GREEN GIANT INC. The following discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported in the financial statements ofChina HGS Real Estate Inc. for the fiscal years endedSeptember 30, 2020 and 2019 and should be read in conjunction with such financial statements and related notes included in this report.
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 and 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 theSEC . 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. Our Business Overview We conduct substantially all of our business throughShaanxi Guangsha Investment andDevelopment 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 inChina . For fiscal 2020, our sales and net loss were approximately$13.0 million and$1.0 million , respectively, representing a decrease of approximately 67.5% and 73.5% from fiscal 2019, respectively. The decrease in revenue, gross profit and net income was mainly due to less GFA sold during fiscal 2020. 26
For fiscal 2020, our average selling price ("ASP") for real estate projects
(excluding sales of parking spaces) located in Yang County was approximately
$718 per square meter, consistent from ASP of $720 per square meter in fiscal
2019. The ASP of our Hanzhong real estate projects (excluding sales of parking
spaces) was approximately $419 per square meter for fiscal 2020, decreased by
25.2% as compared to the ASP of $560 per square meter for fiscal 2019. The
decrease ASP in Hanzhong real estate projects was mainly due to the fact that
many units sold in fiscal 2020 was for government's reallocation of residence
purpose with lower ASP.
Market Outlook
In Fiscal 2019, the macro-economic backdrop will continue to be uncertain with
unrelenting downside pressure, while the overall inventory level of properties
will remain high. The central government will continue to adopt policies aimed
to ensure stability, economic growth and improved employment. The details of
implementation by local government will vary among different PRC cities.
In 2020, the Company expects to start the construction of the real estate
projects surrounding the Liangzhou Road area 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. Our customers continue to
experience growth of their disposable income. With a lower housing price to
family disposable income ratio and an increasing urbanization level, there is a
growing demand for high quality residential housing. From this perspective, the
Company is positive about the outlook for the local real estate market in a long
term. In the meantime, the Company is diversifying its revenue and developing
more commercial and municipal projects.
We intend to remain focused on our existing construction projects in Hanzhong
City and Yang County, deepening our institutional sales network, enhancing our
cost and operational synergies and improving cash flows and strengthening our
balance sheet. In this respect, we began the construction of the following large
high rise residential projects in Hanzhong City and Yang County:
Liangzhou road related projects
InSeptember 2013 , the Company entered into an agreement ("Liangzhou Agreement") with the Hanzhong local government on theLiangzhou 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 ofSeptember 30, 2020 , the main Liangzhou road construction is substantially completed, due to the complicated multiple level of government review process. Since the Company started land leveling and construction process for the Oriental Garden Phase II andLiangzhou Mansion real estate properties in the Liangzhou road real estate project in September, 2020, the Company expected to the government's acceptance to be completed before the end of fiscal 2021. The Company's development cost incurred onLiangzhou Road Project is treated as the Company's deposit on purchasing the related land use rights, as agreed by the local government. As ofSeptember 30, 2020 , the actual costs incurred by the Company were$164,879,955 (September 30, 2019 -$146,958,903 ) and the incremental cost related to residence resettlement approved by the local government.The Liangzhou Road related projects mainly consists Oriental Garden Phase II,Liangzhou Mansion andPearl Commercial Plaza surrounding the Liangzhou road area. The Company started land leveling and construction process for the Oriental Garden Phase II andLiangzhou Mansion real estate properties in the Liangzhou road real estate project in September, 2020. 27 Oriental Garden Phase II Oriental Garden Phase II project is planned to consist of 8 high-rise [[Image Removed]] 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 [[Image Removed]]Liangzhou Mansion project is planned to consist of 7 high-rise building and commercial shops on the first floor with total planned GFA of 160,000 square meters.Pearl Commercial Plaza [[Image Removed]]Pearl Commercial Plaza is planned to consist one office building, one service apartment (or hotel), classical architecture style of Chinese traditional houses and shopping malls with total planned GFA of 124,191 square meters.
