UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2019

 

¨       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from_______ to ________

 

Commission File Number: 001-34864

 

CHINA HGS REAL ESTATE, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Florida   33-0961490
(State or Other Jurisdiction of Incorporation)   (I.R.S. Employer Identification Number)

 

6 Xinghan Road, 19th Floor, Hanzhong City

Shaanxi Province, PRC 723000

(Address of Principal Executive Offices, Zip Code)

 

+(86) 091 - 62622612

(Registrant’s Telephone Number, including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class:   Trading Symbol(s)   Name of each exchange on which registered:
Common Stock, $0.001 par value   HGSH   The NASDAQ Capital Market

  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes x  No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨   Accelerated filer ¨
Non-accelerated filer x   Smaller reporting company x
    Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨  No x

 

The number of shares outstanding of each of the issuer’s classes of common equity, as of August 14, 2019 is as follows:

 

Class of Securities   Shares Outstanding
Common Stock, $0.001 par value   45,050,000

 

 

 

 

 

TABLE OF CONTENTS

  

      Page
PART I  FINANCIAL INFORMATION  1
       
Item 1.  Unaudited Interim Financial Statements  1
   Condensed Consolidated Balance Sheets at June 30, 2019 and September 30, 2018  1
   Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended June 30, 2019 and 2018  2
   Condensed Consolidated Statements of Stockholders’ Equity for the nine months ended June 30, 2019 and 2018  3
   Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2019 and 2018  4
   Notes to Condensed Consolidated Financial Statements  5-21
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations  22
Item 3.  Quantitative and Qualitative Disclosures about Market Risk  37
Item 4.  Controls and Procedures  38
       
PART II  OTHER INFORMATION  39
       
Item 1.  Legal Proceedings  39
Item 1A.  Risk Factors   
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds  39
Item 3.  Defaults upon Senior Securities  39
Item 4.  Mine Safety Disclosures  39
Item 5.  Other Information  39
Item 6  Exhibits  39
   Signatures  40

 

 

 

 

PART I: FINANCIAL INFORMATION

 

ITEM 1. INTERIM FINANCIAL STATEMENTS

  

CHINA HGS REAL ESTATE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

  

   June 30,   September 30, 
   2019   2018 
ASSETS          
Current assets:          
Cash  $538,666   $3,267,020 
Restricted cash   4,041,211    3,508,557 
Contract receivables   10,570,966    12,582,965 
Real estate property development completed   115,938,257    58,999,178 
Real estate property under development   -    60,128,554 
Other current assets   1,592,094    1,408,826 
           
Total current assets   132,681,194    139,895,100 
           
Property, plant and equipment, net   658,953    718,366 
Real estate property development completed, net of current portion   1,218,182    1,217,650 
Security deposits   8,300,408    8,296,782 
Real estate property under development, net of current portion   217,674,575    215,431,915 
Due from local government for real estate property development completed   2,838,105    2,836,865 
           
Total Assets  $363,371,417   $368,396,678 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities:          
Construction loans  $80,517,116   $55,610,803 
Accounts payables   31,968,713    20,507,128 
Other payables   5,477,664    4,894,774 
Construction deposits   1,888,942    1,879,570 
Contract liabilities   1,864,978    5,844,189 
Customer deposits   19,071,273    20,234,072 
Shareholder loans   2,142,255    2,142,110 
Accrued expenses   2,994,701    3,006,150 
Taxes  payable   13,908,342    15,492,902 
           
Total current liabilities   159,833,984    129,611,698 
           
Deferred tax liabilities   2,441,642    2,068,257 
Tax payable - long term   4,962,946    4,960,779 
Customer deposits, net of current portion   1,452,294    1,914,677 
Construction loans, less current portion   30,678,227    66,885,378 
Construction deposits, net of current portion   1,278,611    1,278,053 
           
Total liabilities   200,647,704    206,718,842 
           
Commitments and Contingencies          
Stockholders' equity          
Common stock, $0.001 par value, 100,000,000 shares authorized, 45,050,000 shares issued and outstanding June 30, 2019 and September 30, 2018   45,050    45,050 
Additional paid-in capital   129,907,805    129,907,805 
Statutory surplus   9,925,794    9,925,794 
Retained earnings   31,781,976    30,803,052 
Accumulated other comprehensive deficit   (8,936,912)   (9,003,865)
Total stockholders' equity   162,723,713    161,677,836 
           
Total Liabilities and Stockholders' Equity  $363,371,417   $368,396,678 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

1

 

 

CHINA HGS REAL ESTATE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

  

   Three months ended June 30,   Nine months ended June 30, 
   2019   2018   2019   2018 
Real estate sales  $8,156,204   $14,551,834   $25,260,556   $50,905,772 
Less: Sales tax   (283,809)   (63,611)   (788,766)   (153,891)
Cost of real estate sales   (7,091,672)   (9,183,145)   (20,571,449)   (39,302,376)
Gross profit   780,723    5,305,078    3,900,341    11,449,505 
Operating expenses                    
Selling and distribution expenses   85,863    153,563    360,763    655,898 
General and administrative expenses   467,159    523,055    1,721,778    1,535,262 
Total operating expenses   553,022    676,618    2,082,541    2,191,160 
Operating income   227,701    4,628,460    1,817,800    9,258,345 
Interest expense, net   (11,307)   (130,166)   (152,149)   (384,851)
Other expense   (9,982)   (4,943)   (312,145)   (4,943)
Income before income taxes   206,412    4,493,351    1,353,506    8,868,551 
Provision for income taxes   53,243    1,113,422    374,582    2,244,180 
Net income   153,169    3,379,929    978,924    6,624,371 
Other Comprehensive income (loss)                    
Foreign currency translation adjustment   (3,837,762)   (9,348,988)   66,953    724,475 
Comprehensive income (loss)  $(3,684,593)  $(5,969,059)  $1,045,877   $7,348,846 
Basic and diluted income per common share                    
Basic and diluted  $0.00   $0.08   $0.02   $0.15 
Weighted average common shares outstanding                    
Basic and diluted   45,050,000    45,050,000    45,050,000    45,050,000 

  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

  

2

 

 

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, 2017   45,050,000   $45,050   $129,853,172   $9,142,899   $26,343,030   $(3,494,785)  $161,889,366 
Stock-based Compensation   -    -    44,700    -    -    -    44,700 
Net income for the period   -    -    -    -    6,624,371    -    6,624,371 
Foreign currency translation adjustments   -    -    -    -    -    724,475    724,475 
Balance at June 30, 2018   45,050,000   $45,050   $129,897,872   $9,142,899   $32,967,401   $(2,770,310)  $169,282,912 
                                    
Balance at September 30, 2018   45,050,000   $45,050   $129,907,805   $9,925,794   $30,803,052   $(9,003,865)  $161,677,836 
Net income for the period   -    -              978,924         978,924 
Foreign currency translation adjustments   -    -                   66,953    66,953 
Balance at June 30, 2019   45,050,000   $45,050   $129,907,805   $9,925,794   $31,781,976   $(8,936,912)  $162,723,713 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

3

 

 

CHINA HGS REAL ESTATE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Nine  months ended June 30, 
   2019   2018 
Cash flows from operating activities          
Net income  $978,924   $6,624,371 
Adjustments to reconcile net income to net cash provided by operating activities:          
Deferred tax provision   374,582    1,334,056 
Depreciation   60,065    437,241 
Stock based compensation   -    44,700 
Changes in assets and liabilities:          
Advances to vendors   -    (211,246)
Contract receivables   2,028,876    (797,870)
Real estate property development completed   (57,234,276)   18,698,758 
Real estate property under development   58,333,457    (12,598,796)
Other current assets   (183,682)   70,984 
Accounts payables   11,517,215    (6,568,036)
Other payables   584,025    852,178 
Contract liabilities   (4,004,221)   1,261,805 
Customer deposits   (1,644,082)   (2,693,740)
Construction deposits   8,599    (32,928)
Accrued expenses   (12,911)   (182,051)
Taxes payable   (1,599,226)   (1,465,169)
Net cash provided by operating activities   9,207,345    4,774,257 
           
Cash flow from investing activities          
Purchases of fixed assets   -    (371,640)
Net cash used in investing activities   -    (371,640)
           
Cash flow from financing activities          
Net proceeds (repayments) of shareholder loans   -    (156,679)
Net proceeds (repayments) of bank loans   (11,418,405)   (2,796,115)
Net cash used in financing activities   (11,418,405)   (2,952,794)
           
Effect of changes of foreign exchange rate on cash and restricted cash   15,360    (11,621)
Net increase (decrease) in cash and restricted cash   (2,195,700)   1,438,202 
Cash and restricted cash , beginning of period   6,775,577    4,716,604 
Cash and restricted cash, end of period  $4,579,877   $6,154,806 
Supplemental disclosures of cash flow information:          
Interest paid  $5,439,715   $4,821,443 
Income taxes paid  $287,416   $979,093 
           
Reconciliation to amounts on unaudited condensed consolidated balance sheets:          
Cash  $538,666   $2,723,332 
Restricted  $4,041,211   $3,431,474 
Total cash and restricted cash  $4,579,877   $6,154,806 

  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

4

 

CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

 

Organization and basis of presentation

 

China HGS Real Estate, Inc. (“China HGS” or the “Company” or “we”, “us”, “our”), through its subsidiaries and variable interest entity (“VIE”), engages in real estate development, and the construction and sales of residential apartments, parking space and commercial properties in Tier 3 and Tier 4 cities and counties in China.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results For the three and nine months ended June 30, 2019 and 2018 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, 2018 filed with the SEC on January 10, 2019.

 

Liquidity

 

As of June 30, 2019, the Company had an approximately $27.2 million negative working capital and total cash and restricted cash balance decreased to approximately $4.8 million as of June 30, 2019 as compared to approximately $6.8 million as of September 30, 2018. With respect to capital funding requirements, the Company budgeted our capital spending based on ongoing assessments of needs to maintain adequate cash. Due to the long term relationship with our construction suppliers, we were able to effectively manage cash spending on construction, meantime, we are able to obtain additional funding support from local banks and financial institutions. Also, the Company’s cash flows from pre-sales and current sales should provide financial support for our current developments and operations. For the both nine months ended June 30, 2019 and 2018, the Company had positive cash flow from operating. In addition, our principal shareholder, Mr. Xiaojun Zhu has been providing and will continue to provide his personal funds, if necessary, to support the Company on an as needed basis. The Company believes it has sufficient working capital for the next twelve months. In order to fully implement our business plan and sustain continued growth, we may also need to raise capital from outside investors. Our expectation, therefore, is that we will seek to access the capital markets in both the U.S. and China to obtain the funds as needed. At the present time, however, we do not have commitments of funds from any third party.

 

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of consolidation

 

The unaudited condensed consolidated financial statements include the financial statements of China HGS Real Estate Inc. (the “Company” or “China HGS”), China HGS Investment Inc. (“HGS Investment”), Shaanxi HGS Management and Consulting Co., Ltd. (“Shaanxi HGS”) and its variable interest entity (“VIE”), Shaanxi Guangsha Investment and Development Group Co., Ltd. (“Guangsha”). All inter-company transactions and balances between the Company and its subsidiaries have been eliminated upon consolidation.

 

Use of estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes, and disclosure of contingent liabilities at the date of the consolidated financial statements. Estimates are used for, but not limited to, the assumptions and estimates used by management in recognizing development revenue under the percentage of completion method, the selection of the useful lives of property and equipment, provision necessary for contingent liabilities, revenue recognition, taxes 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.

 

5

CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Fair value of financial instruments

 

The Company follows the provisions of Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures. It clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

 

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

 

Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.

 

Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions or what assumptions the market participants would use in pricing the asset or liability based on the best available information.

 

The carrying amounts reported in the accompanying condensed consolidated balance sheets for cash, restricted cash and all other current assets, security deposits for land use rights, loans and all current liabilities approximate their fair value based on the short-term maturity of these instruments. The fair value of the long term customer, construction and security deposits approximate their carrying amounts because the deposits are received in cash. It was impractical to estimate the fair value of the amount due from the local government and the long term other loans payable.

 

Revenue recognition

 

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 obligations 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. Otherwise, revenue is recognized at a point in time when the customer obtains control of the asset.

 

Under percentage completion method, revenue and profit from the sales of long term real estate development properties is recognized by the percentage of completion method on the sale of individual units when all the following criteria are met:

 

  a. Construction is beyond a preliminary stage.

 

  b. The buyer is committed to the extent of being unable to require a refund except for non-delivery of the unit or interest.

 

  c. Sufficient units have already been sold to assure that the entire property will not revert to rental property.

 

  d. Sales prices are collectible.

 

  e. Aggregate sales proceeds and costs can be reasonably estimated.

 

If any of the above criteria is not met, proceeds shall be accounted for as deposits until the criteria are met.

 

Under the percentage of completion method, revenues from individual real estate condominium units sold under development and related costs are recognized over the course of the construction period, based on the completion progress of a project. The progress towards complete satisfaction of the performance obligation is measured based on the Company’s efforts or inputs to the satisfaction of the performance obligation, by reference to the contract costs incurred up to the end of reporting period as a percentage of total estimated costs for each contract. In relation to any project, revenue is determined by calculating the ratio of incurred costs, including land use rights costs and construction costs, to total estimated costs and applying that ratio to the contracted sales amounts. Cost of sales is recognized by determining the ratio of contracted sales during the period to total estimated sales value, and applying that ratio to the incurred costs. Current period amounts are calculated based on the difference between the life-to-date project totals and the previously recognized amounts.

 

Any changes in significant judgments and/or estimates used in determining construction and development revenue could significantly change the timing or amount of construction and development revenue recognized. Changes in total estimated project costs or losses, if any, are recognized in the period in which they are determined.

 

6

CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Revenue recognition (continued)

 

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.

 

Disaggregation of Revenues

 

Disaggregated revenues was as follows:

 

   For the three months ended
June 30,
 
   2019   2018 
Revenue recognized for completed condominium real estate projects  $149,448   $6,003,371 
Revenue recognized for condominium real estate projects under development   8,006,756    8,548,463 
Total  $8,156,204   $14,551,834 

 

     

 

   For the nine months ended
June 30,
 
   2019   2018 
Revenue recognized for completed condominium real estate projects  $1,126,013    24,965,928 
Revenue recognized for condominium real estate projects under development   24,134,543    25,939,844 
Total  $25,260,556    50,905,772 

 

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.

