ITEM 1. INTERIM FINANCIAL STATEMENTS
CHINA HGS REAL ESTATE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
March 31,
|
|
|
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
ASSETS
|
|
|
(Unaudited)
|
|
|
|
|
|
Cash
|
|
$
|
555,576
|
|
|
$
|
457,699
|
|
Restricted cash
|
|
|
3,297,734
|
|
|
|
3,409,837
|
|
Contract assets
|
|
|
15,195,730
|
|
|
|
14,255,328
|
|
Real estate property development completed
|
|
|
93,359,420
|
|
|
|
94,671,258
|
|
Other assets
|
|
|
9,709,848
|
|
|
|
8,132,555
|
|
Property, plant and equipment, net
|
|
|
567,292
|
|
|
|
571,330
|
|
Security deposits
|
|
|
1,922,853
|
|
|
|
1,855,506
|
|
Real estate property under development
|
|
|
251,151,767
|
|
|
|
227,741,017
|
|
Due from local governments for real estate property development completed
|
|
|
2,973,777
|
|
|
|
2,869,623
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
378,733,997
|
|
|
$
|
353,964,153
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Construction loans
|
|
$
|
116,060,624
|
|
|
$
|
109,937,408
|
|
Accounts payable
|
|
|
31,854,281
|
|
|
|
25,415,352
|
|
Other payables
|
|
|
4,569,384
|
|
|
|
4,028,048
|
|
Construction deposits
|
|
|
3,318,974
|
|
|
|
3,202,730
|
|
Contract liabilities
|
|
|
1,885,982
|
|
|
|
1,847,685
|
|
Customer deposits
|
|
|
21,498,027
|
|
|
|
19,405,528
|
|
Accrued expenses
|
|
|
1,861,745
|
|
|
|
1,920,370
|
|
Taxes payable
|
|
|
20,592,607
|
|
|
|
19,881,211
|
|
Total liabilities
|
|
|
201,641,624
|
|
|
|
185,638,332
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 50,000,000 shares authorized, 22,525,000 shares issued and outstanding March 31, 2021 and September 30, 2020
|
|
|
22,525
|
|
|
|
22,525
|
|
Additional paid-in capital
|
|
|
129,930,330
|
|
|
|
129,930,330
|
|
Statutory surplus
|
|
|
10,458,395
|
|
|
|
10,458,395
|
|
Retained earnings
|
|
|
37,466,885
|
|
|
|
34,954,061
|
|
Accumulated other comprehensive loss
|
|
|
(785,762
|
)
|
|
|
(7,039,490
|
)
|
Total stockholders' equity
|
|
|
177,092,373
|
|
|
|
168,325,821
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
378,733,997
|
|
|
$
|
353,964,153
|
|
CHINA HGS REAL ESTATE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
(Unaudited)
|
|
Three months ended March 31,
|
|
|
Six months ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Real estate sales
|
|
$
|
18,278,112
|
|
|
$
|
1,889,829
|
|
|
$
|
21,033,374
|
|
|
$
|
4,194,073
|
|
Less: Sales tax
|
|
|
(115,166
|
)
|
|
|
(27,048
|
)
|
|
|
(138,704
|
)
|
|
|
(66,281
|
)
|
Cost of real estate sales
|
|
|
(14,474,264
|
)
|
|
|
(1,466,381
|
)
|
|
|
(16,327,906
|
)
|
|
|
(3,171,993
|
)
|
Gross profit
|
|
|
3,688,682
|
|
|
|
396,400
|
|
|
|
4,566,764
|
|
|
|
955,799
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and distribution expenses
|
|
|
16,821
|
|
|
|
200,390
|
|
|
|
96,166
|
|
|
|
400,558
|
|
General and administrative expenses
|
|
|
543,334
|
|
|
|
819,415
|
|
|
|
849,259
|
|
|
|
1,408,254
|
|
Total operating expenses
|
|
|
560,155
|
|
|
|
1,019,805
|
|
|
|
945,425
|
|
|
|
1,808,812
|
|
Operating income (loss)
|
|
|
3,128,527
|
|
|
|
(623,405
|
)
|
|
|
3,621,339
|
|
|
|
(853,013
|
)
|
Interest income (expense), net
|
|
|
712
|
|
|
|
(15,586
|
)
|
|
|
3,537
|
|
|
|
(32,839
|
)
|
Other expense
|
|
|
(166,571
|
)
|
|
|
(96,729
|
)
|
|
|
(272,428
|
)
|
|
|
(96,729
|
)
|
Income (loss) before income taxes
|
|
|
2,962,668
|
|
|
|
(735,720
|
)
|
|
|
3,352,448
|
|
|
|
(982,581
|
)
|
Provision (benefit) for income taxes
|
|
|
741,431
|
|
|
|
(111,699
|
)
|
|
|
839,624
|
|
|
|
(101,179
|
)
|
Net income (loss)
|
|
|
2,221,237
|
|
|
|
(624,021
|
)
|
|
|
2,512,824
|
|
|
|
(881,402
|
)
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(737,431
|
)
|
|
|
(2,823,145
|
)
|
|
|
6,253,728
|
|
|
|
1,557,717
|
|
Comprehensive income (loss)
|
|
$
|
1,483,806
|
|
|
$
|
(3,447,166
|
)
|
|
$
|
8,766,552
|
|
|
$
|
676,315
|
|
Basic and diluted income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.10
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.11
|
|
|
$
|
(0.02
|
)
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
22,525,000
|
|
|
|
22,525,000
|
|
|
|
22,525,000
|
|
|
|
22,525,000
|
|
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
CHINA HGS REAL ESTATE INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY
(Unaudited)
|
|
Common
Stock
|
|
|
Additional
|
|
|
Statutory
|
|
|
Retained
|
|
|
Accumulated
Other
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-in Capital
|
|
|
Surplus
|
|
|
Earnings
|
|
|
Income
(loss)
|
|
|
Total
|
|
Balance at September 30, 2019
|
|
|
22,525,000
|
|
|
$
|
22,525
|
|
|
$
|
129,930,330
|
|
|
$
|
10,360,251
|
|
|
$
|
34,070,767
|
|
|
$
|
(15,683,723
|
)
|
|
$
|
158,700150
|
|
Net loss for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
(257,381
|
)
|
|
|
|
|
|
|
(257,381
|
)
|
Foreign currency translation adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,380,862
|
|
|
|
4,380,862
|
|
Balance at December 31, 2019
|
|
|
22,525,000
|
|
|
|
22,525
|
|
|
$
|
129,930,330
|
|
|
|
10,360,251
|
|
|
$
|
33,189,365
|
|
|
|
(11,302,861
|
|
|
|
162,823,631
|
|
Net loss for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
(624,021
|
)
|
|
|
|
|
|
|
(624,021
|
)
|
Foreign currency translation adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,823,145
|
|
|
|
(2,823,145
|
|
Balance at March 31, 2020
|
|
|
22,525,000
|
|
|
$
|
22,525
|
|
|
$
|
129,930,330
|
|
|
$
|
10,360,251
|
|
|
$
|
33,189,365
|
|
|
$
|
(14,126,006
|
)
|
|
$
|
159,376,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2020
|
|
|
22,525,000
|
|
|
$
|
22,525
|
|
|
$
|
129,930,330
|
|
|
$
|
10,458,395
|
|
|
$
|
34,954,061
|
|
|
$
|
(7,039,490
|
)
|
|
$
|
168,325,821
|
|
Net income for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
291,587
|
|
|
|
-
|
|
|
|
291,587
|
|
Foreign currency
translation adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,991,159
|
|
|
|
6,991,159
|
|
Balance at December 31, 2020
|
|
|
22,525,000
|
|
|
|
22,525
|
|
|
|
129,930,330
|
|
|
$
|
10,458,395
|
|
|
|
35,245,648
|
|
|
$
|
(48,331
|
)
|
|
|
175,608,567
|
|
Net income for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,221,237
|
|
|
|
-
|
|
|
|
2,221,237
|
|
Foreign currency
translation adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(737,431
|
)
|
|
|
(737,431
|
)
|
Balance at March 31, 2021
|
|
|
22,525,000
|
|
|
$
|
22,525
|
|
|
$
|
129,930,330
|
|
|
$
|
10,458,395
|
|
|
$
|
37,466,885
|
|
|
$
|
(785,762
|
)
|
|
$
|
177,092,373
|
|
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,
|
|
|
|
2021
|
|
|
2020
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,512,824
|
|
|
$
|
(881,402
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Deferred tax provision (benefit)
|
|
|
-
|
|
|
|
(235,179
|
)
|
Depreciation
|
|
|
24,772
|
|
|
|
37,710
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Contract assets
|
|
|
(422,948
|
)
|
|
|
651,289
|
|
Real estate property development completed
|
|
|
4,747,385
|
|
|
|
2,937,724
|
|
Real estate property under development
|
|
|
(13,010,220
|
)
|
|
|
(2,835,288
|
)
|
Other current assets
|
|
|
(1,281,964
|
)
|
|
|
(935,053
|
)
|
Security deposit
|
|
|
|
|
|
|
3,195,887
|
|
Accounts payables
|
|
|
5,515,797
|
|
|
|
89,325
|
|
Other payables
|
|
|
395,088
|
|
|
|
111,347
|
|
