ITEM 1. INTERIM FINANCIAL STATEMENTS
CHINA HGS REAL ESTATE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
March 31,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
4,323,993
|
|
|
$
|
2,109,043
|
|
Restricted cash
|
|
|
3,346,369
|
|
|
|
2,607,561
|
|
Cost and earnings in excess of billings
|
|
|
14,973,256
|
|
|
|
12,673,349
|
|
Real estate property development completed
|
|
|
69,315,427
|
|
|
|
79,233,948
|
|
Real estate property under development
|
|
|
77,223,976
|
|
|
|
87,126,402
|
|
Other current assets
|
|
|
1,800,362
|
|
|
|
1,529,698
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
170,983,383
|
|
|
|
185,280,001
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
830,519
|
|
|
|
825,833
|
|
Real estate property development completed, net of current portion
|
|
|
1,470,706
|
|
|
|
1,386,552
|
|
Security deposits
|
|
|
9,084,319
|
|
|
|
8,564,517
|
|
Real estate property under development, net of current portion
|
|
|
213,532,496
|
|
|
|
180,667,276
|
|
Due from local government for real estate property development completed
|
|
|
3,106,142
|
|
|
|
2,928,410
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
399,007,565
|
|
|
$
|
379,652,589
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Other loans
|
|
$
|
45,560,055
|
|
|
$
|
28,545,233
|
|
Accounts payable
|
|
|
19,430,246
|
|
|
|
24,047,980
|
|
Other payables
|
|
|
4,866,333
|
|
|
|
3,897,093
|
|
Construction deposits
|
|
|
2,082,255
|
|
|
|
1,966,115
|
|
Billings in excess of cost and earnings
|
|
|
5,181,133
|
|
|
|
4,247,477
|
|
Customer deposits
|
|
|
25,654,238
|
|
|
|
24,613,864
|
|
Shareholder loan
|
|
|
1,993,486
|
|
|
|
2,304,632
|
|
Accrued expenses
|
|
|
3,116,331
|
|
|
|
3,158,432
|
|
Taxes payable
|
|
|
17,486,893
|
|
|
|
17,259,202
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
125,370,970
|
|
|
|
110,040,028
|
|
Deferred tax liabilities
|
|
|
574,844
|
|
|
|
170,950
|
|
Tax payable - long term
|
|
|
5,431,660
|
|
|
|
5,120,862
|
|
Customer deposits, net of current portion
|
|
|
2,423,238
|
|
|
|
2,314,641
|
|
Other long term loan payable, less current portion
|
|
|
88,601,067
|
|
|
|
98,797,447
|
|
Construction deposits, net of current portion
|
|
|
1,368,715
|
|
|
|
1,319,295
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
223,770,494
|
|
|
|
217,763,223
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 100,000,000 shares authorized, 45,050,000 shares issued and outstanding March 31, 2018 and September 30, 2017
|
|
|
45,050
|
|
|
|
45,050
|
|
Additional paid-in capital
|
|
|
129,882,972
|
|
|
|
129,853,172
|
|
Statutory surplus
|
|
|
9,142,899
|
|
|
|
9,142,899
|
|
Retained earnings
|
|
|
29,587,472
|
|
|
|
26,343,030
|
|
Accumulated other comprehensive income (loss)
|
|
|
6,578,678
|
|
|
|
(3,494,785
|
)
|
Total stockholders' equity
|
|
|
175,237,071
|
|
|
|
161,889,366
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
399,007,565
|
|
|
$
|
379,652,589
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
CHINA HGS REAL ESTATE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
INCOME AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
|
|
Three months ended March 31,
|
|
|
Six months ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate sales
|
|
$
|
21,906,367
|
|
|
$
|
11,113,794
|
|
|
$
|
36,353,938
|
|
|
$
|
20,011,648
|
|
Less: Sales tax
|
|
|
(65,064
|
)
|
|
|
(353,436
|
)
|
|
|
(90,280
|
)
|
|
|
(466,038
|
)
|
Cost of real estate sales
|
|
|
(18,118,690
|
)
|
|
|
(8,254,621
|
)
|
|
|
(30,119,231
|
)
|
|
|
(15,315,656
|
)
|
Gross profit
|
|
|
3,722,613
|
|
|
|
2,505,737
|
|
|
|
6,144,427
|
|
|
|
4,229,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and distribution expenses
|
|
|
185,593
|
|
|
|
131,851
|
|
|
|
502,335
|
|
|
|
278,085
|
|
General and administrative expenses
|
|
|
654,778
|
|
|
|
1,150,833
|
|
|
|
1,012,207
|
|
|
|
1,623,563
|
|
Total operating expenses
|
|
|
840,371
|
|
|
|
1,282,684
|
|
|
|
1,514,542
|
|
|
|
1,901,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
2,882,242
|
|
|
|
1,223,053
|
|
|
|
4,629,885
|
|
|
|
2,328,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(126,064
|
)
|
|
|
(123,447
|
)
|
|
|
(254,685
|
)
|
|
|
(244,570
|
)
|
Income before income taxes
|
|
|
2,756,178
|
|
|
|
1,099,606
|
|
|
|
4,375,200
|
|
|
|
2,083,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
717,008
|
|
|
|
276,524
|
|
|
|
1,130,758
|
|
|
|
498,522
|
|
Net income
|
|
|
2,039,170
|
|
|
|
823,082
|
|
|
|
3,244,442
|
|
|
|
1,585,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
6,344,376
|
|
|
|
1,357,385
|
|
|
|
10,073,463
|
|
|
|
(4,868,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
8,383,546
|
|
|
$
|
2,180,467
|
|
|
$
|
13,317,905
|
|
|
$
|
(3,283,392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.05
|
|
|
|
0.02
|
|
|
$
|
0.07
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
45,050,000
|
|
|
|
45,050,000
|
|
|
|
45,050,000
|
|
|
|
45,050,000
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
CHINA HGS REAL ESTATE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(Unaudited)
|
|
Six months ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,244,442
|
|
|
$
|
1,585,214
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Deferred tax provision
|
|
|
380,788
|
|
|
|
-
|
|
Stock based compensation
|
|
|
442,235
|
|
|
|
29,800
|
|
Depreciation
|
|
|
29,800
|
|
|
|
30,837
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
(561,768
|
)
|
|
|
348,127
|
|
Advances to vendors
|
|
|
(175,248
|
)
|
|
|
-
|
|
Cost and earnings in excess of billings
|
|
|
(1,481,211
|
)
|
|
|
(820,187
|
)
|
Real estate property development completed
|
|
|
14,251,003
|
|
|
|
15,301,222
|
|
Real estate property under development
|
|
|
(6,492,660
|
)
|
|
|
(46,802,444
|
)
|
Other current assets
|
|
|
3,177
|
|
|
|
631,894
|
|
Accounts payables
|
|
|
(5,880,670
|
)
|
|
|
(5,042,313
|
)
|
Other payables
|
|
|
709,012
|
|
|
|
17,601
|
|
Billings in excess of cost and earnings
|
|
|
654,002
|
|
|
|
33,317
|
|
Customer deposits
|
|
|
(469,686
|
)
|
|
|
3,905,190
|
|
Construction deposits
|
|
|
(32,745
|
)
|
|
|
(427,586
|
)
|
Accrued expenses
|
|
|
(198,484
|
)
|
|
|
(245,158
|
)
|
Taxes payable
|
|
|
(793,293
|
)
|
|
|
561,290
|
|
Net cash provided by (used in) operating activities
|
|
|
3,628,694
|
|
|
|
(30,893,196
|
)
|
|
|
|
|
|
|
|
|
|
Cash flow from investing activities
|
|
|
|
|
|
|
|
|
Purchases of fixed assets
|
|
|
(398,269
|
)
|
|
|
-
|
|
Net cash used in investing activities
|
|
|
(398,269
|
)
|
|
|
-
|
|
Cash
flow from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from shareholder loan
|
|
|
-
|
|
|
|
495,742
|
|
Repayment of shareholder loan
|
|
|
(330,130
|
)
|
|
|
-
|
|
Repayment of bank loans
|
|
|
(880,860
|
)
|
|
|
-
|
|
Proceeds from other loans
|
|
|
-
|
|
|
|
26,470,545
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(1,210,990
|
)
|
|
|
26,966,287
|
|
|
|
|
|
|
|
|
|
|
Effect of changes of foreign exchange rate on cash
|
|
|
195,515
|
|
|
|
(183,939
|
)
|
Net increase (decrease) in cash
|
|
|
2,214,950
|
|
|
|
(4,110,848
|
)
|
Cash, beginning of period
|
|
|
2,109,043
|
|
|
|
6,401,237
|
|
Cash, end of period
|
|
$
|
4,323,993
|
|
|
$
|
2,290,389
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
3,008,428
|
|
|
$
|
2,781,494
|
|
Income taxes paid
|
|
$
|
544,678
|
|
|
$
|
355,975
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
CHINA HGS REAL ESTATE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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 and the requirement of Article 8 of Regulation S-X of the Securities and Exchange Commission
(“SEC”). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring
accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended
March 31, 2018 and 2017 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 consolidated 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, , 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:
CHINA HGS REAL ESTATE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Level 1-Inputs are unadjusted quoted prices
in active markets for identical assets or liabilities available at the measurement date.
Level 2-Inputs are unadjusted quoted prices
for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets
that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable
market data.
Level 3-Inputs are unobservable inputs
which reflect the reporting entity’s own assumptions or what assumptions the market participants would use in pricing the
asset or liability based on the best available information.
The carrying amounts reported in the accompanying condensed
consolidated balance sheets for cash, restricted cash and all other current assets, security deposits for land use rights, loans
and all current liabilities approximate their fair value based on the short-term maturity of these instruments. The fair value
of the long term customer, construction and security deposits approximate their carrying amounts because the deposits are received
in cash. It was impractical to estimate the fair value of the amount due from the local government and the long term other loans
payable.
Revenue recognition
Percentage of Completion method
Real estate sales for the long term real
estate projects are recognized under percentage completion method in accordance with the provisions of ASC 360-20-40D “Sale
of Condominium Units”. Revenue and profit from the sales of long term development properties is recognized 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..
CHINA HGS REAL ESTATE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Any changes in significant judgments and/or
estimates used in determining construction and development revenue could significantly change the timing or amount of construction
and development revenue recognized. Changes in total estimated project costs or losses, if any, are recognized in the period in
which they are determined.
Full accrual method
Revenue from the sales of short term development
properties, where the construction period is expected to be 18 months or less is recognized by the full accrual method at the time
of the closing of an individual unit sale. This occurs when title to or possession of the property is transferred to the buyer.