The Company plans to start these three real estate projects after the road construction 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 a Yang CountyEast 2nd Ring Road construction project. The Company was engaged by the Yang County local government to construct theEast 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 byChina construction bank (September 30, 2020 and 2019 - 4.75%). The local government has approved a refund to the Company by reducing local surcharges or taxes otherwise required in the real estate development. The road construction was substantially completed as ofSeptember 30, 2020 and in process of government review and approval. InSeptember 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 endedMarch 31, 2014 . As ofSeptember 30, 2020 , the local government was still in the process of assessing the budget for these projects. Under development: Estimated Completion time of construction Hanzhong City HanfengBeiyuan East Road To be delivered to the government in 2021 The road construction was substantially completedHanzhong City Liangzhou Road inSeptember 2018 , the other related projects related projects started inSeptember 2020 . Hanzhong City Beidajie project Under planning stage Yang County East 2nd Ring Road To be delivered to the government in 2021 28 RESULTS OF OPERATIONS
Year ended
Revenues The following is a breakdown of revenue for the years endedSeptember 30, 2020 and 2019: For the years endedSeptember 30, 2020 2019
Revenue recognized for completed condominium real estate projects
$
12,979,227
- 26,564,065 Total$ 12,979,227 $ 39,964,556
Revenue recognized for completed condominium real estate projects
The following table summarizes our revenue generated by different projects:
For the Years Ended September 30,
2020 2019 Variance
Revenue % Revenue % Variance %
Projects
Yangzhou Pearl Garden Phase
I and II $ 1,312,921 10.1 % $ 2,726,864 20.3 % $ (1,413,943 ) (51.9 )%
Oriental Pearl Garden 187,284 1.4 % 2,627,563 19.6 % (2,440,279 ) (92.9 )%
Mingzhu Garden (Nanyuan and
Beiyuan) Phase I and II 3,500,750 27.0 % 8,046,064 60.1 % (4,545,314 ) (56.5 )%
Yangzhou Palace 7,978,272 61.5 % - 7,978,272 100 %
Total Revenue 12,979,227 100 % 13,400,491 100 % (1421,264 ) (3.1 )%
Sales Tax (193,719 ) (133,803 ) (59,916 ) (44.8 )%
Revenue net of sales tax $ 12,785,508 $ 13,266,688 $ (481,180 ) (3.6 )%
Our revenues are derived from the sale of residential buildings, commercial store-fronts and parking spaces in projects that we have developed. Comparing to last year, revenues before sales tax decreased by 3.1% to approximately$13.0 million in fiscal 2020 from approximately$13.4 million in fiscal 2019. The total GFA sold during fiscal 2020 was 21,735 square meters, consistent from the 22,339 square meters sold during last year. Currently, our Mingzhu Garden Phase I and Phase II, Yangzhou Pearl Garden Phase I and Phase II and Oriental Garden Phase I have all been completed in prior years as well asYangzhou Palace projects has been completed during the third quarter of fiscal 2019, therefore only limited models are available for customer selection, which limited our ability to promote our existing house model to broader range of customers and resulted in lower sales for current year. The sales tax for fiscal 2020 increased by 44.8% from fiscal 2019, due to more surcharge tax charged for the completed real estate properties during fiscal 2020. 29
Revenue recognized for condominium real estate projects under development
We started to recognize revenue under the percentage of completion method forYangzhou Palace real estate project since second quarter of fiscal 2017. For the year endedSeptember 30, 2020 , there was no revenue recognized under the percentage of completion method, becauseYangzhou Palace real estate project was completed bySeptember 30, 2019 and our current real estate projects under development inLiangzhou Road and related project under development as ofSeptember 30, 2020 have not met the criteria for revenue recognition under the percentage of completion method. For
the year ended
Accumulated
Revenue Revenue
Recognized recognized
Average Qualified under under
Percentage of Contract Percentage of Percentage of
Total GFA Completion(1) Sales(2) Completion completion
Real estate properties under
development located in Yang County
Yangzhou Palace 297,450 100 % $ 77,979,739 $ 26,564,065 $ 77,979,739 (1) Percentage of Completion progress is calculated by dividing total costs
incurred by total estimated costs for the relevant buildings in each real
estate building , estimated as of the date of our financial statements as of
and for the year indicated.
(2) Qualified contract sales only include all contract sales with customer
deposits balance as of
of contract sales amount and related individual of buildings were sold over
20%.