 

The following table presents the Company’s contract balances As of June 30, 2019 and September 30, 2018.

 

   As of
June 30,
   As of
September 30,
 
   2019   2018 
Contract assets          
Cost and earnings in excess of billings  $10,570,966   $12,582,965 
           
Contract liabilities          
Billings in excess of cost and earnings  $1,864,978   $5,844,189 

 

7

CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Revenue recognition (continued)

 

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.

 

Foreign currency translation

 

The Company’s financial information is presented in U.S. dollars. The functional currency of the Company’s operating subsidiaries is Renminbi (“RMB”), the currency of the PRC. The financial statements of the Company have been translated into U.S. dollars in accordance with ASC 830-30 “Translation of Financial Statements”. The financial information is first prepared in RMB and then is translated into U.S. dollars at year-end exchange rates as to assets and liabilities and average exchange rates as to revenue and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income in stockholders’ equity.

 

   For nine months
ended June 30,
   September 30, 
   2019   2018   2018 
Period end RMB : USD exchange rate   6.8650    6.6171    6.8680 
Period average RMB : USD exchange rate   6.8265    6.4463    6.5368 

 

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. As of August 8, 2019, the foreign exchange rate between U.S. dollars to RMB was 7.0039.

 

Cash

 

Cash includes cash on hand and demand deposits in accounts maintained with commercial banks within the PRC. The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. The Company maintains bank accounts in the PRC. Cash balances in bank accounts in PRC are not insured by the Federal Deposit Insurance Corporation or other programs.

 

Restricted Cash

 

The restricted cash is required by the banks as collateral for mortgage loans given to the home buyers before obtaining the certificates of ownership of the properties as collateral. In order to provide the banks with the certificates of ownership, the Company is required to complete certain procedures with the Chinese government, which normally takes six to twelve months. Because the banks provide the loan proceeds to the Company without obtaining certificates of ownership as loan collateral during this six to twelve months’ period, the mortgage banks require the Company to maintain, as restricted cash, 5% to 10% of the mortgage proceeds as security for the Company’s obligations under such guarantees. The restricted cash is released by the banks once they receive the certificates of ownership. These deposits are not covered by insurance. The Company has not experienced any losses in such accounts and management believes its restricted cash account is not exposed to any risks.

 

8

CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Advances to vendors

 

Advances to vendors consist of balances paid to contractors and vendors for services and materials that have not been provided or received and generally relate to the development and construction of residential and commercial units in the PRC. Advances to vendors are reviewed periodically to determine whether their carrying value has become impaired. Historically, the Company has not experienced any losses as a result of these advances.

 

Security deposits for land use rights

 

Security deposits for land use rights consist of the deposit held by the PRC government for the purchase of land use rights and the deposit held by an unrelated party to transfer its land use rights to the Company. The deposits will be reclassified to real estate property under development upon the transfers of legal title.

 

Real estate property development completed and under development

 

Real estate property consists of finished residential unit sites, commercial offices and residential unit sites under development. The Company leases the land for the residential unit sites under land use right leases with various terms from the PRC government. The cost of land use rights is included in the development cost and allocated to each project. Real estate property development completed and real estate property under development are stated at the lower of cost or fair value.

 

Expenditures for land development, including cost of land use rights, deed tax, pre-development costs, and engineering costs, exclusive of depreciation, are capitalized and allocated to development projects by the specific identification method. Costs are allocated to specific units within a project based on the ratio of the sales area of units to the estimated total sales area of the project (or phase of the project) multiplied by the total cost of the project (or phase of the project).

 

Cost of amenities transferred to buyers is allocated to specific units as a component of total construction cost. The amenity cost includes landscaping, road paving, etc. Once the projects are completed, the amenities are under control of the property management companies.

 

Real estate property development completed and under development

 

Real estate property development completed and real estate property under development are reclassified on the balance sheet into current and non-current portions based on the estimated date of construction completion and sales. The real estate property development completed classification is based on the estimated date that each property is expected to be sold within the Company’s normal operating cycle of the business and the Company’s sales plan. Real estate property development completed is classified as a current asset if the property is expected to be sold within the normal operating cycle of the business. Otherwise, it is classified as a non-current asset. The majority of real estate projects the Company has completed in the past were multi-layer or sub-high-rise real estate projects. The Company considers its normal operating cycle is 12 months.

 

Real estate property development completed and under development are subject to valuation adjustments when the carrying amount exceeds fair value. An impairment loss is recognized only if the carrying amount of the assets is not recoverable and exceeds fair value. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to be generated by the assets. The Company reviewed all of its real estate projects for future losses and impairment by comparing the estimated future undiscounted cash flows for each project to the carrying value of such project. For the three and nine months ended June 30, 2019 and 2018, the Company did not recognize any impairment for real estate property under development or completed.

9

CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Capitalization of Interest

 

Interest incurred during and directly related to real estate development projects is capitalized to the related real estate property under development during the active development period, which generally commences when borrowings are used to acquire real estate assets and ends when the properties are substantially complete or the property becomes inactive. Interest is capitalized based on the interest rate applicable to specific borrowings or the weighted average of the rates applicable to other borrowings during the period. Interest capitalized to real estate property under development is recorded as a component of cost of real estate sales when related units are sold. All other interest is expensed as incurred. For the three and nine months ended June 30, 2019, the total interest capitalized in the real estate property development was $1,857,424 and $5,403,867, respectively. For the three and nine months ended June 30, 2018, the total interest capitalized in the real estate property development was $1,701,643 and $4,501,913, 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 estimated expected undiscounted future cash flows, the Company measures the amount of impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally determined by using the asset's expected future discounted cash flows or market value. The Company estimates fair value of the assets based on certain assumptions such as budgets, internal projections, and other available information as considered necessary. There is no impairment of long-lived assets during the three and nine months ended June 30, 2019 and 2018.

 

Customer deposits

 

Customer deposits consist of amounts received from customers relating to the sale of residential units in the PRC. In the PRC, customers will generally obtain permanent financing for the purchase of their residential unit prior to the completion of the project. The lending institution will provide the funding to the Company upon the completion of the financing rather than the completion of the project. The Company receives these funds and recognizes them as a liability until the revenue can be recognized. 

 

Property warranty

 

The Company provides its customers with warranties which cover major defects of building structure and certain fittings and facilities of properties sold. The warranty period varies from two years to five years, depending on different property components the warranty covers. The Company continually estimates potential costs for materials and labor with regard to warranty-type claims expected to be incurred subsequent to the delivery of a property. Reserves are determined based on historical data and trends with respect to similar property types and geographical areas. The Company continually monitors the warranty reserve and makes adjustments to its pre-existing warranties, if any, in order to reflect changes in trends and historical data as information becomes available. The Company may seek further recourse against its contractors or any related third parties if it can be proved that the faults are caused by them. In addition, the Company also withholds up to 2% of the contract cost from sub-contractors for periods of two to five years. These amounts are included in construction deposits, and are only paid to the extent that there has been no warranty claim against the Company relating to the work performed or materials supplied by the subcontractors. For the three and nine months ended June 30, 2019 and 2018, the Company had not recognized any warranty costs in excess of the amount retained from subcontractors and therefore, no warranty reserve is considered necessary at the balance sheet dates.

10

CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

  

Construction Deposits


Construction deposits are the warranty deposits the real estate contractors provide to the Company upon signing the construction contracts. The Company can use such deposits to reimburse customers in the event of customer claims due to construction defects.  The remaining balance of the deposits are returned to the contractors when the terms of the after-sale property warranty expires, which normally occurs within two to five years after the date of the deposit.

 

Share-based compensation

 

Share-based payment transactions are measured based on the grant-date fair value of the equity instrument issued and recognized as compensation expense over the requisite service period, or vesting period.

 

Forfeitures to be estimated at the time of grant and revised, if necessary, in the subsequent period if actual forfeitures differ from initial estimates. Forfeiture rate is estimated based on historical and future expectation of employee turnover rate and are adjusted to reflect future change in circumstances and facts, if any. Share-based compensation expense is recorded net of estimated forfeitures such that expense was recorded only for those stock options and common stock awards that are expected to vest. 

 

Income taxes

 

Deferred tax assets and liabilities are for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

 

ASC 740-10-25 prescribes a more-likely-than-not threshold for consolidated financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. It also provides guidance on the recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, years open for tax examination, accounting for income taxes in interim periods and income tax disclosures. There are no material uncertain tax positions as of June 30, 2019 and September 30, 2018. 

 

The Company is a corporation organized under the laws of the State of Florida. However, all of the Company’s operations are conducted solely by its subsidiaries in the PRC. No income is earned in the United States and the management does not repatriate any earnings outside the PRC.  As a result, the Company did not generate any U.S. taxable income for the three and nine months ended June 30, 2019 and 2018. As of June 30, 2019, the Chinese entities’ income tax returns filed in China for the years ended December 31, 2018, 2017, 2016, 2015 and 2014 are subject to examination by the Chinese taxing authorities.

 

As of June 30, 2019, the tax years ended September 30, 2010 through September 30, 2018 for the Company’s PRC entities remain open for statutory examination by PRC tax authorities. The parent Company China HGS Real Estate Inc.’s both U.S. federal tax returns and Florida state tax returns are delinquent since 2009. Its tax years ended September 30, 2014 through September 30, 2018 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 June 30, 2019 and September 30, 2018, including an approximately $2.3 million provision on the deemed repatriation of undistributed foreign earnings and an additional $0.2 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.

 

11

CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

  

Land appreciation tax (“LAT”)

 

In accordance with the relevant taxation laws in the PRC, the Company is subject to LAT based on progressive rates ranging from 30% to 60% on the appreciation of land value, which is calculated as the proceeds of sales of properties less deductible expenditures including borrowing costs and all property development expenditures. LAT is exempted if the appreciation values do not exceed certain thresholds specified in the relevant tax laws.

 

The whole project must be completed before the LAT obligation can be assessed. Accordingly, the Company should record the liability and the total related expense at the completion of a project unless the tax authorities impose an assessment at an earlier date.  The methods to implement this tax law vary among different geographic areas. Hanzhong, where the project Mingzhu Garden, Nan Dajie and Central Plaza are located, implements this tax rule by requiring real estate companies prepay the LAT based upon customer deposits received. The tax rate in Hanzhong is 1%. Yang County, where the project Yangzhou Pearl Garden and Yangzhou Palace are located, requires a tax rate of 0.5%.

 

Comprehensive income (loss)

 

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 nine months ended June 30, 2019 and 2018 were net income and foreign currency translation adjustments.

 

Basic and diluted earnings per share

 

Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. 

 

12

CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

  

Concentration risk

 

The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC's economy. The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America. The Company's results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. All of the Company’s cash is maintained with state-owned banks within the People’s Republic of China of which no deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts

 

Recent Accounting Pronouncements

 

On October 31, 2018 the FASB issued new guidance (ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities) that expands the application of a specific private company accounting alternative related to VIEs and changes the guidance for determining whether a decision-making fee is a variable interest. The amendments in the ASU provide that indirect interests held through related parties under common control will be considered on a proportional basis when determining whether fees paid to decision makers and service providers are variable interests. Such indirect interests were previously treated the same as direct interests. The consideration of indirect interests on a proportional basis is consistent with how indirect interests held through related parties under common control are treated when determining if a reporting entity within a related party group is the primary beneficiary of a VIE. The new guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Retrospective adoption is required. Early adoption is permitted, including adoption in an interim period. The Company does not expect this new guidance to have a material impact on our financial position and results of operations.

 

Excepts as mentioned above, the Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the Company’s consolidated balance sheets, statements of income and comprehensive income (loss), stockholders’ equity and cash flow.

13

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 June 30, 2019 and September 30, 2018:

 

   Balance as of 
   June 30,
2019
   September 30,
2018
 
Development completed:          
Hanzhong City Mingzhu Garden Phase I  $655,555   $655,268 
Hanzhong City Mingzhu Garden Phase II   30,317,279    31,096,125 
Hanzhong City Nan Dajie (Mingzhu Xinju)   1,205,222    1,204,695 
Hanzhong City Oriental Pearl Garden   21,332,166    21,397,560 
Yang County Yangzhou Pearl Garden Phase I   1,674,083    1,673,351 
Yang County Yangzhou Pearl Garden Phase II   4,152,530    4,189,829 
Yang County Yangzhou Palace (a)   57,819,604    - 
Real estate property development completed   117,156,439    60,216,828 
Less:  Real estate property completed – short-term   115,938,257    58,999,178 
Real estate property completed – long-term  $1,218,182   $1,217,650 
Under development:          
Yang County Yangzhou Palace (a)  $-   $60,128,554 
Hanzhong City Shijin Project   7,055,751    7,052,669 
Hanzhong City Liangzhou Road and related projects (b)   149,704,134    135,011,975 
Hanzhong City Hanfeng Beiyuan East (c)   735,275    734,953 
Hanzhong City Beidajie   55,338,732    67,793,750 
Yang County East 2nd Ring Road (d)   4,840,683    4,838,568 
Real estate property under development   217,674,575    275,560,469 
Less:  Short-term portion   -    60,128,554 
Real estate property under development – long-term  $217,674,575   $215,431,915 

 

  (a) The Company recognized $6,987,371 and $19,561,666 of development cost in cost of real estate sales under the percentage of completion method for the three and nine months ended June 30, 2019 (2018-  $4,735,391 and $20,603,618), respectively. The construction of project was fully completed on June 30, 2019, as a result, the carrying value of the project was reclassified from real estate property under development to real estate property completed.

 

  (b)

In September 2013, the Company entered into an agreement (“Liangzhou Agreement”) with the Hanzhong local government on the Liangzhou Road reformation and expansion project (Liangzhou Road Project”). Pursuant to the agreement, the Company is contracted to reform and expand the Liangzhou Road, a commercial street in downtown Hanzhong City, with a total length of 2,080 meters and width of 30 meters and to resettle the existing residences in the Liangzhou road area. The government’s original road construction budget was approximately $33 million in accordance with the Liangzhou Agreement. The Company, in return, is being compensated by the local government to have an exclusive right on acquiring at least 394.5 Mu land use rights in a specified location of Hanzhong City. The Liangzhou Road Project’s road construction started at the end of 2013. In 2014, the original scope and budget on the Liangzhou road reformation and expansion project was extended, because the local government included more area and resettlement residences into the project, which resulted in additional investments from the Company. In return, the Company is authorized by the local government to develop and manage the commercial and residential properties surrounding the Liangzhou Road project. As of June 30, 2019, the main Liangzhou road construction is substantially completed and is expected to be approved by the local government later in fiscal 2019.

