The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
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 months ended December 31, 2017 and 2016 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, 2017 filed with the SEC on January 3, 2018.
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.
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.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
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 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.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
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 receive the loan proceeds
in our bank account and ends on the date the “Certificate of Ownership” evidencing that title to the property has been
transferred to the buyer. The procedures to obtain the Certificate of Ownership take six to twelve months (the “Mortgage
Loan Guarantee Period”). If, after investigation of the buyer’s income and other relevant factors, the bank decides
not to grant the mortgage loan, our mortgage-loan based sales contract terminates and there will be no guarantee obligation. If,
during the Mortgage Loan Guarantee Period, the buyer defaults on his or her monthly mortgage payment for three consecutive months,
we are required to return the loan proceeds back to the bank, although we have the right to keep the customer's deposit and resell
the property to a third party. Once the Certificate of Property has been issued by the relevant government authority, our loan
guarantee terminates. If the buyer then defaults on his or her mortgage loan, the bank has the right to take the property back
and sell it and use the proceeds to pay off the loan. The Company is not liable for any shortfall that the bank may incur in this
event. To date, no buyer has defaulted on his or her mortgage payments during the Mortgage Loan Guarantee Period and the Company
has not returned any loan proceeds pursuant to its mortgage loan guarantees.
For municipal road construction projects,
fees are generally recognized by the full accrual method at the time of 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.
Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The effects of foreign
currency translation adjustments are included as a component of accumulated other comprehensive income in stockholders’ equity.
|
|
For three months
ended December 31,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
Period end RMB : USD exchange rate
|
|
|
6.5063
|
|
|
|
6.9448
|
|
|
|
6.6533
|
|
Period average RMB : USD exchange rate
|
|
|
6.6131
|
|
|
|
6.8343
|
|
|
|
6.8104
|
|
The RMB is not freely convertible into
foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made
that the RMB amounts could have been, or could be, converted into U.S. dollars at the rates used in translation.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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).
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
Cost of amenities transferred to buyers
is allocated to specific units as a component of total construction cost. The amenity cost includes landscaping, road paving, etc.
Once the projects are completed, the amenities are under control of the property management companies. Real estate property development
completed and real estate property under development are reclassified on the balance sheet into current and non-current portions
based on the estimated date of construction completion and sales. The real estate property development completed classification
is based on the estimated date that each property is expected to be sold within the Company’s normal operating cycle of the
business and the Company’s sales plan. Real estate property development completed is classified as a current asset if the
property is expected to be sold within the normal operating cycle of the business. Otherwise, it is classified as a non-current
asset. The majority of real estate projects the Company has completed in the past were multi-layer or sub-high-rise real estate
projects. The Company considers its normal operating cycle is 12 months.
Real estate property development completed and under development are subject to valuation adjustments when
the carrying amount exceeds fair value. An impairment loss is recognized only if the carrying amount of the assets is not recoverable
and exceeds fair value. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to
be generated by the assets. The Company reviewed all of its real estate projects for future losses and impairment by comparing
the estimated future undiscounted cash flows for each project to the carrying value of such project. For the three months ended
December 31, 2017 and 2016, 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 recorded as a component of cost of real estate sales when related units are sold. All other interest is expensed
as incurred. For the three months ended December 31, 2017 and 2016, the total interest capitalized in the real estate property
development was $1,377,691 and $1,281,875, respectively
Impairment of long-lived assets
The Company reviews its long-lived assets
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable
through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever
any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Assets are grouped and evaluated at the
lowest level for their identifiable cash flows that are largely independent of the cash flows of other groups of assets. The Company
considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying
amount of the asset to the future estimated cash flows expected to result from the use of the asset. If the carrying amount of
the asset exceeds estimated expected undiscounted future cash flows, the Company measures the amount of impairment by comparing
the carrying amount of the asset to its fair value. The estimation of fair value is generally determined by using the asset's expected
future discounted cash flows or market value. The Company estimates fair value of the assets based on certain assumptions such
as budgets, internal projections, and other available information as considered necessary. There is no impairment of long-lived
assets during the three months ended December 31, 2017 and 2016.