Contract liabilities
|
|
|
(28,762
|
)
|
|
|
(71,507
|
)
|
Customer deposits
|
|
|
1,387,999
|
|
|
|
2,349,028
|
|
Construction deposits
|
|
|
|
|
|
|
(428
|
)
|
Accrued expenses
|
|
|
|
|
|
|
(675,478
|
)
|
Taxes payables
|
|
|
109,454
|
|
|
|
(1,379,060
|
)
|
Net cash (used in) provided by operating activities
|
|
|
(50,575
|
)
|
|
|
2,358,915
|
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities
|
|
|
|
|
|
|
|
|
Repayments of construction loans
|
|
|
-
|
|
|
|
(2,128,585
|
)
|
Net cash used in financing activities
|
|
|
-
|
|
|
|
(2,128,585
|
)
|
|
|
|
|
|
|
|
|
|
Effect of changes of foreign exchange rate on cash and restricted cash
|
|
|
36,349
|
|
|
|
103,801
|
|
Net (decrease) increase in cash and restricted cash
|
|
|
(14,226
|
)
|
|
|
334,131
|
|
Cash and restricted cash, beginning of period
|
|
|
3,867,536
|
|
|
|
4,202,117
|
|
Cash and restricted cash, end of period
|
|
$
|
3,853,310
|
|
|
$
|
4,536,248
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
1,847,904
|
|
|
$
|
3,416,592
|
|
Income taxes paid
|
|
$
|
135,462
|
|
|
$
|
375,601
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to amounts on condensed consolidated balance sheets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
555,576
|
|
|
$
|
658,313
|
|
Restricted
|
|
$
|
3,297,734
|
|
|
$
|
3,877,935
|
|
Total cash and restricted cash
|
|
$
|
3,853,310
|
|
|
$
|
4,536,248
|
|
|
|
|
|
|
|
|
|
|
Cash, beginning of period
|
|
$
|
457,699
|
|
|
$
|
263,139
|
|
Restricted, beginning of period
|
|
$
|
3,409,837
|
|
|
$
|
3,938,978
|
|
Total cash and restricted cash, beginning of period
|
|
$
|
3,867,536
|
|
|
$
|
4,202,117
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
Reclassification of interest payable to construction loan
|
|
$
|
1,626,210
|
|
|
$
|
-
|
|
Real estate sales for settlements in real estate property under development
|
|
$
|
(14,432,275
|
)
|
|
$
|
|
|
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
China HGS Real Estate, Inc. (“China
HGS” or the “Company” or “we”, “us”, “our”), through its subsidiaries and variable
interest entity (“VIE”), engages in real estate development, and the construction and sales of residential apartments, parking
spaces and commercial properties in Tier 3 and Tier 4 cities and counties in China.
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with the U.S. generally accepted accounting principles (“GAAP”) for
interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating results for the three and six months ended March 31, 2021
and 2020 are not necessarily indicative of the results that may be expected for the full year. The information included in this Form 10-Q
should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the
financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30,
2020 filed with the SEC on January 13, 2021.
Liquidity
In recent years, the Chinese government has implemented
measures to control overheating residential and commercial property prices including but not limited to restrictions on home purchase,
increasing the down-payment requirement against speculative buying, development of low-cost rental housing properties to help low-income
groups while reducing the demand in the commercial housing market, increasing real estate property taxes to discourage speculation, 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 visits to the Company’s sales office, and inability to promote real
estate property sales to customers on a timely basis, our revenue during the six months ended March 31, 2020 were significantly lower.
The Company is experiencing recovery of its real estate development business in the first half of fiscal 2021 due to increasing demand
from the local real estate market. The Company had revenue of approximately $21.0 million for the six months ended March 31, 2021,
increased from $4.2 million in the same period of last year. Based on the assessment of current economic environment, customer demand
and sales trends, we believe that consumer spending has been restored in the local real estate market and the real estate sales are expected
to grow in the coming periods. On the other side, due to negative impact from COVID-19 outbreak and spread, 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 the short term as we originally expected. In addition, as of March 31, 2021, we had large construction loans payable
of approximately $116.1 million and large accounts payable of approximately $31.9 million to be paid to subcontractors within one year.
The extent of the impact of COVID-19 on the Company’s future financial results will be dependent on future developments such as
the length and severity of the crisis, the potential resurgence of the crisis, future government actions in response to the crisis and
the overall impact of the COVID-19 pandemic on the local economy and real estate markets, among many other factors, all of which remain
highly uncertain and unpredictable. Given this uncertainty, the Company is currently unable to quantify the expected impact of the COVID-19
pandemic on its future operations, financial condition, liquidity and results of operations if the current situation continues. The above
mentioned facts raise 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 March 31, 2021, our total cash and restricted cash balance was approximately $3.9 million
similar to approximately $3.9 million as of September 30, 2020. With respect to capital funding requirements, the Company budgeted
its capital spending based on ongoing assessments of needs to maintain adequate cash. As of March 31, 2021, we had approximately
$93.4 million of completed residential apartments and commercial units available for sale to potential buyers. Although we reported approximately
$31.9 million accounts payable as of March 31, 2021, 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 relate to the old town renovation which are supported by the
local government. As of March 31, 2021, we reported approximately $116.1 million of construction loans borrowed from financial institutions
controlled by the local government and such loans can only be used on the 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 March 31,
2021, we had approximately $21.5 million of customer deposits representing cash advances from buyers for pre-sales of our residential
units and we believe such cash advances can be used to fund our ongoing construction projects whenever necessary. For the six months ended
March 31, 2021, we had six large ongoing construction projects (see Note 3, real estate properties under development) which were
under the preliminary development stage due to delayed inspection and acceptance of the development plans by the local government. In
June 2020, we completed the residence relocation surrounding the Liangzhou Road related projects and launched the construction of
these projects in December 2020. For the other four projects, we expect we will be able to obtain the 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. 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. ORGANIZATION AND BASIS OF
PRESENTATION (continued)
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 and VIE have been eliminated upon consolidation.