(3) The actual GFA will be re-measured when the real estate project iscompleted, which could be slightly different from the estimated GFA at the
beginning of the real estate projects.
Cost of sales
The following table sets forth a breakdown of our cost of revenues for the years
indicated.
For the Years Ended September 30,
2020 2019
Cost Percentage Cost Percentage Variance Variance %
Land use rights $ 843,284 9.0 % $ 2,692,563 8.9 % $ (1,849,279 ) (68.7 )%
Construction costs 8,526,536 91.0 % 27,560,950 91.1 % (19,034,414 ) (69.1 )%
Total $ 9,369,820 100 % $ 30,253,513 100 % $ (20,883,693 ) (69.0 )%
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 $9.4 million for the year ended September 30,
2020 compared to $30.3 million for the year ended September 30, 2019 . The 69%
decrease in cost of sales was mainly attributable to the decrease in total GFA
sold for Oriental Pearl Garden, Mingzhu Garden (Nanyuan and Beiyuan) Phase I and
II and Yang County Yangzhou Palace project during fiscal 2020 which led to
decreased revenue and cost of sales during fiscal 2020.
30
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 year endedSeptember 30, 2020 were approximately$0.8 million , as compared to$2.7 million for the year endedSeptember 30, 2019 , representing a decrease of$1.8 million from last year. The decrease in costs of land use rights was due to less GFA sold during fiscal 2020. 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, 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 year endedSeptember 30, 2020 were approximately$8.5 million as compared to approximately$27.6 million for the year endedSeptember 30, 2019 , representing a decrease of$10.0 million . The decrease in construction cost was due to the decrease in units sold in fiscal 2020. Gross profits Gross profit was approximately$0.7 million for the year endedSeptember 30, 2020 as compared to approximately$9.3 million for the year endedSeptember 30, 2019 , representing a decrease of approximately$8.6 million , which was mainly attributable to less GFA sold in Oriental Pearl Garden andYang County Yangzhou Palace project during fiscal 2020 and addition impairment of$2.7 million recognized during the year. We have only limited models available for customer selection in Oriental Pearl Garden project andYangzhou Yangzhou Palace project, therefore, the sales from these completed projects decreased from last year. For fiscal 2020, our average selling price ("ASP") for real estate projects (excluding sales of parking spaces) located in Yang County was approximately$719 per square meter, consistent from the ASP of$720 per square meter for fiscal 2019. The ASP of our Hanzhong real estate projects (excluding sales of parking spaces) was approximately$419 per square meter for fiscal 2020, decreased by 25.2% as compared to the ASP of$560 per square meter for fiscal 2019. The decrease ASP in Hanzhong real estate projects was mainly due to the fact that many units sold in fiscal 2020 was for government's reallocation of residence purpose with lower selling price. The overall gross profit as a percentage of real estate sales was 5.5% for the year endedSeptember 30, 2020 , decreased from 23.3% for the year endedSeptember 30, 2019 , was mainly due to the additional impairment loss of$2.7 million recognized for the year endedSeptember 30, 2020 . For the Year Ended September 30 2020 2019 Gross Gross Variance Project Gross Profit Margin Gross Profit Margin Variance % Yangzhou Pearl Garden Phase I and II$ 289,032 22 %$ 1,619,575 59 %$ (1,330,543 ) 82 % Yangzhou Palace 2,424,864 30 % 5,210,427 20 % (2,785,563 ) (54 )% Mingzhu Garden (Mingzhu Nanyuan and Beiyuan) Phase I and II 842,776 24 % 2,105,274
26 % (1,262,498 ) (60 )%
Oriental Garden 52,735 28 % 775,767 30 % (723,032 ) (93 )%
Sales Tax (193,719 ) - (389,406 ) - 195,687 (50 )%
Impairment losses on real
estate property development
completed (2,703,031 ) - - (2,703,031 ) -
Total Gross Profit $ 712,657 5.5 % $ 9,321,637 23 %
Total Revenue $ 12,979,227 $ 39,964,556
31
Operating expenses