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
months ended December 31, 2017 and 2016, 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.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
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 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 December 31, 2017 and September 30, 2017.
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 VIE in the PRC. No
income is earned in the Company and the Company’s subsidiaries and the management does not repatriate any earnings from VIE
outside the PRC. As a result, the Company did not generate any U.S. taxable income for the three months ended December
31, 2017 and 2016. As of December 31, 2017, the Chinese entities’ income tax returns filed in China for the years ended December
31, 2016, 2015, 2014, 2013 and 2012 are subject to examination by the Chinese taxing authorities. As of December 31, 2017, the
parent Company China HGS Real Estate Inc.’s tax years ended September 30, 2013 through September 30, 2017 remains open for
statutory examination by U.S. tax authorities.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Land appreciation tax (“LAT”)
In accordance with the relevant taxation
laws in the PRC, the Company is subject to LAT based on progressive rates ranging from 30% to 60% on the appreciation of land value,
which is calculated as the proceeds of sales of properties less deductible expenditures including borrowing costs and all property
development expenditures. LAT is exempted if the appreciation values do not exceed certain thresholds specified in the relevant
tax laws.
The whole project must be completed before
the LAT obligation can be assessed. Accordingly, the Company should record the liability and the total related expense at the completion
of a project unless the tax authorities impose an assessment at an earlier date. The methods to implement this tax law
vary among different geographic areas. Hanzhong, where the project Mingzhu Garden, 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 (loss)
In accordance with ASC 220-10-55, comprehensive
income (loss) is defined as all changes in equity except those resulting from investments by owners and distributions to owners.
The Company’s only components of comprehensive income (loss) for the three months ended December 31, 2017 and 2016 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 months
ended December 31, 2017 and 2016, the Company recorded advertising expenses of $114,832 and $74,291, respectively.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Concentration risk
The Company's operations are carried out
in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political,
economic and legal environment in the PRC, and by the general state of the PRC's economy. The Company's operations in the PRC are
subject to specific considerations and significant risks not typically associated with companies in North America. The Company's
results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures,
currency conversion and remittance abroad, and rates and methods of taxation, among other things. Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. 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 December 31, 2017, one supplier accounted for approximately 22% of the Company’s total project expenditures.
For the three months ended December 31, 2016, one supplier accounted for over 15% of the Company’s total project expenditures.
Reclassifications
Certain prior fiscal year restricted cash
balance have been reclassified to conform to the current fiscal year presentation.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU
2014-09”). ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer
of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. Generally
Accepted Accounting Principles when it becomes effective and permits the use of either the retrospective or cumulative effect transition
method. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows
arising from customer contracts. In August 2015, the FASB issued ASU No. 2015-14, “Deferral of the Effective Date”
(“ASU 2015-14”), which defers the effective date for ASU 2014-09 by one year. For public entities, the guidance in
ASU 2014-09 will be effective for annual reporting periods beginning after December 15, 2017 (including interim reporting periods
within those periods), which means it will be effective for the Company’s fiscal year beginning October 1, 2018. In March
2016, the FASB issued ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue versus Net)” (“ASU
2016-08”), which clarifies the implementation guidance on principal versus agent considerations in the new revenue recognition
standard. In April 2016, the FASB issued ASU No. 2016-10, “Identifying Performance Obligations and Licensing” (“ASU
2016-10”), which reduces the complexity when applying the guidance for identifying performance obligations and improves the
operability and understandability of the license implementation guidance. In May 2016, the FASB issued ASU No. 2016-12 “Narrow-Scope
Improvements and Practical Expedients” (“ASU 2016-12”), which amends the guidance on transition, collectability,
noncash consideration and the presentation of sales and other similar taxes. In December 2016, the FASB further issued ASU 2016-20,
“Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” (“ASU 2016-20”),
which makes minor corrections or minor improvements to the Codification that are not expected to have a significant effect on current
accounting practice or create a significant administrative cost to most entities. The amendments are intended to address implementation
and provide additional practical expedients to reduce the cost and complexity of applying the new revenue standard. These amendments
have the same effective date as the new revenue standard.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Recent Accounting Pronouncements
Preliminarily, we will adopt Topic 606
in the first quarter of our fiscal 2019 using the modified retrospective transition method, and are continuing to evaluate the
impact our pending adoption of Topic 606 will have on our unaudited condensed consolidated financial statements. The Company’s
current percentage completion revenue recognition method is not allowed under the new revenue recognition standards set forth
in ASU 2014-09. Potential adjustments might have material impacts on the company’s condensed consolidated financial statement
upon adoption of the new guidance at the time of adoption based upon outstanding contracts at that time.
