
NOTE 3. REAL ESTATE PROPERTY
COMPLETED AND UNDER DEVELOPMENT (continued)
The Company’s development
cost incurred on Liangzhou Road Project is treated as the Company’s deposit on purchasing the related land use rights, as
agreed by the local government. As of September 30, 2016, the actual costs incurred by the Company were $117,226,429 (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 years ended September 30, 2016 and 2015, the Company received government’s
subsidies of $Nil and $9,439,183 for its Shanty Area Reform Project surrounding Liang Zhou Road located in Hantai District, Hanzhong
City, respectively and the Company recorded the subsidies to offset against the development cost of Liangzhou Road 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 quarter
ended March 31, 2014. As of September 30, 2016, the Company is waiting for the local government’s assessment and planning
for the scope and budget for these projects.
|
|
(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 km and a budgeted price of approximately $25.2 million (or RMB 168 million), which was approved by
the local Yang County government in March 2014. The local government is required to repay the Company’s project investment
costs within 3 years with interest at the interest rate based on the commercial borrowing rate with the similar term published
by China construction bank (September 30, 2016 - 4.75% 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 2017
|
|
(e)
|
For the years ended September 30, 2016 and 2015, the Company received government’s subsidies
in the amount of $3,153,544 and $Nil for its Shanty Area Reform Project surrounding Beidajie Project located in Hantai District,
Hanzhong City, respectively and the Company recorded the subsidies to offset against the development cost of Beidajie project.
|
As of September 30, 2016 and 2015, land
use rights included in real estate property under development totaled $19,568,460 and $39,929,072, respectively.
NOTE 4. PROPERTY, PLANT AND EQUIPMENT, NET
As of September 30, 2016 and 2015, property,
plant and equipment was as follows:
|
|
As of September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Buildings
|
|
$
|
819,621
|
|
|
$
|
860,030
|
|
Machinery
|
|
|
27,885
|
|
|
|
29,260
|
|
Office equipment
|
|
|
-
|
|
|
|
-
|
|
Automobiles
|
|
|
545,640
|
|
|
|
444,060
|
|
Total
|
|
|
1,393,146
|
|
|
|
1,333,350
|
|
Less: accumulated depreciation
|
|
|
600,496
|
|
|
|
553,312
|
|
Property, plant and equipment, net
|
|
$
|
792,650
|
|
|
$
|
780,038
|
|
Depreciation expense for the years ended
September 30, 2016 and 2015 was $74,723 and $83,701, respectively.
NOTE 5. RECEIVABLE FROM LOCAL GOVERNMENT
– LONG-TERM
In June 2012, the Company was approved
by Hanzhong local government to construct two municipal roads with total length of 1,064.09 meters. The budgeted price for these
two municipal roads is approximately $2.9 million which was approved by the Hanzhong Ministry of Finance. The Company completed
and delivered these two roads to the local government on March 21, 2014 with local government’s approval. The Company recognized
such revenue during the year ended September 30, 2014. As of September 30, 2016, a receivable from the Hanzhong local government
of $2,920,990 was classified as long term on the accompanying consolidated balance sheets (September 30, 2015 - $3,065,000) because
the Company expected to realize the receivable to offset municipal surcharges from local government for the Liangzhou road related
projects in 2017 and a later time.
NOTE 6. SECURITY DEPOSITS
As of September 30, 2016 and 2015, security
deposits were as follows:
|
|
As of September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Security deposit for land use right
(1)
|
|
$
|
2,998,411
|
|
|
$
|
3,146,237
|
|
Security deposits for other loan
(2)
|
|
|
4,941,726
|
|
|
|
-
|
|
Security deposits
|
|
$
|
7,940,137
|
|
|
$
|
3,146,237
|
|
|
(1)
|
In May 2011, the Company entered into a development agreement
with the Hanzhong local government. Pursuant to the agreement, the Company will prepay the development cost of $17,945,489 (RMB
119,700,000) to acquire certain land use rights through public bidding. The prepaid development cost will be deducted from the
final purchase price of the land use rights. As of September 30, 2016, a deposit of $2,998,411 (RMB 20, 000,000) (2015 - $3,146,237
or RMB 20,000,000) was paid. The Company currently expects to make payment of the remaining development cost as the government’s
work progresses. The Company classified the security deposits for land use rights as long term based on the Company’s development
plan.
|
|
(2)
|
In connection with financing from Hanzhong Urban Construction Investment Development Co., Ltd (
See note 8), the Company was required to provide a security deposit for the loan received. As of September 30, 2016, the security
deposit balances were $4,941,726 (September 30, 2015 - $Nil) for other loan with Hanzhong Urban Construction Investment Development
Co., Ltd.
|
NOTE 7. 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 as of September 30, 2016.