Total operating expenses decreased by 8.0% or approximately$0.3 million to approximately$2.9 million for the year endedSeptember 30, 2020 from approximately$3.2 million for the year endedSeptember 30, 2019 , as a result of a decrease in general administrative expense of approximately$0.3 million , but offset with a slight increase in selling expense of$0.1 million . The Company incurred more marketing expense in fiscal 2020 to promote the sales inYangzhou Palace project, which resulted higher selling expense in last year. The$0.3 million decrease in general and administrative expense was due to less consulting and professional fee incurred for the year endedSeptember 30, 2020 . For the years ended September 30, 2020 2019 General and administrative expenses$ 2,324,057 $ 2,661,578 Selling expenses 580,639 494,646 Total Operating expenses$ 2,904,696 $ 3,156,224
Percentage of Revenue before sales tax 22.4 %
7.9 % Interest expense, net
Net interest expense was approximately
Other income, net
For the year endedSeptember 30, 2020 , the Company had net other income of$1.4 million due to the fact that the Company disposed certain real estate properties in the existing real estate property completed and under-development to suppliers with settlement of their related payables. For the year endedSeptember 30, 2019 , the Company incurred net other expense of$0.3 million for certain non-operating related expenditures. Income taxesU.S. Taxes China HGS is aFlorida corporation. However, all of our operations are conducted solely by our subsidiaries in the PRC. No income is earned inthe United States and we do not repatriate any earnings outside the PRC. As a result, we did not generate anyU.S. taxable income for the years endedSeptember 30, 2020 and 2019.
For the year ended
RecentU.S. federal tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the "U.S. Tax Reform"), was signed into law onDecember 22, 2017 . TheU.S. Tax Reform significantly modified theU.S. Internal Revenue Code by, among other things, reducing the statutoryU.S. federal corporate income tax rate from 35% to 21% for taxable years beginning afterDecember 31, 2017 ; limiting and/or eliminating many business deductions; migrating theU.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 eliminatingU.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. TheU.S. Tax Reform also includes provisions for a new tax on GILTI effective for tax years of foreign corporations beginning afterDecember 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 endedSeptember 30, 2018 , the Company recognized a one-time transition toll tax of approximately$2.3 million that represented management's estimate of the amount ofU.S. corporate income tax based on the deemed repatriation tothe United States of the Company's share of previously deferred earnings of certain non-U.S. subsidiaries and VIE of the Company mandated by theU.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 ofSeptember 30, 2020 , the Company provided an additional$1.0 million provision due to delinquentU.S. tax return fillings. 32 PRC Taxes Our Company is governed by the Enterprise Income Tax Law ofthe 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 years endedSeptember 30, 2020 and 2019, 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 approximately net income of$1.0 million in net income for the year endedSeptember 30, 2020 , representing a decrease of 73.5% or approximately$2.7 million as compared to net income of approximately$3.7 million for the year endedSeptember 30, 2019 . The decrease in net income was mainly due to less GFA sold during fiscal 2020.
Other comprehensive income
We operate primarily in the PRC and the functional currency of our operating
subsidiary is the Chinese Renminbi ("RMB"). 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 USD at the rates used in
translation.
Translation adjustments amounted to approximately $8.6 million and negative $6.7
million for the years ended September 30, 2020 and 2019, respectively. The
balance sheet amounts with the exception of equity at September 30, 2020 were
translated at 6.7896 RMB to 1.00 USD as compared to 7.1477 RMB to 1.00 USD at
September 30, 2019 . The equity accounts were stated at their historical rate.