A sale is not considered consummated until (a) the parties are bound by the terms of a contract, (b) all consideration
has been exchanged, (c) any permanent financing for which the seller is responsible has been arranged, (d) all conditions
precedent to closing have been performed, (e) the seller does not have substantial continuing involvement with the property,
and (f) the usual risks and rewards of ownership have been transferred to the buyer. Further, the buyer’s initial and
continuing investment is adequate to demonstrate a commitment to pay for the property.
The Company provides “mortgage loan
guarantees” only with respect to buyers who make down-payments of 20%-50% of the total purchase price of the property. The
period of the mortgage loan guarantee begins on the date the bank approves the buyer’s mortgage and we 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 information is first prepared in RMB and then is translated into U.S. dollars at year-end
exchange rates as to assets and liabilities and average exchange rates as to revenue and expenses. Capital accounts are translated
at their historical exchange rates when the capital transactions occurred. The effects of foreign currency translation adjustments
are included as a component of accumulated other comprehensive income in stockholders’ equity.
|
|
For six months
ended March 31,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2017
|
|
Period end RMB: USD exchange rate
|
|
|
6.2726
|
|
|
|
6.8832
|
|
|
|
6.6533
|
|
Period average RMB: USD exchange rate
|
|
|
6.4823
|
|
|
|
6.8584
|
|
|
|
6.8104
|
|
CHINA HGS REAL ESTATE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (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 deposits held by the PRC government for the purchase of land use rights and other deposit held by an unrelated party to
transfer its land use rights to the Company. The deposits will be reclassified to real estate property under development upon the
transfer of legal title.
Real estate property development completed
and under development
Real estate property consists of finished
residential unit sites, commercial offices and residential unit sites under development. The Company leases the land for the residential
unit sites under land use right leases with various terms from the PRC government. The cost of land use rights is included in the
development cost and allocated to each project. Real estate property development completed and real estate property under development
are stated at the lower of cost or fair value.
Expenditures for land development, including
cost of land use rights, deed tax, pre-development costs, and engineering costs, exclusive of depreciation, are capitalized and
allocated to development projects by the specific identification method. Costs are allocated to specific units within a project
based on the ratio of the sales area of units to the estimated total sales area of the project (or phase of the project) multiplied
by the total cost of the project (or phase of the project).
CHINA HGS REAL ESTATE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cost of amenities transferred to buyers
is allocated to specific units as a component of total construction cost. The amenity cost includes landscaping, road paving, etc.
Once the projects are completed, the amenities are under control of the property management companies.
Real estate property development completed
and real estate property under development are reclassified on the balance sheet into current and non-current portions based on
the estimated date of construction completion and sales. The real estate property development completed classification is based
on the estimated date that each property is expected to be sold within the Company’s normal operating cycle of the business
and the Company’s sales plan. Real estate property development completed is classified as a current asset if the property
is expected to be sold within the normal operating cycle of the business. Otherwise, it is classified as a non-current asset. Real
estate property under development is classified as a current asset, if the property is reasonably expected to be completed within
the Company’s normal operating cycle of the business. Otherwise, it is classified as a non-current asset. The majority of
real estate projects the Company has completed in the past were multi-layer or sub-high-rise real estate projects. The Company
considers its normal operating cycle is 12 months.
Real estate property development completed
and under development are subject to valuation adjustments when the carrying amount exceeds fair value. An impairment loss is recognized
only if the carrying amount of the assets is not recoverable and exceeds fair value. The carrying amount is not recoverable if
it exceeds the sum of the undiscounted cash flows expected to be generated by the assets. The Company reviewed all of its real
estate projects for future losses and impairment by comparing the estimated future undiscounted cash flows for each project to
the carrying value of such project. For the three and six months ended
March 31, 2018 and
2017,
the Company did not recognize any impairment for real estate property under development and completed.
Capitalization of Interest
Interest incurred during and directly related
to real estate development projects is capitalized to the related real estate property under development during the active
development period, which generally commences when borrowings are used to acquire real estate assets and ends when the properties
are substantially complete or the property becomes inactive. Interest is capitalized based on the interest rate applicable to specific
borrowings or the weighted average of the rates applicable to other borrowings during the period. Interest capitalized to real
estate property under development is expensed as a component of cost of real estate sales when related units are sold. All
other interest is expensed as incurred. For the three and six months ended March 31, 2018, the total interest capitalized in the
real estate property development was $1,422,579 and $2,800,270, respectively. For the three and six months ended March 31, 2017,
the total interest capitalized in the real estate property development was $1,320,670 and $2,602,545, respectively.
Impairment 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.
CHINA HGS REAL ESTATE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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 and six months ended March 31, 2018 and 2017
Customer deposits
Customer deposits consist of amounts received
from customers relating to the sale of residential units in the PRC. In the PRC, customers will generally obtain permanent financing
for the purchase of their residential unit prior to the completion of the project. The lending institution will provide the funding
to the Company upon the completion of the financing rather than the completion of the project. The Company receives these funds
and recognizes them as a liability until the revenue can be recognized.
Property warranty
The Company provides its customers with
warranties which cover major defects of building structure and certain fittings and facilities of properties sold. The warranty
period varies from two years to five years, depending on different property components the warranty covers. The Company continually
estimates potential costs for materials and labor with regard to warranty-type claims expected to be incurred subsequent to the
delivery of a property. Reserves are determined based on historical data and trends with respect to similar property types and
geographical areas. The Company continually monitors the warranty reserve and makes adjustments to its pre-existing warranties,
if any, in order to reflect changes in trends and historical data as information becomes available. The Company may seek further
recourse against its contractors or any related third parties if it can be proved that the faults are caused by them. In addition,
the Company also withholds up to 2% of the contract cost from sub-contractors for periods of two to five years. These amounts are
included in construction deposits, and are only paid to the extent that there has been no warranty claim against the Company relating
to the work performed or materials supplied by the subcontractors. For the three and six months ended March 31, 2018 and 2017,
the Company had not recognized any warranty costs in excess of the amount retained from subcontractors and therefore, no warranty
reserve is considered necessary at the balance sheet dates.
Construction Deposits
Construction deposits are the warranty
deposits the real estate contractors provide to the Company upon signing the construction contracts. The Company can use such deposits
to reimburse customers in the event of customer claims due to construction defects. The remaining balance of the deposits
are returned to the contractors when the terms of the after-sale property warranty expires, which normally occurs within two to
five years after the date of the deposit.
Share-based compensation
Share-based payment transactions are measured
based on the grant-date fair value of the equity instrument issued and recognized as compensation expense over the requisite service
period, or vesting period.
CHINA HGS REAL ESTATE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Forfeitures are estimated at the time of
grant and revised, if necessary, in the subsequent period if actual forfeitures differ from initial estimates. Forfeiture rate
is estimated based on historical and future expectation of employee turnover rate and are adjusted to reflect future change in
circumstances and facts, if any. Share-based compensation expense is recorded net of estimated forfeitures such that expense was
recorded only for those stock options and common stock awards that are expected to vest。
Income taxes
Deferred tax assets and liabilities are
for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this
method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets
and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable
to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.
ASC 740-10-25 prescribes a more-likely-than-not
threshold for consolidated financial statement recognition and measurement of a tax position taken (or expected to be taken) in
a tax return. It also provides guidance on the recognition of income tax assets and liabilities, classification of current and
deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, years open for
tax examination, accounting for income taxes in interim periods and income tax disclosures. There are no material uncertain tax
positions as of March 31, 2018 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 and six months ended
March 31, 2018 and 2017. As of March 31, 2018, the Chinese entities’ income tax returns filed in China for the years ended
December 31, 2013 through, 2017. are subject to examination by the Chinese taxing authorities. As of March 31, 2018, 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.
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, Central Plaza and Oriental Pearl Garden
are located, implements this tax rule by requiring real estate companies prepay the LAT based upon customer deposits received.
The tax rate in Hanzhong is 1%. Yang County, where the project Yangzhou Pearl Garden and Yangzhou Palace are located, requires
a tax rate of 0.5%.
CHINA HGS REAL ESTATE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Comprehensive income (loss)
In accordance with ASC 220-10-55, comprehensive
income (loss) is defined as all changes in equity except those resulting from investments by owners and distributions to owners.
The Company’s only components of comprehensive income (loss) for the three and six months ended March 31, 2018 and 2017 were
net income and foreign currency translation adjustments.
Basic and diluted earnings per share
The Company computes earnings per share
(“EPS”) in accordance with the ASC 260, “Earnings per share”, which requires companies to present basic
and diluted EPS. Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period.
Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible
securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if
later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per
share) are excluded from the calculation of diluted EPS.
Advertising expenses
Advertising costs are expensed as incurred.
For the three and six months ended March 31, 2018, the Company recorded advertising expenses of $32,019 and $146,852, respectively
(2017 - $31,478 and $105,769).
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
six months ended March 31, 2018,
one suppliers accounted f
or 14% of the Company’s
the project expenditures. For the six months ended March 31, 2017, two suppliers accounted for 26% and 19% of the Company’s
the project expenditures, respectively For the three months ended March 31, 2018,
no supplier
accounted for ov
er 10% of the Company’s
total project expenditures.
For
the three months ended March 31, 2017, one supplier accounted for over 38% of the Company’s total project expenditures.
CHINA HGS REAL ESTATE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
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. 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.
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.
In March 2018, the FASB issued ASU 2018-05
— Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (“ASU 2018-05”),
which amends the FASB Accounting Standards Codification and XBRL Taxonomy based on the Tax Cuts and Jobs Act (the “Act”)
that was signed into law on December 22, 2017 and Staff Accounting Bulletin No. 118 (“SAB 118”) that was released by
the Securities and Exchange Commission. The Act changes numerous provisions that impact U.S. corporate tax rates, business-related
exclusions, and deductions and credits and may additionally have international tax consequences for many companies that operate
internationally. The Company does not believe this guidance will have a material impact on its condensed consolidated financial
statements.
Except
for the above-mentioned pronouncements, there are no new recent issued accounting standards that will have material impact on the
unaudited condensed consolidated financial position, statements of operations and cash flows
.