The average interest rate of the loan was
5% as of September 30, 2016 and 5.5% as of September 30, 2015. For the years ended September 30, 2016 and 2015, total loan interest
was $137,962 and $952,083, respectively. Interest expense incurred in fiscal 2016 were included in the interest expense, because
the Mingzhu Beiyuan project has been completed by September 30, 2015. Interest incurred in fiscal 2015 was capitalized in to the
development cost of Mingzhu Garden – Mingzhu Beiyuan project Phase II.
NOTE 8. OTHER LOANS
|
|
As of September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Loan A (i)
|
|
$
|
-
|
|
|
$
|
954,883
|
|
Loan B (ii)
|
|
|
-
|
|
|
|
4,719,356
|
|
Loan C (iii)
|
|
|
93,975,338
|
|
|
|
15,731,186
|
|
Loan D (iv)
|
|
|
11,993,643
|
|
|
|
-
|
|
|
|
|
105,968,981
|
|
|
|
21,405,425
|
|
Less: current maturities of other loans
|
|
|
6,125,753
|
|
|
|
5,674,239
|
|
Other loans – long-term portion
|
|
$
|
99,843,228
|
|
|
$
|
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 years ended September 30, 2016 and 2015, total interest
was $23,364 and $1,038,846, respectively, which was capitalized in to the development cost of Liangzhou road project.
|
|
(ii)
|
On May 6, 2015, the Company renewed a credit agreement with a financial institution. On May 22,
2015, the Company borrowed $4,497,616 (RMB 30,000,000) at a fixed interest rate of 20% per year for a six months period and the
rate may up-float 50% if the loan proceeds were not used for the intended borrowing purpose. The loan was for the construction
of Oriental Pearl Garden real estate project. The loan has been fully repaid as of September 30, 2016. For the years ended September
30, 2016 and 2015, total finance cost was $107,055 and $755,097, respectively, which was capitalized in 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 $116,188,420 (RMB 775,000,000) for a
long term loan at 4.245% interest per year to develop Liang Zhou Road Project. As of September 30, 2016, the Company borrowed $93,975,338
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 $76,618,856 as of September 30, 2016. In addition, the Company was required to
provide a security deposit for the loan received (see note 6). As of September 30, 2016, the security deposit balances were $4,941,726
(2015- $Nil) for loan received. For the years ended September 30, 2016 and 2015, the interest was $2,949,185 and $77,909, respectively,
which was capitalized in to the development cost of Liangzhou road project. Subsequent to September 30, 2016, the Company further received $7,032,773 (RMB 46,910,000) from Hanzhong Urban Construction
Investment Development Co., Ltd. The combined loan repayment schedule assuming total
loan proceeds are borrowed are listed below:
|
|
|
Repayment in USD
|
|
|
Repayment in RMB
|
|
29-May-2017
|
|
|
6,125,753
|
|
|
|
40,860,000
|
|
20-November-2017
|
|
|
6,125,753
|
|
|
|
40,860,000
|
|
20-April -2018
|
|
|
13,116,548
|
|
|
|
87,490,000
|
|
20-May-2018
|
|
|
6,232,197
|
|
|
|
41,570,000
|
|
20-November-2018
|
|
|
6,232,197
|
|
|
|
41,570,000
|
|
20-April-2019
|
|
|
13,116,548
|
|
|
|
87,490,000
|
|
20-May-2019
|
|
|
6,382,117
|
|
|
|
42,570,000
|
|
20-October-2019
|
|
|
13,116,548
|
|
|
|
87,490,000
|
|
29-November-2019
|
|
|
6,382,117
|
|
|
|
42,570,000
|
|
20-April-2020
|
|
|
13,121,046
|
|
|
|
87,520,000
|
|
20-October-2020
|
|
|
13,116,548
|
|
|
|
87,490,000
|
|
20-October-2021
|
|
|
13,121,046
|
|
|
|
87,520,000
|
|
Total
|
|
|
116,188,418
|
|
|
|
775,000,000
|
|
NOTE 8. 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 $11,993,643 (RMB 80,000,000) on development of
Oriental Garden related projects. The loan carries interest at 3.575% per year and is due in January 2019. The Company’s
major shareholder Mr. Xiaojun Zhu pledged his personal assets as collateral for the loan. As of September 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 years ended September
30, 2016 and 2015, total interest was $290,653 and $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
|
|
|
2,998,411
|
|
|
|
20,000,000
|
|
Earlier of October 2018 or 70% sales completed
|
|
|
4,497,616
|
|
|
|
30,000,000
|
|
Earlier of January 2019 or 75% sales completed
|
|
|
4,497,616
|
