*the number of common stock outstanding
has been restated to reflect the 2:1 stock reverse split on August 20, 2020 (Note 11).
The accompanying notes are an integral part
of these consolidated financial statements
*the number of common stock outstanding has been restated to
reflect the 2:1 stock reverse split on August 20, 2020 (Note 11).
The accompanying notes are an integral part
of these consolidated financial statements
*the number of common stock outstanding has been restated to
reflect the 2:1 stock reverse split on August 20, 2020 (Note 11).
The accompanying notes are an integral part
of these consolidated financial statements
The accompanying notes
are an integral part of these consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
China HGS Real Estate Inc. (the “Company”
or “China HGS” or “we”, “our”, “us”) is a corporation organized under the
laws of the State of Florida.
China HGS does not conduct any substantive
operations of its own. Instead, through its subsidiary, Shaanxi HGS Management and Consulting Co., Ltd (“Shaanxi HGS”),
it entered into certain exclusive contractual agreements with the management of the Company’s PRC operating subsidiary, Shaanxi
Guangsha Investment and Development Group Co., Ltd (“Guangsha”). Pursuant to these agreements, Shaanxi HGS is obligated
to absorb a majority of the risk of loss from Guangsha’s activities and entitles Shaanxi HGS to receive a majority of Guangsha’s
expected residual returns. In addition, Guangsha’s shareholders have pledged their equity interest in Guangsha to Shaanxi
HGS, irrevocably granted Shaanxi HGS an exclusive option to purchase, to the extent permitted under PRC Law, all or part of the
equity interests in Guangsha and agreed to entrust all the rights to exercise their voting power to the person(s) appointed
by Shaanxi HGS.
Based on these contractual arrangements,
management believes that Guangsha should be considered a “Variable Interest Entity” (“VIE”) under ASC 810
“Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”, because the equity investors in
Guangsha no longer have the characteristics of a controlling financial interest, and the Company, through Shaanxi HGS, is the primary
beneficiary of Guangsha. Accordingly, Guangsha has been consolidated.
The Company, through its subsidiaries and
VIE, engages in real estate development, in the construction and sale of residential apartments, parking lots and commercial properties.
Total assets and liabilities presented on the consolidated balance sheets and sales, cost of sales, net income presented on Consolidated
Statement of Income and Comprehensive Loss as well as the cash flow from operation, investing and financing activities presented
on the Consolidated Statement of Cash Flows are substantially the financial position, operation and cash flow of Guangsha. The
Company has not provided any financial support to Guangsha for the years ended September 30, 2020 and 2019. The following
assets and liabilities of the consolidated VIE are included in the accompanying consolidated financial statements of the Company
as of September 30, 2020 and 2019:
|
|
Balance as of
|
|
|
|
September 30,
2020
|
|
|
September 30,
2019
|
|
Total assets
|
|
|
353,600,159
|
|
|
|
347,536,362
|
|
Total liabilities
|
|
$
|
181,104,861
|
|
|
$
|
184,937,708
|
|
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation and basis
of presentation
The Company’s consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”). The consolidated financial statements include the accounts of China HGS Real Estate Inc. (the “Company”
or “China HGS”), China HGS Investment Inc. (“HGS Investment”), Shaanxi HGS Management and Consulting Co., Ltd.
(“Shaanxi HGS”) and its variable interest entity (“VIE”), Shaanxi Guangsha Investment and Development Group
Co., Ltd. (“Guangsha”). All inter-company transactions and balances between the Company and its subsidiaries have
been eliminated upon consolidation.
The Company’s operations involve
real estate development and sales. Starting from the year ended September 30, 2020, the Company has been involved in larger
real estate property development with an extended development cycle. As a result, it is not possible to precisely measure the duration
of its operating cycle. The accompanying consolidated balance sheets of the Company have been prepared on an unclassified basis
in accordance with real estate industry practice and the prior year balance sheet has been adjusted to reflect this change.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Liquidity
In recent years, the Chinese government
has implemented measures to control overheating residential and commercial property prices including but not limited to restriction
on home purchase, increase the down-payment requirement against speculative buying, development of low-cost rental housing property
to help low-income groups while reducing the demand in the commercial housing market, increase the real estate property tax to
discourage speculation, and control of the land supply and slowdown the construction land auction process, etc. In addition,
in December 2019, a novel strain of coronavirus (COVID-19) surfaced. COVID-19 has spread rapidly throughout China and worldwide,
which has caused significant volatility in the PRC and international markets. There is significant uncertainty around the breadth
and duration of business disruptions related to COVID-19, as well as its impact on the PRC and international economies. To reduce
the spread of the COVID-19, the Chinese government has employed measures including city lockdowns, quarantines, travel restrictions,
suspension of business activities and school closures. Due to difficulties resulting from the COVID-19 outbreak, including, but
not limited to, the temporary closure of the Company’s facilities and operations beginning in early February through
early March 2020, limited support from the Company’s employees, delayed access to construction raw material supplies,
reduced customer visit to the Company’s sales office, and inability to promote the real estate property sales to customers
on a timely basis, our revenue decreased by approximately $27.0 million in fiscal 2020 as compared to fiscal 2019 due to decreased
sales volume of both residential and commercial properties developed by us, as a result, we reported a net income of approximately
$1.0 million for the year ended September 30,2020. Based on assessment of current economic environment, customer demand and
sales trend, and the negative impact from COVID-19 outbreak and spread, we believe that the real estate market downturn will continue
to be uncertain in the coming periods. As a result, the developing period of real estate properties and our operating cycle has
been extended and we may not be able to liquidate our large balance of completed real estate property within a short term as we
originally expected. In addition, as of September 30, 2020, we had large construction loans payable balance of approximately
$109.9 million and large accounts payable balance of approximately $25.4 million to be paid to subcontractors within one year.
The above mentioned facts raised substantial doubt about the Company's ability to continue as a going concern from the date of
this filing.
In assessing its liquidity, management
monitors and analyzes the Company’s cash on-hand, its ability to generate sufficient revenue sources in the future, and its
operating and capital expenditure commitments. As of September 30, 2020, our total cash and restricted cash balance decreased
to approximately $3.9 million as compared to approximately $4.2 million as of September 30, 2019. With respect to capital
funding requirements, the Company budgeted our capital spending based on ongoing assessments of needs to maintain adequate cash.
As of September 30, 2020, we had approximately $94.7 million completed residential apartments and commercial units available
for sale to potential buyers. Although we reported approximately $25.4 million accounts payable as of September 30, 2020,
due to the long term relationship with our construction suppliers and subcontractors, we were able to effectively manage cash spending
on construction and negotiate with them to adjust the payment schedule based on our cash on hand. In addition, most of our existing
real estate development projects related to old town renovation which are supported by local government. As of September 30,
2020, we reported approximately $109.9 million construction loan borrowed from financial institutions controlled by local government
and such loans can only be used on old town renovation related project development. We expect that we will be able to renew all
of the existing construction loans upon their maturity and borrow additional new loans from local financial institutions when necessary,
based on our past experience and the Company’s good credit history. Also, the Company’s cash flows from pre-sales and
current sales should provide financial support for our current developments and operations. As of September 30, 2020, we had
approximately $19.4 million customer deposits representing cash advance from buyers for pre-sales of our residential units and
we believe such cash advance can be used to fund our ongoing construction projects whenever necessary. For the year ended September 30,
2020, we had five large ongoing construction projects (see Note 3, real estate property under development) which were under preliminary
development stage due to delayed inspection and acceptance of the development plans by local government. In June 2020, we
completed the residence relocation surrounding Liangzhou Road related projects and expects to construct the Liangzhou Road related
projects starting from the fourth quarter of fiscal year 2020. For other four projects, we expect we will be able to obtain government’s
approval of the development plans on these projects in the coming fiscal year and start the pre-sale of the real estate property
to generate cash when certain property development milestones have been achieved. For the years ended September 30, 2020 and
2019, the Company had positive cash flow from operating activities. In addition, our principal shareholder, Mr. Xiaojun Zhu
has been providing and has committed to continue to provide his personal funds to support the Company’s operation whenever
necessary.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Revenue recognition
The Company adopted FASB ASC Topic 606
Revenue from Contracts with Customers (“ASC 606”) on October 1, 2018 using the modified retrospective approach. Under
ASC 606, Revenue from Contracts with Customers, revenue is recognized in accordance with the transfer of goods and services to
customers at an amount that reflects the consideration that the Company expects to be entitled to for those goods and services.