 

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 June 30, 2019, the actual costs incurred by the Company were $149,704,134 (September 30, 2018 - $135,011,975) 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.

 

14

CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 3. REAL ESTATE PROPERTY DEVELOPMENT COMPLETED AND UNDER DEVELOPMENT

 

  (c) In September 2012, the Company was approved by the Hanzhong local government to construct four municipal roads with a total length of approximately 1,192 meters. The project was deferred and then restarted during the quarter ended June 30, 2014. As of June 30, 2019, the local government was still in the process of assessing the budget for these projects.

 

  (d) The Company was engaged by the Yang County local government to construct the East 2nd Ring Road with a total length of 2.15 km. The local government is required to repay the Company’s project investment costs within 3 years with interest at the interest rate based on the commercial borrowing rate with the similar term published by China construction bank (June 30, 2019 and 2017 - 4.75%). The local government has approved a refund to the Company by reducing local surcharges or taxes otherwise required in the real estate development. The road construction was substantially completed As of June 30, 2019 and in process of government review and approval.

 

As of June 30, 2019 and September 30, 2018, land use rights included in real estate property under development totaled $7,052,076 and $14,749,085, respectively.

 

NOTE 4. CONSTRUCTION LOANS

 

    June 30,
2019
    September 30,
2018
 
Loan A (i)   $ 93,900,489     $ 96,472,714  
Loan B (ii)     -       8,736,168  
Loan C (iii)     17,294,854       17,287,299  
      111,195,343       122,496,181  
Less: current maturities of construction loans     80,517,116       55,610,803  
Construction loans – long-term portion   $ 30,678,227     $ 66,885,378  

 

15

CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 4. CONSTRUCTION LOANS (continued)

 

  (i) On June 26, 2015 and March 10, 2016, the Company signed phase I and Phase II agreements with Hanzhong Urban Construction Investment Development Co., Ltd, a state owned Company, to borrow up to $112,891,479 (RMB 775,000,000) for a long term loan at 4.75% interest per year to develop Liangzhou Road Project with maturity date on October 20, 2021. As of June 30, 2019, the Company borrowed $93,900,489 under this credit line (September 30, 2018- $96,472,714) with final due date in October 2021. The loan is guaranteed by Hanzhong City Hantai District Municipal Government and pledged by the Company’s Yang County Yangzhou Palace project with carrying value of $57,819,604 as of June 30, 2019 (September 30, 2018- $60,128,554). In addition, the Company was required to provide a security deposit for the loan received. As of June 30, 2019, the security deposits paid were $5,387,079 (September 30, 2018 - $5,384,726) for loans received. For the three and nine months ended June 30, 2019, interest paid was $1,692,826 and $4,986,267 (2018- $1,557,004 and $4,069,968), respectively, which was capitalized in to the development cost of Liangzhou road project. Due to local government’s delay in reallocation of residence in Liangzhou Road and related area, the Hanzhong Urban Construction Investment Development Co., Ltd has not released all the funds available in this loan to the Company and the Company’s withdraw will be based on the project’s development progress. The total required loan repayment schedule assuming total loan proceeds are borrowed are listed below:

  

For the periods ended:   Repayment in USD     Repayment in RMB  
June 30, 2020     80,517,116       552,750,000  
June 30, 2021     12,744,355       87,490,000  
June 30, 2022     639,018       4,386,860  
Total     93,900,489       644,626,860  

 

  (ii) On January 8, 2016, the Company signed a loan agreement with Hanzhong Municipal Housing Provident Fund Management Center (“Housing Fund”) to borrow up to $11,653,314 (RMB 80,000,000) on development of Oriental Garden related projects. The loan carries interest at 3.575% per year and is due in January 2019. The Company fully repaid the loan upon maturity. The Company’s major shareholder Mr. Xiaojun Zhu pledged his personal assets as collateral for the loan. The Company has received all the proceeds from Housing Fund. The progress repayment was required based on certain sales milestones or a fixed repayment schedule starting in July 2018. The Housing Fund has rights to monitor the project’s future cash flow. For the three and nine months ended June 30, 2019, total interest was $Nil and $61,534 (2018 - $114,620 and $336,446), respectively, which was included in the interest expense, because the related Oriental Garden project was completed in fiscal year 2016. The loan has been fully repaid on January 16, 2019.  

 

16

CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 4. CONSTRUCTION LOANS (continued)

 

  (iii)

In December 2016, the Company signed a loan agreement with Hantai District Urban Construction Investment Development Co., Ltd, a state owned Company, to borrow up to $17,334,304 (RMB 119,000,000) for the development of Hanzhong City Liangzhou Road project. As of June 30, 2019, the balance of loan was $17,294,854. The loan carries interest at a fixed interest of 1.2% and is due on June 20, 2031. The Company is required to repay the loan by equal annual principal repayment of $3,466,861 from December 2027 through June 2031. The Company pledged the assets of Liangzhou Road related projects with carrying value of $149,704,134 as collateral for the loan. Total interest of $53,516 and $158,632 for the three and nine months ended June 30, 2019, (2018 - $57,230 and $167,988) respectively, were capitalized in to the development cost of Hanzhong City Liangzhou Road project.

 

Additionally, in September 2017, the Urban Development Center Co., Ltd. approved a construction loan for the Company in the amount of $25,491,624 (RMB 175,000,000) with an annual interest rate of 1.2% per year in connection with the Liangzhou Road and related Project. The Company is required to repay the loan by equal annual principal repayment of $5,098,325 from December 2027 through May 2031. The amount of this loan is available to be drawn down as soon as the land use rights of the Liangzhou Road is approved and the construction starts, which is expected to begin in the 2019. Interest charge for three and nine months ended June 30, 2019 was $78,699 and $233,282 (2018-$84,161 and $247,041), respectively, which was included in the construction capitalized costs.

 

NOTE 5. CUSTOMER DEPOSITS

 

Customer deposits consist of amounts received from customers for the pre-sale of residential units in the PRC. The detail of customer deposits is as follows:

 

   June 30,
2019
   September 30,
2018
 
Customer deposits by real estate projects          
Mingzhu Garden (Mingzhu Nanyuan and Mingzhu Beiyuan)  $7,834,441   $8,246,058 
Oriental Pearl Garden   4,709,862    4,648,784 
Liangzhou road and related projects   1,452,294    1,914,677 
Yang County Pearl Garden   986,391    997,312 
Yang County Palace   5,540,579    6,341,918 
           
Total   20,523,567    22,148,749 
Less: Customer deposits - short-term   19,071,273    20,234,072 
Customer deposits - long-term  $1,452,294   $1,914,677 

 

Customer deposits are typically 10% - 20% of the unit price for those customers who purchase properties in cash and 30%-50% of the unit price for those customers who purchase properties with mortgages. Buyers with mortgage loans pay customer deposits. The banks provide the balance of the funding to the Company upon consummation of the sales. The banks hold the properties as collateral for customers’ mortgage loans. If the customers default, the bank will repossess the collateral properties. Except during the Mortgage Loan Guarantee Period of approximately six to twelve months, the banks have no recourse to the Company for customers’ defaults. As of June 30, 2019 and September 30, 2018, approximately $4.0 million and $3.5 million was guaranteed by the Company, respectively.

 

17

CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 6. SHAREHOLDER’S LOANS

 

    As of  
    June 30,
 2019
    September 30,
 2018
 
Shareholder loan – USD loan (a)   $ 1,810,000     $ 1,810,000  
Shareholder loan – RMB loan (b)     332,255       332,110  
Total   $ 2,142,255     $ 2,142,110  

 

  a. The Company has a one year loan agreement (“USD Loan Agreement”) with our Chairman, CEO and major shareholder, pursuant to which the Company borrowed $1,810,000 to make a capital injection into Shaanxi HGS, the Company’s subsidiary. The interest rate for the loan is 4% per annum and the loan matured on July 19, 2014. The Company entered into the amendments to the USD Loan Agreement to extend the term until July 31, 2020 and the loan is due on demand. The Company recorded interest of $18,100 and $54,300 for the three and nine months ended June 30, 2019 and 2018, respectively. The Company has not yet paid this interest and it is recorded in accrued expenses in the accompanying consolidated balance sheets as of June 30, 2019 and September 30, 2018, respectively.

 

  b.

On December 31, 2013, Shaanxi Guangsha Investment and Development Group Co., Ltd. (the “Guangsha”), the Company's PRC operating subsidiary, entered into a loan agreement with the Chairman (the “Shareholder RMB Loan Agreement”), pursuant to which Guangsha is able to borrow funds from the Chairman in order to support the Company’s Liangzhou Road construction project development and the Company’s working capital needs. The Loan Agreement has a one-year term, and has been renewed upon maturity on September 25, 2019, with at an interest rate of 4.35% per year. For the three and nine months ended June 30, 2019, the interest was $5,148 and $25,686 (2018- $3,248 and $16,916), respectively, which is capitalized in the development cost of Liangzhou road project.

 

18

CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 7. TAXES

 

(A) Business sales tax and VAT

 

The Company is subject to a 5% business sales tax on revenue.  It is the Company’s continuing practice to recognize the 5% business sales tax based on revenue as a cost of sales as the revenue is recognized. As of June 30, 2019, the Company had business sales tax payable of $8,441,691 (September 30, 2018 - $9,871,794), which is expected to be paid when the projects are completed and assessed by the local tax authority. In May of 2016, the Business Tax has been incorporated into Value Added Tax in China, which means there will be no more Business Tax and accordingly some business operations previously taxed in the name of Business Tax will be taxed in the manner of VAT thereafter. The Company is subject to 5% of VAT for its all existing real estate project based on the local tax authority’s practice.

 

B) Corporate income taxes (“CIT”)

  

The Company’s PRC subsidiaries and VIE are governed by the Income Tax Law of the People’s Republic of China concerning the privately run enterprises, which are generally subject to income tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments. However, as approved by the local tax authority of Hanzhong City, the Company’s CIT was assessed annually at a pre-determined fixed rate as an incentive to stimulate the local economy and encourage entrepreneurship. The local income tax rate in Hanzhong is 2.5% and in Yang County is 1.25% on revenue for the year ended September 30, 2017. Starting from fiscal 2018, the Company’s CIT changed to 25% on taxable income. The change in the income tax policy could negatively affect the Company’s net income in future years. Although the possibility exists for reinterpretation of the application of the tax regulations by higher tax authorities in the PRC, potentially overturning the decision made by the local tax authority, the Company has not experienced any reevaluation of the income taxes for prior years. The PRC tax rules are different from the local tax rules and the Company is required to comply with local tax rules. The difference between the two tax rules will not be a liability of the Company. There will be no further tax payments for the difference As of June 30, 2019 and September 30, 2018, the Company’s income tax payable balances were $8,047,787 and $8,331,026, respectively. The Company expects to pay off the income tax payable balance when the related real estate projects are completely sold.

 

The following table reconciles the statutory rates to the Company’s effective tax rate for the three and nine months ended June 30, 2019 and 2018:

 

   Three months ended
June 30,
   Nine months ended
June 30,
 
   2019   2018   2019   2018 
Chinese statutory tax rate   25%   25%   25%   25%
Valuation allowance change and other adjustments*   0.8%   (0.2)%   2.7%   0.3%
                     
Effective tax rate   25.8%   24.8%   27.7%   25.3%

 

Income tax expense for the three and nine months ended June 30, 2019 and 2018 is summarized as follows:

 

   Three months ended
June 30,
   Nine months ended
June 30,
 
   2019   2018   2019   2018 
Current tax provision  $-   $160,154   $-   $910,124 
Deferred tax provision   53,243    953,268    374,582    1,334,056 
Income tax provision  $53,243   $1,113,422   $374,582   $2,244,180 

 

19

CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 7. TAXES (continued)

 

The components of deferred taxes As of June 30, 2019 and September 30, 2018 consist of the following:

 

   June 30,
2019
   September 30,
2018
 
Deferred tax liability:          
Revenue recognized based on percentage of completion  $2,441,642   $2,068,257 

 

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 June 30, 2019 and September 30, 2018, the Company recognized a one-time transition toll tax liability 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 one-time 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. The Company provided an additional $0.2 million tax 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 June 30, 2019, the outstanding LAT payable balance was $64,892 with respect to completed real estate properties sold up to June 30, 2019. As at September 30, 2018 the Company has an outstanding LAT payable balance of $141,765 with respect to completed real estate properties sold up to September 30, 2018.

 

20

CHINA HGS REAL ESTATE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 7. TAXES (continued)

 

(D) Taxes payable consisted of the following:

 

   June 30,
2019
   September 30,
2018
 
CIT  $8,047,787   $8,331,026 
Business tax   8,523,008    9,871,794 
Other taxes and fees   2,300,493    2,250,861 
Total taxes payable   18,871,288    20,453,681 
Less: current portion   13,908,342    15,492,902 
Tax payable – long term  $4,962,946   $4,960,779 

 

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 expect any liability from the disposition of such claims and litigation individually or in the aggregate would have a material adverse impact on the Company's consolidated financial position, results of operations and cash flows.

 

As an industry practice, the Company provides guarantees to PRC banks with respect to loans procured by the purchasers of the Company’s real estate properties for the total mortgage loan amount until the completion of obtaining the “Certificate of Ownership” of the properties from the government, which generally takes six to twelve months. Because the banks provide loan proceeds without getting the “Certificate of Ownership” as loan collateral during this six to twelve months’ period, the mortgage banks require the Company to maintain, as restricted cash, 5% to 10% of the mortgage proceeds as security for the Company’s obligations under such guarantees. If a purchaser defaults on its payment obligations, the mortgage bank may deduct the delinquent mortgage payment from the security deposit and require the Company to pay the excess amount if the delinquent mortgage payments exceed the security deposit. The Company has made necessary reserves in its restricted cash account to cover any potential mortgage defaults as required by the mortgage lenders. The Company has not experienced any losses related to this guarantee and believes that such reserves are sufficient. As of June 30, 2019 and September 30, 2018, the amount of security deposits provided for these guarantees was approximately $4.0 million and $3.5 million respectively.