Use of estimates
The preparation of financial statements in conformity
with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements
and accompanying notes, and disclosure of contingent liabilities at the date of the consolidated financial statements. Estimates are used
for, but not limited to, the assumptions and estimates used by management in recognizing development revenue under the percentage of completion
method, the selection of the useful lives of property and equipment, provision necessary for contingent liabilities, revenue recognition,
taxes and budgeted costs. Actual results could differ from these estimates.
Fair value of financial instruments
The Company follows the provisions of the Financial
Accounting Standard Board (“”FASB”) 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 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 customer
advances, 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 other loans payable.
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 Company satisfies a performance obligation.
Most of the Company’s revenue is derived
from real estate sales of condominiums and commercial properties 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.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. ORGANIZATION AND BASIS OF
PRESENTATION (continued)
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.
|
Sale 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 the right
to payment and the collection of the consideration is probable. For municipal road construction projects, fees are generally recognized
at the time the projects are completed.
Disaggregation of Revenues
Disaggregated revenues was as follows:
|
|
For the three months ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Revenue recognized for completed condominium real estate projects
|
|
$
|
18,278,112
|
|
|
$
|
1,889,829
|
|
Revenue recognized for condominium real estate projects under development
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
18,278,112
|
|
|
$
|
1,889,829
|
|
|
|
For the six months ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Revenue recognized for completed condominium real estate projects
|
|
$
|
21,033,374
|
|
|
$
|
4,194,073
|
|
Revenue recognized for condominium real estate projects under development
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
21,033,374
|
|
|
$
|
4,194,073
|
|
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Revenue recognition
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 Ownership 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.
Foreign currency translation
The Company’s financial information is presented
in U.S. dollars. The functional currency of the Company’s operating subsidiaries is Renminbi (“RMB”), the currency of
the PRC. The financial statements of the Company have been translated into U.S. dollars in accordance with ASC 830-30 “Translation
of Financial Statements”. The financial information is first prepared in RMB and then is translated into U.S. dollars at period-end
exchange rates as to assets and liabilities and average exchange rates as to revenue and expenses. Capital accounts are translated at
their historical exchange rates when the capital transactions occurred. The effects of foreign currency translation adjustments are included
as a component of accumulated other comprehensive income in stockholders’ equity.
|
|
For three months ended
March 31,
|
|
|
For six months ended
March 31,
|
|
|
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
2020
|
|
Period end RMB : USD exchange rate
|
|
|
6.5518
|
|
|
|
7.0808
|
|
|
|
6.5518
|
|
|
|
7.0808
|
|
|
|
6.7896
|
|
Period average RMB : USD exchange rate
|
|
|
6.4817
|
|
|
|
6.9786
|
|
|
|
6.5526
|
|
|
|
7.0117
|
|
|
|
7.0056
|
|
The RMB is not freely convertible into foreign
currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB
amounts could have been, or could be, converted into U.S. dollars at the rates used in translation.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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
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 its 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 reviews 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, 2021 and 2020, the Company did not recognize an impairment loss for any of
its real estate properties.
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 rates applicable to other borrowings during the period. Interest capitalized to real estate property under development
is recorded as a component of the 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, 2020, the total interest capitalized in the real estate property development was $1,705,550
and $3,474,114, respectively. For the three and six months ended March 31, 2020, the total interest capitalized in the real estate
property development was $1,732,506 and $3,460,383, respectively
Impairment of long-lived assets
The Company reviews its long-lived assets for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the
estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment
exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.
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
its 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 was no impairment of long-lived assets during the three and six months
ended March 31, 2021 and 2020.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Income taxes
Deferred tax assets and liabilities are for the
expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred
income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income. A valuation allowances is established, when necessary, to reduce net 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 positions 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, 2021
and September 30, 2020.
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 and VIE in the PRC.
No income is earned in the United States and the management does not repatriate any earnings outside the PRC. As a result, the Company
did not generate any U.S. taxable income for the three and six months ended March 31, 2021 and 2020. As of March 31, 2021, the
Chinese entities’ income tax returns filed in China for the years ended December 31, 2020, 2019, 2018, 2017 and 2016 are subject
to examination by the Chinese taxing 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, 2009 through September 30, 2020 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 March 31, 2021 and September 30, 2020, including an approximately $2.3 million provision on the deemed repatriation
of undistributed foreign earnings and an additional $0.8 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.
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 Yangzhou Pearl Garden and Yangzhou Palace projects are located, has a tax rate of 0.5%.
Comprehensive income (loss)
In accordance with ASC 220-10-55, comprehensive
income (loss) is defined as all changes in equity except those resulting from investments by owners and distributions to owners. The Company’s
only components of comprehensive income (loss) for the three and six months ended March 31, 2021 and 2020 were net income (loss)
and foreign currency translation adjustments.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Basic and diluted earnings (loss) per share
The Company computes earnings (loss) per share
(“EPS”) in accordance with the FASB ASC 260, “Earnings per share”, which requires companies to present basic and
diluted EPS. Basic EPS is measured as net income (loss) 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. There were no anti-dilutive share for the three and six months ended March 31, 2021 and 2020.
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, 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 of RMB500,000 (approximately $76,300). 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. The Company has not experienced any losses in its
bank accounts.
The Company is dependent on third-party sub-contractors,
manufacturers, and distributors for all construction services and supply of construction materials. For the three and six months ended
March 31, 2021 and 2020, no supplier accounted for more than 10% of the total project expenditures.
For the three and six months ended March 31, 2021,
the Company had real estate sales revenue of $14,432,275 related to sales to the local government for residence reallocation purposes,
representing 79% and 68.6% of the Company’s total real estate sales revenue for the three and six months ended March 31,2021, respectively.
For the three and six months ended March 31, 2020, the Company did not have any individual customer with over 10% of the Company real
estate sales revenue for the related periods.
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.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Management has considered all other recent accounting pronouncements
issued. The Company’s management believes that these recent pronouncements will not have a material effect on the Company’s
financial statements.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3. REAL ESTATE PROPERTY DEVELOPMENT COMPLETED
AND UNDER DEVELOPMENT
The following summarizes the components of real estate property development
completed and under development As of March 31, 2021 and September 30, 2020:
|
|
Balance as of
|
|
|
|
March 31, 2021
|
|
|
September 30, 2020
|
|
|
|
(Unaudited)
|
|
|
|
|
Development completed:
|
|
|
|
|
|
|
|
|
Hanzhong City Mingzhu Garden Phase II
|
|
$
|
23,487,591
|
|
|
$
|
22,801,439
|
|
Hanzhong City Oriental Pearl Garden
|
|
|
20,660,729
|
|
|
|
19,937,105
|
|
Yang County Yangzhou Pearl Garden Phase II
|
|
|
2,616,474
|
|
|
|
2,559,977
|
|
Yang County Yangzhou Palace
|
|
|
46,594,626
|
|
|
|
49,372,737
|
|
Real estate property development completed
|
|
$
|
93,359,420
|
|
|
$
|
94,671,258
|
|
Under development:
|
|
|
|
|
|
|
|
|
Hanzhong City Liangzhou Road and related projects (a)
|
|
$
|
174,713,368
|
|
|
$
|
164,879,955
|
|
Hanzhong City Nanyuan II project(e)
|
|
|
23,185,457
|
|
|
|
-
|
|
Hanzhong City Hanfeng Beiyuan East (b)
|
|
|
854,422
|
|
|
|
824,496
|
|
Hanzhong City Beidajie (b)
|
|
|
46,530,230
|
|
|
|
57,142,127
|
|
Yang County East 2nd Ring Road (c)
|
|
|
5,868,290
|
|
|
|
4,894,439
|
|
Real estate property under development
|
|
$
|
251,151,767
|
|
|
$
|
227,741,017
|
|
(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 March 31, 2021, the main Liangzhou road construction is substantially completed. The Company launched
the construction of the Liangzhou Road related projects in December 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 March 31, 2021, the actual costs incurred by the Company were $174,713,368 (September 30, 2019 - $164,879,955)
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.