CHINA HGS REAL ESTATE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 3. REAL ESTATE PROPERTY DEVELOPMENT
COMPLETED AND UNDER DEVELOPMENT
The following summarizes the components of real estate property
development completed and under development as of March 31, 2018 and September 30, 2017:
|
|
Balance as of
|
|
|
|
March 31,
2018
|
|
|
September 30,
2017
|
|
Development completed:
|
|
|
|
|
|
|
|
|
Hanzhong City Mingzhu Garden Phase I
|
|
$
|
873,288
|
|
|
$
|
823,319
|
|
Hanzhong City Mingzhu Garden Phase II
|
|
|
37,357,426
|
|
|
|
42,274,715
|
|
Hanzhong City Nan Dajie (Mingzhu Xinju)
|
|
|
1,385,974
|
|
|
|
1,306,669
|
|
Hanzhong City Oriental Pearl Garden (a)
|
|
|
24,559,943
|
|
|
|
29,969,640
|
|
Yang County Yangzhou Pearl Garden Phase I
|
|
|
1,994,573
|
|
|
|
1,880,443
|
|
Yang County Yangzhou Pearl Garden Phase II
|
|
|
4,614,929
|
|
|
|
4,365,714
|
|
Real estate property development completed
|
|
|
70,786,133
|
|
|
|
80,620,500
|
|
Less: Real estate property completed – short-term
|
|
|
69,315,427
|
|
|
|
79,233,948
|
|
Real estate property completed – long-term
|
|
$
|
1,470,706
|
|
|
$
|
1,386,552
|
|
Under development:
|
|
|
|
|
|
|
|
|
Yang County Yangzhou Palace
|
|
$
|
77,223,976
|
|
|
$
|
87,126,402
|
|
Hanzhong City Shijin Project
|
|
|
7,722,114
|
|
|
|
7,280,256
|
|
Hanzhong City Liangzhou Road and related projects (b)
|
|
|
141,225,849
|
|
|
|
133,941,504
|
|
Hanzhong City Hanfeng Beiyuan East (c)
|
|
|
804,716
|
|
|
|
758,670
|
|
Hanzhong City Beidajie (e)
|
|
|
58,531,517
|
|
|
|
36,335,231
|
|
Yang County East 2
nd
Ring Road (d)
|
|
|
5,248,300
|
|
|
|
2,351,615
|
|
Real estate property under development
|
|
|
290,756,472
|
|
|
|
267,793,678
|
|
Less: Short-term portion
|
|
|
77,223,976
|
|
|
|
87,126,402
|
|
Real estate property under development –long-term
|
|
$
|
213,532,496
|
|
|
$
|
180,667,276
|
|
|
(a)
|
The Company recognized $9,844,433 and $15,868,225 of development cost in cost of real estate sales under the percentage of completion method for the three and six months ended March 31, 2018 (2017 - $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 March 31, 2018, 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 UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 3. REAL ESTATE PROPERTY DEVELOPMENT
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 March 31, 2018, the actual costs incurred by the Company were $141,225,849 (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 and six months ended March 31, 2018 and 2017, 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 March 31, 2018, 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 $26.7 million (or RMB 168 million), which was approved by the local Yang County government in March 2014. The local government is required to repay the Company’s project investment costs within 3 years with interest at the interest rate based on the commercial borrowing rate with the similar term published by China construction bank (March 31, 2018 – 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 road construction is expected to be completed by 2018.
|
|
(e)
|
For the three and six months ended March 31, 2018 and 2017, 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 March 31, 2018 and September 30,
2017, land use rights included in real estate property under development totaled $17,495,683 and $ 18,040,624, respectively.
NOTE 4. OTHER LOANS
|
|
March 31, 2018
|
|
|
September 30, 2017
|
|
Loan A (i)
|
|
$
|
102,479,018
|
|
|
$
|
97,473,417
|
|
Loan B (ii)
|
|
|
12,753,882
|
|
|
|
12,024,108
|
|
Loan C (iii)
|
|
|
18,928,222
|
|
|
|
17,845,155
|
|
|
|
|
134,161,122
|
|
|
|
127,342,680
|
|
Less: current maturities of other loans
|
|
|
45,560,055
|
|
|
|
28,545,233
|
|
Other loans – long-term portion
|
|
$
|
88,601,067
|
|
|
$
|
98,797,447
|
|
CHINA HGS REAL ESTATE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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 approximately $123.6 million (or RMB 775 million) for a long term loan at 4.245% interest per year to develop Liang Zhou Road Project. The Company repaid $7,424,354 (RMB 46,570,000) prior to March 31, 2018. As of March 31, 2018, the Company borrowed $102,479,018 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 $77,223,976 as of March 31, 2018 (September 30, 2017 - $87,126,402). In addition, the Company was required to provide a security deposit for the loan received. As of March 31, 2018, the security deposits paid were $5,895,849 (September 30, 2017 - $5,558,490) for loans received and included in the long term security deposit. For the three and six months ended March 31, 2018, the interests paid were $1,275,874 and $2,512,964 (2017 - $1,175,312 and $2,313,186), respectively, which was capitalized in to the development cost of Liangzhou road project. Due to local government’s delay in reallocation of residence in Liangzhou Road and related area, the Hanzhong Urban Construction Investment Development Co., Ltd has not released all the funds available in this loan to the Company and the Company’s withdraw will be based on the project’s development progress. The total required loan repayment schedule assuming total loan proceeds are borrowed are listed below:
|
For the periods ended:
|
|
Repayment in USD
|
|
|
Repayment in RMB
|
|
March 31, 2019
|
|
$
|
32,806,173
|
|
|
$
|
205,780
|
|
March 31, 2020
|
|
|
41,469,246
|
|
|
|
260,120,000
|
|
March 31, 2021
|
|
|
27,900,711
|
|
|
|
175,010,000
|
|
March 31, 2022
|
|
|
13,952,747
|
|
|
|
87,520,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
116,128,877
|
|
|
$
|
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 $12.8 million (RMB 80 million) related to 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 March 31, 2018, 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 and six months ended March 31, 2018, total interest was $112,506 and $221,826 (2017 - $103,880 and $209,662), respectively. As of March 31, 2018, The full amount of loan has following repayment schedule:
|
|
|
Repayment in USD
|
|
|
Repayment in RMB
|
|
Earlier of July 2018 or 60% sales completed
|
|
$
|
3,188,470
|
|
|
$
|
20,000,000
|
|
Earlier of October 2018 or 70% sales completed
|
|
|
4,782,706
|
|
|
|
30,000,000
|
|
Earlier of January 2019 or 75% sales completed
|
|
|
4,782,705
|
|
|
|
30,000,000
|
|
Total
|
|
$
|
12,753,881
|
|
|
$
|
80,000,000
|
|
CHINA HGS REAL ESTATE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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
approximately $19 million (RMB 119 million) for the development of Hanzhong City Liangzhou Road project. As of March 31, 2018,
the Company received all the proceeds and repaid unused fund of $43,177(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 $141,225,849 and $133,941,504 as of March 31, 2018
and September 30, 2017, respectively. Total financing costs of $56,174 and $110,758 for the three and six months ended March 31,
2018 (2017- $128,143 and $258,646), respectively, were capitalized in to the development cost of Hanzhong City Liangzhou Road project.
Additionally, in September 2017, the Urban
Development Center Co., Ltd. approved a construction loan for the Company in the amount of approximately $27.9 million (RMB 175
million) with an annual interest rate of 1.2% per year in connection with the Liangzhou Road and related Project. The Company is
required to repay the loan by equal annual principal repayment of approximately $5.4 million from December 2027 through May 2031.
The amount of this loan is available to be drawn down as soon as the land use rights of the Liangzhou Road is approved and the
construction starts, which is expected to begin in 2018. Interest charge for the three and six months ended March 31, 2018 was
$82,609 and $162,880, respectively, which was included in the construction capitalized costs (2017 – Nil).
|
NOTE 5. CUSTOMER DEPOSITS
Customer deposits consist of amounts received
from customers for the pre-sale of residential units in the PRC. The detail of customer deposits is as follows:
|
|
March 31,
2018
|
|
|
September 30,
2017
|
|
Customer deposits by real estate projects
|
|
|
|
|
|
|
|
|
Mingzhu Garden (Mingzhu Nanyuan and Mingzhu Beiyuan)
|
|
$
|
12,959,137
|
|
|
$
|
9,931,120
|
|
Oriental Pearl Garden
|
|
|
5,966,783
|
|
|
|
6,342,632
|
|
Liangzhou road and related projects
|
|
|
2,455,122
|
|
|
|
2,314,641
|
|
Yang County Pearl Garden
|
|
|
1,435,637
|
|
|
|
934,557
|
|
Yang County Palace
|
|
|
5,260,797
|
|
|
|
7,405,555
|
|
|
|
|
28,077,476
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
26,928,505
|
|
Less: Customer deposits - short-term
|
|
|
25,654,238
|
|
|
|
24,613,864
|
|
Customer deposits - long-term
|
|
$
|
2,423,238
|
|
|
$
|
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 March 31, 2018 and September
30, 2017, approximately $3.3 million and $2.6 million were guaranteed by the Company, respectively.
CHINA HGS REAL ESTATE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 6. RELATED PARTY LOANS
|
|
As of
|
|
|
|
March 31,
2018
|
|
|
September 30, 2017
|
|
Shareholder loan – USD loan (a)
|
|
$
|
1,810,000
|
|
|
$
|
1,810,000
|
|
Shareholder loan – RMB loan (b)
|
|
|
183,486
|
|
|
|
494,632
|
|
Total
|
|
$
|
1,993,486
|
|
|
$
|
2,304,632
|
|
|
a.