The average translation rates applied to the income statements accounts for the
years ended September 30, 2020 and 2019 were 7.0056 RMB to 1.00 USD and 6.8753
RMB to 1.00 USD , 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 restriction on home purchase, increase the down-payment requirement against speculative buying, development of low-cost rental housing property to help low-income groups while reducing the demand in the commercial housing market, increase the real estate property tax to discourage speculation, and control of the land supply and slowdown the construction land auction process, etc. In addition, inDecember 2019 , a novel strain of coronavirus (COVID-19) surfaced. COVID-19 has spread rapidly throughoutChina 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 earlyMarch 2020 , limited support from the Company's employees, delayed access to construction raw material supplies, reduced customer visit to the Company's sales office, and inability to promote the real estate property sales to customers on a timely basis, our revenue decreased by approximately$27.0 million in fiscal 2020 as compared to fiscal 2019 due to decreased sales volume of both residential and commercial properties developed by us. Based on assessment of current economic environment, customer demand and sales trend, and the negative impact from COVID-19 outbreak and spread, we believe that the real estate market downturn will continue to be uncertain in the coming periods. As a result, the developing period of real estate properties and our operating cycle has been extended and we may not be able to liquidate our large balance of completed real estate property within a short term as we originally expected. In addition, as ofSeptember 30, 2020 , we had large construction loans payable balance of approximately$109.9 million and large accounts payable balance of approximately$25.4 million to be paid to subcontractors within one year. The above mentioned facts raised substantial doubt about the Company's ability to continue as a going concern from the date of this filing. 33
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 ofSeptember 30, 2020 , our total cash and restricted cash balance decreased to approximately$3.9 million as compared to approximately$4.2 million as ofSeptember 30, 2019 . With respect to capital funding requirements, the Company budgeted our capital spending based on ongoing assessments of needs to maintain adequate cash. As ofSeptember 30, 2020 , we had approximately$109.0 million completed residential apartments and commercial units available for sale to potential buyers when needed. Although we reported approximately$25.4 million accounts payable as ofSeptember 30, 2020 , due to the long term relationship with our construction suppliers and subcontractors, we were able to effectively manage cash spending on construction and negotiate with them to adjust the payment schedule based on our cash on hand. In addition, most of our existing real estate development projects related to old town renovation which are supported by local government. As ofSeptember 30, 2020 , we reported approximately$109.9 million construction loan borrowed from financial institutions controlled by local government and such loans can only be used on old town renovation related project development. We expect that we will be able to renew all of the existing construction loans upon their maturity and borrow additional new loans from local financial institutions when necessary, based on our past experience and the Company's good credit history. Also, the Company's cash flows from pre-sales and current sales should provide financial support for our current developments and operations. As ofSeptember 30, 2020 , we had approximately$19.4 million customer deposits representing cash advance from buyers for pre-sales of our residential units and we believe such cash advance can be used to fund our ongoing construction projects whenever necessary. For the year endedSeptember 30, 2020 , we had five large ongoing construction projects, which were under preliminary development stage due to delayed inspection and acceptance of the development plans by local government. InJune 2020 , we completed the residence relocation surrounding Liangzhou Road related projects and expects to construct the Liangzhou Road related projects starting from the fourth quarter of fiscal year 2020. For other four projects, we expect we will be able to obtain government's approval of the development plans on these projects in the coming fiscal year and start the pre-sale of the real estate property to generate cash when certain property development milestones have been achieved. For the years endedSeptember 30, 2020 and 2019, the Company had positive cash flow from operating activities. In addition, our principal shareholder, Mr.Xiaojun Zhu has been providing and has committed to continue to provide his personal funds to support the Company's operation whenever necessary. Cash Flow
Year ended
Comparison of cash flows results for the fiscal year ended
For the years ended September 30,
2020 2019 VarianceNet cash provided by operating activities$ 2,217,264 $ 8,937,581 $ (6,720,317 ) Net cash used in provided by financing activities$ (2,415,924 ) $ (11,337,359 ) $ 8,921,435 Effect of changes of foreign exchange rate on cash$ (135,921 ) $ (173,682 ) $ 37,761 Net increase (decrease) in cash$ (334,581 )
$ (2,573,460 ) $ 2,238,879 34 Operating activities Net cash provided by operating activities during fiscal 2020 was approximately$2.2 million , consisting of net income of approximately$1.0 million , noncash adjustments of approximately$2.7 million impairment on the real estate property completed and deficit of$5.0 million due to gain on settlement of certain payables with suppliers and settlements on shareholder loans and net changes in our operating assets and liabilities, which mainly included a decrease in real estate property completed of approximately$9.4 million due to the sales of real estate properties, a decrease of security deposit with government of$6.3 million due to the fact that the Company started the construction of Liangzhou road and affiliated projects inSeptember 2020 and the local government refunded such deposits to support the Company's working capital and an increase of$1.3 million in customers deposit received from buyers, offset by the continuous spending on real estate property under development of$7.5 million , a reduction of accounts payable of$1.5 million due to payments to suppliers based on development progress and a reduction of tax payable of$2.6 million . Net cash provided by operating activities during fiscal 2019 was approximately$8.9 million , consisting of net income of approximately$3.7 million , noncash adjustments of approximately$1.4 million and net changes in our operating assets and liabilities, which mainly included an increase in real estate property completed of approximately$45.8 million and a decrease in real estate property under development of approximately$51.0 million due to the completion ofYangzhou Palace real estate project during the year and reclassification from real estate property under development to real estate property completed, an increase of accounts payable of$8.0 million due to continuous spending on the real estate under developments, an increase of$1.2 million in tax payable, offset by a reduction of customer deposits of$4.3 million and reduction of contract balance of$3.9 million due to recognition of revenue. Financing activities Net cash used in financing activities was approximately$4.6 million for fiscal 2020, mainly representing the repayment of construction loan of$2.4 million during fiscal 2020 and a settlement of shareholder loan of$2.1 million .