The Company determines revenue recognition through the following steps:
· identification
of the contract, or contracts, with a customer;
· identification
of the performance obligations in the contract;
· determination
of the transaction price, including the constraint on variable consideration;
· allocation
of the transaction price to the performance obligations in the contract; and
· recognition
of revenue when (or as) the Group satisfy a performance obligation.
Most of the Company’s revenue is
derived from real estate sales of condominiums and commercial property in the PRC. The majority of the Company’s contracts
contain a single performance obligation involving significant real estate development activities that are performed together to
deliver a real estate property to customers. Revenues arising from real estate sales are recognized when or as the control of the
asset is transferred to the customer. The control of the asset may transfer over time or at a point in time. For the sales of individual
condominium units in a real estate development project, the Company has an enforceable right to payment for performance completed
to date, revenue is recognized over time by measuring the progress towards complete satisfaction of that performance obligation
(“percentage completion method”). Otherwise, revenue is recognized at a point in time when the customer obtains control
of the asset.
Under percentage completion method, revenue
and profit from the sales of long term real estate development properties is recognized by the percentage of completion method
on the sale of individual units when all the following criteria are met:
|
a.
|
Construction is beyond a preliminary stage.
|
|
b.
|
The buyer is committed to the extent of being unable to require a refund except for non-delivery
of the unit or interest.
|
|
c.
|
Sufficient units have already been sold to assure that
the entire property will not revert to rental property.
|
|
d.
|
Sales prices are collectible.
|
|
e.
|
Aggregate sales proceeds and costs can be reasonably
estimated.
|
If any of the above criteria is not met,
proceeds shall be accounted for as deposits until the criteria are met.
Under the percentage of completion method,
revenues from individual real estate condominium units sold under development and related costs are recognized over the course
of the construction period, based on the completion progress of a project. The progress towards complete satisfaction of the performance
obligation is measured based on the Company’s efforts or inputs to the satisfaction of the performance obligation, by reference
to the contract costs incurred up to the end of reporting period as a percentage of total estimated costs for each contract. In
relation to any project, revenue is determined by calculating the ratio of incurred costs, including land use rights costs and
construction costs, to total estimated costs and applying that ratio to the contracted sales amounts. Cost of sales is recognized
by determining the ratio of contracted sales during the period to total estimated sales value, and applying that ratio to the incurred
costs. Current period amounts are calculated based on the difference between the life-to-date project totals and the previously
recognized amounts.
Any changes in significant judgments and/or
estimates used in determining construction and development revenue could significantly change the timing or amount of construction
and development revenue recognized. Changes in total estimated project costs or losses, if any, are recognized in the period in
which they are determined.
Revenue from the sales of previously
completed real estate condominium units is recognized at the time of the closing of an individual unit sale. This occurs when
the customer obtains the physical possession, the legal title, or the significant risks and rewards of ownership of the
assets and the Company has present right to payment and the collection of the consideration is probable. For municipal road
construction projects, fees are generally recognized at the time of the projects are completed.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Revenue recognition - continued
Disaggregation of Revenues
Disaggregated revenues was as follows:
|
|
For the years ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Revenue recognized for completed condominium real estate projects
|
|
$
|
12,979,227
|
|
|
$
|
13,400,491
|
|
Revenue recognized for condominium real estate projects under development
|
|
|
-
|
|
|
|
26,564,065
|
|
Total
|
|
$
|
12,979,227
|
|
|
$
|
39,964,556
|
|
Contract balances
Timing of revenue recognition may differ
from the timing of billing and cash receipts from customers. The Company records a contract asset when revenue is recognized prior
to invoicing, or a contract liability when cash is received in advance of recognizing revenue. A contract asset is a right to consideration
that is conditional upon factors other than the passage of time. Contract assets include billed and billable receivables, which
are the Company’s unconditional rights to consideration other than to the passage of time. Contract liabilities include cash
collected in excess of revenues. Customer deposits are excluded from contract liabilities.
The Company has elected to apply the optional practical expedient
for costs to obtain a contract which allows the Company to immediately expense sales commissions (included under selling expenses)
because the amortization period of the asset that the Company otherwise would have used is one year or less.
The Company provides “mortgage loan
guarantees” only with respect to buyers who make down-payments of 20%-50% of the total purchase price of the property. The
period of the mortgage loan guarantee begins on the date the bank approves the buyer’s mortgage and we receive the loan proceeds
in our bank account and ends on the date the “Certificate of Ownership” evidencing that title to the property has been
transferred to the buyer. The procedures to obtain the Certificate of Ownership take six to twelve months (the “Mortgage
Loan Guarantee Period”). If, after investigation of the buyer’s income and other relevant factors, the bank decides
not to grant the mortgage loan, our mortgage-loan based sales contract terminates and there will be no guarantee obligation. If,
during the Mortgage Loan Guarantee Period, the buyer defaults on his or her monthly mortgage payment for three consecutive months,
we are required to return the loan proceeds back to the bank, although we have the right to keep the customer's deposit and resell
the property to a third party. Once the Certificate of Property has been issued by the relevant government authority, our loan
guarantee terminates. If the buyer then defaults on his or her mortgage loan, the bank has the right to take the property back
and sell it and use the proceeds to pay off the loan. The Company is not liable for any shortfall that the bank may incur in this
event. To date, no buyer has defaulted on his or her mortgage payments during the Mortgage Loan Guarantee Period and the Company
has not returned any loan proceeds pursuant to its mortgage loan guarantees.
Use of estimates
The preparation of financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes, and disclosure of contingent liabilities at the date of the consolidated financial
statements. Estimates are used for, but not limited to, the assumptions and estimates used by management in recognizing development
revenue under the percentage of completion method, the selection of the useful lives of property and equipment, provision necessary
for contingent liabilities, revenue recognition, taxes and budgeted costs. Management believes that the estimates utilized in preparing
its consolidated financial statements are reasonable and prudent. Actual results could differ from these estimates.
Changes of estimated gross profit margins
related to revenue recognized under the percentage of completion method are made in the period in which circumstances requiring
the revisions become known. For the year ended September 30, 2020 and 2019, the Company did not change the estimated revenue
and related gross profit margin from fiscal 2019. .
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Fair value of financial instruments
The Company follows the provisions of Accounting
Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures. It clarifies the definition of fair value,
prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair
value as follows:
Level 1-Inputs are unadjusted quoted prices
in active markets for identical assets or liabilities available at the measurement date.
Level 2-Inputs are unadjusted quoted prices
for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets
that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable
market data.
Level 3-Inputs are unobservable inputs
which reflect the reporting entity’s own assumptions or what assumptions the market participants would use in pricing the
asset or liability based on the best available information.
The carrying amounts reported in the accompanying
consolidated balance sheets for cash, restricted cash and all other current assets, security deposits for land use rights, loans
and all current liabilities approximate their fair value based on the short-term maturity of these instruments. The fair value
of the long term customer, construction and security deposits approximate their carrying amounts because the deposits are received
in cash. It was impractical to estimate the fair value of the amount due from the local government and the long term other loans
payable.
Foreign currency translation
The Company’s financial information
is presented in U.S. dollars. The functional currency of the Company’s operating subsidiaries is Renminbi (“RMB”),
the currency of the PRC. The consolidated financial statements of the Company have been translated into U.S. dollars in accordance
with ASC 830-30 “Translation of Financial Statements”. The financial information is first prepared in RMB and then
is translated into U.S. dollars at year-end exchange rates as to assets and liabilities and average exchange rates as to revenue
and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The effects
of foreign currency translation adjustments are included as a component of accumulated other comprehensive income in stockholders’
equity.
|
|
2020
|
|
|
2019
|
|
Year end RMB : USD exchange rate
|
|
|
6.7896
|
|
|
|
7.1477
|
|
Annual average RMB : USD exchange rate
|
|
|
7.0056
|
|
|
|
6.8753
|
|
The RMB is not freely convertible into foreign currency and
all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts
could have been, or could be, converted into U.S. dollars at the rates used in translation.