|
|
|
30,000,000
|
|
Total
|
|
|
11,993,643
|
|
|
|
80,000,000
|
|
NOTE 9. CUSTOMER DEPOSITS
Customer deposits consist of amounts received
from customers for the pre-sale of residential units in the PRC. The details of customer deposits are as follows:
|
|
As of September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Customer deposits by real estate projects
|
|
|
|
|
|
|
|
|
Mingzhu Garden (Mingzhu Nanyuan and Mingzhu Beiyuan)
|
|
$
|
9,150,119
|
|
|
$
|
7,832,619
|
|
Oriental Pearl Garden
|
|
|
5,582,158
|
|
|
|
7,220,575
|
|
Liangzhou road and related projects
|
|
|
2,593,625
|
|
|
|
2,035,615
|
|
Yang County Pearl Garden
|
|
|
2,057,931
|
|
|
|
2,334,775
|
|
Yang County Palace
|
|
|
8,093,647
|
|
|
|
6,210,389
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
27,477,480
|
|
|
|
25,633,973
|
|
Including: Customer deposits - short-term
|
|
|
16,790,208
|
|
|
|
17,387,969
|
|
Customer deposits - long-term
|
|
$
|
10,687,272
|
|
|
$
|
8,246,004
|
|
Customer deposits are typically 10% - 20%
of the unit price for those customers who purchase properties in cash and 30%-50% of the unit price for those customers who purchase
properties with mortgages. Buyers with mortgage loans pay customer deposits. The banks provide the balance of the funding to the
Company upon consummation of the sales. The banks hold the properties as collateral for customers’ mortgage loans. If the
customers default, the bank will repossess the collateral properties. Except during the Mortgage Loan Guarantee Period of approximately
six to twelve months, the banks have no recourse to the Company for customers’ defaults. As of September 30, 2016 and 2015,
approximately $1.5 million and $1.7 million was guaranteed by the Company, respectively.
NOTE 10. RELATED PARTY LOANS
|
|
As of September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Shareholder loan – USD loan (a)
|
|
$
|
1,810,000
|
|
|
$
|
1,810,000
|
|
Shareholder loan – RMB loan (b)
|
|
|
899,523
|
|
|
|
-
|
|
Total
|
|
$
|
2,709,523
|
|
|
$
|
1,810,000
|
|
|
a.
|
The Company has a one year loan agreement (“USD
Loan Agreement”) with Mr. Xiaojun Zhu, our Chairman, CEO and major shareholder (“Mr. Zhu”), pursuant to which
the Company borrowed $1,810,000 to make a capital injection into Shaanxi HGS, the Company’s subsidiary. The interest
rate for the loan is 4% per annum and the loan matured on July 19, 2014. The Company entered into the amendments to
the USD Loan Agreement to extend the term until July 31, 2017. The Company recorded interest of $72,400 for each of the years
ended September 30, 2016 and 2015. The Company has not yet paid this interest and it is recorded in accrued expenses in the accompanying
consolidated balance sheets as of September 30, 2016 and 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 4.35% per year. The RMB loan balance as of September 30, 2016 and 2015 was $899,523 and $Nil, respectively. For the years
ended September 30, 2016 and 2015, the interest was $40,172 and $240,687, respectively, which is capitalized in the development
cost of Liangzhou road project.
|
NOTE 11. 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 September
30, 2016 and 2015, 36.1% 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:
|
|
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
|
|
NOTE 11. STOCK OPTIONS (continued)
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
|
|
|
Grant Date
Fair Value
|
|
Outstanding, September 30, 2014
|
|
|
140,000
|
|
|
$
|
2.39
|
|
|
|
0.89
|
|
|
|
44,207
|
|
Granted
|
|
|
120,000
|
|
|
$
|
1.89
|
|
|
|
2.89
|
|
|
|
178,800
|
|
Forfeited
|
|
|
(130,000
|
)
|
|
$
|
2.39
|
|
|
|
-
|
|
|
|
(31,093
|
)
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, September 30, 2015
|
|
|
130,000
|
|
|
$
|
1.93
|
|
|
|
2.71
|
|
|
$
|
191,914
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited *
|
|
|
(10,000
|
)
|
|
$
|
2.37
|
|
|
|
-
|
|
|
|
(13,114
|
)
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, September 30, 2016
|
|
|
120,000
|
|
|
$
|
1.89
|
|
|
|
1.89
|
|
|
$
|
178,800
|
|
Exercisable, September 30, 2016
|
|
|
43,333
|
|
|
$
|
1.89
|
|
|
|
1.89
|
|
|
$
|
64,567
|
|
* options expired for the years ended September
30, 2016.