Net cash used in financing activities was approximately
Off-Balance Sheet Arrangements
We do not have any 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 this six to twelve months' period, the mortgage banks require the Company to maintain, as restricted cash, 5% to 10% of the mortgage proceeds as security for the Company's obligations under such guarantees. If a purchaser defaults on its payment obligations, the mortgage bank may deduct the delinquent mortgage payment from the security deposit and require the Company to pay the excess amount if the delinquent mortgage payments exceed the security deposit. If the delinquent mortgage payments exceed the security deposit, the banks may require us to pay the excess amount. If multiple purchasers default on their payment obligations at around the same time, we will be required to make significant payments to the banks to satisfy our guarantee obligations. If we are unable to resell the properties underlying defaulted mortgages on a timely basis or at prices higher than the amounts of our guarantees and related expenses, we will suffer financial losses. The Company has made necessary reserves in its restricted cash account to cover any potential mortgage defaults as required by the mortgage lenders. For the years endedSeptember 30, 2020 and 2019, the Company has not experienced any delinquent mortgage loans and has not experienced any losses related to this guarantee. As ofSeptember 30, 2020 and 2019, our outstanding guarantees in respect of our customers' mortgage loans amounted to approximately$68 million and$78 million , respectively. As ofSeptember 30, 2020 and 2019, the amount of security deposits provided for these guarantees was approximately$3.4 million and$3.9 million respectively and the Company believes that such reserves are sufficient. 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.
35
Critical Accounting Policies and Management Estimates
Revenue recognition
The Company adopted FASB ASC Topic 606 Revenue from Contracts with Customers
("ASC 606") on October 1, 2018 using the modified retrospective approach. Under
ASC 606, Revenue from Contracts with Customers, revenue is recognized in
accordance with the transfer of goods and services to customers at an amount
that reflects the consideration that the Company expects to be entitled to for
those goods and services. The Company determines revenue recognition through the
following steps:
· identification of the contract, or contracts, with a customer;
· identification of the performance obligations in the contract;
· determination of the transaction price, including the constraint on variable
consideration;
· allocation of the transaction price to the performance obligations in the
contract; and
· recognition of revenue when (or as) the Group satisfy a performance obligation.
Most of the Company's revenue is derived from real estate sales of condominiums
and commercial property in the PRC. The majority of the Company's contracts
contain a single performance obligation involving significant real estate
development activities that are performed together to deliver a real estate
property to customers. Revenues arising from real estate sales are recognized
when or as the control of the asset is transferred to the customer. The control
of the asset may transfer over time or at a point in time. For the sales of
individual condominium units in a real estate development project, the Company
has an enforceable right to payment for performance completed to date, revenue
is recognized over time by measuring the progress towards complete satisfaction
of that performance obligation ("percentage completion method"). Otherwise,
revenue is recognized at a point in time when the customer obtains controlof the asset.
Under percentage completion method, revenue and profit from the sales of long term real estate development properties is recognized by the percentage of completion method on the sale of individual units when all the following criteria are met:
a. Construction is beyond a preliminary stage.
b. The buyer is committed to the extent of being unable to require a refund
except for non-delivery of the unit or interest.
c. Sufficient units have already been sold to assure that the entire property
will not revert to rental property.
d. Sales prices are collectible.
e. Aggregate sales proceeds and costs can be reasonably estimated.