Cash
Cash includes cash on hand and demand deposits in accounts maintained
with large reputable commercial banks within the PRC. The Company considers all highly liquid investments with original maturities
of three months or less when purchased to be cash equivalents.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Restricted cash
The restricted cash is required by the
banks as collateral for mortgage loans given to the home buyers before obtaining the certificates of ownership of the properties
as collateral. In order to provide the banks with the certificates of ownership, the Company is required to complete certain procedures
with the Chinese government, which normally takes six to twelve months. Because the banks provide the loan proceeds to the Company
without obtaining certificates of ownership as loan collateral during this six to twelve months’ period, the mortgage banks
require the Company to maintain, as restricted cash, 5% to 10% of the mortgage proceeds as security for the Company’s obligations
under such guarantees. The restricted cash is released by the banks once they receive the certificates of ownership. These deposits
are not covered by insurance. The Company has not experienced any losses in such accounts and management believes its restricted
cash account is not exposed to any significant risks.
Advances to vendors
Advances to vendors consist of balances
paid to contractors and vendors for services and materials that have not been provided or received and generally relate to the
development and construction of residential and commercial units in the PRC. Advances to vendors are reviewed periodically to determine
whether their carrying value has become impaired. Historically, the Company has not experienced any losses as a result of these
advances.
Security deposits for land use rights
Security deposits for land use rights consist
of the deposit held by the PRC government for the purchase of land use rights and the deposit held by an unrelated party to transfer
its land use rights to the Company. The deposits will be reclassified to real estate property under development upon the transfers
of legal title.
Real estate property development completed
and under development
Real estate property consists of finished
residential unit sites, commercial offices and residential unit sites under development. The Company leases the land for the residential
unit sites under land use right leases with various terms from the PRC government. The cost of land use rights is included in the
development cost and allocated to each project. Real estate property development completed and real estate property under development
are stated at the lower of cost or fair value.
Expenditures for land development, including
cost of land use rights, deed tax, pre-development costs, and engineering costs, exclusive of depreciation, are capitalized and
allocated to development projects by the specific identification method. Costs are allocated to specific units within a project
based on the ratio of the sales area of units to the estimated total sales area of the project (or phase of the project) multiplied
by the total cost of the project (or phase of the project).
Cost of amenities transferred to buyers
is allocated to specific units as a component of total construction cost. The amenity cost includes landscaping, road paving, etc.
Once the projects are completed, the amenities are under control of the property management companies.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Real estate property development completed
and under development- continued
Real estate property development completed
and under development are subject to valuation adjustments when the carrying amount exceeds fair value. An impairment loss is recognized
only if the carrying amount of the assets is not recoverable and exceeds fair value. The carrying amount is not recoverable if
it exceeds the sum of the undiscounted cash flows expected to be generated by the assets. The Company reviewed all of its real
estate projects for future losses and impairment by comparing the estimated future undiscounted cash flows for each project to
the carrying value of such project. For the years ended September 30, 2020 and 2019, the Company recognized $2,703,031 and nil impairment for real estate property completed, respectively.
Capitalization of interest
Interest incurred during and directly related
to real estate development projects is capitalized to the related real estate property under development during the active development
period, which generally commences when borrowings are used to acquire real estate assets and ends when the properties are substantially
complete or the property becomes inactive. Interest is capitalized based on the interest rate applicable to specific borrowings
or the weighted average of the rates applicable to other borrowings during the period. Interest capitalized to real estate property
under development is recorded as a component of cost of real estate sales when related units are sold. All other interest is expensed
as incurred. For the years ended September 30, 2020 and 2019, the total interest capitalized in the real estate property development
was $7,086,018 and $7,158,391, respectively.
Property, plant and equipment, net
Property, plant and equipment are recorded
at cost less accumulated depreciation and any impairment losses. The cost of an asset comprises its purchase price and
any directly attributable costs of bringing the asset to its working condition and location for its intended use.
Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, less any estimated residual value. Estimated useful lives of the
assets are as follows:
Buildings
|
39 years
|
Machinery and office equipment
|
5-10 years
|
Vehicles
|
8 years
|
Any gain or loss on disposal or retirement
of a fixed asset is recognized in the profit and loss account and is the difference between the net sales proceeds and the net
carrying amount of the asset. When property and equipment are retired or otherwise disposed of, the asset and accumulated depreciation
are removed from the accounts and the resulting profit or loss is reflected in income (loss).
Maintenance, repairs and minor renewals
are charged directly to expense as incurred unless such expenditures extend the useful life or represent a betterment, in which
case they are capitalized.
Impairment of long-lived assets
The Company reviews its long-lived assets
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable
through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever
any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Impairment of long-lived assets - continued
Assets are grouped and evaluated at the
lowest level for their identifiable cash flows that are largely independent of the cash flows of other groups of assets. The Company
considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying
amount of the asset to the future estimated cash flows expected to result from the use of the asset. If the carrying amount of
the asset exceeds estimated expected undiscounted future cash flows, the Company measures the amount of impairment by comparing
the carrying amount of the asset to its fair value. The estimation of fair value is generally determined by using the asset's expected
future discounted cash flows or market value. The Company estimates fair value of the assets based on certain assumptions such
as budgets, internal projections, and other available information as considered necessary. There is no impairment of long-lived
assets for the years ended September 30, 2020 and 2019.
Customer deposits
Customer deposits consist of amounts received
from customers relating to the sale of residential units in the PRC. In the PRC, customers will generally obtain permanent financing
for the purchase of their residential unit prior to the completion of the project. The lending institution will provide the funding
to the Company upon the completion of the financing rather than the completion of the project. The Company receives these funds
and recognizes them as a liability until the revenue can be recognized.
Property warranties
The Company provides its customers with
warranties which cover major defects of the building structure and certain fittings and facilities of properties sold. The warranty
period varies from two years to five years, depending on different property components the warranty covers. The Company continually
estimates potential costs for materials and labor with regard to warranty-type claims expected to be incurred subsequent to the
delivery of a property. Reserves are determined based on historical data and trends with respect to similar property types and
geographical areas. The Company continually monitors the warranty reserve and makes adjustments to its pre-existing warranties,
if any, in order to reflect changes in trends and historical data as information becomes available. The Company may seek further
recourse against its contractors or any related third parties if it can be proved that the faults are caused by them. In addition,
the Company also withholds up to 2% of the contract cost from sub-contractors for periods of two to five years. These amounts are
included in construction deposits, and are only paid to the extent that there has been no warranty claim against the Company relating
to the work performed or materials supplied by the subcontractors. For the years ended September 30, 2020 and 2019, the Company
had not recognized any warranty costs in excess of the amount retained from subcontractors and therefore, no warranty reserve is
considered necessary at the balance sheet dates.
Stock-based compensation
Share-based payment transactions are measured
based on the grant-date fair value of the equity instrument issued and recognized as compensation expense over the requisite service
period, or vesting period.
Forfeitures to be estimated at the time
of grant and revised, if necessary, in the subsequent period if actual forfeitures differ from initial estimates. Forfeiture rate
is estimated based on historical and future expectation of employee turnover rate and are adjusted to reflect future change in
circumstances and facts, if any. Share-based compensation expense is recorded net of estimated forfeitures such that expense was
recorded only for those stock options and common stock awards that are expected to vest.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Construction deposits
Construction deposits are the warranty
deposits the real estate contractors provide to the Company upon signing the construction contracts. The Company can use such deposits
to reimburse customers in the event of customer claims due to construction defects. The remaining balance of the deposits
are returned to the contractors when the terms of the after-sale property warranty expires, which normally occurs within two to
five years after the date of the deposit.
Income taxes
Deferred tax assets and liabilities are for the expected future
tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income
taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods
in which the differences are expected to affect taxable income. A valuation allowances is established, when necessary, to reduce
deferred tax assets to the amount expected to be realized.
ASC 740-10-25 prescribes a more-likely-than-not
threshold for consolidated financial statement recognition and measurement of a tax position taken (or expected to be taken) in
a tax return. It also provides guidance on the recognition of income tax assets and liabilities, classification of current and
deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, years open for
tax examination, accounting for income taxes in interim periods and income tax disclosures. There are no material uncertain tax
positions as of September 30, 2020 and 2019.