 

On June 21, 2019, the “Company received a letter from the Listing Qualifications staff of The Nasdaq Stock Market (“Nasdaq”) notifying the Company that it is no longer in compliance with the minimum bid price requirement for continued listing on the Nasdaq Capital Market. Nasdaq Listing Rule 5550(a)(2) requires listed companies to maintain a minimum bid price of $1.00 per share. The letter noted that the bid price of the Company’s common stock was below $1.00 for the 30-day period ending June 20, 2019. The notification letter has no immediate effect on the Company’s listing on the Nasdaq Capital Market. Nasdaq has provided the Company with 180 days, or until December 18, 2019, to regain compliance with the minimum bid price requirement by having a closing bid price of at least $1.00 per share for a minimum of 10 consecutive business days.

 

21

 

 

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 nine months ended June 30, 2019 and 2018 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 nine months ended June 30, 2019, our sales, gross profit and net income were approximately $25.3 million, $3.9 million and $1.0 million, respectively, representing an approximate 50.4%, 65.9% and 85.2% decrease in sales, gross profit and net income as compared to nine months ended June 30, 2018, respectively. The decrease in sales, gross profit and net income was mainly resulted from less gross floor area (“GFA”) sold during the first nine months ended June 30, 2019.

 

For the first nine months ended June 30, 2019, we recognized revenue under the percentage of completion method for Yangzhou Palace real estate Project. Total revenue recognized under the percentage of completion method for the nine months ended June 30, 2019 was approximately $24.1 million (2018 - $25.9 million), representing 95.5% (2018 – 51.0%) of total revenue for the period, with related costs of these real estate sales was approximately $19.6 million (2018 - $20.6 million), representing 95.1% (2018–52.4%) of the real estate costs in the period. The gross profit before sales tax from the percentage of completion method was approximately $4.6 million (2018 - $5.3 million), representing 97.5% (2018 – 46.0%) of the total gross profit for the period.

 

22

 

 

For the nine months ended June 30, 2019, the average selling price (“ASP”) for our real estate projects (excluding sales of parking spaces) located in Yang County was approximately $507 per square meter, an increase of 11% from the ASP of $457 per square meter for the nine months ended June 30, 2018, because the construction of Yangzhou Palace project was completed in June 30, 2019, its average selling price slightly increased for the three months ended June 30, 2019. . The ASP of our Hanzhong real estate projects (excluding sales of parking spaces) was approximately $372 per square meter, a 33% decrease from the ASP of $553 per square meter for the nine months ended June 30, 2018, because Nanyuan, Beiyuan and Oriental Garden have all been completed in prior years, and only limited models are available for customer selection, as a result, we lowered price to promote the sales of remaining real estate units in the Hanzhong real estate projects.

 

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 2019, the Company expects to start 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. Our customers continue to experience growth of their disposable income. With a lower housing price to family disposable income ratio and an increasing urbanization level, there is a growing demand for high quality residential housing. From this perspective, the Company is positive about the outlook for the local real estate market in a long term. In the meantime, the Company is diversifying its revenue and developing more commercial and municipal projects.

 

We intend to remain focused on our existing construction projects in Hanzhong City and Yang County, deepening our institutional sales network, enhancing our cost and operational synergies and improving cash flows and strengthening our balance sheet. In this respect, we began the construction of the following large high rise residential projects in Hanzhong City and Yang County:

 

Liangzhou road and related projects

 

In September 2013, the Company entered into an agreement (“Liangzhou Agreement”) with the Hanzhong local government on the Liangzhou Road reformation and expansion project (Liangzhou Road Project”). Pursuant to the agreement, the Company is contracted to reform and expand the Liangzhou Road, a commercial street in downtown Hanzhong City, with a total length of 2,080 meters and width of 30 meters and to resettle the existing residences in the Liangzhou road area. The government’s original road construction budget was approximately $33 million in accordance with the Liangzhou Agreement. The Company, in return, is being compensated by the local government to have an exclusive right on acquiring at least 394.5 Mu land use rights in a specified location of Hanzhong City. The Liangzhou Road Project’s road construction started at the end of 2013. In 2014, the original scope and budget on the Liangzhou road reformation and expansion project was extended, because the local government included more area and resettlement residences into the project, which resulted in additional investments from the Company. In return, the Company is authorized by the local government to develop and manage the commercial and residential properties surrounding the Liangzhou Road project. As of June 30, 2019, the main Liangzhou road construction is substantially completed and is expected to be approved by the local government later in fiscal 2019. 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 June 30, 2019, the actual costs incurred by the Company was approximately $149.7 million (September 30, 2018 - $135.0 million) and the incremental cost related to residence resettlement was approved by the local government. The Company determined that the Company’s Investment in Liangzhou Road Project in exchange for interests in future land use rights is a barter transaction with commercial substance. 

 

23

 

 

Oriental Pearl Garden Phase II

 

Oriental Garden Phase II project is planned to consist of 8 high-rise residential buildings and 6 commercial buildings with total planned GFA of 370,298 square meters. The project will also include a farmer’s market.

 

Liangzhou Mansion

 

Liangzhou Mansion project is planned to consist of 7 high-rise building and commercial shops on the first floor with total planned GFA of 160,000 square meters.

 

Pearl Commercial Plaza

 

Pearl Commercial Plaza is planned to consist one office building, one service apartment (or hotel), classical architecture style of Chinese traditional houses and shopping malls with total planned GFA of 124,191 square meters.

 

The Company plans to start the construction of these three real estate projects in 2019 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.

 

Other projects

 

Yangzhou Palace

 

The Company is currently constructing 9 high-rise residential buildings and 16 sub-high-rise residential and multi-layer residential buildings with total GFA of 285,244 square meters in Yangzhou Palace located in Yang County. The construction started in the fourth quarter of fiscal 2013 and was completed in June 2019. The Company has obtained pre-sale license in September 2016 and started to sell the residential units in Yangzhou Palace in 2017.

 

Road Construction

 

Other road construction projects mainly included a 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 and a budgeted price of approximately $24.5 million (or RMB 168 million), which was approved by the local Yang County government in March 2014. The local government is required to repay the Company’s project investment costs within 3 years with interest at the interest rate based on the commercial borrowing rate with the similar term published by China construction bank (December 31,2018 and September 30, 2018 - 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 June 30, 2019 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 June 30, 2014. As of June 30, 2019, the local government was still in the process of assessing the budget for these projects.

 

24

 

 

Summary of real estate projects completion status

 

   Actual (estimated)
Completion time of
  Estimated time to sell
Development completed  construction  the entire property
Hanzhong City Mingzhu Garden
(Mingzhu Nanyuan & Mingzhu Beiyuan)
  Majority was completed during the third quarter of fiscal 2012  2019
Hanzhong City Nan Dajie (Mingzhu Xinju)  Phase one completed in 2010 and Phase two completed in 2011  2019
Hanzhong City Mingzhu Garden Phase II  Completed by Fiscal 2015  2019
Hanzhong City Oriental Pearl Garden  Completed by Fiscal 2016  2019
Yang County Yangzhou Pearl Garden Phase II  Completed by Fiscal 2015  2019
Yang County Yangzhou Pearl Garden  Majority completed in 2011 and 2012  2019
Yang County Yangzhou Palace  Completed in June, 2019  2020

 

Under development:  Estimated Completion time of construction
Hanzhong City Shijin Project  Under planning stage
Hanzhong City Hanfeng Beiyuan East Road  To deliver the road project to government in 2019
Hanzhong City Liangzhou Road and related projects  The road construction was substantially completed as of June 30, 2019, the other related projects will be completed in later years
Hanzhong City Beidajie project  Under planning stage
Yang County East 2nd Ring Road  To be completed in 2019

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect our reported assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis and use them on historical experience and various other assumptions that are believed to be reasonable under the circumstances as the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates because of different assumptions or conditions.

 

We believe the following critical accounting policies affect our significant estimates and judgments used in the preparation of our condensed consolidated financial statements. These policies should be read in conjunction with Note 2 of the notes to unaudited condensed consolidated financial statements.

 

Revenue recognition

 

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 obligations 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. Otherwise, revenue is recognized at a point in time when the customer obtains control of the asset.

 

Under percentage completion method, revenue and profit from the sales of long term real estate development properties is recognized by the percentage of completion method on the sale of individual units when all the following criteria are met:

 

  a. Construction is beyond a preliminary stage.
  b. The buyer is committed to the extent of being unable to require a refund except for non-delivery of the unit or interest.
  c. Sufficient units have already been sold to assure that the entire property will not revert to rental property.
  d. Sales prices are collectible.
  e. Aggregate sales proceeds and costs can be reasonably estimated.

 

If any of the above criteria is not met, proceeds shall be accounted for as deposits until the criteria are met.

 

25

 

 

Under the percentage of completion method, revenues from individual real estate condominium units sold 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.

 

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.

 

26

 

 

Use of estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes, and disclosure of contingent liabilities at the date of the consolidated financial statements. Estimates are used for, but not limited to, the assumptions and estimates used by management in recognizing development revenue under the percentage of completion method, the selection of the useful lives of property and equipment, provision necessary for contingent liabilities, revenue recognition, taxes and budgeted costs. Management believes that the estimates utilized in preparing its consolidated financial statements are reasonable and prudent. Actual results could differ from these estimates. 

 

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 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.

 

27

 

 

RESULTS OF OPERATIONS

 

Three Months Ended June 30, 2019 compared to Three Months Ended June 30, 2018

 

Revenues

 

The following is a breakdown of revenue:

 

   For Three Months Ended 
June 30,
 
   2019   2018 
Revenue recognized for completed condominium real estate projects  $149,448   $6,003,371 
Revenue recognized for condominium real estate projects under development   8,006,756    8,548,463 
Total  $8,156,204   $14,551,834 

 

Revenue recognized for completed condominium real estate projects 

 

The following table summarizes our revenue generated by different projects:

 

   For Three Months Ended June 30,     
   2019   2018   Variance 
   Revenue   %   Revenue   %   Amount   % 
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan) Phase I and II  $176,700    118.2%  $4,060,448    67.6%  $(3,883,748)   (95.6)%
Oriental Pearl Garden   -    -%   1,913,345    31.9%   (1,913,345)   (100.0)%
Yangzhou Pearl Garden Phase I and II   (27,252)   (18.2)%   29,578    0.5%   (56,830)   (192.1)%
                               
Total Real Estate Sales before Sales Tax   149,448    100%   6,003,371    100%   (5,853,923)   (97.5)%
Sales Tax   (4,429)        (63,611)        (59,182)   (93.0)%
Revenue net of sales tax  $145,019        $5,939,760        $(5,794,741)   (97.6)%

 

Our revenues are derived from the sale of residential buildings, commercial store-fronts and parking spaces in projects that we have developed. Comparing to the same period of last year, revenues before sales tax decreased by 97.5% to approximately $0.1 million for the three months ended June 30, 2019 from approximately $6.0 million. The total GFA sold during three months ended June 30, 2019 was merely 192 square meters, representing a significant decrease from the 10,913 square meters completed and sold during the same period of last year. In addition, 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 as Yangzhou Palace projects has been completed during this quarter, therefore only limited models are available for customer selection, which resulted in lower sales for current period. The sales tax for the three months ended June 30, 2019 decreased by 93% from 2018, consistent with the drop in sales.

 

28

 

 

Revenue recognized for condominium real estate projects under development

 

       For the three months ended June 30, 2019 
   Total GFA   Average
Percentage of
Completion(1)
   Qualified
Contract
Sales(2)
   Revenue
Recognized
under
Percentage of
Completion
   Accumulated 
Revenue
recognized
under
Percentage of
completion
 
Real estate properties under development located in Hanzhong                         
Yangzhou Palace   297,450    100%  $75,786,799   $8,006,756   $75,361,775 

 

We started to recognize revenue under the percentage of completion method for Yangzhou Palace real estate property since second quarter of fiscal 2017. Total qualified contract sales as of June 30, 2019 were $75.8 million. Total GFA sold under qualified contract sales as of June 30, 2019 was 149,596 square meters. The average unit price under contract sales was $507 per square meters (September 30, 2018 - $506). As of June 30, 2019, the construction of project was fully completed.

 

       For the three months ended June 30, 2018 
   Total GFA   Average
Percentage of
Completion(1)
   Qualified
Contract
Sales(2)
   Revenue
Recognized
under
Percentage of
Completion
   Accumulated
Revenue
recognized
under
Percentage of
completion
 
Real estate properties under  development located in Hanzhong                         
Yangzhou Palace   297,450    89%  $46,967,336   $8,548,463   $41,800,929 

 

As of June 30, 2018, total GFA sold under qualified contract sales was 92,850 square meters. The average unit price under contract sales was $506 per square meters.

 

(1) Percentage of completion is calculated by dividing total costs incurred by total estimated costs for the relevant buildings in the each real estate building, estimated as of the time of preparation of our financial statements as of and for the year indicated.

 

(2) Qualified contract sales only include all contract sales with customer deposits balance As of June 30, 2019 and 2018 equal or greater than 30% 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 is completed, which could be slightly different from the estimated GFA at the beginning of the real estate projects.

 

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Cost of Sales

 

The following table sets forth a breakdown of our cost of sales:

 

   For Three Months Ended June 30,     
   2019   2018   Variance 
   Cost   %   Cost   %   Amount   % 
Land use rights  $638,250    9.0%  $769,484    8.4%  $(131,234)   (17.1)%
Construction cost   6,453,422    91.0%   8,413,661    91.6%   (1,960,239)   (23.3)%
Total cost  $7,091,672    100%  $9,183,145    100%  $(2,091,473)   (22.8)%

 

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 $7.1 million for the three months ended June 30, 2019 compared to $9.2 million for the same period of last year. The $2.1 million decrease in cost of sales was mainly attributable to less GFA sold during the three months ended June 30, 2019 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 three months ended June 30, 2019 were approximately $0.6 million, as compared to approximately $0.8 million for the same period of last year, representing a decrease of approximately $0.1 million from the same quarter last year. The decrease was consistent with the fact that total GFA sold in this quarter was significantly less than 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 June 30, 2019 were approximately $6.5 million as compared to approximately $8.4 million for the same period of last year, representing a decrease of approximately $2.0 million. The decrease in construction cost was due to decrease in units sold during the quarter ended June 30, 2019.