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 December 31, 2017 and September 30, 2017:
|
|
Balance as of
|
|
|
|
December 31, 2017
|
|
|
September 30, 2017
|
|
Development completed:
|
|
|
|
|
|
|
|
|
Hanzhong City Mingzhu Garden Phase I
|
|
$
|
841,920
|
|
|
$
|
823,319
|
|
Hanzhong City Mingzhu Garden Phase II
|
|
|
40,417,361
|
|
|
|
42,274,715
|
|
Hanzhong City Nan Dajie (Mingzhu Xinju)
|
|
|
1,336,192
|
|
|
|
1,306,669
|
|
Hanzhong City Oriental Pearl Garden
|
|
|
27,384,391
|
|
|
|
29,969,640
|
|
Yang County Yangzhou Pearl Garden Phase I
|
|
|
1,922,928
|
|
|
|
1,880,443
|
|
Yang County Yangzhou Pearl Garden Phase II
|
|
|
4,464,351
|
|
|
|
4,365,714
|
|
Real estate property development completed
|
|
|
76,367,143
|
|
|
|
80,620,500
|
|
Less: Real estate property completed – short-term
|
|
|
74,949,264
|
|
|
|
79,233,948
|
|
Real estate property completed – long-term
|
|
$
|
1,417,879
|
|
|
$
|
1,386,552
|
|
Under development:
|
|
|
|
|
|
|
|
|
Yang County Yangzhou Palace (a)
|
|
$
|
85,651,923
|
|
|
$
|
87,126,402
|
|
Hanzhong City Shijin Project
|
|
|
7,444,745
|
|
|
|
7,280,256
|
|
Hanzhong City Liangzhou Road and related projects (b)
|
|
|
135,144,631
|
|
|
|
133,941,504
|
|
Hanzhong City Hanfeng Beiyuan East (c)
|
|
|
775,811
|
|
|
|
758,670
|
|
Hanzhong City Beidajie (e)
|
|
|
44,626,372
|
|
|
|
36,335,231
|
|
Yang County East 2
nd
Ring Road (d)
|
|
|
4,633,891
|
|
|
|
2,351,615
|
|
Real estate property under development
|
|
|
278,277,373
|
|
|
|
267,793,678
|
|
Less: Short-term portion
|
|
|
85,651,923
|
|
|
|
87,126,402
|
|
Real estate property under development –long-term
|
|
$
|
192,625,450
|
|
|
$
|
180,667,276
|
|
|
(a)
|
The
Company recognized $6,023,792 of development cost in cost of real estate sales under the percentage of completion method for the
three months ended December 31, 2017 (2016 - $Nil)
|
|
(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. As of December 31, 2017, the main
Liangzhou road construction is substantially completed and is expected to be approved by the local government in fiscal 2018.
|
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 3. REAL ESTATE PROPERTY DEVELOPMENT
COMPLETED AND UNDER DEVELOPMENT
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 December 31, 2017, the actual costs incurred by the Company were $135,144,631 (September
30, 2017 - $133,941,504) 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 months ended December 31, 2017 and 2016, 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 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 year ended September 30, 2014. As of December
31, 2017, the local government was still in the process of assessing the 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 $25.8 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 (December
31,2017 - 4.75% and September 30, 2017 – 4.75%). The local government has approved a refund to the Company by reducing local
surcharges or taxes otherwise required in the real estate development. The load construction is expected to be completed by early
2018.
|
|
(e)
|
For
the three months ended December 31, 2017 and 2016, the Company did not received government’s subsidies for its Shanty Area
Reform Project surrounding Beidajie Project located in Hantai District, Hanzhong City.
|
As of December 31, 2017 and September 30,
2017, land use rights included in real estate property under development totaled $17,835,957 and $18,040,624, respectively.