Stock-based compensation expense recognized
in the years ended September 30, 2016 and 2015 was $59,600 and $4,967, respectively. As of September 30, 2016 and 2015, there was
$114,233 and $173,833 unrecognized compensation cost related to stock option awards that are expected to be recognized.
NOTE 12. TAXES
(A) Business sales tax and VAT
The Company is subject to a 5% business
sales tax on revenue. It is the Company’s continuing practice to recognize the 5% business sales tax based on
revenue as a cost of sales as the revenue is recognized. As of September 30, 2016, the Company had business sales tax payable of
$13,453,236 (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 years ended September 30, 2016 and 2015, the Company’s
income taxes were $974,688 and $1,951,226, 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.
The following table reconciles the statutory rates to the Company’s effective tax rate for the years ended September 30,
2016, 2015 and 2014:
|
|
2016
|
|
|
2015
|
|
Chinese statutory tax rate
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
Valuation allowance change
|
|
|
0.7
|
%
|
|
|
0.1
|
%
|
Net impact of Exemption rendered by local tax authorities and other adjustments
|
|
|
(9.4
|
)%
|
|
|
(19.3
|
)%
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
16.3
|
%
|
|
|
5.8
|
%
|
NOTE 12. TAXES (continued)
(B) Corporate income
taxes (“CIT”) - continued
Income tax expense for the years ended
September 30, 2016 and 2015 is summarized as follows:
|
|
For the years ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Current tax provision
|
|
$
|
343,589
|
|
|
$
|
81,046
|
|
Deferred tax provision
|
|
$
|
631,099
|
|
|
$
|
1,870,180
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
974,688
|
|
|
$
|
1,951,226
|
|
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 amounted to
$533,160 and $401,160 as of September 30, 2016 and 2015, respectively, which are available to reduce future years’ taxable
income. These carry forwards will expire in 2036. However, the change in control resulting from the reverse merger in 2010 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 September 30, 2016 and 2015.
The components of deferred taxes as of September 30, 2016 and 2015 consist of the following:
|
|
As of September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Deferred tax asset from net operating loss carry-forwards for parent company
|
|
$
|
181,274
|
|
|
$
|
136,394
|
|
Valuation allowance
|
|
|
(181,274
|
)
|
|
|
(136,394
|
)
|
Deferred tax asset - net
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
Revenue recognized based on percentage of completion
|
|
$
|
5,107,087
|
|
|
$
|
4,711,161
|
|
Deferred tax liability – long term
|
|
$
|
5,107,087
|
|
|
$
|
4,711,161
|
|
Movement of valuation allowance:
|
|
As of September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Beginning Balance
|
|
$
|
136,394
|
|
|
$
|
110,089
|
|
Current year additions
|
|
|
44,880
|
|
|
|
26,305
|
|
Ending Balance
|
|
$
|
181,274
|
|
|
$
|
136,394
|
|
The valuation allowance increased $44,880
and $26,305 for the years end September 30, 2016 and 2015, 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 September 30, 2016, the outstanding
LAT payable balance was $1,049,401 with respect to completed real estate properties sold up to September 30, 2016. As at September
30, 2015, the Company has an outstanding LAT payable balance of $752,664 with respect to completed real estate properties sold
up to September 30, 2015.
NOTE 12. TAXES (continued)
(D) Taxes payable consisted of the following:
|
|
September 30,
2016
|
|
|
September 30,
2015
|
|
|
|
|
|
|
|
|
CIT
|
|
$
|
677,734
|
|
|
$
|
794,780
|
|
Business tax
|
|
|
13,453,236
|
|
|
|
13,306,414
|
|
Other taxes and fees
|
|
|
1,712,845
|
|
|
|
1,729,692
|
|
|
|
|
|
|
|
|
|
|
Total taxes payable
|
|
$
|
15,843,815
|
|
|
$
|
15,830,886
|
|
NOTE 13. STOCKHOLDERS’
EQUITY
(a) Common stock
Prior to the Share Exchange, the Company
had 20,050,000 shares of common stock issued and outstanding. Before the closing of the Share Exchange transaction, the Company
retired 14,000,000 shares of common stock in connection with the spin-off of Dalian Holding. In connection with the Share Exchange
consummated on August 31, 2009, the Company issued 14,000,000 shares of its common stock to the HGS Shareholder and an additional
25,000,000 shares to the management team of Guangsha. As of September 30, 2016 and 2015, the Company has a total of 45,050,000
shares of common stock issued and outstanding.