The Company is a corporation organized
under the laws of the State of Florida. However, all of the Company’s operations are conducted solely by its subsidiaries
in the PRC. No income is earned in the United States and the management does not repatriate any earnings outside the PRC. As a
result, the Company did not generate any U.S. taxable income for the years ended September 30, 2020 and 2019. As of September 30,
2020, the Chinese entities’ income tax returns filed in China for the years ended December 31, 2019, 2018, 2017, 2016
and 2015 are subject to examination by the Chinese taxing authorities.
As of September 30, 2020, the tax
years ended September 30, 2010 through September 30, 2019 for the Company’s PRC entities remain open for statutory
examination by PRC tax authorities. The parent Company China HGS Real Estate Inc.’s both U.S. federal tax returns and Florida
state tax returns are delinquent since 2009. Its tax years ended September 30, 2014 through September 30, 2019 remain
open for statutory examination by U.S. federal and state tax authorities.
On December 22, 2017, the Tax Cuts
and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes
include, but are not limited to, a U.S. corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31,
2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition
tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. Due to the complexity involved
in applying the provisions of the Tax Act, we made reasonable estimates of the effects and recorded accrued amounts in our consolidated
financial statements As of September 30, 2020 and 2019, including an approximately $2.3 million provision on the deemed repatriation
of undistributed foreign earnings and an additional $1.0 million provision for delinquent U.S. and State tax fillings. The Company
is in the process of engaging a tax professional to file its delinquent tax returns. Failure to furnish any income tax and information
returns with respect to any foreign business entity required, within the time prescribed by the IRS, subjects the Company to civil
penalties. Management is of the opinion that penalties, if any, that may be assessed would not be material to the consolidated
financial statements.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Land appreciation tax (“LAT”)
In accordance with the relevant taxation
laws in the PRC, the Company is subject to LAT based on progressive rates ranging from 30% to 60% on the appreciation of land value,
which is calculated as the proceeds of sales of properties less deductible expenditures including borrowing costs and all property
development expenditures. LAT is exempted if the appreciation values do not exceed certain thresholds specified in the relevant
tax laws.
The whole project must be completed before
the LAT obligation can be assessed. Accordingly, the Company should record the liability and the total related expense at the completion
of a project unless the tax authorities impose an assessment at an earlier date. The methods to implement this tax law vary among
different geographic areas. Hanzhong, where the project Mingzhu Garden, Nan Dajie and Central Plaza are located, implements this
tax rule by requiring real estate companies prepay the LAT based upon customer deposits received. The tax rate in Hanzhong
is 1%. Yang County, where the project Yangzhou Pearl Garden and Yangzhou Palace are located, requires a tax rate of 0.5%.
Comprehensive income (loss)
In accordance with ASC 220-10-55, comprehensive
income (loss) is defined as all changes in equity except those resulting from investments by owners and distributions to owners.
The Company’s only components of comprehensive income (loss) for the years ended September 30, 2020 and 2019 were net
income and foreign currency translation adjustments.
Advertising expenses
Advertising costs are expensed as incurred.
For the years ended September 30, 2020 and 2019, the Company recorded advertising expenses of $271,811 and $57,448, respectively.
Basic and diluted earnings per share
The Company computes earnings per share
(“EPS”) in accordance with the ASC 260, “Earnings per share”, which requires companies to present basic
and diluted EPS. Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period. Diluted
EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible
securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if
later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss
per share) are excluded from the calculation of diluted EPS.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Concentration risk
The Company's operations are carried out in the PRC. Accordingly,
the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environment
in the PRC, and by the general state of the PRC's economy. The Company's operations in the PRC are subject to specific considerations
and significant risks not typically associated with companies in North America. The Company's results may be adversely affected
by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things. Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of cash and trade accounts receivable. The company’s cash and restricted cash were on
deposit at financial institutions in the PRC, which the management believes are of high credit quality. In May 1, 2015, China’s
new Deposit Insurance Regulation came into effect, pursuant to which banking financial institutions, such as commercial banks,
established in China are required to purchase deposit insurance for deposits in RMB and in foreign currency placed with them. Such
Deposit Insurance Regulation would not be effective in providing complete protection for the Company’s accounts, as its aggregate
deposits are much higher than the compensation limit. However, the Company believes that the risk of failure of any of these Chinese
banks is remote. Bank failure is uncommon in China and the Company believes that those Chinese banks that hold the Company’s
cash and restricted cash are financially sound based on public available information. For the years ended September 30, 2020
and 2019, the Company has not experienced any delinquent mortgage loans and has not experienced any losses related to this guarantee.
The Company believes that such reserves are sufficient.
The Company is dependent on third-party
sub-contractors, manufacturers, and distributors for all construction services and supply of construction materials. For the year
ended September 30, 2020 and 2019, none supplier accounted for more than 10% of the total project expenditure.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13,
“Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires
the Company to measure and recognize expected credit losses for financial assets held and not accounted for at fair value through
net income. In November 2018, April 2019 and May 2019, the FASB issued ASU No. 2018-19, “Codification Improvements to Topic
326, Financial Instruments - Credit Losses,” “ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments
- Credit Losses,” “Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” and “ASU
No. 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief,” which provided additional implementation
guidance on the previously issued ASU. The ASU is effective for fiscal years beginning after December 15, 2020. The ASU requires
a modified retrospective adoption method. The Company is still evaluating the impact of adoption on its financial statements and
disclosures.
In October 2018, the FASB issued ASU
No. 2018-17 (“ASU 2018-17”), Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable
Interest Entities. The updated guidance requires entities to consider indirect interests held through related parties under common
control on a proportional basis rather than as the equivalent of a direct interest in its entirety when determining whether a decision-making
fee is a variable interest. The amendments in this update are effective for non-public business entities for fiscal years beginning
after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021, with early adoption
permitted. These amendments should be applied retrospectively with a cumulative-effect adjustment to retained earnings at the beginning
of the earliest period presented. The Company is currently evaluating the impact of adopting this standard on its consolidated
financial statements.
In December 2019, the FASB issued
ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, to simplify the accounting for
income taxes. The new guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology
for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences.
It also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting
for transactions that result in a step-up in the tax basis of goodwill. This ASU will become effective for the Company's annual
and interim periods beginning in January 1, 2021, and early adoption is permitted. The Company is evaluating the impact of
this standard on its consolidated financial statements.
Excepts as mentioned above, the Company
does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material
effect on the Company’s consolidated balance sheets, statements of income and comprehensive loss, stockholders’ equity
and cash flow.