 

30

 

 

 

Gross Profit

 

Gross profit was approximately $0.8 million for the three months ended June 30, 2019 as compared to approximately $5.3 million for the three months ended June 30, 2018, representing a decrease of $4.5 million, which was mainly attributable to less GFA sold during the third quarter of fiscal 2019. The gross margin decreased from 36.5% during the quarter ended June 30, 2018 to 9.6% for the quarter ended June 30, 2019. During the quarter ended June 30, 2018, the higher margin in Yangzhou Palace project was resulted from a sales of several commercial unit with high gross margin, but most sales during quarter ended June 30, 2019 was related to residential units and the Company lowed selling price in Yangzhou Palace project upon its completion of construction in June 2019 to promote its sales.

  

   For Three Months Ended June 30, 
   2019   2018 
   Gross Profit   Gross Margin   Gross Profit   Gross Margin 
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan) Phase I and II  $49,445    28.0%  $1,111,225    27.4%
Oriental Garden   -    -    441,560    23.1%
Yangzhou Pearl Garden Phase I and II   (4,298)   15.8    2,832    9.6%
Yangzhou Palace   1,019,385    12.7%   3,813,072    44.6%
Sales Tax   (283,810)        (63,611)     
Total Gross Profit  $780,723    9.6%  $5,305,078    36.5%
Total Real Estate Sales before Sales Tax  $8,156,204        $14,551,834      

 

Operating Expenses

 

Total operating expenses decreased by 18.3% to $0.6 million for the three months ended June 30, 2019 from $0.7 million for the three months ended June 30, 2018 as a result of a decrease of $67,700 in selling expense due to less sales during this quarter and a decrease of $55,896 in general and administrative expense primarily attributed to less office expense incurred. Our total operating expenses accounted for 6.8% and 4.6% of our real estate sales before sales taxes for the three months ended June 30, 2019 and 2018, respectively. 

  

   For Three Months Ended 
June 30,
 
   2019   2018 
Selling expenses  $85,863   $153,563 
General and administrative expenses   467,159    523,055 
Total operating expenses  $553,022   $676,618 
Percentage of Real Estate Sales before Sales Tax   6.8%   4.6%

 

Income Taxes

 

For the three months ended June 30, 2019 and 2018, the Company’s income taxes were approximately $0.05 million and $1.1 million, respectively. The decreased income tax provision was due to less income for the three months ended June 30, 2019.

 

Net Income

 

We reported net income of approximately $0.2 million for the three months ended June 30, 2019, as compared to net income of approximately $3.4 for the three months ended June 30, 2018. The decrease of approximately $3.2 million in our net income was primarily due to lower amount of revenue and lower margin for the three months ended June 30, 2019 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 negative of $3.8 and $9.3 million for the three months ended June 30, 20198 and 2018, respectively, due to the fluctuation of RMB during the period.  The balance sheet amounts with the exception of equity at June 30, 2019 were translated at 6.8650 RMB to 1.00 USD as compared to 6.8680 RMB to 1.00 USD at September 30, 2018. The equity accounts were stated at their historical rate. The average translation rates applied to the income statements accounts for the periods ended June 30, 2019 and 2018 were 6.8265 RMB and 6.4463 RMB, respectively. RMB has depreciated 6% against the U.S. dollar from June 30, 2018 to June 30, 2019.

  

31

 

Nine months Ended June 30, 2019 compared to Nine months Ended June 30, 2018

 

Revenues

 

The following is a breakdown of revenue:

 

   For Nine months Ended
June 30,
 
   2019   2018 
Revenue recognized under full accrual method  $1,126,013   $24,965,928 
Revenue recognized under percentage of completion method   24,134,543    25,939,844 
Total  $25,260,556   $50,905,772 

 

Revenue recognized for completed condominium real estate projects 

 

The following table summarizes our revenue generated by different projects:

 

   For Nine months Ended June 30,     
   2019   2018   Variance 
   Revenue   %   Revenue   %   Amount   % 
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan) Phase I and Phase II  $956,496    84.9%  $15,605,296    62.5%  $(14,648,800)   (93.9)%
Yangzhou Pearl Garden Phase I and Phase II   46,803    4.2%   48,090    0.2%   (1,287)   155.2%
Oriental Garden   122,714    10.9%   9,312,542    37.3%   (9,189,828)   (98.7)%
                               
Total Real Estate Sales before Sales Tax   1,126,013    100%   24,965,928    100%   (23,839,915)   (95.5)%
Sales Tax   (121,923)        (153,891)        (31,968)   (20.8)%
Revenue net of sales tax  $1,004,090        $24,812,037        $(23,807,947)   (96.0)%

 

Our revenues are derived from the sale of residential buildings, commercial front-stores and parking space in projects that we have developed. Our Mingzhu Garden Phase I and Phase II, Yangzhou Pearl Garden Phase I and Phase II and Oriental Garden Phase I have all been completed in prior years, the related revenues have been included in revenue recognized from completed projects, which resulted in lower revenue reported for the nine months ended June 30, 2019 as compared to the same comparative period of 2018. Our sales of completed real estate projects decreased by approximately 95.5% from the sales of $25.0 million in the same period of last year to approximately $1.1 million for the nine months ended June 30, 2019 due to total GFA sold during the nine months ended June 30, 2019 was merely 3,093 square meters, decreased by 92% from GFA of 45,255 square meters sold in the same period of last year. 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 as Yangzhou Palace project was completed in June 2019, therefore only limited models are available for customer selection, which resulted in lower sales for current period. The sales tax for the nine months ended June 30, 2019 decreased 20.8% from the same period of last year due to reduction of sales.

 

Revenue recognized for condominium real estate projects under development

 

       For the nine months ended June 30, 2019 
   Total GFA   Average
Percentage of
Completion(1)
   Qualified
Contract
Sales(2)
   Revenue
Recognized
under
Percentage of
Completion
   Accumulated 
Revenue
recognized
under
Percentage of
completion
 
Real estate properties under development located in Hanzhong                         
Yangzhou Palace   297,450    100%  $75,786,799   $24,134,543   $75,361,775 

 

32

 

We started to recognize revenue under the percentage of completion method for Yangzhou Palace real estate property since second quarter of fiscal 2017. Total qualified contract sales as of June 30, 2019 were $75.8 million. Total GFA sold under qualified contract sales as of June 30, 2019 was 149,596 square meters. The average unit price under contract sales was $507 per square meters (September 30, 2018 - $506). As of June 30, 2019, the construction of project was fully completed.

 

       For the nine months ended June 30, 2018 
   Total GFA  

 

Average

Percentage of
Completion(1)

   Qualified
Contract Sales(2)
  Revenue
Recognized
under Percentage
of Completion
   Accumulated  
Revenue
Recognized under
Percentage of
Completion
 
Real estate properties under development located in Hanzhong                         
Yangzhou Palace   297,450    89%  $46,967,336   $25,939,844   $41,800,929 

  

As of June 30, 2018, total GFA sold under qualified contract sales was 92,850 square meters. The average unit price under contract sales was $506 per square meters.

 

  (1) Percentage of completion is calculated by dividing total costs incurred by total estimated costs for the relevant buildings in the each real estate building , estimated as of the time of preparation of our financial statements as of and for the year indicated.

 

  (2) Qualified contract sales only include all contract sales with customer deposits balance as of June 30, 2019 and 2018 equal or greater than 30% of contract sales amount and related individual of buildings were sold over 20%.

    

Cost of Sales

 

The following table sets forth a breakdown of our cost of sales:

 

   For Nine months Ended June 30,     
   2019   2018   Variance 
   Cost   %   Cost   %   Amount   % 
Land use rights  $2,036,573    9.9%  $3,412,799    8.7%  $(1,376,226)   (67.6)%
Construction cost   18,534,876    90.1%   35,889,577    91.3%   (17,354,701)   (93.6)%
Total cost  $20,571,449    100%  $39,302,376    100%  $(18,730,927)   (91.1)%

  

Our cost of sales consists of costs associated with land use rights and construction costs. Cost of sales are capitalized and allocated to development projects using the specific identification method. Costs are allocated to specific units within a project based on the ratio of the sales area of units to the estimated total sales area of the project (or phase of the project) times the total cost of the project (or phase of the project).

 

Cost of sales was approximately $20.6 million for the nine months ended June 30, 2019 compared to $39.3 million for the nine months ended June 30, 2018. The $18.7 million decrease in cost of sales was mainly attributable to the decrease in total GFA sold from completed projects during the nine months ended June 30, 2019. 

 

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 nine months ended June 30, 2019 were approximately $2.0 million, as compared to $3.4 million for the nine months ended June 30, 2018, representing a decrease of 67.6%. The increase was consistent with the fact that less GFA sold in during nine months ended June 30, 2019 comparing to the same period of last year.

 

Construction cost: We outsource the construction of all of our projects to third party contractors, whom we select through a competitive tender process. Our construction contracts provide a fixed payment which covers substantially all labor, materials and equipment costs, subject to adjustments for some types of excess, such as design changes during construction or changes in government-suggested steel prices. Our construction costs consist primarily of the payments to our third-party contractors, which are paid over the construction period based on specified milestones. In addition, we purchase and supply a limited range of fittings and equipment, including elevators, window frames and door frames. Our construction costs for the nine months ending June 30, 2019 were approximately $18.5 million as compared to approximately $35.9 million for the nine months ended June 30, 2018, representing a decrease of 93.6%. The decrease in construction cost was due to decrease in units sold during nine months ended June 30, 2019.

 

33

   

Gross Profit

 

Gross profit was approximately $3.9 million for the nine months ended June 30, 2019 as compared to approximately $11.4 million for the nine months ended June 30, 2018, representing a decrease of $7.5 million, which was mainly attributable to less GFA sold in the completed condominium real estate projects and less GFA sold in Yangzhou Palace project. The overall gross profit as a percentage of real estate sales before sales tax decreased to 15.4 % during the nine months ended June 30, 2019 from 22.5% for the same period last year. Majority of the Company’s revenue for the nine months ended June 30, 2019 were from sales of residential units in Yangzhou Palace project with gross margin of 18.9%. However, during the same period of last year, the Company sold several commercial units in both Minzhu Garden projects and Yangzhou Palace project with higher gross margin, which resulted in average gross margin of 22.5% in the same period of last year.

 

The following table sets forth the gross margin of each of our projects:

 

   For Nine months Ended June 30, 
   2019   2018 
   Gross Profit   Percentage
of Revenue
   Gross Profit   Percentage
of Revenue
 
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan)  $159,592    16.7%  $5,415,098    34.7%
Oriental Garden   (50,816)   (41.4)%   845,970    9.1%
Yangzhou Pearl Garden   7,454    15.9%   6,102    12.7%
Yangzhou Palace   4,572,877    18.9%   5,336,226    20.6%
Sales Tax   (788,766)        (153,891)     
Total Gross Profit   3,900,341    15.4%   11,449,505    22.5%
Total Real Estate Sales before Sales Tax  $25,260,556        $50,905,772      

 

Operating Expenses

 

Total operating expenses were approximately $2.1 and $2.2 million for the nine months ended June 30, 2019 and 2018, respectively.

 

The decrease in selling expenses of $0.3 million for nine months ended June 30, 2019 was primarily attributed to decrease of commission paid to salesforce and marketing activities. The decrease in selling expense was offset by an increase of $0.2 million in general administration expense for the nine months ended June 30, 2019, due to more office expenses and professional fee expenses incurred.

 

   For Nine months Ended
June 30,
 
   2019   2018 
Selling expenses  $360,763   $655,898 
General and administrative expenses   1,721,778    1,535,262 
Total operating expenses  $2,082,541   $2,191,160 
Percentage of Real Estate Sales before Sales Tax   8.2%   4.3%

  

Income Taxes

 

For the nine months ended June 30, 2019 and 2018, the Company’s income taxes were approximately $0.4 million and $2.2 million, respectively. The decreased income tax provision was due to less income for the nine months ended June 30, 2019.

 

Net Income

 

We reported net income of approximately $1.0 million for the nine months ended June 30, 2019, as compared to net income of approximately $6.6 million for the nine months ended June 30, 2018. The decrease of $5.6 million in our net income was primarily due to lower amount of revenue and lower margin for the nine months ended June 30, 2019 as discussed above under Revenues and Gross Profit

 

34

 

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 $0.07 and $0.7 million for the nine months ended June 30, 2019 and 2018, respectively, due to the fluctuation of RMB during the period.  The balance sheet amounts with the exception of equity at June 30, 2019 were translated at 6.8650 RMB to 1.00 USD as compared to 6.8680 RMB to 1.00 USD at September 30, 2018. The equity accounts were stated at their historical rate. The average translation rates applied to the income statements accounts for the periods ended June 30, 2019 and 2018 were 6.8265 RMB and 6.4463 RMB, respectively. RMB has depreciated 6% against the U.S. dollar from June 30, 2018 to June 30, 2019. 

 

Liquidity and Capital Resources

 

Current Assets and Liabilities

 

Our principal need for liquidity and capital resources is to maintain working capital sufficient to support our operations and to make capital expenditures to finance the growth of our business. Historically we mainly financed our operations primarily through cash flows from operations and borrowings from our principal shareholder.

 

As of June 30, 2019, the Company had an approximately $27.2 million negative working capital, a decrease of $37.4 million as compared to $10.3 million positive working capital as of September 30, 2018, which was mainly resulted from the $24.9 million increase in the current portion of long term loan and $11.5 million increase in accounts payable due to continuous investments in our long term real estate project- Liangzhou road and affiliated projects. Our total cash and restricted cash balance decreased to approximately $4.8 million as of June 30, 2019 as compared to approximately $6.8 million as of September 30, 2018. The decrease of $2.2 million in cash was resulted of a repayment of $11.4 million loan during the nine months ended June 30, 2019, offset by cash flow from operating of $9.2 million during the period.