For the year ended September 30, 2016,
in order to expand business in the large municipal market, which requires participants with significant paid in capital, the Company’s
VIE – Guangsha completed an equity recapitalization. The VIE’s accumulated retained earnings of $103,509,640 and statutory
reserve of $8,460,016 were reclassified to additional paid in capital in the consolidation financials statements.
(b) Statutory surplus reserves
The Company is required to make appropriations
to reserve funds, comprising the statutory surplus reserve and discretionary surplus reserve, based on after-tax net income determined
in accordance with generally accepted accounting principles of the PRC (“PRC GAAP”).
Appropriations to the statutory surplus
reserve is required to be at least 10% of the after tax net income determined in accordance with PRC GAAP until the reserve is
equal to 50% of the entities’ registered capital. Appropriations to the discretionary surplus reserve are made at the discretion
of the Board of Directors. The statutory surplus reserve fund is non-discretionary other than during liquidation and can be used
to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing
new shares to existing shareholders in proportion to their shareholding or by increasing the par value of shares currently held
by them, provided that the remaining statutory surplus reserve balance after such issue is not less than 25% of the registered
capital before the conversion. Pursuant to the Company’s articles of incorporation, the Company is to appropriate 10%
of its net profits as statutory surplus reserve. Due to the recapitalization of VIE equity, reserve of $8,460,016 was reversed
and transferred to additional paid in capital in the year ended September 30, 2016. As of September 30, 2016 and 2015, the balance
of statutory surplus reserve was $8,495,631 and $16,439,333, respectively.
NOTE 13. STOCKHOLDERS’
EQUITY (continued)
(b) Statutory surplus reserves (continued)
The discretionary surplus reserve may be
used to acquire fixed assets or to increase the working capital to expend on production and operation of the business. The Company’s
Board of Directors decided not to make an appropriation to this reserve for the years ended September 30, 2016 and 2015.
NOTE 14. CONTINGENCIES AND COMMITMENTS
From time to time, the Company is a party to various legal actions arising in the ordinary course
of business. The Company accrues costs associated with these matters when they become probable and the amount can be reasonably
estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. The Company's management does
not expect any liability from the disposition of such claims and litigation individually or in the aggregate would have a
material adverse impact on the Company's consolidated financial position, results of operations and cash flows.
As an industry practice, the Company provides
guarantees to PRC banks with respect to loans procured by the purchasers of the Company’s real estate properties for the
total mortgage loan amount until the completion of obtaining the “Certificate of Ownership” of the properties from
the government, which generally takes six to twelve months. Because the banks provide loan proceeds without getting the “Certificate
of Ownership” as loan collateral during this six to twelve months’ period, the mortgage banks require the Company to
maintain, as restricted cash, 5% to 10% of the mortgage proceeds as security for the Company’s obligations under such guarantees.
If a purchaser defaults on its payment obligations, the mortgage bank may deduct the delinquent mortgage payment from the security
deposit and require the Company to pay the excess amount if the delinquent mortgage payments exceed the security deposit. 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 September 30, 2016 and 2015, the amount of security deposit provided for these guarantees was approximately $1.5 million and
$1.7 million respectively.
CHINA HGS REAL ESTATE INC.
SCHEDULE I- PARENT COMPANY BALANCE SHEETS
(UNAUDITED)
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Investment in subsidiary
|
|
$
|
157,139,041
|
|
|
$
|
159,592,844
|
|
Total Assets
|
|
$
|
157,139,041
|
|
|
$
|
159,592,844
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
|
380,100
|
|
|
|
307,700
|
|
Shareholder loan
|
|
|
1,810,000
|
|
|
|
1,810,000
|
|
Total current liabilities
|
|
|
2,190,100
|
|
|
|
2,117,700
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 100,000,000 shares authorized, 45,050,000 shares issued and
outstanding
|
|
$
|
45,050
|
|
|
$
|
45,050
|
|
Additional paid-in capital
|
|
|
129,793,572
|
|
|
|
17,764,316
|
|
Statutory surplus
|
|
|
8,495,631
|
|
|
|
16,439,333
|
|
Retained earnings
|
|
|
20,661,184
|
|
|
|
119,668,198
|
|
Accumulated other comprehensive income
|
|
|
(4,046,496
|
)
|
|
|
3,558,247
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity
|
|
|
154,948,941
|
|
|
|
157,475,144
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
157,139,041
|
|
|
$
|
159,592,844
|
|
The accompanying notes are integral part
of Schedule I
CHINA HGS REAL ESTATE INC.