NOTE 4. OTHER LOANS
|
|
December 31,
2017
|
|
|
September 30,
2017
|
|
Loan A (i)
|
|
$
|
98,798,071
|
|
|
$
|
97,473,417
|
|
Loan B (ii)
|
|
|
12,295,775
|
|
|
|
12,024,108
|
|
Loan C (iii)
|
|
|
18,248,339
|
|
|
|
17,845,155
|
|
|
|
|
129,342,185
|
|
|
|
127,342,680
|
|
Less: current maturities of other loans
|
|
|
40,190,277
|
|
|
|
28,545,233
|
|
Other loans – long-term portion
|
|
$
|
89,151,908
|
|
|
$
|
98,797,447
|
|
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 4. OTHER LOANS (continued)
|
(i)
|
On
June 26, 2015 and March 10, 2016, the Company signed phase I and Phase II agreements with Hanzhong Urban Construction Investment
Development Co., Ltd, a state owned Company, to borrow up to $119,115,319 (RMB 775,000,000) for a long term loan at 4.245% interest
per year to develop Liang Zhou Road Project. The Company repaid $7,157,679 (RMB 46,570,000) prior to December 31, 2017. As of
December 31, 2017, the Company borrowed $98,798,071 under this credit line (September 30, 2017 - $97,473,417). 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 $85,651,923 as of September 30, 2017 (September 30, 2017 - $87,126,402). In addition, the Company was required to provide
a security deposit for the loan received. As of December 31, 2017, the security deposits paid were $5,684,075 (September 30, 2017
- $5,558,490) for loans received and included in the long term security deposit. For the three months ended December 31, 2017
and 2016, the interests paid were $1,237,090 and $1,137,874, respectively, which was capitalized in to the development cost of
Liangzhou road project. Due to local government’s delay in reallocation of residence in Liangzhou Road and related area,
the Hanzhong Urban Construction Investment Development Co., Ltd has not released all the funds available in this loan to the Company
and the Company’s withdraw will be based on the project’s development progress. The total required loan repayment
schedule assuming total loan proceeds are borrowed are listed below:
|
For the periods ended:
|
|
Repayment in USD
|
|
|
Repayment in RMB
|
|
December 31, 2018
|
|
|
32,505,417
|
|
|
|
211,490,000
|
|
December 31, 2019
|
|
|
39,102,101
|
|
|
|
254,410,000
|
|
December 31, 2020
|
|
|
26,898,544
|
|
|
|
175,010,000
|
|
December 31, 2021
|
|
|
13,451,578
|
|
|
|
87,520,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
111,957,640
|
|
|
|
728,430,000
|
|
|
(ii)
|
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 $12,295,775 (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 December 31, 2017, 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 months ended December 31, 2017 and 2016,
total interests were $109,320 and $105,782, respectively, which were included in the interest expense, because the related Oriental
Garden project was completed as of September 30, 2016. The full amount of loan has following repayment schedule:
|
|
|
Repayment in USD
|
|
|
Repayment in RMB
|
|
Earlier of July 2018 or 60% sales completed
|
|
|
3,073,944
|
|
|
|
20,000,000
|
|
Earlier of October 2018 or 70% sales completed
|
|
|
4,610,916
|
|
|
|
30,000,000
|
|
Earlier of January 2019 or 75% sales completed
|
|
|
4,610,915
|
|
|
|
30,000,000
|
|
Total
|
|
|
12,295,775
|
|
|
|
80,000,000
|
|
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 4. OTHER LOANS (continued)
|
(iii)
|
In December 2016, the Company signed a loan agreement with
Hantai District Urban Construction Investment Development Co., Ltd, a state owned Company, to borrow up to $18,289,965 (RMB 119,000,000)
for the development of Hanzhong City Liangzhou Road project. As of September 30, 2017, the Company received all the proceeds and
repaid unused fund of $41,626 (RMB 270,829). The loan carries interest at a fixed interest of 1.2% and is due on June 20, 2031.