|
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3. REAL ESTATE PROPERTY DEVELOPMENT COMPLETED
AND UNDER DEVELOPMENT (continued)
(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 March 31, 2021, the local government has not completed the budget for these projects therefore the delivery for these projects for government’s acceptance and related settlement were extended to 2022. Due to delays in the government approval and slow development progress, the Company disposed of certain construction properties in the Beidajie project to Hanzhong Guangsha Real Estate Development Inc. (“Hanzhong Guangsha”) an entity controlled by the Company’s chairman and Chief executive officer Mr. Xiaojun Zhu to settle the payable of approximately $28.2 million related to Hanzhong Guangsha in connection with the acquisition of the Hanzhong Nanyuan II Project disclosed below in (e).
|
(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 the China Construction Bank (December 31,2020 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 March 31, 2021 and in process of government review and approval.
|
(e)
|
On January 20, 2021, the Company entered into agreement with Hanzhong Guangsha, an entity controlled by the Company’s chairman and Chief executive officer Mr. Xiaojun Zhu, to acquire certain real estate under development in the Hanzhong Nanyuan II Project in the amount of approximately $28.2 million, for the local government’s residence reallocation related to the Liangzhou road and affiliated project. The remaining balance of the real estate under development in the Hanzhong Nanyuan II project is expected to be completed before September 30, 2021 and will be sold to the local government for residence reallocation purposes.
|
NOTE 4. CONSTRUCTION LOANS
|
|
March 31,
2021
|
|
|
September 30,
2020
|
|
|
|
(Unaudited)
|
|
|
|
|
Loan A
|
|
$
|
97,939,013
|
|
|
$
|
92,450,491
|
|
Loan B
|
|
|
18,121,611
|
|
|
|
17,486,917
|
|
Total
|
|
$
|
116,060,624
|
|
|
$
|
109,937,408
|
|
|
(A)
|
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 $118.8 million (RMB 775,000,000) for a long term loan with interest at 4.75% to the develop Liangzhou
Road Project. As of September 30, 2020, the Company borrowed $97,832,408 under this credit line with a due date in October 2021.
Due to local government’s delay in the reallocation of residences in the Liangzhou Road Project and related area, the Hanzhong
Urban Construction Investment Development Co., Ltd has not released all the funds available to the Company and additional withdrawals
will be based on the project’s development progress and the Company expects the loan will be extended upon maturity. The loan is
guaranteed by Hanzhong City Hantai District Municipal Government and pledged by the Company’s Yang County Yangzhou Palace project
with a carrying value of $46,594,626 as of March 31, 2021 (September 30, 2020- $49,372,737). For the three and six months ended
March 31, 2021, the interest was $1,570,490 and $3,203,279, respectively, which was capitalized into the development cost of the
Liangzhou Road Project. For the three and six months ended March 31, 2020, interest was $1,599,637 and $3,195,887, respectively,
which was capitalized in to the development cost of the Liangzhou Road Project.
|
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4. CONSTRUCTION LOANS (continued)
(B)
|
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
$18.2 million (RMB 119,000,000) for the development of the Hanzhong City Liangzhou Road Project. The interest is 1.2% and due on June 20,
2031. The Company is required to repay the loan by equal annual principal repayments of approximately $3.3 million commencing from December 2027
through June 2031 with interest payable on an annual basis. The Company pledged the assets of the Liangzhou Road related projects
with a carrying value of $174,713,368 as collateral for the loan. Total interest of $54,262 and $109,583 for the three and six months
ended March 31, 2021, respectively, was capitalized into the development cost of the Hanzhong City Liangzhou Road Project. Total
interest of $51,732 and $102,961 for the three and six months ended March 31, 2020, respectively, were capitalized into 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 $26.8 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 commencing from December 2027 through May 2031 with
the interest payable on an annual basis. The amount of this loan is available to be drawn down as soon as the land use rights of the Liangzhou
Road Project are approved and the construction starts, which is expected to be completed before the end of 2021. As of March 31,
2021 and September 30, 2020, the outstanding balance of the loan was Nil. Interest charges for the three and six months ended March 31,
2021 was $79,798 and $161,152, respectively, which was included in the construction capitalized costs. Interest charges for the three
and six months ended March 31, 2020 was $76,062 and $151,414, respectively, which was included in the construction capitalized costs.
|
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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,
2021
|
|
|
September 30,
2020
|
|
|
|
(Unaudited)
|
|
|
|
|
Customer deposits by real estate projects:
|
|
|
|
|
|
|
|
|
Mingzhu Garden (Mingzhu Nanyuan and Mingzhu Beiyuan)
|
|
$
|
7,906,459
|
|
|
$
|
7,606,944
|
|
Oriental Pearl Garden
|
|
|
4,669,289
|
|
|
|
4,358,467
|
|
Liangzhou Road and related projects
|
|
|
615,098
|
|
|
|
888,123
|
|
Yangzhou Pearl Garden
|
|
|
1,442,548
|
|
|
|
1,243,137
|
|
Yangzhou Palace
|
|
|
6,864,633
|
|
|
|
5,308,857
|
|
Total
|
|
$
|
21,498,027
|
|
|
$
|
19,405,528
|
|
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.
NOTE 6. TAXES
(A) Value added Tax (“VAT”)
The Company is subject to a 5% VAT for its existing
real estate projects based on the local tax authority’s practice. As of March 31, 2021, the Company had business sales tax
payable of $4,643,839 (September 30, 2020 - $5,159,296), which is expected to be paid when the projects are completed and assessed by
the local tax authority.
(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. The
Company’s CIT is 25% on taxable income. 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. As of March 31, 2021 and September 30, 2020, the Company’s total income
tax payable amounted to $13,241,343 and $11,639,537, respectively, which included the income tax payable balances in the PRC of $9,944,343
and $8,342,537, respectively and the Company expects to pay this income tax payable balance when the related real estate projects are
completely sold.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6. TAXES (continued)
The following table reconciles the statutory rates
to the Company’s effective tax rate for the three and six months ended March 31, 2021 and 2020:
|
|
Three months ended
March 31,
|
|
|
Six months ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Chinese statutory tax rate
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
Valuation allowance change and other adjustments*
|
|
|
-
|
|
|
|
(9.8
|
)%
|
|
|
-
|
|
|
|
(14.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
25
|
%
|
|
|
15.2
|
%
|
|
$
|
25
|
%
|
|
|
10.3
|
%
|
*Valuation allowance change and other adjustments
for the three and six months ended March 31, 2021 and 2020 were primarily related to valuation allowance changes on historical losses.
Income tax expense for the three and six months
ended March 31, 2021 and 2020 is summarized as follows:
|
|
Three months ended
March 31,
|
|
|
Six months ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Current tax provision
|
|
$
|
741,431
|
|
|
$
|
67,000
|
|
|
$
|
839,624
|
|
|
$
|
134,000
|
|
Deferred tax provision
|
|
|
-
|
|
|
|
(178,699
|
)
|
|
|
-
|
|
|
|
(235,179
|
)
|
Income tax provision
|
|
$
|
741,431
|
|
|
$
|
(111,699
|
)
|
|
$
|
839,624
|
|
|
$
|
(101,179
|
)
|
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6. 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. As of March 31, 2021 and September
30, 2020, the Company’s GILTI tax payable was Nil.