Reclassifications
The Company changed its presentation of
its consolidated balance sheet to an unclassified format as of September 30, 2020. Certain amounts in the prior year consolidated
balance sheet have been reclassified for comparative purposes to conform to the current year’s presentation.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. REAL ESTATE PROPERTY
COMPLETED AND UNDER DEVELOPMENT
The following summarizes the components
of real estate property completed and under development as of September 30, 2020 and 2019:
|
|
Balance as of
|
|
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
Development completed:
|
|
|
|
|
|
|
|
|
Hanzhong City Mingzhu Garden Phase I (e)
|
|
$
|
-
|
|
|
$
|
530,314
|
|
Hanzhong City Mingzhu Garden Phase II
|
|
|
22,801,439
|
|
|
|
24,264,216
|
|
Hanzhong City Nan Dajie (Mingzhu Xinju) (e)
|
|
|
-
|
|
|
|
1,157,554
|
|
Hanzhong City Oriental Pearl Garden
|
|
|
19,937,105
|
|
|
|
19,070,129
|
|
Yang County Yangzhou Pearl Garden Phase I (e)
|
|
|
-
|
|
|
|
1,514,241
|
|
Yang County Yangzhou Pearl Garden Phase II
|
|
|
2,559,977
|
|
|
|
3,054,412
|
|
Yang County Yangzhou Palace
|
|
|
49,372,737
|
|
|
|
52,342,164
|
|
Real estate property development completed
|
|
|
94,671,258
|
|
|
|
101,933,030
|
|
Under development:
|
|
|
|
|
|
|
|
|
Hanzhong City Shijin Project (“’Shijin Project) (d)
|
|
|
-
|
|
|
|
6,776,688
|
|
Hanzhong City Liangzhou Road and related projects (a)
|
|
|
164,879,955
|
|
|
|
146,958,903
|
|
Hanzhong City Hanfeng Beiyuan East (b)
|
|
|
824,496
|
|
|
|
706,194
|
|
Hanzhong City Beidajie (b)
|
|
|
57,142,127
|
|
|
|
56,654,212
|
|
Yang County East 2nd Ring Road (c)
|
|
|
4,894,439
|
|
|
|
4,649,228
|
|
Real estate property under development
|
|
|
227,741,017
|
|
|
|
215,745,225
|
|
|
(a)
|
In September 2013, the Company entered
into an agreement (“Liangzhou Agreement”) with the Hanzhong local government on the Liangzhou Road reformation and
expansion project (Liangzhou Road Project”). Pursuant to the agreement, the Company is contracted to reform and expand the
Liangzhou Road, a commercial street in downtown Hanzhong City, with a total length of 2,080 meters and width of 30 meters and to
resettle the existing residences in the Liangzhou road area. The government’s original road construction budget was approximately
$33 million in accordance with the Liangzhou Agreement. The Company, in return, is being compensated by the local government to
have an exclusive right on acquiring at least 394.5 Mu land use rights in a specified location of Hanzhong City. The Liangzhou
Road Project’s road construction started at the end of 2013. In 2014, the original scope and budget on the Liangzhou road
reformation and expansion project was extended, because the local government included more area and resettlement residences into
the project, which resulted in additional investments from the Company. In return, the Company is authorized by the local government
to develop and manage the commercial and residential properties surrounding the Liangzhou Road project. As of June 30, 2020,
the main Liangzhou road construction is substantially completed. The Company also completed the relocation of residence by the
end of June 2020 and expects to launch the construction of the Liangzhou Road related projects starting from the fourth quarter
of fiscal year 2020.
The Company’s development cost incurred on Liangzhou Road
Project is treated as the Company’s deposit on purchasing the related land use rights, as agreed by the local government.
As of September 30,2020, the actual costs incurred by the Company were $164,879,955 (September 30, 2019 - $146,958,903)
and the incremental cost related to residence resettlement approved by the local government. The Company determined that the Company’s
Investment in Liangzhou Road Project in exchange for interests in future land use rights is a barter transaction with commercial
substance.
|
|
(b)
|
In September 2012, the Company was approved by the Hanzhong local government to construct four municipal roads with a total length of approximately 1,192 meters. The project was deferred and then restarted during the quarter ended June 30, 2014. As of September 30, 2020, the local government has not completed the budget for these projects therefore the delivery to these projects for government’s acceptance and related settlement were extended to 2021.
|
|
(c)
|
The Company was engaged by the Yang County local government to construct the East 2nd Ring Road with a total length of 2.15 km. The local government is required to repay the Company’s project investment costs within 3 years with interest at the interest rate based on the commercial borrowing rate with the similar term published by China construction bank (September 30, 2020 and 2019 - 4.75%). The local government has approved a refund to the Company by reducing local surcharges or taxes otherwise required in the real estate development. The road construction was substantially completed as of September 30, 2020 and in process of government review and approval.
|
|
(d)
|
For the year ended September 30, 2020, the Company
entered into an agreement with Mr. Zhu Xiaojun and an unrelated party (the “buyer group”) to dispose Shijin
project at price of $8,984,329 (or RMB 61 million). The carrying value of Shijin project prior to the disposal was
$7,134,107. Pursuant to the agreement, a portion of selling price of $3,402,313 was fully settled by the Company’s
shareholder’s loan of $2,145,945 and accrued interest payable of $1,256,368 to Mr. Zhu Xiaojun. The rest of
proceeds approximately $5.6 million will be collected from the unrelated party by September 30, 2021 (Note 9). The
transaction resulted in a gain of approximately $1.9 million for the year ended September 30, 2020.
|
|
(e)
|
For the year ended September 30, 2020, the Company entered into an agreement with certain suppliers to settle the related payables balances of $3,415,572 with these suppliers by disposal of the remaining real estate properties in Hanzhong City Mingzhu Garden Phase I, Hanzhong City Nan Dajie and Yang County Yangzhou Pearl Garden Phase I projects with the aggregated carrying value of $267,032 (after recognized an impairment loss of $2,703,031 during the year ended September 30, 2020). The transaction resulted in a gain of approximately $3.1 million for the year ended September 30, 2020.
|
CHINA HGS REAL
ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. PROPERTY, PLANT AND EQUIPMENT, NET
As of September 30, 2020 and 2019,
property, plant and equipment was as follows:
|
|
As of September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Buildings
|
|
$
|
805,208
|
|
|
$
|
764,867
|
|
Automobiles
|
|
|
97,823
|
|
|
|
207,186
|
|
Total
|
|
|
903,031
|
|
|
|
972,053
|
|
Less: accumulated depreciation
|
|
|
(331,701
|
)
|
|
|
(358,045
|
)
|
Property, plant and equipment, net
|
|
$
|
571,330
|
|
|
$
|
614,008
|
|
Depreciation expense for the years ended
September 30, 2020 and 2019 was $72,748 and $79,270, respectively.
NOTE 5. RECEIVABLE FROM LOCAL GOVERNMENT
In June 2012, the Company was approved
by Hanzhong local government to construct two municipal roads with total length of 1,064.09 meters. The Company completed and delivered
these two roads to the local government on March 21, 2014 with local government’s approval. The Company recognized such
revenue during the year ended September 30, 2014. As of September 30, 2020, a receivable balance from the Hanzhong local
government was $2,869,623 (September 30, 2018 - $2,725,854) and the Company expected to realize the receivable to offset municipal
surcharges from local government for the Liangzhou Road related projects when the Company started the Liangzhou Road related real
estate property construction in 2021 and later years.
NOTE 6. SECURITY DEPOSITS
As of September 30, 2020 and 2019,
security deposits were as follows:
|
|
As of September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Security deposit for land use right (1)
|
|
$
|
1,855,506
|
|
|
$
|
2,798,103
|
|
Security deposits for other loan (2)
|
|
|
-
|
|
|
|
5,174,014
|
|
Security deposits
|
|
$
|
1,855,506
|
|
|
$
|
7,972,117
|
|
|
(1)
|
In May 2011, the Company entered into a development agreement with the Hanzhong local government. Pursuant to the agreement, the Company prepaid $1,855,506 and $2,798,103 to Hanzhong Urban Construction Investment Development Co., Ltd with the purpose to acquire certain land use rights through public bidding as of September 30, 2020 and 2019, respectively. The Company currently expects to make payment of the remaining development cost as the government’s work progresses.
|
|
(2)
|
In connection with financing from Hanzhong Urban Construction
Investment Development Co., Ltd (See note 7), the Company provided a security deposit for the loan received. As of September 30,
2020, the security deposit balances were nil (September 30, 2019 - $5,174,014) for other loan with Hanzhong Urban Construction
Investment Development Co., Ltd. Since the Company commenced the preliminary construction of Liangzhou road and affiliated
project in September 30, 2020, the previous security deposits was refunded by Hanzhong Urban Construction Investment Development
Co., Ltd as of September 30, 2020.