The Company pledged the assets of Liangzhou Road and related projects as collateral for the loan. The carrying value of the Liangzhou
Road and related projects amounted to $135,144,631 and $133,941,504 as of December 31, 2017 and September 30, 2017, respectively.
Total financing costs of $54,584 and $130,503 for the three months ended December 31, 2017 and 2016, respectively, were capitalized
in to the development cost of Hanzhong City Liangzhou Road project.
|
Additionally, in September 2017,
the Urban Development Center Co., Ltd. approved a construction loan for the Company in the amount of $26,897,008 (RMB 175,000,000)
with an annual interest rate of 1.2% per year in connection with the Liangzhou Road and related Project. The Company is required
to repay the loan by equal annual principal repayment of $5,379,402 from December 2027 through May 2031. The amount of this loan
is available to be drawn down as soon as the land use rights of the Liangzhou Road is approved and the construction starts, which
is expected to begin in the Spring of 2018. Interest charge for the three months ended December 31, 2017 and 2016 was $80,271 and
Nil, respectively, which was included in the construction capitalized costs.
NOTE 5. CUSTOMER DEPOSITS
Customer deposits consist of amounts received from customers
for the pre-sale of residential units in the PRC. The detail of customer deposits is as follows:
|
|
December 31,
2017
|
|
|
September 30,
2017
|
|
Customer deposits by real estate projects
|
|
|
|
|
|
|
|
|
Mingzhu Garden (Mingzhu Nanyuan and Mingzhu Beiyuan)
|
|
$
|
12,493,657
|
|
|
$
|
9,931,120
|
|
Oriental Pearl Garden
|
|
|
6,721,489
|
|
|
|
6,342,632
|
|
Liangzhou road and related projects
|
|
|
2,366,937
|
|
|
|
2,314,641
|
|
Yang County Pearl Garden
|
|
|
1,384,070
|
|
|
|
934,557
|
|
Yang County Palace
|
|
|
5,071,835
|
|
|
|
7,405,555
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
28,037,988
|
|
|
|
26,928,505
|
|
Less: Customer deposits - short-term
|
|
|
25,671,051
|
|
|
|
24,613,864
|
|
Customer deposits - long-term
|
|
$
|
2,366,937
|
|
|
$
|
2,314,641
|
|
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 December 31, 2017 and September
30, 2017, approximately $2.8 million and $2.6 million was guaranteed by the Company, respectively.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 6. SHAREHOLDER’S LOANS
|
|
As of
|
|
|
|
December 31,
2017
|
|
|
September 30,
2017
|
|
Shareholder loan – USD loan (a)
|
|
$
|
1,810,000
|
|
|
$
|
1,810,000
|
|
Shareholder loan – RMB loan (b)
|
|
|
381,312
|
|
|
|
494,632
|
|
Total
|
|
$
|
2,191,312
|
|
|
|
$ 2,304,632
|
|
|
a.
|
The Company has a
one year loan agreement (“USD Loan Agreement”) with our Chairman, CEO and major shareholder, pursuant to which
the Company borrowed $1,810,000 to make a capital injection into Shaanxi HGS, the Company’s subsidiary.
The interest rate for the loan is 4% per annum and the loan matured on July 19, 2014. The Company entered into the
amendments to the USD Loan Agreement to extend the term until July 31, 2018. The Company recorded interest expense of $18,100
for both three months ended December 31, 2017 and 2016, respectively. The Company has not yet paid this interest and it is
recorded in accrued expenses.
|
|
b.
|
On
December 31, 2013, Shaanxi Guangsha Investment and Development Group Co., Ltd. (the “Guangsha”) entered into a loan
agreement with the Chairman (the “Shareholder RMB Loan Agreement”), pursuant to which Guangsha is able to borrow in
order to support the Company’s Liang Shan Road construction project development and the Company’s working capital
needs. The Loan Agreement has a one-year term, and has been renewed upon maturity, with at an interest rate of 4.35% per year.