For the year 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 March 31, 2021 and September 30, 2020, 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 March 31, 2021 and September 30,
2020, the outstanding LAT payable balance was Nil with respect to completed real estate properties sold up to March 31, 2021 and
September 30, 2020.
(D) Taxes payable consisted of the following:
|
|
December 31,
2020
|
|
|
September 30,
2020
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
CIT
|
|
$
|
13,241,343
|
|
|
$
|
12,213,470
|
|
VAT payable
|
|
|
4,643,839
|
|
|
|
5,159,296
|
|
Other taxes and fees
|
|
|
2,707,425
|
|
|
|
2,508,445
|
|
Tax payable
|
|
$
|
20,592,607
|
|
|
$
|
19,881,211
|
|
CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7. STOCKHOLDERS’ EQUITY
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 affect 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 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. The Company had a total of 45,050,000 shares of common stock issued and outstanding prior to the Reverse Stock Split.
As a result of the Reverse Stock Split, the number of common stock outstanding as of March 31, 2021 and September 30, 2020,
which reflects the effect of the reverse split, was 22,525,000. The financial statements give retroactive effect to this reverse stock
split.
NOTE 8. COMMITMENTS AND CONTINGENCIES
From time to time, the Company is a party to various
legal actions arising in the ordinary course of business. The Company accrues costs associated with these matters when they become probable
and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. The Company's
management does not believe the 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 the six to twelve months’ period, the mortgage banks require the Company to maintain, as restricted cash
of at least 5% 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 three and six months ended March 31, 2021 and 2020,
the Company has not experienced any delinquent mortgage loans and has not experienced any losses related to this guarantee. As of March 31,
2021 and September 30, 2020, our outstanding guarantees in respect of our customers' mortgage loans amounted to approximately $66
million and $68 million, respectively. As of March 31, 2021 and September 30, 2020, the amount of security deposits provided
for these guarantees was approximately $3.3 million and $3.4 million, respectively, and the Company believes that such reserves are sufficient.
NOTE 9. SUBSEQUENT EVENT
On April 19, 2021 (the “Closing Date”),
pursuant to the terms of the Equity Acquisition Agreement, dated as of March 24, 2021, between China HGS Real Estate Inc., (the “Company,”)
and Shaanxi Tianhao Construction Engineer Co., Ltd (“Shaanxi Tianhao”) (the "Purchaser") (the “Equity Acquisition
Agreement”), the Company issued 3,092,114 shares of common stock to the Purchaser to settle its accounts payable balance of RMB
43 million with the Purchaser. In accordance with the Equity Acquisition Agreement, the Purchaser received shares of common stock equivalent
to RMB 43 million based on a price of $2.13 per share which was the average stock price of the Company stock during the five (5) trading
days preceding the Closing Date.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The following discussion and analysis of financial
condition and results of operations relates to the operations and financial condition reported in the unaudited condensed consolidated
financial statements of China HGS Real Estate, Inc. For the three and six months ended March 31, 2021 and 2020 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, 2021, our sales, gross profit and net income were $21.0 million, $4.6 million and $2.5 million,
respectively, representing an approximate 401.5%, 377.8% and 385.1% increase in sales, gross profit and net income as compared to six
months ended March 31, 2020, respectively. The increase in sales, gross profit and net income was mainly resulted from more
gross floor area (“GFA”) sold during six months ended March 31, 2021
For the six months ended March 31, 2021,
the average selling price (“ASP”) for our real estate projects (excluding sales of parking spaces) located in Yang County
was approximately $671 per square meter, an increase of 13.2% from the ASP of $593 per square meter for the six months ended March 31,
2020, which was mainly due to more commercial units with higher selling price were sold during the six months ended March 31, 2021.
The ASP of our Hanzhong real estate projects (excluding sales of parking spaces) was approximately $618 per square meter for the six months
ended March 31, 2021, increased from the ASP of $544 per square meter for the six months ended March 31, 2020 due to increasing
real estate price in the local market.
Market Outlook
The Chinese government is expected to continue
implementing the tightening of measurements to cool down the real estate market. These measures may include but not limit 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. The downward pressure on home
sales and prices will be especially obvious in third- and fourth-tier cities, while the property market in the first- and second-tier
cities is expected to be resilient.
The Company intends 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.
The Company started the construction of Liangzhou
Road related project after the approval by the local government of the road. 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.
In December 2019, a novel strain of coronavirus
(COVID-19) surfaced. COVID-19 has spread rapidly to many parts of the PRC and other parts of the world in the first quarter of 2020, 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 and, as such, the Company is
unable to determine if it will have a material impact to its operations. For the six months ended March 31, 2021, the COVID-19 pandemic
did not have a material net impact on the Company’s financial positions and operating results. The extent of the impact on the Company’s
future financial results will be dependent on future developments such as the length and severity of the crisis, the potential resurgence
of the crisis, future government actions in response to the crisis and the overall impact of the COVID-19 pandemic on the local economy
and real estate markets, among many other factors, all of which remain highly uncertain and unpredictable. Given this uncertainty, the
Company is currently unable to quantify the expected impact of the COVID-19 pandemic on its future operations, financial condition, liquidity
and results of operations if the current situation continues.
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 resident 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, 2021, the main Liangzhou road construction is substantially completed, due to the complicated multiple
level of government review process, the Company expected to the government's acceptance to be completed before the end of fiscal 2021.
Due to historical delays in government approval and acceptance, the Company included such balance in real estate property under development
as non-current assets.
As of March 31, 2021, the actual costs incurred
by the Company was $174,713,368 (September 30, 2020 - $164,879,955) and the incremental cost related to residence resettlement was
approved by the local government. The Company determined that the Company’s Investment in the Liangzhou Road Project in exchange
for interests in future land use rights is a barter transaction with commercial substance.
The Liangzhou Road related projects mainly consists
of 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 buildings 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 of
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 the construction of
these three real estate projects in 2020 after the road construction is fully completed and passes local government’s inspection
and approval. These related projects may take 2-3 years to fully complete.
Road Construction
Other road construction projects mainly included
the Yang County East 2nd Ring Road construction project. The Company was engaged by the Yang County local government to construct the
East 2nd Ring Road with a total length of 2.15 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 the China
Construction Bank (December 31, 2020 and 2 September 30, 2020 - 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 December 31, 2020 and in process of government review and approval.
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, 2021, the local government was still in
the process of assessing the budget for these projects, which is expected to be completed by 2021.
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 the unaudited condensed consolidated financial statements.
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 Company satisfies a performance obligation.
Most of the Company’s revenue is derived
from real estate sales of condominiums and commercial properties 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.
|
Sale 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 the right
to payment and the collection of the consideration is probable. For municipal road construction projects, fees are generally recognized
at the time the projects are completed.