|
CHINA HGS REAL
ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. CONSTRUCTION LOANS
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
Loan A (i)
|
|
$
|
92,450,491
|
|
|
$
|
90,186,614
|
|
Loan C (ii)
|
|
|
17,486,917
|
|
|
|
16,610,822
|
|
|
|
|
109,937,408
|
|
|
|
106,797,436
|
|
(i)
|
On June 26, 2015 and March 10, 2016, the Company signed phase I and Phase II agreements with Hanzhong Urban Construction Investment Development Co., Ltd, a state owned Company, to borrow up to approximately $114.1 million (RMB 775,000,000) for a long term loan at 4.75% interest per year to develop Liangzhou Road Project. As of September 30, 2020, the Company borrowed $92,450,491 under this credit line (September 30, 2019 - $90,186,614) with final due date in October 2021. The loan is guaranteed by Hanzhong City Hantai District Municipal Government and pledged by the Company’s Yang County Yangzhou Palace project with carrying value of $49,372,737 as of September 30, 2020 (September 30, 2019- $52,342,164). In addition, the Company was required to provide a security deposit for the loan received (see note 6). As of September 30, 2020, the security deposits paid was released due to the Company’ commence of construction of Liangzhou Road and affiliated project (2019 -$5,174,014). For the years ended September 30, 2020 and 2019, the interest paid was $6,537,079 and $6,617,720, respectively, which was capitalized in to the development cost of Liangzhou road project. Due to local government’s delay in reallocation of residence in Liangzhou Road and related area, the Hanzhong Urban Construction Investment Development Co., Ltd has not released all the funds available in this loan to the Company and the Company’s withdraw will be based on the project’s development progress. The total required loan repayment schedule assuming total loan proceeds are borrowed are listed below:
|
For the years ending:
|
|
Repayment in USD
|
|
|
Repayment in RMB
|
|
September 30, 2021
|
|
|
92,098,945
|
|
|
|
625,315,000
|
|
September 30, 2022
|
|
|
351,546
|
|
|
|
2,386,860
|
|
Total
|
|
|
92,450,491
|
|
|
|
627,701,860
|
|
(ii)
|
In December 2016, the Company signed a loan agreement with Hantai District Urban Construction Investment Development Co., Ltd, a state owned Company, to borrow up to approximately $17.5 million (RMB 119,000,000) for the development of Hanzhong City Liangzhou Road project. As of September 30, 2020, the Company received all the proceeds and repaid unused fund of $39,888 (RMB 270,829). The loan carries interest at a fixed annual interest of 1.2% and is due on June 20, 2031. The Company is required to repay the loan by equal annual principal repayment of approximately $3.3 million from December 2027 through June 2031 and the interest is payable on annual basis. The Company pledged the assets of Liangzhou Road related projects with carrying value of $164,879,955 as collateral for the loan. Total interest of $213,827 and $157,506 for the years ended September 30, 2020 and 2019, respectively, were capitalized in to the development cost of Hanzhong City Liangzhou Road project.
|
|
Additionally, in September 2017, the Urban Development Center Co., Ltd. approved a construction loan for the Company in the amount of approximately $25.8 million (RMB 175,000,000) with an annual interest rate of 1.2% per year in connection with the Liangzhou Road and related Project. The Company is required to repay the loan by equal annual principal repayment of approximately $5 million from December 2027 through May 2031 and the interest is payable on annual basis. The amount of this loan is available to be drawn down as soon as the land use rights of the Liangzhou Road is approved and the construction starts, which is expected to begin in the 2021. As of September 30, 2020 and 2019, the outstanding balance of loan was Nil. Interest charge for the year ended September 30, 2020 and 2019 was $314,452 (2019- $231,626), respectively, which was included in the construction capitalized costs..
|
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. CUSTOMER DEPOSITS
Customer deposits consist of amounts received
from customers for the pre-sale of residential units in the PRC. The details of customer deposits are as follows:
|
|
As of September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Customer deposits by real estate projects
|
|
|
|
|
|
|
|
|
Mingzhu Garden (Mingzhu Nanyuan and Mingzhu Beiyuan)
|
|
$
|
7,606,944
|
|
|
$
|
7,029,356
|
|
Oriental Pearl Garden
|
|
|
4,358,467
|
|
|
|
4,182,454
|
|
Liangzhou road related projects
|
|
|
888,123
|
|
|
|
1,043,692
|
|
Yang County Pearl Garden
|
|
|
1,243,137
|
|
|
|
1,163,407
|
|
Yangzhou Palace
|
|
|
5,308,857
|
|
|
|
3,764,355
|
|
Total
|
|
$
|
19,405,528
|
|
|
$
|
17,183,264
|
|
Customer deposits are typically 10% - 20%
of the unit price for those customers who purchase properties in cash and 30%-50% of the unit price for those customers who purchase
properties with mortgages. Buyers with mortgage loans pay customer deposits. The banks provide the balance of the funding to the
Company upon consummation of the sales. The banks hold the properties as collateral for customers’ mortgage loans. If the
customers default, the bank will repossess the collateral properties. Except during the Mortgage Loan Guarantee Period of approximately
six to twelve months, the banks have no recourse to the Company for customers’ defaults. As of September 30, 2020 and
2019, approximately $3.4 million and $3.9 million was guaranteed by the Company, respectively.
CHINA HGS REAL
ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. SHAREHOLDERS LOANS
|
|
As of September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Shareholder loan – USD loan (*)
|
|
$
|
-
|
|
|
$
|
1,810,000
|
|
Shareholder loan – RMB loan (**)
|
|
|
-
|
|
|
|
319,114
|
|
Total
|
|
$
|
-
|
|
|
$
|
2,129,114
|
|
*.
|
The Company has a one year loan agreement (“USD Loan Agreement”) with our Chairman, CEO and major shareholder”), pursuant to which the Company borrowed $1,810,000 to make a capital injection into Shaanxi HGS, the Company’s subsidiary. The interest rate for the loan is 4% per annum and the loan matured on July 19, 2014. The Company entered into the amendments to the USD Loan Agreement to extend the term until July 31, 2020 and the loan is due on demand. The Company recorded interest of $72,400 for each of the years ended September 30, 2020 and 2019. The Company has not yet paid this interest. As of September 30, 2020 and 2019, the accrued interest payable amounted to $669,700 and $597,300, respectively.
|
**.
|
On December 31, 2013, Shaanxi Guangsha Investment and Development Group Co., Ltd. (the “Guangsha”), the Company's PRC operating subsidiary, entered into a loan agreement with the Chairman (the “Shareholder RMB Loan Agreement”), pursuant to which Guangsha is able to borrow funds from the Chairman in order to support the Company’s Liangzhou Road construction project development and the Company’s working capital needs. The Loan Agreement has a one-year term, and has been renewed upon maturity to September 25, 2021, with at an interest rate of 4.35% per year. For years ended September 30, 2020 and 2019, the interest was $20,661 and $20,403, respectively, which is capitalized in the development cost of Liangzhou road project. As of September 30, 2020 and 2019, the accrued interest payable amounted to $586,668 and $537,651, respectively.
|
|
On September 30, 2020, the Company entered into an agreement with Mr. Zhu Xiaojun and an unrelated party (the “buyer group”) to sell Shijin project at price of $7,364,204 (or RMB 50 million) (Note 3). Pursuant to the agreement, a portion of selling price of approximately $3.4 million was fully settled by the Company’s shareholder’s loan payable with accrued interest payable to Mr. Zhu Xiaojun and the rest of proceeds will be collected from the unrelated party by September 30, 2021 (Note 9). The transaction resulted in a gain of $1.9 million for the year ended September 30, 2020.
|
NOTE 10. TAXES
(A) Business sales tax and VAT
The Company is subject to a 5% business
sales tax on revenue. It is the Company’s continuing practice to recognize the 5% business sales tax based on
revenue as a cost of sales as the revenue is recognized. As of September 30, 2020, the Company had business sales tax payable
of $5,159,296 (2019 - $7,819,884), which is expected to be paid when the projects are completed and assessed by the local tax authority.
In May of 2016, the Business Tax has been incorporated into Value Added Tax in China, which means there will be no more Business
Tax and accordingly some business operations previously taxed in the name of Business Tax will be taxed in the manner of VAT thereafter.
The Company is subject to 5% of VAT for its all existing real estate project based on the local tax authority’s practice.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. TAXES (continued)
(B) Corporate income taxes (“CIT”)
The Company’s PRC subsidiaries and
VIE are governed by the Income Tax Law of the People’s Republic of China concerning the privately run enterprises, which
are generally subject to income tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate
tax adjustments. However, as approved by the local tax authority of Hanzhong City, the Company’s CIT was assessed annually
at a pre-determined fixed rate as an incentive to stimulate the local economy and encourage entrepreneurship. The local income
tax rate in Hanzhong is 2.5% and in Yang County is 1.25% on revenue prior to the year ended September 30, 2018. Starting from
fiscal 2018, the Company’s CIT changed to 25% on taxable income. The change in the income tax policy could negatively affect
the Company’s net income in future years. Although the possibility exists for reinterpretation of the application of the
tax regulations by higher tax authorities in the PRC, potentially overturning the decision made by the local tax authority, the
Company has not experienced any reevaluation of the income taxes for prior years. The PRC tax rules are different from the
local tax rules and the Company is required to comply with local tax rules. The difference between the two tax rules will
not be a liability of the Company. There will be no further tax payments for the difference. For the years ended September 30,
2020 and 2019, the Company’s total income tax payable amounted to $11,639,537 and $11,720,848, respectively, which included
the income tax payable balances in PRC of $8,342,537 and $8,691,848, respectively and the Company expects to pay off the income
tax payable balance when the related real estate projects are completely sold.