The RMB loan balance as of December 31, 2017 and September 30, 2017 was $381,312 and $494,632, respectively. For the three months
ended December 31, 2017 and 2016, the interest was $5,746 and $13,498, respectively, which is capitalized in the development cost
of Liangzhou road project.
|
NOTE 7. 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 December 31, 2017 and
September 30, 2017, 77.8% and 69.4% 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
|
|
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:
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 7. STOCK OPTIONS (continued)
|
|
Number of
options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Life in Years
|
|
|
Grant Date
Fair Value
|
|
Outstanding, September 30, 2017
|
|
|
120,000
|
|
|
$
|
1.89
|
|
|
|
0.89
|
|
|
$
|
178,800
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, December 31, 2017
|
|
|
120,000
|
|
|
$
|
1.89
|
|
|
|
0.64
|
|
|
$
|
178,800
|
|
Exercisable, December 31, 2017
|
|
|
93,333
|
|
|
$
|
1.89
|
|
|
|
0.64
|
|
|
$
|
139,066
|
|
NOTE 8. 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 December 31, 2017, the Company had business sales tax payable of $14,162,069
(September 30, 2017 - $14,143,444), which is expected to be paid when the projects are completed and assessed by the local tax
authority. In May of 2016, the Business Tax has been incorporated into Value Added Tax in China, which means there will be no more
Business Tax and accordingly some business operations previously taxed in the name of Business Tax will be taxed in the manner
of VAT thereafter. The Company is subject to 5% of VAT for its all existing real estate project based on the local tax authority’s
practice.
B) Corporate income taxes (“CIT”)
The Company and its subsidiaries had operating
losses since inception and the Company recorded a full valuation allowance against those tax losses. All the Company’s consolidated
earnings are generated by the Company’ VIE in PRC.
The Company’s 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, prior to October 1, 2017, 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. Starting from October 1, 2017, the Company is subject
to income tax rate of 25% on taxable income in fiscal 2018 and afterwards. The change in the income tax policy could negatively
affect the Company’s net income. For the three months ended December 31, 2017 and 2016, the Company’s income taxes
were $413,750 and $221,998, respectively. Although the possibility exists for reinterpretation of the application of the tax regulations
by higher tax authorities in the PRC for the Company’s tax filling prior to October 1, 2017, 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.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 8. TAXES (continued)
On December 22, 2017, the Tax Cuts and
Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include,
but are not limited to, a U.S. corporate tax rate decrease from 35% to 21% effective for tax years beginning
after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and
a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. The Company
has determined that the Company’s VIE in PRC does not qualify as a reportable controlled foreign corporation (“CFC”)
in accordance with its understanding of the Act and guidance available as of the date of this filing and as a result the Company
assessed there was no significant income tax impact during the period in which the legislation was enacted.
On December 22, 2017, Staff Accounting
Bulletin No. 118 ("SAB 118") was issued to address the application of US GAAP in situations when a registrant does not
have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting
for certain income tax effects of the Act. In accordance with SAB 118, the Company has determined that the Company’s VIE
in PRC does not qualify as a reportable CFC, therefore it is not necessary to record any income tax provision in connection with
the transition tax on the mandatory deemed repatriation of foreign earnings at December 31, 2017. Additional work is necessary
to do a more detailed analysis of the Act as well as potential correlative adjustments. Any subsequent adjustment to these amounts
will be recorded to current tax expense in fiscal 2018 when the analysis is complete.