|
The Company has a one year loan agreement (“USD Loan Agreement”) with Mr. Xiaojun Zhu, the Chairman, CEO and major shareholder, pursuant to which the Company borrowed $1,810,000 to make a capital injection into Shaanxi HGS, the Company’s subsidiary. The 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 and $36,200 for three months and six ended March 31, 2018 and 2017, 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 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 upon maturity, with at an interest rate of 4.35% per year. The RMB loan balance as of March 31, 2018 and September 30, 2017 was $183,486 and $494,632, respectively. For the three and six months ended March 31, 2018, the interest was $7,922 and $13,668 (2017 - $17,214 and $30,712), 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 March
31, 2018 and September 30, 2017, 86.1% 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 UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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, March 31, 2018
|
|
|
120,000
|
|
|
$
|
1.89
|
|
|
|
0.39
|
|
|
$
|
178,800
|
|
Exercisable, March 31, 2018
|
|
|
103,333
|
|
|
$
|
1.89
|
|
|
|
0.39
|
|
|
$
|
153,966
|
|
NOTE 8. TAXES
(A) Business sales tax
The Company is subject to a 5% business
sales tax on revenue. It is the Company’s continuing practice to recognize the 5% business sales tax based on
revenue as a cost of sales as the revenue is recognized. As of March 31, 2018, the Company had business sales tax payable of $13,619,534
(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 entire exiting 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 and six months ended March 31, 2018 and 2017, the Company’s income taxes
were $717,008 and $1,130,758 (2017 - $276,524 and $498,522), 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 UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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. 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 and six months ended March 31, 2018 and 2017:
|
|
Three months ended
March 31,
|
|
|
Six months ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Chinese statutory tax rate
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
Net impact of Exemption rendered by local tax authorities
|
|
|
-
|
|
|
|
(0.9
|
%)
|
|
|
-
|
|
|
|
(2.2
|
%)
|
Valuation allowance change and other adjustments
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
0.8
|
%
|
|
|
1.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
26
|
%
|
|
|
25.1
|
%
|
|
$
|
25.8
|
%
|
|
|
23.9
|
%
|
Income tax expense for the three and six
months ended March 31, 2018 and 2017 is summarized as follows:
|
|
Three months ended
March 31,
|
|
|
Six months ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Current tax provision
|
|
$
|
481,934
|
|
|
$
|
276,524
|
|
|
$
|
749,970
|
|
|
$
|
498,522
|
|
Deferred tax provision
|
|
|
235,074
|
|
|
|
-
|
|
|
|
380,788
|
|
|
|
-
|
|
Income tax provision
|
|
$
|
717,008
|
|
|
$
|
276,524
|
|
|
$
|
1,130,758
|
|
|
$
|
498,522
|
|
CHINA HGS REAL ESTATE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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 $731,160 and $665,160 as of March 31, 2018 and September 30, 2017, respectively, which are available to reduce future years’
taxable income. These carry forwards will expire in 2037. 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 March 31, 2018
and September 30, 2017. The components of deferred
taxes as of March 31, 2018 and September 30, 2017 consist of the following:
|
|
March 31,
2018
|
|
|
September 30, 2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Deferred tax asset from net operating loss carry-forwards for parent company
|
|
$
|
240,014
|
|
|
$
|
226,154
|
|
Valuation allowance
|
|
|
(240,014
|
)
|
|
|
(226,154
|
)
|
Deferred tax asset - net
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
Revenue recognized based on percentage of completion
|
|
$
|
574,844
|
|
|
$
|
170,950
|
|
Deferred tax liability – long term
|
|
$
|
574,844
|
|
|
$
|
170,950
|
|
Movement of valuation allowance:
|
|
Three months ended
March 31,
|
|
|
Six months ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Beginning Balance
|
|
$
|
233,084
|
|
|
$
|
192,494
|
|
|
$
|
226,154
|
|
|
$
|
181,274
|
|
Current period additions
|
|
|
6,930
|
|
|
|
11,220
|
|
|
|
13,860
|
|
|
|
22,440
|
|
Ending Balance
|
|
$
|
240,014
|
|
|
$
|
203,714
|
|
|
$
|
240,014
|
|
|
$
|
203,714
|
|
The valuation allowance increased $6,930
and $13,680 for the three months ended March 31, 2018 (2017 - $11,220 and $22,440), 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 March 31, 2018, the outstanding LAT payable was $1,370,973 with respect to completed real estate properties sold up to March
31, 2018. As at September 30, 2017, the outstanding LAT payable balance was $1,292,527 with respect to completed real estate
properties sold up to September 30, 2017.
(D) Taxes payable consisted of the following:
|
|
March 31,
2018
|
|
|
September 30,
2017
|
|
|
|
|
|
|
|
|
CIT
|
|
$
|
6,973,855
|
|
|
$
|
6,216,432
|
|
Business tax
|
|
|
13,619,534
|
|
|
|
14,143,444
|
|
Other taxes and fees
|
|
|
2,325,164
|
|
|
|
2,020,188
|
|
Total taxes payable
|
|
|
22,918,553
|
|
|
|
22,380,064
|
|
Less: current portion
|
|
|
17,486,893
|
|
|
|
17,259,202
|
|
Tax payable – long term
|
|
$
|
5,431,660
|
|
|
$
|
5,120,862
|
|
CHINA HGS REAL ESTATE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 9. COMMITMENTS AND CONTINGENCY
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 March 31, 2018 and September 30, 2017, the amount of security deposit provided for these guarantees was approximately $3.3 million
and $2.6 million respectively.
ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion and analysis
of financial condition and results of operations relates to the operations and financial condition reported in the unaudited condensed
consolidated financial statements of China HGS Real Estate, Inc. for the three months ended March 31, 2018 and 2017 and should
be read in conjunction with such financial statements and related notes included in this report.
As used in this report, the terms “Company,”
“we,” “our,” “us” and “HGS” refer to China HGS Real Estate, Inc. and its subsidiaries.
Preliminary Note Regarding Forward-Looking Statements.
We make forward-looking statements in
Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report based
on the beliefs and assumptions of our management and on information currently available to us. Forward-looking statements include
information about our possible or assumed future results of operations which follow under the headings “Business Overview,”
“Liquidity and Capital Resources,” and other statements throughout this report preceded by, followed by or that include
the words “believes,” “expects,” “anticipates,” “intends,” “plans,”
“estimates” or similar expressions.
Forward-looking statements are subject
to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in these forward-looking
statements, including the risks and uncertainties described below and other factors we describe from time to time in our periodic
filings with the U.S. Securities and Exchange Commission (the “SEC”). We therefore caution you not to rely unduly on
any forward-looking statements. The forward-looking statements in this report speak only as of the date of this report, and we
undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments
or otherwise. These forward-looking statements include, among other things, statements relating to:
|
•
|
our ability to sustain our project development
|
|
•
|
our ability to obtain additional land use rights at favorable prices;
|
|
•
|
the market for real estate in Tier 3 and 4 cities and counties;
|
|
•
|
our ability to obtain additional capital in future years to fund our planned expansion; or
|
|
•
|
economic, political, regulatory, legal and foreign exchange risks associated with our operations.
|
Business Overview
We conduct substantially all of our business
through Shaanxi Guangsha Investment and Development Group Co., Ltd, in Hanzhong, Shaanxi Province. Since the initiation of our
business, we have been focused on expanding our business in certain Tier 3 and Tier 4 cities and counties in China.
For
the first six months ended March 31, 2018, our sales, gross profit and net income were approximately $36.4 million, $6.1 million
and $3.2 million, respectively, representing an approximate 87.1%, 45.3% and 104.7% increase in sales, gross profit and net income
as compared to six months ended March 31, 2017, respectively. The increase in sales, gross profit and net income was mainly resulted
from more gross floor area (“GFA”) sold during the first half of fiscal 2018.
For
the first six months ended March 31, 2018, we recognized revenue under the percentage of completion method for Yangzhou Palace
real estate Project because the real estate project under development have met the criteria for revenue recognition under the percentage
of completion method as June 30, 2017. Total revenue recognized under the percentage of completion method for the six months ended
March 31, 2018 was approximately $17.4 million (2017 - $Nil), representing 47.8% (2017 – Nil) of total revenue for the period,
with related costs of these real estate sales was approximately of $15.9 million (2017 - Nil), representing 52.7% (2017 –
Nil) of the real estate costs in the period. The gross profit before sales tax from the percentage of completion method was approximately
$1.5 million (2017 - Nil), representing 24.4% (2017–Nil) of the total gross profit for the period.
For
the six months ended March 31, 2018, the average selling price (“ASP”) for our completed real estate projects (excluding
sales of parking spaces) located in Yang County was approximately $445 per square meter, an increase of 35.1% from the ASP of $329
per square meter for the six months ended March 31, 2017. The increase in ASP was mainly due to the fact all the revenue in Yang
County was from sales of our residential units in Yangzhou Palace real estate Project, which is our new project with a relatively
higher selling price. However, the ASP for Yang County Palace project for the three months ended March 31, 2018 was still lower
than the ASP of $461 for the year ended September 30, 2017 due to our promotion on the related sales. The ASP of our Hanzhong completed
real estate projects (excluding sales of parking spaces) was approximately $553 per square meter, slightly increase from the ASP
of $533 per square meter for the six months ended March 31, 2017, which reflected a normal price increase in the local real estate
market.
Market Outlook
In
2018, the Company expects to focus on the development of the Liangzhou Road related project. These projects will comprise of residential
for end-users and upgraders, shopping malls as well as serviced apartments and offices to satisfy different market demands. Our
customers continue to experience growth of their disposable income. With a lower housing price to family disposable income ratio
and an increasing urbanization level, there is a growing demand for high quality residential housing. From this perspective, the
Company is positive about the outlook for the local real estate market in a long term. In the meantime, the Company is diversifying
its revenue and developing more commercial and municipal projects.
We
intend to remain focused on our existing construction projects in Hanzhong City and Yang County, deepening our institutional sales
network, enhancing our cost and operational synergies and improving cash flows and strengthening our balance sheet. In this respect,
we began the construction of the following large high rise residential projects in Hanzhong City and Yang County:
Liangzhou road and related projects
In September 2013, the Company entered
into an agreement (“Liangzhou Agreement”) with the Hanzhong local government on the Liangzhou Road reformation and
expansion project (Liangzhou Road Project”). Pursuant to the agreement, the Company is contracted to reform and expand the
Liangzhou Road, a commercial street in downtown Hanzhong City, with a total length of 2,080 meters and width of 30 meters and to
resettle the existing residences in the Liangzhou road area. The government’s original road construction budget was approximately
$33 million in accordance with the Liangzhou Agreement. The Company, in return, is being compensated by the local government to
have an exclusive right on acquiring at least 394.5 Mu land use rights in a specified location of Hanzhong City. The Liangzhou
Road Project’s road construction started at the end of 2013. In 2014, the original scope and budget on the Liangzhou road
reformation and expansion project was extended, because the local government included more area and resettlement residences into
the project, which resulted in additional investments from the Company. In return, the Company is authorized by the local government
to develop and manage the commercial and residential properties surrounding the Liangzhou Road project. As of March 31, 2018, the
main Liangzhou road construction is substantially completed and is expected to be approved by the local government in fiscal 2018.
The Company’s development cost incurred on Liangzhou Road Project is treated as the Company’s deposit on purchasing
the related land use rights, as agreed by the local government.
As of March 31, 2018, the actual costs
incurred by the Company was approximately $141.2 million (September 30, 2017 - $133.9 million) and the incremental cost related
to residence resettlement was approved by the local government. The Company determined that the Company’s Investment in Liangzhou
Road Project in exchange for interests in future land use rights is a barter transaction with commercial substance. For the three
and six months ended March 31, 2018 and 2017, the Company did not receive government’s subsidies for its Shanty Area Reform
Project surrounding Liangzhou Road located in Hantai District, Hanzhong City, respectively, and the Company recorded the subsidies
to offset against the development cost of Liangzhou Road Project.