The following table reconciles the statutory
rates to the Company’s effective tax rate for the years ended September 30, 2020 and 2019:
|
|
For the years ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Chinese statutory tax rate
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
Valuation allowance change
|
|
|
18.7
|
%
|
|
|
0.2
|
%
|
Net impact of Exemption rendered by local tax
authorities and other adjustments Effective tax rate
|
|
|
2.5
|
%
|
|
|
10.1
|
%
|
|
|
|
46.2
|
%
|
|
|
35.3
|
%
|
Income tax expense for the years ended
September 30, 2020 and 2019 is summarized as follows:
|
|
For the years ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Current tax provision
|
|
$
|
841,933
|
|
|
$
|
719,437
|
|
Deferred tax provision
|
|
|
-
|
|
|
|
1,302,606
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
841,933
|
|
|
$
|
2,022,043
|
|
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. TAXES (continued)
Recent U.S. federal tax legislation, commonly
referred to as the Tax Cuts and Jobs Act (the “U.S. Tax Reform”), was signed into law on December 22, 2017. The
U.S. Tax Reform significantly modified the U.S. Internal Revenue Code by, among other things, reducing the statutory U.S. federal
corporate income tax rate from 35% to 21% for taxable years beginning after December 31, 2017; limiting and/or eliminating
many business deductions; migrating the U.S. to a territorial tax system with a one-time transition tax on a mandatory deemed repatriation
of previously deferred foreign earnings of certain foreign subsidiaries; subject to certain limitations, generally eliminating
U.S. corporate income tax on dividends from foreign subsidiaries; and providing for new taxes on certain foreign earnings. Taxpayers
may elect to pay the one-time transition tax over eight years or in a single lump sum. The U.S. Tax Reform also includes provisions
for a new tax on GILTI effective for tax years of foreign corporations beginning after December 31, 2017. The GILTI provisions
impose a tax on foreign income in excess of a deemed return on tangible assets of controlled foreign corporations (“CFCs”),
subject to the possible use of foreign tax credits and a deduction equal to 50 percent to offset the income tax liability, subject
to some limitations.
For the years ended September 30,
2018, the Company recognized a one-time transition toll tax of approximately $2.3 million that represented management’s estimate
of the amount of U.S. corporate income tax based on the deemed repatriation to the United States of the Company’s share of
previously deferred earnings of certain non-U.S. subsidiaries and VIE of the Company mandated by the U.S. Tax Reform. The Company’s
estimate of the onetime transition toll Tax is subject to the finalization of management’s analysis related to certain matters,
such as developing interpretations of the provisions of the Tax Act and amounts related to the earnings and profits of certain
foreign VIEs and the filing of our tax returns. U.S. Treasury regulations, administrative interpretations or court decisions interpreting
the Tax Act may require further adjustments and changes in our estimates. As of September 30, 2020 and 2019, the Company provided
an additional $0.8 million provision due to delinquent U.S. tax return fillings.
(C) Land appreciation tax (“LAT”)
Since January 1, 1994, LAT has been
applicable at progressive tax rates ranging from 30% to 60% on the appreciation of land values, with an exemption provided for
the sales of ordinary residential properties if the appreciation values do not exceed certain thresholds specified in the relevant
tax laws. However, the Company’s local tax authority in Hanzhong City has not imposed the regulation on real estate companies
in its area of administration. Instead, the local tax authority has levied the LAT at the rate of 0.5% in Yang County and 1.0%
in Hanzhong against total cash receipts from sales of real estate properties, rather than according to the progressive rates.
As at September 30, 2020 and 2019,
the outstanding LAT payable balance was Nil with respect to completed real estate properties sold up to September 30, 2020
and 2019, respectively.
(D) Taxes payable consisted of
the following:
|
|
September 30,
2020
|
|
|
September 30,
2019
|
|
CIT
|
|
$
|
12,213,470
|
|
|
$
|
11,720,848
|
|
Business tax
|
|
|
5,159,296
|
|
|
|
7,819,884
|
|
Other taxes and fees
|
|
|
2,508,445
|
|
|
|
2,349,086
|
|
Total taxes payables
|
|
$
|
19,881,211
|
|
|
$
|
21,889,818
|
|
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. STOCKHOLDERS’
EQUITY
(a) Common stock
As of September 30, 2019, the Company
had a total of 45,050,000 shares of common stock issued and outstanding.
On August 19, 2020, the Company filed
an Amendment to the Company’s Articles of Incorporation (the “Certificate of Amendment”) with the Florida Secretary
of State to effect a one-for-two reverse split of the Company’s authorized and issued and outstanding shares of common stock
(the “Reverse Stock Split”). The Reverse Stock Split became effective in accordance with the terms of the Certificate
of Amendment on August 20, 2020 (the “Effective Time”). At the Effective Time, every two shares of the Company’s
common stock authorized and issued and outstanding were automatically combined into one share of common stock, without any change
in the par value per share. The Company will not issue any fractional shares in connection with the Reverse Stock Split. Instead,
fractional shares will be rounded up to the nearest full share. As a result of the reverse split, the number of common stock outstanding
as of September 30, 2020 and 2019 was restated to reflect the effect of the reverse split.
As of September 30, 2020, the Company
has a total of 22,525,000 shares of common stock issued and outstanding.
(b) Statutory surplus reserves
The Company is required to make appropriations
to reserve funds, comprising the statutory surplus reserve and discretionary surplus reserve, based on after-tax net income determined
in accordance with generally accepted accounting principles of the PRC (“PRC GAAP”).
Appropriations to the statutory surplus
reserve is required to be at least 10% of the after tax net income determined in accordance with PRC GAAP until the reserve is
equal to 50% of the entities’ registered capital. Appropriations to the discretionary surplus reserve are made at the discretion
of the Board of Directors. The statutory surplus reserve fund is non-discretionary other than during liquidation and can be used
to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing
new shares to existing shareholders in proportion to their shareholding or by increasing the par value of shares currently held
by them, provided that the remaining statutory surplus reserve balance after such issue is not less than 25% of the registered
capital before the conversion. Pursuant to the Company’s articles of incorporation, the Company is to appropriate 10%
of its net profits as statutory surplus reserve. As of September 30, 2020 and 2019, the balance of statutory surplus reserve
was $10,458,395 and $10,360,251, respectively.
The discretionary surplus reserve may be
used to acquire fixed assets or to increase the working capital to expend on production and operation of the business. The Company’s
Board of Directors decided not to make an appropriation to this reserve for the years ended September 30, 2020 and 2019.
NOTE 12. CONTINGENCIES AND COMMITMENTS
From time to time, the Company is a party
to various legal actions arising in the ordinary course of business. The Company accrues costs associated with these matters when
they become probable and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are
expensed as incurred. The Company's management does not expect any liability from the disposition of such claims and litigation
individually or in the aggregate would have a material adverse impact on the Company's consolidated financial position, results
of operations and cash flows.
As an industry practice, the Company provides
guarantees to PRC banks with respect to loans procured by the purchasers of the Company’s real estate properties for the
total mortgage loan amount until the completion of obtaining the “Certificate of Ownership” of the properties from
the government, which generally takes six to twelve months. Because the banks provide loan proceeds without getting the “Certificate
of Ownership” as loan collateral during this six to twelve months’ period, the mortgage banks require the Company to
maintain, as restricted cash, 5% to 10% of the mortgage proceeds as security for the Company’s obligations under such guarantees.