 

With respect to capital funding requirements, the Company budgeted our capital spending based on ongoing assessments of needs to maintain adequate cash. Due to the long term relationship with our construction suppliers, we were able to effectively manage cash spending on construction, meantime, we are able to obtain additional funding support from local banks and financial institutions. Also, our principal shareholder, Mr. Xiaojun Zhu has been providing and will continue to provide his personal funds, if necessary, to support the Company on an as needed basis. In addition, the Company’s cash flows from pre-sales and current sales should provide financial support for our current developments and operations. For the both nine months ended June 30, 2019 and 2018, the Company had positive cash flow from operating. The Company believes it has sufficient working capital for the next twelve months.

 

In order to fully implement our business plan and sustain continued growth, we may also need to raise capital from outside investors. Our expectation, therefore, is that we will seek to access the capital markets in both the U.S. and China to obtain the funds as needed. At the present time, however, we do not have commitments of funds from any third party.

 

Cash Flow

 

Comparison of cash flows results is summarized as follows:

 

   Nine months ended
June 30,
 
   2019   2018 
Net cash provided by operating activities  $9,207,345   $4,774,257 
Net cash used in investing activities   -    (371,640)
Net cash used in financing activities   (11,418,405)   (2,952,794)
Effect of change of foreign exchange rate on cash and restricted cash   15,360    (11,621)
Net (decrease) increase in cash and restricted cash   (2,195,700)   1,438,202 
Cash and restricted cash, beginning of period   6,775,577    4,716,604 
Cash and restricted cash, end of period  $4,579,877   $6,154,806 

 

Operating Activities

 

Net cash provided by operating activities during the nine months ended June 30, 2019 was approximately $9.2 million, consisting of net income of approximately $1.0 million, noncash adjustments of $0.4 million and net changes in our operating assets and liabilities, which mainly included an increase of accounts payable of $11.5 million due to increasing spending on Liangzhou road and affiliated project and Yangzhou Palace project, a decrease in real estate property under development by approximately $58.3 million due to the completion of Yangzhou Palace project which was reclassified to real estate property completed and a decrease of approximately $2.0 million in contract receivable due to collection, offset with an increase in real estate property completed of $57.2 million due to the completion of Yangzhou Palace project and a decrease in contract liabilities of approximately $4.0 million.

 

35

  

Net cash provided by operating activities during the nine months ended June 30, 2018 was $4.8 million, consisting of net income of approximately $6.6 million, noncash adjustments of $1.8 million and net changes in our operating assets and liabilities, which mainly included a reduction of $18.7 million in real estate property completed due to our increased sales during the first nine months of fiscal 2018 and increase of contract liability of $1.3 million, offset by the increase in spending on real estate property under development of $12.6 million, paying off the accounts payable of $6.6 million and reduce in the customer deposits of $2.7 million due to more sales realized during the first nine months of fiscal 2018.

 

Investing activities

 

Net cash used in investing activities for purchase of fixed assets during nine months ended June 30, 2019 and 2018 was $Nil and $0.4 million, respectively.

  

Financing Activities

 

Net cash flows used in financing activities was approximately $11.4 million for nine months ended June 30, 2019, which mainly included a repayment of other bank loans of approximately $11.4 million during the nine months ended June 30, 2019.

 

Net cash flows used in financing activities amounted to approximately $3.0 million for the nine months ended June 30, 2018, which mainly included repayment of bank loan of $2.8 million and repayment of shareholder loan of $0.2 million.

 

Off-Balance Sheet Arrangements

 

As the date of the Report, we have following off-balance sheet arrangements that are likely to have a future effect on our financial condition, revenues or expenses, results of operations and liquidity:

 

Contingent Liabilities

 

As an industry practice, the Company provides guarantees to PRC banks with respect to loans procured by the purchasers of the Company’s real estate properties for the total mortgage loan amount until the completion of obtaining the “Certificate of Ownership” of the properties from the government, which generally takes six to twelve months. Because the banks provide loan proceeds without getting the “Certificate of Ownership” as loan collateral during this six to twelve months’ period, the mortgage banks require the Company to maintain, as restricted cash, 5% to 10% of the mortgage proceeds as security for the Company’s obligations under such guarantees. If a purchaser defaults on its payment obligations, the mortgage bank may deduct the delinquent mortgage payment from the security deposit and require the Company to pay the excess amount if the delinquent mortgage payments exceed the security deposit. The Company has made necessary reserves in its restricted cash account to cover any potential mortgage defaults as required by the mortgage lenders. The Company has not experienced any losses related to this guarantee and believes that such reserves are sufficient. As of June 30, 2019 and September 30, 2018, the amount of security deposits provided for these guarantees was approximately $4.0 million and $3.5 million respectively.

 

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.

 

36

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

Foreign Exchange Risk

 

All of our net sales, and a majority of our costs and expenses are denominated in RMB. Although the conversion of RMB is highly regulated in China, the value of RMB against the value of the U.S. dollar or any other currency nonetheless may fluctuate and be affected by, among other things, changes in China’s political and economic conditions. Under current policy, the value of RMB is permitted to fluctuate within a narrow band against a basket of certain foreign currencies. China is currently under significant international pressures to liberalize this government currency policy, and if such liberalization were to occur, the value of RMB could appreciate or depreciate against the U.S. dollar.

 

Because substantially all of our earnings and majority of our cash assets are denominated in RMB, other than certain cash deposits we keep in a bank in Hong Kong and the U.S., appreciation or depreciation in the value of RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividends we may issue in future that will be exchanged into U.S. dollars and earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.

 

Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedging transactions may be limited and we may not be able to successfully hedge our exposure at all. In addition, our currency exchange losses may be magnified by the PRC exchange control regulations that restrict our ability to convert RMB into foreign currency.

 

Interest Rate Risk

 

We have not been, nor do we anticipate being exposed to material risks due to changes in interest rates. Our risk exposure to changes in interest rates relates primarily to the interest income generated by cash deposited in interest-bearing savings accounts and interest expense on variable rate bank loan. We have not used, and do not expect to use in the future any derivative financial instruments to hedge our interest risk exposure. However, fluctuations in interest rates can lead to significant changes in our interest income and interest expense.

 

Credit Risk

 

We are exposed to credit risk from our cash in banks, accounts receivable and due from local government for real estate property development completed. The credit risk on cash in bank and fixed deposits is limited because the counterparties are recognized financial institutions. Accounts receivable are subjected to credit evaluations. An allowance would be made, if necessary, for estimated unrecoverable amounts by reference to past default experience, if any, and by reference to the current economic environment.

 

Inflation

 

Inflationary factors, such as increases in the cost of our products and overhead costs, could impair our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of sales revenue if the selling prices of our products do not increase with these increased costs.

 

We Conduct Substantially All Our Business in Foreign Country

  

Substantially all of our operations are conducted in China and are subject to various political, economic, and other risks and uncertainties inherent in conducting business in China. Among other risks, our Company and our subsidiaries’ operations are subject to the risks of restrictions on transfer of funds; export duties, quotas, and embargoes; domestic and international customs and tariffs; changing taxation policies; foreign exchange restrictions; and political conditions and governmental regulations.

 

37

 

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”). The evaluation of our disclosure controls and procedures included a review of our processes and the effect on the information generated for use in this Quarterly Report on Form 10-Q. In the course of this evaluation, we sought to identify any material weaknesses in our disclosure controls and procedures and to confirm that any necessary corrective action, including process improvements, was taken. The purpose of this evaluation is to determine if, as of the Evaluation Date, our disclosure controls and procedures were operating effectively such that the information, required to be disclosed in our SEC reports (i) was recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Management conducted its evaluation of disclosure controls and procedures under the supervision of our chief executive officer and our chief financial officer. Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of June 30, 2019. Management is committed to improving the internal controls over financial reporting and will undertake the consistent improvements or enhancements on an ongoing basis. To remediate the material weakness and significant deficiencies and to prevent similar deficiencies in the future, we are currently evaluating additional controls and procedures, which may include:

 

·Implementing an ongoing initiative and training in the Company to ensure the importance of internal controls and compliance to ensure that established policies and procedures are fully understood throughout the organization and plan to provide continuous U.S. GAAP knowledge training to relevant employees involved to ensure the performance of and compliance with those procedures and policies

 

The remedial measures being undertaken may not be fully effectuated or may be insufficient to address the significant deficiencies we identified, and there can be no assurance that significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified or occur in the future. If additional significant deficiencies (or if material weaknesses) in our internal controls are discovered or occur in the future, among other similar or related effects: (i) the Company may fail to meet future reporting obligations on a timely basis, (ii) the Company’s consolidated financial statements may contain material misstatements, and (iii) the Company’s business and operating results may be harmed.

 

Changes in Internal Control over Financial Reporting

 

Except for the matters described above to improve our internal controls over financial reporting, there were no changes in our internal control over financial reporting for the three and nine months ended June 30, 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, however, the Company is in the process of designing and planning to change as described above.

 

38

 

 

PART II: OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We may be subject to, from time to time, various legal proceedings relating to claims arising out of our operations in the ordinary course of our business. We are not currently a party to any legal proceedings, the adverse outcome of which, individually or in the aggregate, would have a material adverse effect on the business, financial condition, or results of operations of the Company.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

(a) Exhibits

  

Exhibit Number   Description of Exhibit
     
31.1*   Rule 13a-14(a) Certification of Chief Executive Officer
     
31.2*   Rule 13a-14(a) Certification of Chief Financial Officer
     
32.1*   Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
     
101.INS*   XBRL Instance
     
101.SCH*   XBRL Taxonomy Extension Schema
     
101.CAL*   XBRL Taxonomy Extension Calculation
     
101.DEF*   XBRL Taxonomy Extension Definition
     
101.LAB*   XBRL Taxonomy Extension Labels
     
101.PRE*   XBRL Taxonomy Extension Presentation

 

* Furnished electronically herewith

 

39

 

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  China HGS Real Estate, Inc.
     
August 14, 2019 By: /s/ Xiaojun Zhu
    Xiaojun Zhu
    Chief Executive Officer

 

40

 

 

Exhibit 31.1

 

CERTIFICATION

 

I, Xiaojun Zhu, the Chief Executive Officer, certify that:

 

(1)          I have reviewed this Quarterly Report on Form 10-Q of China HGS Real Estate, Inc., for the fiscal period ended June 30, 2019.

 

(2)          Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

(3)          Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

(4)          The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15a-15(f)) for the registrant and have:

 

  a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles:

 

  c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

(5)          The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: August 14, 2019

 

/s/ Xiaojun Zhu  
Name: Xiaojun Zhu  
Title: Chief Executive Officer  

 

 

 

Exhibit 31.2

 

CERTIFICATION

 

I, Wei Shen, the Chief Financial Officer of the registrant, certify that:

 

(1)          I have reviewed this Quarterly Report on Form 10-Q of China HGS Real Estate Inc., for the fiscal period ended June 30, 2019.

 

(2)          Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

(3)          Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

(4)          The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15a-15(f)) for the registrant and have:

 

  a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles:

 

  c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

(5)          The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

August 14, 2019  
   
/s/Wei Shen  
Name: Wei Shen   
Title: Chief Financial Officer   

 

 

  

Exhibit 32.1

 

Certification
of Principal Executive Officer and Principal Financial Officer Pursuant to Exchange Act Rule 13a-14(a),
As Adopted
Pursuant to Section 302 of the
Sarbanes - Oxley Act of 2002

 

The undersigned of the Company, certifies that:

 

(1)         They has reviewed this Quarterly Report on Form 10-Q of China HGS Real Estate, Inc. for the quarter ended June 30, 2019; and

 

(2)         Based on their knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in the light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report.

 

/s/ Xiaojun Zhu   /s/ Wei Shen
Name: Xiaojun Zhu    Name: Wei Shen
Title: Chief Executive Officer    Chief Financial Officer
August 14, 2019   August 14, 2019

 

A signed original of this written statement required by Section 906 of the Sarbanes Oxley Act of 2002 has been provided to the Company and will be retained by the Company and will be furnished to the SEC or its staff upon request. This exhibit is not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 but is instead furnished as provided by applicable rules of the SEC.

  

 