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 Ownership 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. 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. 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 its 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 reviews 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, 2021 and 2020, the Company did not recognize an impairment loss for any of
its real estate properties.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2021 compared to Three Months
Ended March 31, 2020
Revenues
The following is a breakdown of revenue:
|
|
For Three Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Revenue recognized for completed condominium real estate projects
|
|
$
|
18,278,112
|
|
|
$
|
1,889,829
|
|
Revenue recognized for condominium real estate projects under development
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
18,278,112
|
|
|
$
|
1,889,829
|
|
Revenue recognized for completed condominium real estate projects
The following table summarizes our revenue generated by different projects:
|
|
For Three Months Ended March 31,
|
|
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Variance
|
|
|
|
Revenue
|
|
|
%
|
|
|
Revenue
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan) Phase I and II
|
|
$
|
68,894
|
|
|
|
0.4
|
%
|
|
$
|
350,048
|
|
|
|
18.5
|
%
|
|
$
|
(281,154
|
)
|
|
|
(80.3
|
)%
|
Oriental Pearl Garden
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
88,224
|
|
|
|
4.7
|
%
|
|
|
(88,224
|
)
|
|
|
(100
|
)%
|
Nanyuan II Project
|
|
|
14,432,275
|
|
|
|
79.0
|
%
|
|
|
|
|
|
|
|
|
|
|
14,432,275
|
|
|
|
100
|
%
|
Yangzhou Palace
|
|
|
3,734,831
|
|
|
|
20.4
|
%
|
|
|
1,451,557
|
|
|
|
76.8
|
%
|
|
|
2,283,274
|
|
|
|
157.3
|
%
|
Yangzhou Pearl Garden Phase I and II
|
|
|
42,112
|
|
|
|
0.2
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
42,112
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Real Estate Sales before Sales Tax
|
|
|
18,278,112
|
|
|
|
100
|
%
|
|
|
1,889,829
|
|
|
|
100
|
%
|
|
|
16,288,283
|
|
|
|
867.2
|
%
|
Sales Tax
|
|
|
(115,166
|
)
|
|
|
|
|
|
|
(27,048
|
)
|
|
|
|
|
|
|
(88,118
|
)
|
|
|
325.8
|
%
|
Revenue net of sales tax
|
|
$
|
18,162,946
|
|
|
|
|
|
|
$
|
1,862,781
|
|
|
|
|
|
|
$
|
16,300,165
|
|
|
|
875.0
|
%
|
Our revenues are derived from the sale of residential
buildings, commercial store-fronts and parking spaces in projects that we have developed. Comparing to the same period of last year, revenues
before sales tax increased by 867.2% to approximately $18.3 million for the three months ended March 31, 2021 from approximately
$1.9 million. The total GFA sold during three months ended March 31, 2021 was 5,368 square meters, representing a significant
increase from the 3,266 square meters completed and sold during the same period of last year. In addition, we acquired Nanyuan II project
under development from our affiliated entity in January 2021 and sold certain completed residential units to the local government
for residence reallocation purposes with total revenue of approximately $14.4 million for the three months ended March 31, 2021.
The sales tax for the three months ended March 31, 2021 was approximately $0.1 million, increased by 325.8% from the same period
of 2020, consistent with the increase in revenue.
Cost of Sales
The following table sets forth a breakdown of our cost of sales:
|
|
For Three Months Ended March 31,
|
|
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Variance
|
|
|
|
Cost
|
|
|
%
|
|
|
Cost
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Land use rights
|
|
$
|
1,302,684
|
|
|
|
9
|
%
|
|
$
|
133,968
|
|
|
|
9.1
|
%
|
|
$
|
1,168,716
|
|
|
|
872.4
|
%
|
Construction cost
|
|
|
13,171,580
|
|
|
|
91
|
%
|
|
|
1,332,413
|
|
|
|
90.9
|
%
|
|
|
11,839,167
|
|
|
|
888.6
|
%
|
Total cost
|
|
$
|
14,474,264
|
|
|
|
100
|
%
|
|
$
|
1,466,381
|
|
|
|
100
|
%
|
|
$
|
13,007,883
|
|
|
|
887.1
|
%
|
Our cost of sales consists primarily of costs associated with land
use rights and construction costs. Cost of sales are capitalized and allocated to development projects using a 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 $14.5 million
for the three months ended March 31, 2021 compared to $1.5 million for the same period of last year. The $13.1 million increase in
cost of sales was mainly attributable to more GFA sold during the three months ended March 31, 2021 which led to increased cost of
sales.
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, 2021 were approximately $1.3 million, as compared to approximately $0.1 million for the three months ended March 31,
2020, representing an increase of approximately $1.2 million from the same quarter last year. The increase was consistent with the fact
that total GFA sold in this quarter significantly increased from 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, 2021 were approximately $13.2 million as compared to approximately $1.3 million for the same
period of last year, representing an increase of approximately $11.8 million. The increase in construction cost was due to more real estate
projects sold during the quarter ended March 31, 2021.
Gross Profit
Gross profit was approximately $3.7 million for
the three months ended March 31, 2021 as compared to approximately $0.4 million for the three months ended March 31, 2020, representing
an increase of $3.3 million, which was mainly attributable to more GFA sold during the current quarter of fiscal 2021. The gross margin
was consistently around 20% to 21% in both periods.
|
|
For Three Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
Gross Profit
|
|
|
Gross Margin
|
|
|
Gross Profit
|
|
|
Gross Margin
|
|
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan) Phase I and II
|
|
$
|
20,765
|
|
|
|
30.1
|
%
|
|
$
|
96,691
|
|
|
|
27.6
|
%
|
Oriental Garden
|
|
|
-
|
|
|
|
-
|
|
|
|
26,357
|
|
|
|
29.9
|
%
|
Nanyuan II
project
|
|
|
2,851,601
|
|
|
|
19.8
|
%
|
|
|
-
|
|
|
|
-
|
|
Yangzhou Pearl Garden Phase I and II
|
|
|
5,698
|
|
|
|
13.5
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Yangzhou Palace
|
|
|
925.784
|
|
|
|
24.8
|
%
|
|
|
300,400
|
|
|
|
20.7
|
|
Sales Tax
|
|
|
(115,166
|
)
|
|
|
-
|
|
|
|
(27,048
|
)
|
|
|
-
|
|
Total Gross Profit
|
|
$
|
3,688,682
|
|
|
|
20.2
|
%
|
|
$
|
396,400
|
|
|
|
21.0
|
%
|
Total Real Estate Sales before Sales Tax
|
|
$
|
18,278,112
|
|
|
|
|
|
|
$
|
1,889,829
|
|
|
|
|
|
Operating Expenses
Total operating expenses decreased by 45.1% to
approximately $0.6 million for the three months ended March 31, 2021 from $1.0 million for the three months ended March 31,
2020, primarily due more marketing and promotion selling expense incurred for the three months ended March 31, 2020. Our general
and administrative expense was approximately $0.6 million for the three months ended March 31, 2021, decreased by $0.4 million from
the three months ended March 31, 2020 due to less office expenses and professional and consulting fee expenses incurred. Our
total operating expenses accounted for 3.1% and 54% of our real estate sales before sales taxes for the three months ended March 31,
2021 and 2020, respectively.
|
|
For Three Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Selling expenses
|
|
$
|
16,821
|
|
|
$
|
200,390
|
|
General and administrative expenses
|
|
|
543,334
|
|
|
|
819,415
|
|
Total operating expenses
|
|
$
|
560,155
|
|
|
$
|
1,019,805
|
|
Percentage of Real Estate Sales before Sales Tax
|
|
|
3.1
|
%
|
|
|
54.0
|
%
|
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, 2021
and 2020.
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 year 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 March 31, 2021 and September 30, 2020, the Company provided an additional
$0.8 million provision due to delinquent U.S. tax return fillings.
PRC Taxes
Our
Company is governed by the Enterprise Income Tax Law of the People’s Republic of China concerning private-run enterprises, which
are generally subject to tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax
adjustments. For the six months ended March 31, 2021 and 2020, the Company is subject to income tax rate of 25% on taxable income. 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.
Net income
We reported net income
of approximately $2.2 million for the three months ended March 31, 2021, as compared to net loss of approximately $0.6 for the three
months ended March 31, 2020. The increase of approximately $2.8 million in our net income was primarily due to more revenue for the
three months ended March 31, 2021 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 loss of $0.7 million and $2.8 million for the three months ended March 31, 2021
and 2020, respectively, due to the significant fluctuation of RMB during the period.
The balance sheet amounts with the exception of equity at March 31, 2021 were translated at 6.5518 RMB to 1.00 USD as compared to
6.7896 RMB to 1.00 USD at September 30, 2020. 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, 2021 and 2020 were 6.5526 RMB and 7.0117 RMB, respectively.