If a purchaser defaults on its payment obligations, the mortgage bank may deduct the delinquent mortgage payment from the security
deposit and require the Company to pay the excess amount if the delinquent mortgage payments exceed the security deposit. If the
delinquent mortgage payments exceed the security deposit, the banks may require us to pay the excess amount. If multiple purchasers
default on their payment obligations at around the same time, we will be required to make significant payments to the banks to
satisfy our guarantee obligations. If we are unable to resell the properties underlying defaulted mortgages on a timely basis or
at prices higher than the amounts of our guarantees and related expenses, we will suffer financial losses. The Company has made
necessary reserves in its restricted cash account to cover any potential mortgage defaults as required by the mortgage lenders.
For the years ended September 30, 2020 and 2019, the Company has not experienced any delinquent mortgage loans and has not
experienced any losses related to this guarantee. As of September 30, 2020 and 2019, our outstanding guarantees in respect
of our customers' mortgage loans amounted to approximately $68 million and $78 million, respectively. As of September 30,
2020 and 2019, the amount of security deposits provided for these guarantees was approximately $3.4 million and $3.9 million respectively
and the Company believes that such reserves are sufficient.
NOTE 13. PENDING NASDAQ COMPLIANCE ISSUE
On June 21, 2019, the “Company
received a letter from the Listing Qualifications staff of The Nasdaq Stock Market (“Nasdaq”) notifying the Company
that it is no longer in compliance with the minimum bid price requirement for continued listing on the Nasdaq Capital Market. Nasdaq
Listing Rule 5550(a)(2) requires listed companies to maintain a minimum bid price of $1.00 per share. The letter noted
that the bid price of the Company’s common stock was below $1.00 for the 30-day period ending June 20, 2019. The notification
letter has no immediate effect on the Company’s listing on the Nasdaq Capital Market. Nasdaq has provided the Company with
180 days, or until January 14, 2020, to regain compliance with the minimum bid price requirement by having a closing bid price
of at least $1.00 per share for a minimum of 10 consecutive business days. On December 19, 2019, Nasdaq determined that the
Company is eligible for an additional 180 calendar day period, or until June 15, 2020, to regain compliance. Given the extraordinary
market conditions caused by COVID-19, Nasdaq has determined to toll the compliance periods for bid price and market value of publicly
held shares requirements through June 30, 2020. In that regard, on April 16, 2020, Nasdaq filed an immediately effective
rule change with the Securities and Exchange Commission. Accordingly, the Company has until August 31, 2020, to regain
compliance. As of November 3, 2020, The Company has been advised that March 1, 2021 represents the full extent
of the Panel’s discretion to grant continued listing while it is non-compliant. Should the company fail to demonstrate compliance
with Nasdaq Listing Rule 5550(a)(2) by that date, the Panel will issue a final delist determination and the Company will
be suspended from trading on The Nasdaq Stock Market.
CHINA HGS REAL ESTATE INC.
SCHEDULE I- PARENT COMPANY BALANCE SHEETS
(UNAUDITED)
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Investment in subsidiary
|
|
$
|
171,622,821
|
|
|
$
|
164,136,450
|
|
Total assets
|
|
$
|
171,622,821
|
|
|
$
|
164,136,450
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
-
|
|
|
$
|
597,300
|
|
Tax payable
|
|
|
3,297,000
|
|
|
|
3,029,000
|
|
Shareholder loan
|
|
|
-
|
|
|
|
1,810,000
|
|
Total liabilities
|
|
|
3,297,000
|
|
|
|
5,436,300
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 50,000,000 shares authorized, 22,525,000 shares issued and outstanding
|
|
|
22,525
|
|
|
|
22,525
|
|
Additional paid-in capital
|
|
|
129,930,330
|
|
|
|
129,930,330
|
|
Statutory surplus
|
|
|
10,458,395
|
|
|
|
10,360,251
|
|
Retained earnings
|
|
|
34,954,061
|
|
|
|
34,070,767
|
|
Accumulated other comprehensive loss
|
|
|
(7,039,490
|
)
|
|
|
(15,683,723
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity
|
|
|
168,325,821
|
|
|
|
158,700,150
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
171,622,821
|
|
|
$
|
164,136,450
|
|
The accompanying notes are integral part
of Schedule I
CHINA HGS REAL ESTATE INC.
SCHEDULE I - STATEMENTS OF INCOME AND
COMPREHENSIVE LOSS
FOR THE YEARS ENDED SEPTEMBER 30, 2020
AND 2019
(UNAUDITED)
|
|
2020
|
|
|
2019
|
|
Equity in profit of subsidiary
|
|
$
|
1,321,838
|
|
|
$
|
4,344,572
|
|
General and administrative expenses
|
|
|
-
|
|
|
|
-
|
|
Interest expense
|
|
|
72,400
|
|
|
|
72,400
|
|
Income before income taxes
|
|
|
1,249,438
|
|
|
|
4,272,172
|
|
Provision for income taxes
|
|
|
268,000
|
|
|
|
570,000
|
|
Net income
|
|
|
981,438
|
|
|
|
3,702,172
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
8,644,233
|
|
|
|
(6,679,858
|
)
|
Comprehensive loss
|
|
$
|
9,625,671
|
|
|
$
|
(2,977,686
|
)
|
The accompanying notes are integral part
of Schedule I
CHINA HGS REAL ESTATE INC.
SCHEDULE I - STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2020
AND 2019
(UNAUDITED)
|
|
2020
|
|
|
2019
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
981,438
|
|
|
$
|
3,702,172
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
Equity in profit of subsidiary
|
|
|
(1,321,838
|
)
|
|
|
(4,344,572
|
)
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Tax payable
|
|
|
268,000
|
|
|
|
570,000
|
|
Accrued expenses
|
|
|
72,400
|
|
|
|
72,400
|
|
Net cash used in operating activities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
-
|
|
|
|
-
|
|
Cash, beginning of year
|
|
|
-
|
|
|
|
-
|
|
Cash, end of year
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
-
|
|
|
$
|
-
|
|
Income taxes paid
|
|
$
|
-
|
|
|
$
|
-
|
|
The accompanying notes are integral part
of Schedule I
CHINA HGS REAL ESTATE INC.
NOTES TO SCHEDULE I
NOTE 1. BASIS OF PRESENTATION
Certain information and footnote disclosures
normally included in financial statements prepared in conformity with generally accepted accounting principles have been condensed
or omitted. The Company’s investment in subsidiary and variable interest entity (“VIE”) is stated at cost plus
equity in undistributed earnings of subsidiaries.
NOTE 2. RESTRICTED ASSETS
The Company’s PRC VIE and subsidiary
are restricted in their ability to transfer a portion of their net assets to the Company. The payment of dividends by entities
organized in China is subject to limitations, procedures and formalities. Regulations in the PRC currently permit payment of dividends
only out of accumulated profits as determined in accordance with accounting standards and regulations in China. The Company’s
subsidiaries and its VIEs are also required to set aside at least 10% of its after-tax profit based on PRC accounting standards
each year to its statutory reserves account until the accumulative amount of such reserves reaches 50% of its respective registered
capital. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends.
In addition, the Company’s operations
and revenues are conducted and generated in China, all of the Company’s revenues being earned and currency received are denominated
in RMB. RMB is subject to the foreign exchange control regulation in China, and, as a result, the Company may be unable to distribute
any dividends outside of China due to PRC foreign exchange control regulations that restrict the Company’s ability to convert
RMB into US Dollars.
Schedule I of Article 5-04 of Regulation
S-X requires the condensed financial information of registrant shall be filed when the restricted net assets of consolidated subsidiaries
exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year. For purposes of the above
test, restricted net assets of consolidated subsidiaries shall mean that amount of the registrant’s proportionate share of
net assets of consolidated subsidiaries (after intercompany eliminations) which as of the end of the most recent fiscal year may
not be transferred to the parent company by subsidiaries in the form of loans, advances or cash dividends without the consent of
a third party. The condensed parent company financial statements have been prepared in accordance with Rule 12-04, Schedule
I of Regulation S-X as the restricted net assets of the Company’s PRC subsidiary and VIE exceed 25% of the consolidated net
assets of the Company.
NOTE 3. COMMITMENTS
The Company did not have any significant commitments or long-term
obligations as at September 30, 2020 and 2019.