The Liangzhou road related projects mainly
consists Oriental Garden Phase II, Liangzhou Mansion and Pearl Commercial Plaza surrounding the Liangzhou Road area. The Liangzhou
road related projects mainly consists Oriental Garden Phase II, Liangzhou Mansion and Pearl Commercial Plaza surrounding the Liangzhou
road area.
Oriental Pearl Garden Phase II
Oriental Garden Phase II project is planned
to consist of 8 high-rise residential buildings and 6 commercial buildings with total planned GFA of 370,298 square meters. The
project will also include a farmer’s market.
Liangzhou Mansion
Liangzhou Mansion project is planned to
consist of 7 high-rise building and commercial shops on the first floor with total planned GFA of 160,000 square meters.
Pearl Commercial Plaza
Pearl Commercial Plaza is planned to consist
one office building, one service apartment (or hotel), classical architecture style of Chinese traditional houses and shopping
malls with total planned GFA of 124,191 square meters
The Company plans to start these three
real estate projects in 2018 after the road construction is fully completed and passes local government’s inspection and
approval in fiscal 2018. These related projects may take 2-3 years to fully complete.
Other projects
Yangzhou Palace
The Company is currently constructing 9
high-rise residential buildings and 16 sub-high-rise residential and multi-layer residential buildings with total GFA of 285,244
square meters in Yangzhou Palace located in Yang County. The construction started in the fourth quarter of fiscal 2013 and is expected
to be completed by the beginning of 2018. The Company has obtained pre-sale license in September 2016 and started to sell the residential
units in Yangzhou Palace during fiscal 2017.
Road Construction
Other road construction projects mainly
included a Yang County East 2nd Ring Road construction project. The Company was engaged by Yang County local government to construct
East 2nd Ring Road with total length of 2.15 km and budgeted price approximately of $26.7 million (or RMB 168 million) approved
by local Yang County government in March 2014. The local government is required to repay the Company’s project investment
within 3-4 years with interest based on the commercial borrowing rate with the similar term published by China Construction Bank.
The local government also was allowed to refund the Company by reducing local surcharges or taxes otherwise required in the real
estate development. The Company is expected to deliver these two road construction projects to local government in early 2018.
In September 2012, the Company was approved
by the Hanzhong local government to construct four municipal roads with a total length of approximately 1,192 meters. The project
was deferred and then restarted during the quarter ended March 31, 2014. As of March 31, 2018, the local government was still in
the process of planning and assessing the scope and budget for these projects. We expect these initiatives will help us during
this difficult period and better position us to capitalize on opportunities from a future market upturn.
Summary of real estate projects completion status
|
|
Actual (estimated)
Completion time of
construction
|
|
Estimated time to sell of
the property
|
Development completed
|
|
|
|
|
Hanzhong City Mingzhu Garden
(Mingzhu Nanyuan & Mingzhu Beiyuan)
|
|
Majority was completed during the third quarter of fiscal 2012
|
|
2018
|
Hanzhong City Nan Dajie (Mingzhu Xinju)
|
|
Phase one completed in 2010 and Phase two completed in 2011
|
|
2018
|
Hanzhong City Mingzhu Garden Phase II
|
|
Completed by Fiscal 2015
|
|
2018
|
Hanzhong City Oriental Pearl Garden
|
|
Completed by Fiscal 2016
|
|
2018
|
Yang County Yangzhou Pearl Garden Phase II
|
|
Completed by Fiscal 2015
|
|
2018
|
Yang County Yangzhou Pearl Garden
|
|
Majority completed in 2011 and 2012
|
|
2018
|
Under development:
|
|
Estimated Completion time of construction
|
Yang County Yangzhou Palace
|
|
To be completed in the beginning of 2018
|
Hanzhong City Shijin Project
|
|
Under planning stage
|
Hanzhong City Hanfeng Beiyuan East Road
|
|
To deliver the road to government in early of 2018
|
Hanzhong City Liangzhou Road and related projects
|
|
The projects will be completed in 2018
and later years
.
|
Hanzhong City Beidajie project
|
|
Under planning stage
|
Yang County East 2
nd
Ring Road
|
|
To be completed in 2018
|
We expect these initiatives will help us
during this difficult period and better position us to capitalize on opportunities from a future market upturn.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial
condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated
financial statements requires us to make estimates and judgments that affect our reported assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis and use them on historical
experience and various other assumptions that are believed to be reasonable under the circumstances as the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ
from these estimates because of different assumptions or conditions.
We believe the following critical accounting
policies affect our significant estimates and judgments used in the preparation of our condensed consolidated financial statements.
These policies should be read in conjunction with Note 2 of the notes to unaudited condensed consolidated financial statements.
Revenue recognition
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.
Revenue recognized to date in excess of
amounts received from customers is classified as current assets under cost and earnings in excess of billings. Amounts received
from customers in excess of revenue recognized to date are classified as current liabilities under billings in excess of cost and
earnings.
Any changes in significant judgments and/or
estimates used in determining construction and development revenue could significantly change the timing or amount of construction
and development revenue recognized. Changes in total estimated project costs or losses, if any, are recognized in the period in
which they are determined.
Full accrual method
Revenue from the sales of short term development
properties, where the construction period is expected to 18 months or less is recognized by the full accrual method at the time
of the closing of an individual unit sale. This occurs when title to or possession of the property is transferred to the buyer.
A sale is not considered consummated until (a) the parties are bound by the terms of a contract, (b) all consideration
has been exchanged, (c) any permanent financing for which the seller is responsible has been arranged, (d) all conditions
precedent to closing have been performed, (e) the seller does not have substantial continuing involvement with the property,
and (f) the usual risks and rewards of ownership have been transferred to the buyer. Further, the buyer’s initial and
continuing investment is adequate to demonstrate a commitment to pay for the property.
The Company provides “mortgage
loan guarantees” only with respect to buyers who make down-payments of 20%-50% of the total purchase price of the property.
The period of the mortgage loan guarantee begins on the date the bank approves the buyer’s mortgage and we receives the loan
proceeds in our bank account and ends on the date the “Certificate of Ownership” evidencing that title to the property
has been transferred to the buyer. The procedures to obtain the Certificate of Ownership take six to twelve months (the “Mortgage
Loan Guarantee Period”). If, after investigation of the buyer’s income and other relevant factors, the bank
decides not to grant the mortgage loan, our mortgage-loan based sales contract terminates and there will be no guarantee obligation. If,
during the Mortgage Loan Guarantee Period, the buyer defaults on his or her monthly mortgage payment for three consecutive months,
we are required to return the loan proceeds back to the bank, although we have the right to keep the customer's deposit and resell
the property to a third party. Once the Certificate of Property has been issued by the relevant government authority,
our loan guarantee terminates. If the buyer then defaults on his or her mortgage loan, the bank has the right to take
the property back and sell it and use the proceeds to pay off the loan. The Company is not liable for any shortfall
that the bank may incur in this event. To date, no buyer has defaulted on his or her mortgage payments during the Mortgage Loan
Guarantee Period and the Company has not returned any loan proceeds pursuant to its mortgage loan guarantees.
For municipal road construction projects,
fees are generally recognized by the full accrual method at the time of the projects are completed.
Use of estimates
The preparation of financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the
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 useful lives of property and equipment, provision necessary
for contingent liabilities, fair values, revenue recognition, income 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.
Real estate property development completed
and under development
Real estate property consists of finished
residential unit sites, commercial offices and residential unit sites under development. The Company leases the land for the residential
unit sites under land use right leases with various terms from the PRC government. The cost of land use rights is included in the
development cost and allocated to each project. Real estate property development completed and real estate property under development
are stated at the lower of cost or fair value.
Expenditures for land development, including
cost of land use rights, deed tax, pre-development costs, and engineering costs, exclusive of depreciation, are capitalized and
allocated to development projects by the specific identification method. Costs are allocated to specific units within a project
based on the ratio of the sales area of units to the estimated total sales area of the project (or phase of the project) multiplied
by the total cost of the project (or phase of the project).
Cost of amenities transferred to buyers
is allocated to specific units as a component of total construction cost. The amenity cost includes landscaping, road paving, etc.
Once the projects are completed, the amenities are under control of the property management companies.
Real estate property development completed
and real estate property under development are reclassified on the balance sheet into current and non-current portions based on
the estimated date of construction completion and sales. The real estate property development completed classification is based
on the estimated date that each property is expected to be sold within the Company’s normal operating cycle of the business
and the Company’s sales plan. Real estate property development completed is classified as a current asset if the property
is expected to be sold within the normal operating cycle of the business. Otherwise, it is classified as a non-current asset. Real
estate property under development is classified as a current asset, if the property is reasonably expected to be completed within
the Company’s normal operating cycle of the business. Otherwise, it is classified as a non-current asset. The majority of
real estate projects the Company has completed in the past were multi-layer or sub-high-rise real estate projects. The Company
considers its normal operating cycle is 12 months.
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.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2018 compared to Three
Months Ended March 31, 2017
Revenues
The following is a breakdown of revenue:
|
|
For Three Months Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Revenue recognized under full accrual method
|
|
$
|
11,121,635
|
|
|
$
|
11,113,794
|
|
Revenue recognized under percentage of completion method
|
|
|
10,784,732
|
|
|
|
-
|
|
Total
|
|
$
|
21,906,367
|
|
|
$
|
11,113,794
|
|
Revenues recognized from completed projects
The following table summarizes our revenue generated by different
projects:
|
|
For Three Months Ended March 31,
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Variance
|
|
|
|
Revenue
|
|
|
%
|
|
|
Revenue
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan) Phase I and II
|
|
$
|
7,489,298
|
|
|
|
67.3
|
%
|
|
$
|
4,821,688
|
|
|
|
43.4
|
%
|
|
$
|
2,667,610
|
|
|
|
55.3
|
%
|
Oriental Pearl Garden
|
|
|
3,613,825
|
|
|
|
32.5
|
%
|
|
|
6,186,456
|
|
|
|
55.7
|
%
|
|
|
(2,572,631
|
)
|
|
|
(41.6
|
)%
|
Yangzhou Pearl Garden Phase I and II
|
|
|
18,512
|
|
|
|
0.2
|
%
|
|
|
105,650
|
|
|
|
1.0
|
%
|
|
|
(87,138
|
)
|
|
|
(82.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Real Estate Sales before Sales Tax
|
|
|
11,121,635
|
|
|
|
100
|
%
|
|
|
11,113,794
|
|
|
|
100
|
%
|
|
|
7,841
|
|
|
|
0.1
|
%
|
Sales Tax
|
|
|
(65,064
|
)
|
|
|
|
|
|
|
(353,436
|
)
|
|
|
|
|
|
|
288,372
|
|
|
|
(81.6
|
)%
|
Revenue net of sales tax
|
|
$
|
11,056,571
|
|
|
|
|
|
|
$
|
10,760,358
|
|
|
|
|
|
|
$
|
296,213
|
|
|
|
2.8
|
%
|
Our revenues are derived from the sale
of residential buildings, commercial store-fronts and parking spaces in projects that we have developed. Our Mingzhu Garden Phase
I and Phase II, Yangzhou Pearl Garden Phase I and Phase II and Oriental Garden Phase I have all been completed in prior years,
the related revenues have been included in revenue recognized from completed projects in prior years. For these completed real
estate properties, only limited models are available for customer selection. Comparing to the second quarter of fiscal 2017,
revenues before sales tax was consistent at $11.1 million for the second quarter of fiscal 2018. The total GFA sold during
three months ended March 31, 2018 was 19,587 square meters, slightly decrease from the 21,589 square meters sold in the same period
of last year. The decrease in GFA was offset by the increase in ASP of Hanzhong real estate market.