If any of the above criteria is not met, proceeds shall be accounted for as deposits until the criteria are met.
Under the percentage of completion method, revenues from individual real estate condominium units sold under development and related costs are recognized over the course of the construction period, based on the completion progress of a project. The progress towards complete satisfaction of the performance obligation is measured based on the Company's efforts or inputs to the satisfaction of the performance obligation, by reference to the contract costs incurred up to the end of reporting period as a percentage of total estimated costs for each contract. In relation to any project, revenue is determined by calculating the ratio of incurred costs, including land use rights costs and construction costs, to total estimated costs and applying that ratio to the contracted sales amounts. Cost of sales is recognized by determining the ratio of contracted sales during the period to total estimated sales value, and applying that ratio to the incurred costs. Current period amounts are calculated based on the difference between the life-to-date project totals and the previously recognized amounts. Any changes in significant judgments and/or estimates used in determining construction and development revenue could significantly change the timing or amount of construction and development revenue recognized. Changes in total estimated project costs or losses, if any, are recognized in the period in
which they are determined. Revenue from the sales of completed real estate condominium units is recognized at the time of the closing of an individual unit sale. This occurs when the customer obtains the physical possession, the legal title, or the significant risks and rewards of ownership of the assets and the Company has present right to payment and the collection of the consideration is probable. For municipal road construction projects, fees are generally recognized at the time of the projects are completed. 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 deposit 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. Contract assets and liabilities are generally classified as current based on our contract operating cycle. 36
The Company provides "mortgage loan guarantees" only with respect to buyers who make down-payments of 20%-50% of the total purchase price of the property. The period of the mortgage loan guarantee begins on the date the bank approves the buyer's mortgage and we receive the loan proceeds in our bank account and ends on the date the "Certificate of Ownership" evidencing that title to the property has been transferred to the buyer. The procedures to obtain the Certificate of Ownership take six to twelve months (the "Mortgage Loan Guarantee Period"). If, after investigation of the buyer's income and other relevant factors, the bank decides not to grant the mortgage loan, our mortgage-loan based sales contract terminates and there will be no guarantee obligation. If, during the Mortgage Loan Guarantee Period, the buyer defaults on his or her monthly mortgage payment for three consecutive months, we are required to return the loan proceeds back to the bank, although we have the right to keep the customer's deposit and resell the property to a third party. Once the Certificate of Property has been issued by the relevant government authority, our loan guarantee terminates. If the buyer then defaults on his or her mortgage loan, the bank has the right to take the property back and sell it and use the proceeds to pay off the loan. The Company is not liable for any shortfall that the bank may incur in this event. To date, no buyer has defaulted on his or her mortgage payments during the Mortgage Loan Guarantee Period and the Company has not returned any loan proceeds pursuant to its mortgage loan guarantees. Use of estimates The preparation of financial statements in conformity withU.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes, and disclosure of contingent liabilities at the date of the consolidated financial statements. Estimates are used for, but not limited to, the assumptions and estimates used by management in recognizing development revenue under the percentage of completion method, the selection of the useful lives of property and equipment, provision necessary for contingent liabilities, revenue recognition, taxes and budgeted costs. Management believes that the estimates utilized in preparing its consolidated financial statements are reasonable and prudent. Actual results could differ from these estimates.
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 fair value. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to be generated by the assets. The Company reviewed all of its real estate projects for future losses and impairment by comparing the estimated future undiscounted cash flows for each project to the carrying value of such project. For the years endedSeptember 30, 2020 and 2019, the Company recognized$2,703,031 and nil impairment for real estate property completed, respectively. 37 Capitalization of Interest Interest incurred during and directly related to real estate development projects is capitalized to the related real estate property under development during the active development period, which generally commences when borrowings are used to acquire real estate assets and ends when the properties are substantially complete or the property becomes inactive. Interest is capitalized based on the interest rate applicable to specific borrowings or the weighted average of the rates applicable to other borrowings during the period. Interest capitalized to real estate property under development is recorded as a component of cost of real estate sales when related units are sold. All other interest is expensed as incurred.
© Edgar Online, source