The following table reconciles the statutory
rates to the Company’s effective tax rate for the three months ended December 31, 2017 and 2016:
|
|
For the three months ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Chinese statutory tax rate
|
|
|
25
|
%
|
|
$
|
25
|
%
|
Valuation allowance change
|
|
|
0.6
|
%
|
|
|
1.1
|
%
|
Net impact of Exemption rendered by local tax authorities and other adjustments
|
|
|
-
|
|
|
|
(3.5
|
)%
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
25.6
|
%
|
|
$
|
22.6
|
%
|
Income tax expense for the three months
ended December 31, 2017 and 2016 is summarized as follows:
|
|
For the three months ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Current tax provision
|
|
$
|
268,036
|
|
|
$
|
221,998
|
|
Deferred tax provision
|
|
|
145,714
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
$
|
413,750
|
|
|
$
|
221,998
|
|
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 8. 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 $698,160 and $665,160 as of December 31, 2017 and September 30, 2017, 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 any taxable income in the foreseeable
future. Accordingly, the Company recorded a full valuation allowance as of December 31, 2017 and September 30, 2017. The Company
calculated deferred tax asset using a blended rate in accordance with the Act. The components of deferred taxes as of December
31, 2017 and September 30, 2017 consist of the following:
|
|
December 31,
2017
|
|
|
September 30,
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Deferred tax asset from net operating loss carry-forwards for parent company
|
|
$
|
233,084
|
|
|
$
|
226,154
|
|
Valuation allowance
|
|
|
(233,084
|
)
|
|
|
(226,154
|
)
|
Deferred tax asset – net
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
Revenue recognized based on percentage of completion
|
|
$
|
332,918
|
|
|
$
|
170,950
|
|
Deferred tax liability – long term
|
|
$
|
332,918
|
|
|
$
|
170,950
|
|
Movement of valuation allowance:
|
|
For the three months ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Beginning Balance
|
|
$
|
226,154
|
|
|
$
|
181,274
|
|
Current period additions
|
|
|
6,930
|
|
|
|
11,220
|
|
Ending Balance
|
|
$
|
233,084
|
|
|
$
|
192,494
|
|
The valuation allowance increased $6,930
and $11,220 for the three months ended December 31, 2017 and 2016, 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 December 31, 2017, the outstanding
LAT payable balance was $1,321,729 with respect to completed real estate properties sold up to December 31, 2017. As at September
30, 2017, the Company has an outstanding LAT payable balance of $1,292,527 with respect to completed real estate properties sold
up to September 30, 2017.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
NOTE 8. TAXES (continued)
(D) Taxes payable consisted of the following:
|
|
December 31,
2017
|
|
|
September 30,
2017
|
|
|
|
|
|
|
|
|
CIT
|
|
$
|
6,528,787
|
|
|
$
|
6,216,432
|
|
Business tax
|
|
|
14,162,069
|
|
|
|
14,143,444
|
|
Other taxes and fees
|
|
|
2,132,729
|
|
|
|
2,020,188
|
|
Total taxes payable
|
|
|
22,823,585
|
|
|
|
22,380,064
|
|
Less: current portion
|
|
|
17,587,026
|
|
|
|
17,259,202
|
|
Tax payable – long term
|
|
$
|
5,236,559
|
|
|
$
|
5,120,862
|
|
NOTE 9. COMMITMENTS AND CONTINGENCIES
From time to time, the Company is a party
to various legal actions arising in the ordinary course of business. The Company accrues costs associated with these matters when
they become probable and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are
expensed as incurred. The Company's management does not expect any liability from the disposition of such claims and litigation
individually or in the aggregate would have a material adverse impact on the Company's consolidated financial position, results
of operations and cash flows.
As an industry practice, the Company provides
guarantees to PRC banks with respect to loans procured by the purchasers of the Company’s real estate properties for the
total mortgage loan amount until the completion of obtaining the “Certificate of Ownership” of the properties from
the government, which generally takes six to twelve months. Because the banks provide loan proceeds without getting the “Certificate
of Ownership” as loan collateral during this six to twelve months’ period, the mortgage banks require the Company to
maintain, as restricted cash, 5% to 10% of the mortgage proceeds as security for the Company’s obligations under such guarantees.
If a purchaser defaults on its payment obligations, the mortgage bank may deduct the delinquent mortgage payment from the security
deposit and require the Company to pay the excess amount if the delinquent mortgage payments exceed the security deposit. 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 December 31, 2017 and September 30, 2017, the amount of security deposits provided for these guarantees was approximately $2.8
million and $2.6 million, respectively.