Six Months Ended March 31, 2021 compared to Six Months
Ended March 31, 2020
Revenues
The following is a breakdown of revenue:
|
|
For Six Months
Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Revenue recognized under full accrual method
|
|
$
|
21,033,374
|
|
|
$
|
4,194,073
|
|
Revenue recognized under percentage of completion method
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
21,033,374
|
|
|
$
|
4,194,073
|
|
Revenue recognized for completed condominium real estate projects
The following table summarizes our revenue generated by different projects:
|
|
For Six Months Ended March 31,
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Variance
|
|
|
|
Revenue
|
|
|
%
|
|
|
Revenue
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan) Phase I and Phase II
|
|
$
|
188,519
|
|
|
|
0.9
|
%
|
|
$
|
530,953
|
|
|
|
12.7
|
%
|
|
$
|
(342,434
|
)
|
|
|
(64.5
|
)%
|
Nanyuan II Project
|
|
|
14,432,275
|
|
|
|
68.6
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
14,432,275
|
|
|
|
100
|
%
|
Yangzhou Pearl Garden Phase I and Phase II
|
|
|
42,112
|
|
|
|
0.2
|
%
|
|
|
8,708
|
|
|
|
0.2
|
%
|
|
|
33,404
|
|
|
|
383.6
|
%
|
Oriental Garden
|
|
|
-
|
|
|
|
-
|
|
|
|
121,904
|
|
|
|
2.9
|
%
|
|
|
(121,904
|
)
|
|
|
(100
|
)%
|
Yangzhou Palace
|
|
|
6,370,468
|
|
|
|
30.3
|
%
|
|
|
3,532,508
|
|
|
|
84.2
|
|
|
|
2,837,960
|
|
|
|
80.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Real Estate Sales before Sales Tax
|
|
|
21,033,374
|
|
|
|
100
|
%
|
|
|
4,194,073
|
|
|
|
100
|
%
|
|
|
16,839,301
|
|
|
|
401.5
|
%
|
Sales Tax
|
|
|
(138,704
|
)
|
|
|
|
|
|
|
(66,281
|
)
|
|
|
|
|
|
|
(72,422
|
)
|
|
|
109.3
|
%
|
Revenue net of sales tax
|
|
$
|
20,894,670
|
|
|
|
|
|
|
$
|
4,127,792
|
|
|
|
|
|
|
$
|
16,766,878
|
|
|
|
406.2
|
%
|
Our revenues are derived from the sale of residential
buildings, commercial store-fronts and parking spaces in projects that we have developed. Comparing to the same period of last year, revenues
before sales tax increased by 401.5% to approximately $21.0 million for the six months ended March 31, 2021 from approximately $4.2
million in the same period of last year. The total GFA sold during six months ended March 31, 2020 was merely 9,893 square meters,
representing a 38% increase from the 7,173 square meters completed and sold during the same period of last year. In addition, we acquired
the Nanyuan II project under development from our affiliated entity in January 2021 and sold certain completed residential units
to local government for residence reallocation purpose with total revenue of approximately $14.4 million for the six months ended March 31,
2021. The sales tax for the six months ended March 31, 2021 was approximately $0.1 million, increased by 109.3% from the same period
of 2020, consistent with more revenue in the first half of fiscal 2021.
Cost of Sales
The following table sets forth a breakdown of our cost of sales:
|
|
For Six Months Ended March 31,
|
|
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Variance
|
|
|
|
Cost
|
|
|
%
|
|
|
Cost
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Land use rights
|
|
$
|
1,551,151
|
|
|
|
9.5
|
%
|
|
$
|
297,629
|
|
|
|
9.4
|
%
|
|
$
|
1,253,522
|
|
|
|
421.2
|
%
|
Construction cost
|
|
|
14,776,755
|
|
|
|
90.5
|
%
|
|
|
2,874,364
|
|
|
|
90.6
|
%
|
|
|
11,902,391
|
|
|
|
414.1
|
%
|
Total cost
|
|
$
|
16,327,906
|
|
|
|
100
|
%
|
|
$
|
3,171,993
|
|
|
|
100
|
%
|
|
$
|
13,155,913
|
|
|
|
414.8
|
%
|
Our cost of sales consists primarily of costs associated with land
use rights and construction costs. Cost of sales are capitalized and allocated to development projects using a 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 $16.3 million for the six months ended March 31, 2021 compared to $3.2 million for the same period
of last year. The $13.2 million decrease in cost of sales was mainly attributable to more GFA sold during the six months ended March 31,
2021 which led to less cost of sales.
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, 2021 were approximately $1.6 million, as compared to approximately $0.3 million
for the six months ended March 31, 2020, representing an increase of approximately $1.3 million from the same period of last year.
The increase was consistent with the fact that total GFA sold in the first six months 2020 was significantly increased from 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, 2021 were approximately $14.8 million as compared to
approximately $2.9 million for the same period of last year, representing an increase of approximately $11.9 million. The increase in
construction cost was due to more real estate property units sold during the first half of fiscal 2020.
Gross Profit
Gross profit was approximately $4.6 million for
the six months ended March 31, 2021 as compared to approximately $1.0 million for the six months ended March 31, 2020, representing
an increase of $3.6 million, which was mainly attributable to more GFA sold during the first half of fiscal 2021. The gross margin was
consistently around 21.7% to 22.8% in the first half of fiscal 2021 and 2020. For the six months ended March 31, 2021, the ASP for
our real estate projects (excluding sales of parking spaces) located in Yang County was approximately $671 per square meter, an increase
of 13.2% from the ASP of $593 per square meter for the six months ended March 31, 2020, which was mainly due to more commercial units
with higher selling price were sold during the six months ended March 31, 2021. The ASP of our Hanzhong real estate projects (excluding
sales of parking spaces) was approximately $618 per square meter for the six months ended March 31, 2020, increased from the ASP
of $544 per square meter for the six months ended March 31, 2020 due to increasing real estate prices in the local market.
The following table sets forth the gross margin of each of our projects:
|
|
For Six Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
Gross Profit
|
|
|
Percentage
of Revenue
|
|
|
Gross
Profit
|
|
|
Percentage
of Revenue
|
|
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan)
|
|
$
|
47,102
|
|
|
|
27.7
|
%
|
|
$
|
147,062
|
|
|
|
27.7
|
%
|
Oriental Garden
|
|
|
-
|
|
|
|
-
|
|
|
|
36,419
|
|
|
|
29.9
|
%
|
Nanyuan
II project
|
|
|
2,851,601
|
|
|
|
19.8
|
%
|
|
|
|
|
|
|
|
|
Yangzhou Pearl Garden
|
|
|
5,698
|
|
|
|
13.5
|
%
|
|
|
1,179
|
|
|
|
13.5
|
%
|
Yangzhou Palace
|
|
|
1,801,067
|
|
|
|
28.3
|
%
|
|
|
837,420
|
|
|
|
23.7
|
%
|
Sales Tax
|
|
|
(128,704
|
)
|
|
|
|
|
|
|
(66,281
|
)
|
|
|
|
|
Total Gross Profit
|
|
|
4,566,764
|
|
|
|
21.7
|
%
|
|
|
955,799
|
|
|
|
22.8
|
%
|
Total Real Estate Sales before Sales Tax
|
|
$
|
21,033,374
|
|
|
|
|
|
|
$
|
4,194,073
|
|
|
|
|
|
Operating Expenses
Total
operating expenses were approximately $0.9 million and $1.8 million for the six months ended March 31, 2021 and 2020, respectively.