v3.19.2
Document And Entity Information - shares
9 Months Ended
Jun. 30, 2019
Aug. 14, 2019
Document And Entity Information [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Jun. 30, 2019  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q3  
Entity Registrant Name CHINA HGS REAL ESTATE INC.  
Entity Current Reporting Status Yes  
Entity Shell Company false  
Entity Central Index Key 0001158420  
Current Fiscal Year End Date --09-30  
Entity Filer Category Non-accelerated Filer  
Trading Symbol HGSH  
Entity Common Stock, Shares Outstanding   45,050,000
Entity Emerging Growth Company false  
Entity Small Business true  
v3.19.2
CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)
Jun. 30, 2019
Sep. 30, 2018
Current assets:    
Cash $ 538,666 $ 3,267,020
Restricted cash 4,041,211 3,508,557
Contract receivables 10,570,966 12,582,965
Real estate property development completed 115,938,257 58,999,178
Real estate property under development 0 60,128,554
Other current assets 1,592,094 1,408,826
Total current assets 132,681,194 139,895,100
Property, plant and equipment, net 658,953 718,366
Real estate property development completed, net of current portion 1,218,182 1,217,650
Security deposits 8,300,408 8,296,782
Real estate property under development, net of current portion 217,674,575 215,431,915
Due from local government for real estate property development completed 2,838,105 2,836,865
Total Assets 363,371,417 368,396,678
Current liabilities:    
Construction loans 80,517,116 55,610,803
Accounts payables 31,968,713 20,507,128
Other payables 5,477,664 4,894,774
Construction deposits 1,888,942 1,879,570
Contract liabilities 1,864,978 5,844,189
Customer deposits 19,071,273 20,234,072
Shareholder loans 2,142,255 2,142,110
Accrued expenses 2,994,701 3,006,150
Taxes payable 13,908,342 15,492,902
Total current liabilities 159,833,984 129,611,698
Deferred tax liabilities 2,441,642 2,068,257
Tax payable - long term 4,962,946 4,960,779
Customer deposits, net of current portion 1,452,294 1,914,677
Construction loans, less current portion 30,678,227 66,885,378
Construction deposits, net of current portion 1,278,611 1,278,053
Total liabilities 200,647,704 206,718,842
Commitments and Contingencies
Stockholders' equity    
Common stock, $0.001 par value, 100,000,000 shares authorized, 45,050,000 shares issued and outstanding June 30, 2019 and September 30, 2018 45,050 45,050
Additional paid-in capital 129,907,805 129,907,805
Statutory surplus 9,925,794 9,925,794
Retained earnings 31,781,976 30,803,052
Accumulated other comprehensive deficit (8,936,912) (9,003,865)
Total stockholders' equity 162,723,713 161,677,836
Total Liabilities and Stockholders' Equity $ 363,371,417 $ 368,396,678
v3.19.2
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares
Jun. 30, 2019
Sep. 30, 2018
CONDENSED CONSOLIDATED BALANCE SHEETS    
Common stock, par value $ 0.001 $ 0.001
Common stock, shares authorized 100,000,000 100,000,000
Common stock, shares issued 45,050,000 45,050,000
Common stock, shares outstanding 45,050,000 45,050,000
v3.19.2
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME(LOSS) - USD ($)
3 Months Ended 9 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)        
Real estate sales $ 8,156,204 $ 14,551,834 $ 25,260,556 $ 50,905,772
Less: Sales tax (283,809) (63,611) (788,766) (153,891)
Cost of real estate sales (7,091,672) (9,183,145) (20,571,449) (39,302,376)
Gross profit 780,723 5,305,078 3,900,341 11,449,505
Operating expenses        
Selling and distribution expenses 85,863 153,563 360,763 655,898
General and administrative expenses 467,159 523,055 1,721,778 1,535,262
Total operating expenses 553,022 676,618 2,082,541 2,191,160
Operating income 227,701 4,628,460 1,817,800 9,258,345
Interest expense, net (11,307) (130,166) (152,149) (384,851)
Other expense (9,982) (4,943) (312,145) (4,943)
Income before income taxes 206,412 4,493,351 1,353,506 8,868,551
Provision for income taxes 53,243 1,113,422 374,582 2,244,180
Net income 153,169 3,379,929 978,924 6,624,371
Other Comprehensive income (loss)        
Foreign currency translation adjustment (3,837,762) (9,348,988) 66,953 724,475
Comprehensive income (loss) $ (3,684,593) $ (5,969,059) $ 1,045,877 $ 7,348,846
Basic and diluted income per common share        
Basic and diluted $ 0.00 $ 0.08 $ 0.02 $ 0.15
Weighted average common shares outstanding        
Basic and diluted 45,050,000 45,050,000 45,050,000 45,050,000
v3.19.2
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - USD ($)
Common Stock [Member]
Additional Paid-in Capital [Member]
Statutory Surplus [Member]
Retained Earnings [Member]
Accumulated Other Comprehensive Income (loss) [Member]
Total
Beginning balance at Sep. 30, 2017 $ 45,050 $ 129,853,172 $ 9,142,899 $ 26,343,030 $ (3,494,785) $ 161,889,366
Beginning balance (in Shares) at Sep. 30, 2017 45,050,000          
Stock-based Compensation $ 0 44,700 0 0 0 44,700
Net income for the year 0 0 0 6,624,371 0 6,624,371
Foreign currency translation adjustments 0 0 0 0 724,475 724,475
Ending balance at Jun. 30, 2018 $ 45,050 129,897,872 9,142,899 32,967,401 (2,770,310) 169,282,912
Ending Balance (in Shares) at Jun. 30, 2018 45,050,000          
Beginning balance at Sep. 30, 2018 $ 45,050 129,907,805 9,925,794 30,803,052 (9,003,865) 161,677,836
Beginning balance (in Shares) at Sep. 30, 2018 45,050,000          
Net income for the year $ 0 0 0 978,924 0 978,924
Foreign currency translation adjustments 0 0 0 0 66,953 66,953
Ending balance at Jun. 30, 2019 $ 45,050 $ 129,907,805 $ 9,925,794 $ 31,781,976 $ (8,936,912) $ 162,723,713
Ending Balance (in Shares) at Jun. 30, 2019 45,050,000          
v3.19.2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
9 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Cash flows from operating activities    
Net income $ 978,924 $ 6,624,371
Adjustments to reconcile net income to net cash provided by operating activities:    
Deferred tax provision 374,582 1,334,056
Depreciation 60,065 437,241
Stock based compensation 0 44,700
Changes in assets and liabilities:    
Advances to vendors 0 (211,246)
Contract receivables 2,028,876 (797,870)
Real estate property development completed (57,234,276) 18,698,758
Real estate property under development 58,333,457 (12,598,796)
Other current assets (183,682) 70,984
Accounts payables 11,517,215 (6,568,036)
Other payables 584,025 852,178
Contract liabilities (4,004,221) 1,261,805
Customer deposits (1,644,082) (2,693,740)
Construction deposits 8,599 (32,928)
Accrued expenses (12,911) (182,051)
Taxes payable (1,599,226) (1,465,169)
Net cash provided by operating activities 9,207,345 4,774,257
Cash flow from investing activities    
Purchases of fixed assets 0 (371,640)
Net cash used in investing activities 0 (371,640)
Cash flow from financing activities    
Net proceeds (repayments) of shareholder loans 0 (156,679)
Net proceeds (repayments) of bank loans (11,418,405) (2,796,115)
Net cash used in financing activities (11,418,405) (2,952,794)
Effect of changes of foreign exchange rate on cash and restricted cash 15,360 (11,621)
Net increase (decrease) in cash and restricted cash (2,195,700) 1,438,202
Cash and restricted cash , beginning of period 6,775,577 4,716,604
Cash and restricted cash, end of period 4,579,877 6,154,806
Supplemental disclosures of cash flow information:    
Interest paid 5,439,715 4,821,443
Income taxes paid 287,416 979,093
Reconciliation to amounts on unaudited condensed consolidated balance sheets:    
Cash 538,666 2,723,332
Restricted 4,041,211 3,431,474
Cash and restricted cash, end of period $ 4,579,877 $ 6,154,806
v3.19.2
ORGANIZATION AND BASIS OF PRESENTATION
9 Months Ended
Jun. 30, 2019
ORGANIZATION AND BASIS OF PRESENTATION  
ORGANIZATION AND BASIS OF PRESENTATION

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

Organization and basis of presentation

China HGS Real Estate, Inc. (“China HGS” or the “Company” or “we”, “us”, “our”), through its subsidiaries and variable interest entity (“VIE”), engages in real estate development, and the construction and sales of residential apartments, parking space and commercial properties in Tier 3 and Tier 4 cities and counties in China.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results For the three and nine months ended June 30, 2019 and 2018 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, 2018 filed with the SEC on January 10, 2019.

Liquidity

As of June 30, 2019, the Company had an approximately $27.2 million negative working capital and total cash and restricted cash balance decreased to approximately $4.8 million as of June 30, 2019 as compared to approximately $6.8 million as of September 30, 2018. With respect to capital funding requirements, the Company budgeted our capital spending based on ongoing assessments of needs to maintain adequate cash. Due to the long term relationship with our construction suppliers, we were able to effectively manage cash spending on construction, meantime, we are able to obtain additional funding support from local banks and financial institutions. Also, the Company’s cash flows from pre-sales and current sales should provide financial support for our current developments and operations. For the both nine months ended June 30, 2019 and 2018, the Company had positive cash flow from operating. In addition, our principal shareholder, Mr. Xiaojun Zhu has been providing and will continue to provide his personal funds, if necessary, to support the Company on an as needed basis. The Company believes it has sufficient working capital for the next twelve months. In order to fully implement our business plan and sustain continued growth, we may also need to raise capital from outside investors. Our expectation, therefore, is that we will seek to access the capital markets in both the U.S. and China to obtain the funds as needed. At the present time, however, we do not have commitments of funds from any third party.

v3.19.2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
9 Months Ended
Jun. 30, 2019
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

The unaudited condensed consolidated financial statements include the financial statements of China HGS Real Estate Inc. (the “Company” or “China HGS”), China HGS Investment Inc. (“HGS Investment”), Shaanxi HGS Management and Consulting Co., Ltd. (“Shaanxi HGS”) and its variable interest entity (“VIE”), Shaanxi Guangsha Investment and Development Group Co., Ltd. (“Guangsha”). All inter-company transactions and balances between the Company and its subsidiaries have been eliminated upon consolidation.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes, and disclosure of contingent liabilities at the date of the consolidated financial statements. Estimates are used for, but not limited to, the assumptions and estimates used by management in recognizing development revenue under the percentage of completion method, the selection of the useful lives of property and equipment, provision necessary for contingent liabilities, revenue recognition, taxes 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.

Fair value of financial instruments

The Company follows the provisions of Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures. It clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

Level 1‑Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

Level 2‑Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.

Level 3‑Inputs are unobservable inputs which reflect the reporting entity’s own assumptions or what assumptions the market participants would use in pricing the asset or liability based on the best available information.

The carrying amounts reported in the accompanying condensed consolidated balance sheets for cash, restricted cash and all other current assets, security deposits for land use rights, loans and all current liabilities approximate their fair value based on the short-term maturity of these instruments. The fair value of the long term customer, construction and security deposits approximate their carrying amounts because the deposits are received in cash. It was impractical to estimate the fair value of the amount due from the local government and the long term other loans payable.

Revenue recognition

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 obligations 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. Otherwise, revenue is recognized at a point in time when the customer obtains control of the asset.

Under percentage completion method, revenue and profit from the sales of long term real estate development properties is recognized by the percentage of completion method on the sale of individual units when all the following criteria are met:

a.

Construction is beyond a preliminary stage.

b.

The buyer is committed to the extent of being unable to require a refund except for non-delivery of the unit or interest.

c.

Sufficient units have already been sold to assure that the entire property will not revert to rental property.

d.

Sales prices are collectible.

e.

Aggregate sales proceeds and costs can be reasonably estimated.

If any of the above criteria is not met, proceeds shall be accounted for as deposits until the criteria are met.

Under the percentage of completion method, revenues from individual real estate condominium units sold under development and related costs are recognized over the course of the construction period, based on the completion progress of a project. The progress towards complete satisfaction of the performance obligation is measured based on the Company’s efforts or inputs to the satisfaction of the performance obligation, by reference to the contract costs incurred up to the end of reporting period as a percentage of total estimated costs for each contract. In relation to any project, revenue is determined by calculating the ratio of incurred costs, including land use rights costs and construction costs, to total estimated costs and applying that ratio to the contracted sales amounts. Cost of sales is recognized by determining the ratio of contracted sales during the period to total estimated sales value, and applying that ratio to the incurred costs. Current period amounts are calculated based on the difference between the life-to-date project totals and the previously recognized amounts.

Any changes in significant judgments and/or estimates used in determining construction and development revenue could significantly change the timing or amount of construction and development revenue recognized. Changes in total estimated project costs or losses, if any, are recognized in the period in which they are determined.

Revenue from the sales of 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.

Disaggregation of Revenues

Disaggregated revenues was as follows:

 

 

 

 

 

 

 

 

 

 

For the three months ended June 30, 

 

    

2019

    

2018

Revenue recognized  for completed condominium real estate projects

 

$

149,448

 

$

6,003,371

Revenue recognized for condominium real estate projects under development

 

 

8,006,756

 

 

8,548,463

Total

 

$

8,156,204

 

$

14,551,834

 

 

 

 

 

 

 

 

 

For the nine months ended June 30,

 

    

2019

    

2018

Revenue recognized  for completed condominium real estate projects

 

$

1,126,013

 

24,965,928

Revenue recognized for condominium real estate projects under development

 

 

24,134,543

 

25,939,844

Total

 

$

25,260,556

 

50,905,772

 

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.

The following table presents the Company’s contract balances As of June 30, 2019 and September 30, 2018.

 

 

 

 

 

 

 

 

 

    

As of June 30, 

    

As of September 30, 

 

 

2019

 

2018

Contract assets

 

 

 

 

 

 

Cost and earnings in excess of billings

 

$

10,570,966

 

$

12,582,965

 

 

 

 

 

 

 

Contract liabilities

 

 

 

 

 

 

Billings in excess of cost and earnings

 

$

1,864,978

 

$

5,844,189

 

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.

Foreign currency translation

The Company’s financial information is presented in U.S. dollars. The functional currency of the Company’s operating subsidiaries is Renminbi (“RMB”), the currency of the PRC. The financial statements of the Company have been translated into U.S. dollars in accordance with ASC 830‑30 “Translation of Financial Statements”. The financial information is first prepared in RMB and then is translated into U.S. dollars at year-end exchange rates as to assets and liabilities and average exchange rates as to revenue and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income in stockholders’ equity.

 

 

 

 

 

 

 

 

 

 

For nine months

 

 

 

 

ended June 30, 

 

September 30, 

 

    

2019

    

2018

    

2018

Period end RMB : USD exchange rate

 

6.8650

 

6.6171

 

6.8680

Period average RMB : USD exchange rate

 

6.8265

 

6.4463

 

6.5368

 

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. As of August 8, 2019, the foreign exchange rate between U.S. dollars to RMB was 7.0039.

Cash

Cash includes cash on hand and demand deposits in accounts maintained with commercial banks within the PRC. The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. The Company maintains bank accounts in the PRC. Cash balances in bank accounts in PRC are not insured by the Federal Deposit Insurance Corporation or other programs.

Restricted Cash

The restricted cash is required by the banks as collateral for mortgage loans given to the home buyers before obtaining the certificates of ownership of the properties as collateral. In order to provide the banks with the certificates of ownership, the Company is required to complete certain procedures with the Chinese government, which normally takes six to twelve months. Because the banks provide the loan proceeds to the Company without obtaining certificates of ownership as loan collateral during this six to twelve months’ period, the mortgage banks require the Company to maintain, as restricted cash, 5% to 10% of the mortgage proceeds as security for the Company’s obligations under such guarantees. The restricted cash is released by the banks once they receive the certificates of ownership. These deposits are not covered by insurance. The Company has not experienced any losses in such accounts and management believes its restricted cash account is not exposed to any risks.

Advances to vendors

Advances to vendors consist of balances paid to contractors and vendors for services and materials that have not been provided or received and generally relate to the development and construction of residential and commercial units in the PRC. Advances to vendors are reviewed periodically to determine whether their carrying value has become impaired. Historically, the Company has not experienced any losses as a result of these advances.

Security deposits for land use rights

Security deposits for land use rights consist of the deposit held by the PRC government for the purchase of land use rights and the deposit held by an unrelated party to transfer its land use rights to the Company. The deposits will be reclassified to real estate property under development upon the transfers of legal title.