In May of 2016, the Business Tax has been
incorporated into Value Added Tax in China, which means there will be no more Business Tax and accordingly some business operations
previously taxed in the name of Business Tax will be taxed in the manner of VAT thereafter. The Company is subject to 5% of VAT
for all its exiting real estate project based on the local tax authority’s practice. As our revenue is reported net of VAT,
the Company does not expect the overall gross margin for the existing real estate properties will be significantly affected by
the change from business tax to VAT. The sales tax for the three months ended March 31, 2018 was $0.07 million, while there was
$0.4 million sales tax charge for the three months ended March 31, 2017.
Revenue recognized from projects under
development
|
|
|
|
|
For the three months ended March 31, 2018
|
|
|
|
Total GFA
|
|
|
Average
Percentage of
Completion
(1)
|
|
|
Qualified
Contract
Sales
(2)
|
|
|
Revenue
Recognized
under
Percentage of
Completion
|
|
|
Accumulated
Revenue
recognized
under
Percentage of
completion
|
|
Real estate properties under
development located in Hanzhong
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yangzhou Palace
|
|
|
297,450
|
|
|
|
88
|
%
|
|
$
|
37,190,682
|
|
|
$
|
10,784,732
|
|
|
$
|
32,727,800
|
|
We started to recognize revenue under the
percentage of completion method for Yangzhou Palace real estate property since second quarter of fiscal 2017. As of March 31, 2018,
total GFA sold under qualified contract sales as of March 31, 2018 was 75,214 square meters (September 30, 2017 – 36,133).
The average unit price under contract sales was $494 per square meters.
|
|
|
|
|
For the three months ended March 31, 2017
|
|
|
|
Total GFA
|
|
|
Average
Percentage of
Completion
(1)
|
|
|
Qualified
Contract
Sales
(2)
|
|
|
Revenue
Recognized
under
Percentage of
Completion
|
|
|
Accumulated
Revenue
recognized
under
Percentage of
completion
|
|
Real estate properties under
development located in Hanzhong
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oriental Garden Phase I
|
|
|
N/A
|
|
|
|
N/A
|
%
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
(1)
|
Percentage of completion is calculated by dividing total costs incurred by total estimated costs for the relevant buildings in the each real estate building , estimated as of the time of preparation of our financial statements as of and for the year indicated.
|
|
(2)
|
Qualified contract sales only include all contract sales with customer deposits balance as of March 31, 2018 and 2017 equal or greater than 30% of contract sales amount and related individual of buildings were sold over 20%.
|
Cost of Sales
The following table sets forth a breakdown of our cost of sales:
|
|
For Three Months Ended March 31,
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Variance
|
|
|
|
Cost
|
|
|
%
|
|
|
Cost
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land use rights
|
|
$
|
1,596,433
|
|
|
|
8.8
|
%
|
|
$
|
639,721
|
|
|
|
7.7
|
%
|
|
$
|
956,712
|
|
|
|
149.6
|
%
|
Construction cost
|
|
|
16,522,257
|
|
|
|
91.2
|
%
|
|
|
7,624,900
|
|
|
|
92.3
|
%
|
|
|
8,897,357
|
|
|
|
117.0
|
%
|
Total cost
|
|
$
|
18,118,690
|
|
|
|
100
|
%
|
|
$
|
8,254,621
|
|
|
|
100
|
%
|
|
$
|
9,864,069
|
|
|
|
119.5
|
%
|
Our cost of sales consists of costs associated
with land use rights and construction costs. Cost of sales are capitalized and allocated to development projects using the specific
identification method. Costs are allocated to specific units within a project based on the ratio of the sales area of units to
the estimated total sales area of the project (or phase of the project) times the total cost of the project (or phase of the project).
Cost of sales was approximately $18.1 million
for the three months ended March 31, 2018 compared to $8.3 million for the three months ended March 31, 2017. The $9.9 million
increase in cost of sales was mainly attributable to the increase in total GFA sold in Yang County Palace project during the quarter
ended March 31, 2018 which led to increased revenue and cost of sales during this quarter.
Land use rights cost
: The cost of
land use rights includes the land premium we pay to acquire land use rights for our property development sites, plus taxes. Our
land use rights cost varies for different projects according to the size and location of the site and the minimum land premium
set for the site, all of which are influenced by government policies, as well as prevailing market conditions. Costs for land use
rights for the three months ended March 31, 2018 were $1.6 million, as compared to $0.6 million for the three months ended March
31, 2017, representing an increase of $1.0 million from the same quarter last year. The increase was consistent with the fact that
more GFA sold in Yangzhou Palace project during this quarter comparing to the same period of last year.
Construction cost:
We outsource
the construction of all of our projects to third party contractors, whom we select through a competitive tender process. Our construction
contracts provide a fixed payment which covers substantially all labor, materials and equipment costs, subject to adjustments for
some types of excess, such as design changes during construction or changes in government-suggested steel prices. Our construction
costs consist primarily of the payments to our third-party contractors, which are paid over the construction period based on specified
milestones. In addition, we purchase and supply a limited range of fittings and equipment, including elevators, window frames and
door frames. Our construction costs for the three months ending March 31, 2018 were approximately $16.5 million as compared to
approximately $7.6 million for the three months ended March 31, 2017, representing an increase of $8.9 million. The increase in
construction cost was due to increase in units sold during the quarter ended March 31, 2018.
The total cost of sales as a percentage
of real estate sales before sales tax for the three months ended March 31, 2018 was 82.7%, increased from 74.3% for the three months
ended March 31, 2017, because the Company promoted sales in Oriental Garden project during the second quarter of fiscal 2018, which
resulted in lower revenue.
Gross Profit
Gross profit was approx
imately
$3.7 million for the three months ended March 31, 2018 as compared to approximately $2.5 million for the three months ended March
31, 2017, representing an increase of 48.6%. The overall gross profit as a percentage of real estate sales before sales tax decreased
to 17.0% during the three months ended March 31, 2018 from 22.5% for the same quarter last year, mainly due to lower gross margin
in the Oriental Garden project. The Company had promotion sales in Oriental Garden project with ASP of $446 per square meter during
the second quarter of fiscal 2018 comparing to average ASP of $553 per square meter, which lower the overall gross margin during
the quarter. On the other side, during the second quarter of fiscal 2018, 12% of Mingzhu Garden’s revenue were from sales
of commercial units with over 79% gross margin and resulted in higher gross margin of 40.3% in the Mingzhu Garden project. During
the same period of last year, 100% of revenue from Mingzhu Garden were from sales of residential units.
The following table sets forth the gross margin of each of our
projects:
|
|
For Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Gross Profit
|
|
|
Gross Margin
|
|
|
Gross Profit
|
|
|
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan) Phase I and II
|
|
$
|
3,015,391
|
|
|
|
40.3
|
%
|
|
$
|
1,193,369
|
|
|
|
24.8
|
%
|
Oriental Garden
|
|
|
(171,281
|
)
|
|
|
(4.7
|
)%
|
|
|
1,661,381
|
|
|
|
26.9
|
%
|
Yangzhou Pearl Garden Phase I and II
|
|
|
3,270
|
|
|
|
17.7
|
%
|
|
|
4,423
|
|
|
|
4.2
|
%
|
Yangzhou Palace
|
|
|
940,297
|
|
|
|
8.7
|
%
|
|
|
-
|
|
|
|
-
|
|
Sales Tax
|
|
|
(65,064
|
)
|
|
|
|
|
|
|
(353,436
|
)
|
|
|
|
|
Total Gross Profit
|
|
|
3,722,613
|
|
|
|
17.0
|
%
|
|
|
2,505,737
|
|
|
|
22.5
|
%
|
Total Real Estate Sales before Sales Tax
|
|
$
|
21,906,367
|
|
|
|
|
|
|
$
|
11,113,794
|
|
|
|
|
|
Operating Expenses
Total operating expenses decreased by 34.5%
to $0.8 million for the three months ended March 31, 2018 from $1.3 million for the three months ended March 31, 2017 as a result
of a decrease of general administrative expense of 0.5 million, offset by an increase in selling expense of $0.05 million. Our
general and administrative expense decreased by 43.1% from the same period of last year, because the Company incurred a $0.6 million
of repair and maintenance expense in the same period of last year for a completed project and did not incur similar charge in the
second quarter of fiscal 2018. Our total operating expenses accounted for 3.8% and 11.5% of our real estate sales before sales
taxes for the three months ended March 31, 2018 and 2017, respectively.
|
|
For Three Months Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
$
|
185,593
|
|
|
$
|
131,851
|
|
General and administrative expenses
|
|
|
654,778
|
|
|
|
1,150,833
|
|
Total operating expenses
|
|
$
|
840,371
|
|
|
$
|
1,282,684
|
|
Percentage of Real Estate Sales before Sales Tax
|
|
|
3.8
|
%
|
|
|
11.5
|
%
|
Income Taxes
U.S. Taxes
China HGS is a Florida corporation. However,
all of our operations are conducted solely by our subsidiaries in the PRC. No income is earned in the United States and we do not
repatriate any earnings outside the PRC. As a result, we did not generate any U.S. taxable income for the three months ended March
31, 2018 and 2017.
PRC Taxes
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 March 31, 2018 and 2017, the Company’s income taxes were
$717,008 and $276,524, 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.