The significant decrease in selling expenses of $0.3 million for six months ended March 31, 2021 was primarily attributed to less
promotion activities. The 47.7% decrease in general administration expense for the six months ended
March 31, 2021 was primarily attributed to less office expenses and professional and consulting fee expenses incurred.
Our total operating expenses accounted for 4.5% and 43.1% of our real estate sales before sales taxes for the six months ended
March 31, 2021 and 2020, respectively.
|
|
For Six Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Selling expenses
|
|
$
|
96,166
|
|
|
$
|
400,558
|
|
General and administrative expenses
|
|
|
849,259
|
|
|
|
1,408,254
|
|
Total operating expenses
|
|
$
|
945,425
|
|
|
$
|
1,808,812
|
|
Percentage of Real Estate Sales before Sales Tax
|
|
|
4.5
|
%
|
|
|
43.1
|
%
|
Income Taxes
U.S. Taxes
China HGS is a Florida corporation. However, all
of our operations are conducted solely by our subsidiaries in the PRC. No income is earned in the United States and we do not repatriate
any earnings outside the PRC. As a result, we did not generate any U.S. taxable income for the six months ended March 31, 2021 and
2020.
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 year 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 March 31, 2021 and September 30, 2020, the Company provided an additional
$0.8 million provision due to delinquent U.S. tax return fillings.
PRC Taxes
Our Company is governed
by the Enterprise Income Tax Law of the People’s Republic of China concerning private-run enterprises, which are generally subject
to tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments. For the
six months ended March 31, 2021 and 2020, the Company is subject to income tax rate of 25% on taxable income. 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.
Net Income
We reported net income
of approximately $2.5 million for the six months ended March 31, 2021, as compared to net loss of approximately $0.9 million for
the six months ended March 31, 2020. The increase of $3.4 million in our net income was primarily due to more revenue reported for
the first half of fiscal 2021 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 loss of $6.3 million and $1.6 million for the six months ended March 31, 2021
and 2020, respectively, due to the significant fluctuation of RMB during the period.
The balance sheet amounts with the exception of equity at March 31, 2021 were translated at 6.5518 RMB to 1.00 USD as compared to
6.7896 RMB to 1.00 USD at September 30, 2020. 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, 2021 and 2020 were 6.5526 RMB and 7.0117 RMB, respectively.
Liquidity and Capital Resources
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.
In recent years, the Chinese government has implemented
measures to control overheating residential and commercial property prices including but not limited to restrictions on home purchase,
increasing the down-payment requirement against speculative buying, development of low-cost rental housing properties to help low-income
groups while reducing the demand in the commercial housing market, increasing real estate property taxes to discourage speculation, 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 visits to the Company’s sales office, and inability to promote the
real estate property sales to customers on a timely basis, our revenue during the six months ended March 31, 2020 were significantly
lower. The Company is experiencing a recovery of its real estate development business in the first half of fiscal 2021 due to increasing
demand from the local real estate market. The Company had revenue of approximately $21.0 million for the six months ended March 31,
2021, increased from $4.2 million in the same period of last year. Based on the assessment of current economic environment, customer demand
and sales trends, we believe that consumer spending has been restored in the local real estate market and the real estate sales are expected
to grow in the coming periods. On the other side, due to negative impact from COVID-19 outbreak and spread, 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 the short term as we originally expected. In addition, as of March 31, 2021, we had large construction loans payable
of approximately $116.1 million and a large accounts payable of approximately $31.9 million to be paid to subcontractors within one year.
The extent of the impact of COVID-19 on the Company’s future financial results will be dependent on future developments such as
the length and severity of the crisis, the potential resurgence of the crisis, future government actions in response to the crisis and
the overall impact of the COVID-19 pandemic on the local economy and real estate markets, among many other factors, all of which remain
highly uncertain and unpredictable. Given this uncertainty, the Company is currently unable to quantify the expected impact of the COVID-19
pandemic on its future operations, financial condition, liquidity and results of operations if the current situation continues. The above
mentioned facts raise 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 March 31, 2021, our total cash and restricted cash balance was approximately $3.9 million
similar to the approximately $3.9 million as of September 30, 2020. With respect to capital funding requirements, the Company budgeted
its capital spending based on ongoing assessments of needs to maintain adequate cash. As of March 31, 2021, we had approximately
$93.4 million of completed residential apartments and commercial units available for sale to potential buyers. Although we reported approximately
$31.9 million accounts payable as of March 31, 2021, 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 relate to the old town renovation which are supported by the
local government. As of March 31, 2021, we reported approximately $116.1 million of construction loans borrowed from financial institutions
controlled by the local government and such loans can only be used on the 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 projects and operations. As of March 31,
2021, we had approximately $21.5 million of customer deposits representing cash advances from buyers for pre-sales of our residential
units and we believe such cash advances can be used to fund our ongoing construction projects whenever necessary. For the six months ended
March 31, 2021, we had six large ongoing construction projects (see Note 3, real estate properties under development) which were
under the preliminary development stage due to delayed inspection and acceptance of the development plans by the local government. In
June 2020, we completed the residence relocation surrounding the Liangzhou Road related projects and launched the construction of
these projects in December 2020. For the other four projects, we expect we will be able to obtain the 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. 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 operations whenever necessary.
Cash Flow
Comparison of cash flows results is summarized as follows:
|
|
Six months ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Net cash (used in) provided by operating activities
|
|
$
|
(50,575
|
)
|
|
$
|
2,358,915
|
|
Net cash used in financing activities
|
|
|
-
|
|
|
|
(2,128,585
|
)
|
Effect of change of foreign exchange rate on cash and restricted cash
|
|
|
36,349
|
|
|
|
103,801
|
|
Net (decrease) increase in cash and restricted cash
|
|
|
(14,226
|
)
|
|
|
334,131
|
|
Cash and restricted cash, beginning of period
|
|
|
3,867,536
|
|
|
|
4,202,117
|
|
Cash and restricted cash, end of period
|
|
$
|
3,853,310
|
|
|
$
|
4,536,248
|
|
Operating Activities
Net cash used in operating activities during the
three months ended March 31, 2021 was approximately $0.05 million, consisting of net income of approximately $2.5 million and net
changes in our operating assets and liabilities, which mainly included a decrease in real estate property completed by approximately $4.7
million due to sales of our Yangzhou Palace project and an increase in accounts payable of $5.5 million payable to construction contractors
and an increase in customer deposit received of $1.4 million, offset by additional spending in real estate under development of $13.0
million.
Net cash provided by operating activities during
the six months ended March 31, 2020 was approximately $2.4 million, consisting of net loss of approximately $0.9 million and net
changes in our operating assets and liabilities, which mainly included a decrease in real estate property completed of approximately $2.9
million due to sales of our Yangzhou Palace project, a collection of security deposit of $3.2 million and an increase in customer deposits
received of $2.3 million, offset by additional spending in real estate under development of $2.8 million and payments of accrued expenses
and taxes payable of approximately $2.1 million.
Financing Activities
Net cash flows used in financing activities
was approximately $2.1 million for six months ended March 31, 2020, which was due to a repayment of construction loans of
approximately $2.1 million during the six months ended March 31, 2020.
Off-Balance Sheet Arrangements
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 the six to twelve months’ period, the mortgage banks require the Company to maintain, as restricted cash
of at least 5% 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. The Company has not experienced any delinquent mortgage loans and has not experienced
any losses related to this guarantee. As of March 31, 2021 and September 30, 2020, our outstanding guarantees in respect of
our customers' mortgage loans amounted to approximately $66 million and $68 million, respectively. As of March 31, 2021 and September 30,
2020, the amount of security deposits provided for these guarantees was approximately $3.3 million and $3.4 million, respectively, and
the Company believes that such reserves are sufficient.
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.