SCHEDULE I - STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED SEPTEMBER 30, 2016
AND 2015
(UNAUDITED)
|
|
2016
|
|
|
2015
|
|
Equity in profit of subsidiary
|
|
$
|
5,150,940
|
|
|
$
|
31,504,993
|
|
General and administrative expenses
|
|
|
59,600
|
|
|
|
4,967
|
|
Interest expense - net
|
|
|
72,400
|
|
|
|
72,400
|
|
Income before income taxes
|
|
|
5,018,940
|
|
|
|
31,427,626
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
Net income
|
|
|
5,018,940
|
|
|
|
31,427,626
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(7,604,743
|
)
|
|
|
(5,186,242
|
)
|
Comprehensive income (loss)
|
|
$
|
(2,585,803
|
)
|
|
$
|
26,241,384
|
|
The accompanying notes are integral part
of Schedule I
CHINA HGS REAL ESTATE INC.
SCHEDULE I - STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2016 AND
2015
(UNAUDITED)
|
|
2016
|
|
|
2015
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,018,940
|
|
|
$
|
31,427,626
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
59,600
|
|
|
|
4,967
|
|
Equity in profit of subsidiary
|
|
|
(5,150,940
|
)
|
|
|
(31,504,993
|
)
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
|
72,400
|
|
|
|
72,400
|
|
Net cash used in operating activities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
-
|
|
|
|
-
|
|
Cash, beginning of year
|
|
|
-
|
|
|
|
-
|
|
Cash, end of year
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
-
|
|
|
$
|
-
|
|
Income taxes paid
|
|
$
|
-
|
|
|
$
|
-
|
|
The accompanying notes are integral part of
Schedule I
CHINA HGS REAL ESTATE INC.
NOTES TO SCHEDULE I
NOTE 1. BASIS OF PRESENTATION
Certain information and footnote disclosures
normally included in financial statements prepared in conformity with generally accepted accounting principles have been condensed
or omitted. The Company’s investment in subsidiary and variable interest entity (“VIE”) is stated at cost plus
equity in undistributed earnings of subsidiaries.
NOTE 2. RESTRICTED ASSETS
The Company’s PRC VIE and subsidiary
are restricted in their ability to transfer a portion of their net assets to the Company. The payment of dividends by entities
organized in China is subject to limitations, procedures and formalities. Regulations in the PRC currently permit payment of dividends
only out of accumulated profits as determined in accordance with accounting standards and regulations in China. The Company’s
subsidiaries and its VIEs are also required to set aside at least 10% of its after-tax profit based on PRC accounting standards
each year to its statutory reserves account until the accumulative amount of such reserves reaches 50% of its respective registered
capital. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends.
In addition, the Company’s operations
and revenues are conducted and generated in China, all of the Company’s revenues being earned and currency received are denominated
in RMB. RMB is subject to the foreign exchange control regulation in China, and, as a result, the Company may be unable to distribute
any dividends outside of China due to PRC foreign exchange control regulations that restrict the Company’s ability to convert
RMB into US Dollars.
Schedule I of Article 5-04 of Regulation S-X
requires the condensed financial information of registrant shall be filed when the restricted net assets of consolidated subsidiaries
exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year. For purposes of the above
test, restricted net assets of consolidated subsidiaries shall mean that amount of the registrant’s proportionate share of
net assets of consolidated subsidiaries (after intercompany eliminations) which as of the end of the most recent fiscal year may
not be transferred to the parent company by subsidiaries in the form of loans, advances or cash dividends without the consent of
a third party. The condensed parent company financial statements have been prepared in accordance with Rule 12-04, Schedule I of
Regulation S-X as the restricted net assets of the Company’s PRC subsidiary and VIE exceed 25% of the consolidated net assets
of the Company.
NOTE 3. COMMITMENTS
The Company did not have any significant commitments or long-term
obligations as at September 30, 2016 and 2015.