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. Any subsequent adjustment to
these amounts will be recorded to current tax expense in fiscal 2018 when the analysis is complete.
Net Income
We
reported net income of $2.0 for the three months ended March 31, 2018, as compared to net income of $0.8 million for the three
months ended March 31, 2017. The increase of approximately $1.2 million in our net income was primarily due to higher sales and
decreased general and administrative expense as discussed above under Revenues and Gross Profit.
Other Comprehensive Income
We
operate primarily in the PRC and the functional currency of our operating subsidiary is the Chinese Renminbi (“RMB”).
RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized
institutions. No representation is made that RMB amounts could have been, or could be, converted into USD at the rates used in
translation.
Translation
adjustments resulting from this process amounted to $6.3 million and $1.4 million for the three months ended March 31, 2018 and
2017, respectively, due to the significant depreciation of USD. The balance sheet amounts with the exception of equity
at March 31, 2018 were translated at 6.2726 RMB to 1.00 USD as compared to 6.8832 RMB to 1.00 USD at September 30, 2017, RMB has
depreciated 8.9% against the U.S. dollar from September 30, 2017 to March 31, 2018. The equity accounts were stated at their historical
rate. The average translation rates applied to the income statements accounts for the periods ended March 31, 2018 and 2017 were
6.4823 RMB and 6.8584 RMB, respectively. RMB has depreciated 5.5% against the U.S. dollar from March 31, 2017 to March 31, 2018.
As a result, our financial statements reported more translation gain in 2018.
Six Months Ended March 31, 2018 compared to Six
Months Ended March 31, 2017
Revenues
The following is a breakdown of revenue:
|
|
For Six Months Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Revenue recognized under full accrual method
|
|
$
|
18,862,557
|
|
|
$
|
20,011,648
|
|
Revenue recognized under percentage of completion method
|
|
|
17,391,381
|
|
|
|
-
|
|
Total
|
|
$
|
36,353,938
|
|
|
$
|
20,011,648
|
|
Revenues recognized under full accrual method
The following table summarizes our revenue generated by different
projects:
|
|
For Six Months Ended March 31,
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Variance
|
|
|
|
Revenue
|
|
|
%
|
|
|
Revenue
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan) Phase I and Phase II
|
|
$
|
11,544,848
|
|
|
|
60.9
|
%
|
|
$
|
8,359,383
|
|
|
|
41.8
|
%
|
|
$
|
3,185,465
|
|
|
|
38.1
|
%
|
Yangzhou Pearl Garden Phase I and Phase II
|
|
|
18,512
|
|
|
|
0.1
|
%
|
|
|
141,547
|
|
|
|
0.7
|
%
|
|
|
(123,035
|
)
|
|
|
(86.9
|
)%
|
Oriental Garden
|
|
|
7,399,197
|
|
|
|
39.0
|
%
|
|
|
11,510,718
|
|
|
|
57.5
|
%
|
|
|
(4,111,521
|
)
|
|
|
(35.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Real Estate Sales before Sales Tax
|
|
|
18,962,557
|
|
|
|
100
|
%
|
|
|
20,011,648
|
|
|
|
100
|
%
|
|
|
(1,049,091
|
)
|
|
|
(5.2
|
)%
|
Sales Tax
|
|
|
(90,280
|
)
|
|
|
|
|
|
|
(466,038
|
)
|
|
|
|
|
|
|
375,758
|
|
|
|
(80.6
|
)%
|
Revenue net of sales tax
|
|
$
|
18,872,277
|
|
|
|
|
|
|
$
|
19,545,610
|
|
|
|
|
|
|
$
|
(673,333
|
)
|
|
|
(3.4
|
)%
|
Our
revenues are derived from the sale of residential buildings, commercial front-stores and parking space in projects that we have
developed. Our Mingzhu Garden Phase I and Phase II, Yangzhou Pearl Garden Phase I and Phase II and Oriental Garden Phase I have
all been completed in prior years, the related revenues have been included in revenue recognized from completed projects, which
resulted in higher revenue reported for the six months ended March 31, 2018 as compared to the same comparative period of 2017.
Our sales of completed real estate projects decreased by approximately $3.4% from the sales of $20 million in the same period of
last year to approximately $18.9 million for the six months ended March 31, 2018. The total GFA sold during the six months
ended March 31, 2018 was 34,342 square meters, decreased by 13.2% from GFA of 39,565 square meters sold in the same period of last
year. But, the impact from decreased GFA sold during the first half of fiscal 2018 was offset by increasing real estate price in
Hanzhong market. For the completed real estate properties, we only limited models are available for customer selection. In order
to promote the sales of the remaining units, we lowered our selling price during the six months ended March 31, 2018, which led
to more GFA sold during the six months ended March 31, 2018 than in the same period of 2017.
In
May of 2016, the Business Tax has been incorporated into Value Added Tax in China, which means there will be no more Business Tax
and accordingly some business operations previously taxed in the name of Business Tax will be taxed in the manner of VAT thereafter.
The Company is subject to 5% of VAT for all its exiting real estate project based on the local tax authority’s practice.
As our revenue is reported net of VAT, the Company does not expect the overall gross margin for the existing real estate properties
will be significantly affected by the change from business tax to VAT. The sales tax for the six months ended March 31, 2018 was
$0.09 million, while there was $0.5 million sales tax charge for the six months ended March 31, 2017.
Revenue recognized under percentage completion method
|
|
|
|
|
For the six months ended March 31, 2018
|
|
|
|
Total GFA
|
|
|
Average
Percentage of
Completion
(1)
|
|
|
Qualified
Contract
Sales
(2)
|
|
|
Revenue
Recognized
under
Percentage of
Completion
|
|
|
Accumulated
Revenue
recognized
under
Percentage of
completion
|
|
Real estate properties under
development located in Hanzhong
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yangzhou Palace
|
|
|
297,450
|
|
|
|
88
|
%
|
|
$
|
37,190,682
|
|
|
$
|
17,391,381
|
|
|
$
|
32,727,800
|
|
We started to recognize revenue under the
percentage of completion method for Yangzhou Palace real estate property since second quarter of fiscal 2017. As of March 31, 2018,
total GFA sold under qualified contract sales as of March 31, 2018 was 75,214 square meters (September 30, 2017 – 36,133).
The average unit price under contract sales was $494 per square meters.
|
|
|
|
|
For the six months ended March 31, 2017
|
|
|
|
Total GFA
|
|
|
Average
Percentage of
Completion
(1)
|
|
|
Qualified
Contract Sales
(2)
|
|
|
Revenue
Recognized
under Percentage
of Completion
|
|
|
Accumulated
Revenue
Recognized under
Percentage of
Completion
|
|
Real estate properties under development located in Hanzhong
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oriental Garden
|
|
|
N/A
|
|
|
|
N/A
|
%
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
(1)
|
Percentage of completion is calculated by dividing total costs incurred by total estimated costs for the relevant buildings in the each real estate building , estimated as of the time of preparation of our financial statements as of and for the year indicated.
|
|
(2)
|
Qualified contract sales only include all contract sales with customer deposits balance as of March 31, 2018 and 2017 equal or greater than 30% of contract sales amount and related individual of buildings were sold over 20%.
|
Cost of Sales
The following table sets forth a breakdown of our cost of sales:
|
|
For Six Months Ended March 31,
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Variance
|
|
|
|
Cost
|
|
|
%
|
|
|
Cost
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land use rights
|
|
$
|
2,643,315
|
|
|
|
8.8
|
%
|
|
$
|
992,772
|
|
|
|
6.5
|
%
|
|
$
|
1,650,545
|
|
|
|
166.3
|
%
|
Construction cost
|
|
|
27,475,916
|
|
|
|
91.2
|
%
|
|
|
14,322,884
|
|
|
|
93.5
|
%
|
|
|
13,153,033
|
|
|
|
91.8
|
%
|
Total cost
|
|
$
|
30,119,231
|
|
|
|
100
|
%
|
|
$
|
15,315,656
|
|
|
|
100
|
%
|
|
$
|
14,803,575
|
|
|
|
96.7
|
%
|
Our
cost of sales consists of costs associated with land use rights and construction costs. Cost of sales are capitalized and allocated
to development projects using the specific identification method. Costs are allocated to specific units within a project based
on the ratio of the sales area of units to the estimated total sales area of the project (or phase of the project) times the total
cost of the project (or phase of the project).
Cost
of sales was approximately $30.1 million for the six months ended March 31, 2018 compared to $15.3 million for the six months ended
March 31, 2017. The $14.8 million increase in cost of sales was mainly attributable to the increase in total GFA sold from Yang
Palace project during the six months ended March 31, 2018 which led to increased revenue and cost of sales during this period.
Land
use rights cost
: The cost of land use rights includes the land premium we pay to acquire land use rights for our property development
sites, plus taxes. Our land use rights cost varies for different projects according to the size and location of the site and the
minimum land premium set for the site, all of which are influenced by government policies, as well as prevailing market conditions.
Costs for land use rights for the six months ended March 31, 2018 were approximately $2.6 million, as compared to $1.0 million
for the six months ended March 31, 2017, representing an increase of $1.6 million from the same period last year. The increase
was consistent with the fact that more GFA sold in Yangzhou Palace project during six months ended March 31, 2018 comparing to
the same period of last year.
Construction
cost:
We outsource the construction of all of our projects to third party contractors, whom we select through a competitive
tender process. Our construction contracts provide a fixed payment which covers substantially all labor, materials and equipment
costs, subject to adjustments for some types of excess, such as design changes during construction or changes in government-suggested
steel prices. Our construction costs consist primarily of the payments to our third-party contractors, which are paid over the
construction period based on specified milestones. In addition, we purchase and supply a limited range of fittings and equipment,
including elevators, window frames and door frames. Our construction costs for the six months ending March 31, 2018 were approximately
27.5 million as compared to approximately $14.3 million for the six months ended March 31, 2017, representing an increase of $13.2
million. The increase in construction cost was due to increase in units sold during the six months ended March 31, 2018.
The
total cost of sales as a percentage of real estate sales before sales tax for the six months ended March 31, 2018 were 82.8%, increased
from 76.5% for the six months ended March 31, 2017, which was lower revenue in the Oriental Garden project.
Gross Profit
Gross
profit was approximately $6.1 million for the six months ended March 31, 2018 as compared to approximately $4.2 million for the
six months ended March 31, 2017, representing an increase of $1.9 million, which was mainly attributable to more sales in Yangzhou
Palace project. The overall gross profit as a percentage of real estate sales before sales tax decreased to 16.9% during the six
months ended March 31, 2018 from 21.1% for the same period last year, because the Company promoted sales in Yangzhou Palace project
and Oriental Garden project during the first half of fiscal 2018, the lower selling price resulted in lower gross margin of 5.5%
and 8.8% in the first half of fiscal 2018, respectively. For the Mingzhu Garden project, the Company sold commercial units with
over 79% gross margin during the first half of fiscal 2018, but most of sales in the same period of last year were only residential
units, which resulted in higher gross margin of 37.3%, comparing to gross margin of 22.8% in the same period of last year.
The following table sets forth the gross margin of each of our
projects:
|
|
For Six Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Gross Profit
|
|
|
Percentage
of Revenue
|
|
|
Gross
Profit
|
|
|
Percentage
of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan)
|
|
$
|
4,303,873
|
|
|
|
37.3
|
%
|
|
$
|
1,908,078
|
|
|
|
22.8
|
%
|
Oriental Garden
|
|
|
404,410
|
|
|
|
5.5
|
%
|
|
|
2,794,649
|
|
|
|
24.3
|
%
|
Yangzhou Pearl Garden
|
|
|
3,270
|
|
|
|
17.7
|
%
|
|
|
(6,735
|
)
|
|
|
(4.8
|
)%
|
Yangzhou Palace
|
|
|
1,523,154
|
|
|
|
8.8
|
%
|
|
|
-
|
|
|
|
-
|
|
Sales Tax
|
|
|
(90,280
|
)
|
|
|
|
|
|
|
(466,038
|
)
|
|
|
|
|
Total Gross Profit
|
|
|
6,144,427
|
|
|
|
16.9
|
%
|
|
|
4,229,954
|
|
|
|
21.1
|
%
|
Total Real Estate Sales before Sales Tax
|
|
$
|
36,353,938
|
|
|
|
|
|
|
$
|
20,011,648
|
|
|
|
|
|
Operating Expenses
Total
operating expenses decreased by 20.4% to approximately $1.5 million for the six months ended March 31, 2018 from $1.9 million for
the six months ended March 31, 2017 as a result of a decrease in general administrative expense of $0.6 million , offset by an
increase in selling expense of $0.2 million
The
increase in selling expenses for six months ended March 31, 2018 was primarily attributed to increase of commission paid to salesforce
and marketing activities. The decrease in general administration expense for the six months ended March 31, 2018 was attributed
to the Company incurred additional $0.6 million repairing and maintenance expense on the completed projects during six months ended
March 31, 2017 and the Company did not have similar expense during the first half of fiscal 2018.
|
|
For Six Months Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
$
|
502,335
|
|
|
$
|
278,085
|
|
General and administrative expenses
|
|
|
1,012,207
|
|
|
|
1,623,563
|
|
Total operating expenses
|
|
$
|
1,514,542
|
|
|
$
|
1,901,648
|
|
Percentage of Real Estate Sales before Sales Tax
|
|
|
4.2
|
%
|
|
|
9.5
|
%
|
Income Taxes
U.S. Taxes
China HGS is a Florida corporation. However,
all of our operations are conducted solely by our subsidiaries in the PRC. No income is earned in the United States and we do not
repatriate any earnings outside the PRC. As a result, we did not generate any U.S. taxable income for the six months ended March
31, 2018 and 2017.
PRC Taxes
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
six months ended March 31, 2018 and 2017, the Company’s income taxes were approximately $1.1 million and $0.5 million, 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.
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. Any subsequent adjustment to
these amounts will be recorded to current tax expense in fiscal 2018 when the analysis is complete.
Net Income
We reported net
income of approximately $3.2 million for the six months ended March 31, 2018, as compared to net income of approximately $1.6 million
for the six months ended March 31, 2017. The increase of $1.6 million in our net income was primarily due to more revenue and less
operating expense as discussed above under Revenues and Gross Profit.
Other Comprehensive Income (Loss)
We
operate primarily in the PRC and the functional currency of our operating subsidiary is the Chinese Renminbi (”RMB”).
RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized
institutions. No representation is made that RMB amounts could have been, or could be, converted into USD at the rates used in
translation.
Translation
adjustments resulting from this process amounted to $10.1 and negative $4.9 million for the six months ended March 31, 2018 and
2017, respectively,
due to the significant depreciation of USD. The balance
sheet amounts with the exception of equity at March 31, 2018 were translated at 6.2726 RMB to 1.00 USD as compared to 6. 8832 RMB
to 1.00 USD at September 30, 2017, RMB has depreciated 8.9% against the U.S. dollar from September 30, 2017 to March 31, 2018.
The equity accounts were stated at their historical rate. The average translation rates applied to the income statements accounts
for the periods ended March 31, 2018 and 2017 were 6.4823 RMB and 6.8584 RMB, respectively. RMB has depreciated 5.5% against the
U.S. dollar from March 31, 2017 to March 31, 2018. As a result, our financial statements reported more translation gain in 2018.
Liquidity and Capital Resources
Current Assets and Liabilities
Our
principal need for liquidity and capital resources is to maintain working capital sufficient to support our operations and to make
capital expenditures to finance the growth of our business. Historically we mainly financed our operations primarily through cash
flows from operations and borrowings from our principal shareholder.
As
of March 31, 2018, the Company had approximately $45.6 million in working capital, a decrease of $29.6 million as compared to $75.2
million as of September 30, 2017 primarily due to the investment in long term of real estate under development projects. Our total
cash and restricted cash balance were approximately $7.7 million and $4.7 million as of March 31, 2018 and September 30, 2017,
respectively. Since most of our current real estate development is completed, we are expecting to collect the full purchase price
from our existing customers in the coming months. We expect our cash collection will improve during remaining half of our fiscal
2018. In addition, on June 26, 2015 and March 10, 2016, the Company signed phase I and Phase II agreements with Hanzhong Urban
Construction Investment Development Co., Ltd, a state owned Company, to borrow up to $123.6 million (RMB 775 million) long term
loan at 4.245% interest to develop Liangzhou Road Project. As of March 31, 2018, the Company borrowed $102.5 million (September
30, 2017 - $97.5 million) from this credit line. The loan is guaranteed by Hanzhong City Hantai District Municipal Government and
pledged by the Company’s Yang County Palace project with carrying value of $77.2 million as of March 31, 2018 (September
30, 2017 - $87.1 million). On January 8, 2016, the Company signed a loan agreement with Hanzhong Municipal Housing Provident Fund
Management Center to borrow up to $12.8 million (RMB 80 millioin) related to Oriental Garden project. The loan carries interest
at is 3.575% and is due in January 2019. As of September 30, 2017, the Company received all the proceeds from Housing Fund, The
repayment is required based on certain sales milestones or a fixed repayment schedule starting in July 2018.
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
$19.0 million (RMB 119 million) for the development of Hanzhong City Liangzhou Road project. The loan carries interest at a fixed
interest of 1.2% and is due on June 20, 2031. As of March 31, 2018, the Company pledged the assets of Liangzhou Road and related
projects with carrying value of $141.2 million (September 30, 2017 - $133.9 million) as collateral for the loan. Our major shareholder
pledged their assets for the loan. The Housing Fund has rights to monitor the project’s future cash flow. Additionally, in
September 2017, the Urban Development Center Co., Ltd. approved a construction loan for the Company in the amount of $ $27.9 million
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 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.
With respect to capital funding requirements,
the Company budgeted our capital spending based on ongoing assessments of needs to maintain adequate cash. Due to the long term
relationship with our construction suppliers, we were able to effectively manage cash spending on construction. Also, our principal
shareholder, Mr. Xiaojun Zhu has been providing and will continue to provide his personal funds, if necessary, to support the Company
on an as needed basis. In addition, the Company’s cash flows from pre-sales and current sales should provide financial support
for our current developments and operations. The Company believes it has sufficient working capital for the next twelve months.
In order to fully implement our business plan and sustain continued
growth, we may also need to raise capital from outside investors. Our expectation, therefore, is that we will seek to access the
capital markets in both the U.S. and China to obtain the funds as needed. At the present time, however, we do not have commitments
of funds from any third party.
Cash Flow
Comparison of cash flows results is summarized as follows:
|
|
Six months ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net cash provided by (used in) operating activities
|
|
$
|
3,628,694
|
|
|
$
|
(30,893,196
|
)
|
Net cash used in investing activities
|
|
|
(398,269
|
)
|
|
|
-
|
|
Net cash (used in) provided by financing activities
|
|
|
(1,210,990
|
)
|
|
|
26,966,287
|
|
Effect of change of foreign exchange rate on cash
|
|
|
195,515
|
|
|
|
(183,938
|
)
|
Net cash increase (decrease) in cash
|
|
|
2,214,950
|
|
|
|
(4110,848
|
)
|
Cash, beginning of period
|
|
|
2,109,043
|
|
|
|
6,401,237
|
|
Cash, end of period
|
|
$
|
4,323,993
|
|
|
$
|
2,290,389
|
|
Operating Activities
Net
cash provided by operating activities during the six months ended March 31, 2018 was $3.6 million, consisting of net income of
approximately $3.2 million, noncash adjustments of $0.9 million and net changes in our operating assets and liabilities, which
mainly included a reduction of $14.3 million in real estate property completed due to our increased sales during the first half
of fiscal 2018, offset by the increase in spending on real estate property under development of $6.5 million, paying off the accounts
payable of $5.9 million and increase in cost and earnings in excess of billings of $1.5 million due to more sales during the first
half of fiscal 2018.
Net
cash used in operating activities during the six months ended March 31, 2017 was $30.9 million, consisting of net income of approximately
$1.6 million, noncash adjustments of $60,637 and net changes in our operating assets and liabilities, which mainly included the
increase in spending on real estate property under development of $46.8 million, paying off the accounts payable of $5 million,
and decrease of cost and earnings in excess of billings of $0.8 million, offset by a decrease in real estate property development
completed by $15.3 million due to current sales a net increase of customer deposits received of $3.9 million, an increase of tax
payables of $0.6 million.
Investing activities
Net
cash used in investing activities during six months ended March 31, 2018 and 2017 was $0.4 million and Nil, respectively, due to
purchases of office equipment during the period.
Financing Activities
Net
cash flows used in financing activities amounted to approximately $1.2 million for the six months ended March 31, 2018, which mainly
included repayment of other loan of $0.9 million and repayment shareholder loan of $0.3 million.
Net cash flows provided
by financing activities amounted to approximately $27.0 million for the six months ended March 31, 2017, which mainly included
an increase of $26.5 million new loans from banks or financial institutions.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Inflation
Inflation has not had a material impact
on our business and we do not expect inflation to have a material impact on our business in the near future.