Real estate property development completed and under development

Real estate property consists of finished residential unit sites, commercial offices and residential unit sites under development. The Company leases the land for the residential unit sites under land use right leases with various terms from the PRC government. The cost of land use rights is included in the development cost and allocated to each project. Real estate property development completed and real estate property under development are stated at the lower of cost or fair value.

Expenditures for land development, including cost of land use rights, deed tax, pre-development costs, and engineering costs, exclusive of depreciation, are capitalized and allocated to development projects by the specific identification method. Costs are allocated to specific units within a project based on the ratio of the sales area of units to the estimated total sales area of the project (or phase of the project) multiplied by the total cost of the project (or phase of the project).

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

Real estate property development completed and real estate property under development are reclassified on the balance sheet into current and non-current portions based on the estimated date of construction completion and sales. The real estate property development completed classification is based on the estimated date that each property is expected to be sold within the Company’s normal operating cycle of the business and the Company’s sales plan. Real estate property development completed is classified as a current asset if the property is expected to be sold within the normal operating cycle of the business. Otherwise, it is classified as a non-current asset. The majority of real estate projects the Company has completed in the past were multi-layer or sub-high-rise real estate projects. The Company considers its normal operating cycle is 12 months.

Real estate property development completed and under development are subject to valuation adjustments when the carrying amount exceeds fair value. An impairment loss is recognized only if the carrying amount of the assets is not recoverable and exceeds fair value. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to be generated by the assets. The Company reviewed all of its real estate projects for future losses and impairment by comparing the estimated future undiscounted cash flows for each project to the carrying value of such project. For the three and nine months ended June 30, 2019 and 2018, the Company did not recognize any impairment for real estate property under development or completed.

Capitalization of Interest

Interest incurred during and directly related to real estate development projects is capitalized to the related real estate property under development during the active development period, which generally commences when borrowings are used to acquire real estate assets and ends when the properties are substantially complete or the property becomes inactive. Interest is capitalized based on the interest rate applicable to specific borrowings or the weighted average of the rates applicable to other borrowings during the period. Interest capitalized to real estate property under development is recorded as a component of cost of real estate sales when related units are sold. All other interest is expensed as incurred. For the three and nine months ended June 30, 2019, the total interest capitalized in the real estate property development was $1,857,424 and $5,403,867, respectively. For the three and nine months ended June 30, 2018, the total interest capitalized in the real estate property development was $1,701,643 and $4,501,913, 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 estimated expected undiscounted future cash flows, the Company measures the amount of impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally determined by using the asset’s expected future discounted cash flows or market value. The Company estimates fair value of the assets based on certain assumptions such as budgets, internal projections, and other available information as considered necessary. There is no impairment of long-lived assets during the three and nine months ended June 30, 2019 and 2018.

Customer deposits

Customer deposits consist of amounts received from customers relating to the sale of residential units in the PRC. In the PRC, customers will generally obtain permanent financing for the purchase of their residential unit prior to the completion of the project. The lending institution will provide the funding to the Company upon the completion of the financing rather than the completion of the project. The Company receives these funds and recognizes them as a liability until the revenue can be recognized.

Property warranty

The Company provides its customers with warranties which cover major defects of building structure and certain fittings and facilities of properties sold. The warranty period varies from two years to five years, depending on different property components the warranty covers. The Company continually estimates potential costs for materials and labor with regard to warranty-type claims expected to be incurred subsequent to the delivery of a property. Reserves are determined based on historical data and trends with respect to similar property types and geographical areas. The Company continually monitors the warranty reserve and makes adjustments to its pre-existing warranties, if any, in order to reflect changes in trends and historical data as information becomes available. The Company may seek further recourse against its contractors or any related third parties if it can be proved that the faults are caused by them. In addition, the Company also withholds up to 2% of the contract cost from sub-contractors for periods of two to five years. These amounts are included in construction deposits, and are only paid to the extent that there has been no warranty claim against the Company relating to the work performed or materials supplied by the subcontractors. For the three and nine months ended June 30, 2019 and 2018, the Company had not recognized any warranty costs in excess of the amount retained from subcontractors and therefore, no warranty reserve is considered necessary at the balance sheet dates.

Construction Deposits

Construction deposits are the warranty deposits the real estate contractors provide to the Company upon signing the construction contracts. The Company can use such deposits to reimburse customers in the event of customer claims due to construction defects. The remaining balance of the deposits are returned to the contractors when the terms of the after-sale property warranty expires, which normally occurs within two to five years after the date of the deposit.

Share-based compensation

Share-based payment transactions are measured based on the grant-date fair value of the equity instrument issued and recognized as compensation expense over the requisite service period, or vesting period.

Forfeitures to be estimated at the time of grant and revised, if necessary, in the subsequent period if actual forfeitures differ from initial estimates. Forfeiture rate is estimated based on historical and future expectation of employee turnover rate and are adjusted to reflect future change in circumstances and facts, if any. Share-based compensation expense is recorded net of estimated forfeitures such that expense was recorded only for those stock options and common stock awards that are expected to vest.

Income taxes

Deferred tax assets and liabilities are for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

ASC 740‑10‑25 prescribes a more-likely-than-not threshold for consolidated financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. It also provides guidance on the recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, years open for tax examination, accounting for income taxes in interim periods and income tax disclosures. There are no material uncertain tax positions as of June 30, 2019 and September 30, 2018.

The Company is a corporation organized under the laws of the State of Florida. However, all of the Company’s operations are conducted solely by its subsidiaries in the PRC. No income is earned in the United States and the management does not repatriate any earnings outside the PRC.  As a result, the Company did not generate any U.S. taxable income for the three and nine months ended June 30, 2019 and 2018. As of June 30, 2019, the Chinese entities’ income tax returns filed in China for the years ended December 31, 2018, 2017, 2016, 2015 and 2014 are subject to examination by the Chinese taxing authorities.

As of June 30, 2019, the tax years ended September 30, 2010 through September 30, 2018 for the Company’s PRC entities remain open for statutory examination by PRC tax authorities. The parent Company China HGS Real Estate Inc.’s both U.S. federal tax returns and Florida state tax returns are delinquent since 2009. Its tax years ended September 30, 2014 through September 30, 2018 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 June 30, 2019 and September 30, 2018, including an approximately $2.3 million provision on the deemed repatriation of undistributed foreign earnings and an additional $0.2 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.

Land appreciation tax (“LAT”)

In accordance with the relevant taxation laws in the PRC, the Company is subject to LAT based on progressive rates ranging from 30% to 60% on the appreciation of land value, which is calculated as the proceeds of sales of properties less deductible expenditures including borrowing costs and all property development expenditures. LAT is exempted if the appreciation values do not exceed certain thresholds specified in the relevant tax laws.

The whole project must be completed before the LAT obligation can be assessed. Accordingly, the Company should record the liability and the total related expense at the completion of a project unless the tax authorities impose an assessment at an earlier date. The methods to implement this tax law vary among different geographic areas. Hanzhong, where the project Mingzhu Garden, Nan Dajie and Central Plaza are located, implements this tax rule by requiring real estate companies prepay the LAT based upon customer deposits received. The tax rate in Hanzhong is 1%. Yang County, where the project Yangzhou Pearl Garden and Yangzhou Palace are located, requires a tax rate of 0.5%.

Comprehensive income (loss)

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 nine months ended June 30, 2019 and 2018 were net income and foreign currency translation adjustments.

Basic and diluted earnings per share

Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.

Concentration risk

The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC’s economy. The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. All of the Company’s cash is maintained with state-owned banks within the People’s Republic of China of which no deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts

Recent Accounting Pronouncements

On October 31, 2018 the FASB issued new guidance (ASU 2018‑17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities) that expands the application of a specific private company accounting alternative related to VIEs and changes the guidance for determining whether a decision-making fee is a variable interest. The amendments in the ASU provide that indirect interests held through related parties under common control will be considered on a proportional basis when determining whether fees paid to decision makers and service providers are variable interests. Such indirect interests were previously treated the same as direct interests. The consideration of indirect interests on a proportional basis is consistent with how indirect interests held through related parties under common control are treated when determining if a reporting entity within a related party group is the primary beneficiary of a VIE. The new guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Retrospective adoption is required. Early adoption is permitted, including adoption in an interim period. The Company does not expect this new guidance to have a material impact on our financial position and results of operations.

Excepts as mentioned above, the Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the Company’s consolidated balance sheets, statements of income and comprehensive income (loss), stockholders’ equity and cash flow.

v3.19.2
REAL ESTATE PROPERTY DEVELOPMENT COMPLETED AND UNDER DEVELOPMENT
9 Months Ended
Jun. 30, 2019
REAL ESTATE PROPERTY DEVELOPMENT COMPLETED AND UNDER DEVELOPMENT  
REAL ESTATE PROPERTY DEVELOPMENT COMPLETED AND UNDER DEVELOPMENT

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 June 30, 2019 and September 30, 2018:

 

 

 

 

 

 

 

 

 

 

Balance as of

 

    

June 30, 2019

    

September 30, 2018

Development completed:

 

 

 

 

 

 

Hanzhong City Mingzhu Garden Phase I

 

$

655,555

 

$

655,268

Hanzhong City Mingzhu Garden Phase II

 

 

30,317,279

 

 

31,096,125

Hanzhong City Nan Dajie (Mingzhu Xinju)

 

 

1,205,222

 

 

1,204,695

Hanzhong City Oriental Pearl Garden

 

 

21,332,166

 

 

21,397,560

Yang County Yangzhou Pearl Garden Phase I

 

 

1,674,083

 

 

1,673,351

Yang County Yangzhou Pearl Garden Phase II

 

 

4,152,530

 

 

4,189,829

Yang County Yangzhou Palace (a)

 

 

57,819,604

 

 

 —

Real estate property development completed

 

 

117,156,439

 

 

60,216,828

Less:  Real estate property completed – short-term

 

 

115,938,257

 

 

58,999,178

Real estate property completed – long-term

 

$

1,218,182

 

$

1,217,650

Under development:

 

 

 

 

 

 

Yang County Yangzhou Palace (a)

 

$

 —

 

$

60,128,554

Hanzhong City Shijin Project

 

 

7,055,751

 

 

7,052,669

Hanzhong City Liangzhou Road and related projects (b)

 

 

149,704,134

 

 

135,011,975

Hanzhong City Hanfeng Beiyuan East (c)

 

 

735,275

 

 

734,953

Hanzhong City Beidajie

 

 

55,338,732

 

 

67,793,750

Yang County East 2nd Ring Road (d)

 

 

4,840,683

 

 

4,838,568

Real estate property under development

 

 

217,674,575

 

 

275,560,469

Less:  Short-term portion

 

 

 —

 

 

60,128,554

Real estate property under development –long-term

 

$

217,674,575

 

$

215,431,915


(a)

The Company recognized $6,987,371 and $19,561,666 of development cost in cost of real estate sales under the percentage of completion method for the three and nine months ended June 30, 2019 (2018 - $4,735,391 and $20,603,618), respectively. The construction of project was fully completed on June 30, 2019, as a result, the carrying value of the project was reclassified from real estate property under development to real estate property completed.

(b)

In September 2013, the Company entered into an agreement (“Liangzhou Agreement”) with the Hanzhong local government on the Liangzhou Road reformation and expansion project (Liangzhou Road Project”). Pursuant to the agreement, the Company is contracted to reform and expand the Liangzhou Road, a commercial street in downtown Hanzhong City, with a total length of 2,080 meters and width of 30 meters and to resettle the existing residences in the Liangzhou road area. The government’s original road construction budget was approximately $33 million in accordance with the Liangzhou Agreement. The Company, in return, is being compensated by the local government to have an exclusive right on acquiring at least 394.5 Mu land use rights in a specified location of Hanzhong City. The Liangzhou Road Project’s road construction started at the end of 2013. In 2014, the original scope and budget on the Liangzhou road reformation and expansion project was extended, because the local government included more area and resettlement residences into the project, which resulted in additional investments from the Company. In return, the Company is authorized by the local government to develop and manage the commercial and residential properties surrounding the Liangzhou Road project. As of June 30, 2019, the main Liangzhou road construction is substantially completed and is expected to be approved by the local government later in fiscal 2019.

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 June 30, 2019, the actual costs incurred by the Company were $149,704,134 (September 30, 2018 - $135,011,975) 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.

(c)

In September 2012, the Company was approved by the Hanzhong local government to construct four municipal roads with a total length of approximately 1,192 meters. The project was deferred and then restarted during the quarter ended June 30, 2014. As of June 30, 2019, the local government was still in the process of assessing the budget for these projects.

(d)

The Company was engaged by the Yang County local government to construct the East 2nd Ring Road with a total length of 2.15 km. The local government is required to repay the Company’s project investment costs within 3 years with interest at the interest rate based on the commercial borrowing rate with the similar term published by China construction bank (June 30, 2019 and 2017 - 4.75%). The local government has approved a refund to the Company by reducing local surcharges or taxes otherwise required in the real estate development. The road construction was substantially completed As of June 30, 2019 and in process of government review and approval.

As of June 30, 2019 and September 30, 2018, land use rights included in real estate property under development totaled $7,052,076 and $14,749,085, respectively.

v3.19.2
CONSTRUCTION LOANS
9 Months Ended
Jun. 30, 2019
CONSTRUCTION LOANS  
CONSTRUCTION LOANS

NOTE 4. CONSTRUCTION LOANS

 

 

 

 

 

 

 

 

 

    

June 30, 

    

September 30, 

 

 

2019

 

2018

Loan A (i)

 

$

93,900,489

 

$

96,472,714

Loan B (ii)

 

 

 —

 

 

8,736,168

Loan C (iii)

 

 

17,294,854

 

 

17,287,299

 

 

 

111,195,343

 

 

122,496,181

Less: current maturities of construction loans

 

 

80,517,116

 

 

55,610,803

Construction loans – long-term portion

 

$

30,678,227

 

$

66,885,378


(i)

On June 26, 2015 and March 10, 2016, the Company signed phase I and Phase II agreements with Hanzhong Urban Construction Investment Development Co., Ltd, a state owned Company, to borrow up to $112,891,479 (RMB 775,000,000) for a long term loan at 4.75% interest per year to develop Liangzhou Road Project with maturity date on October 20, 2021. As of June 30, 2019, the Company borrowed $93,900,489 under this credit line (September 30, 2018‑ $96,472,714) with final due date in October 2021. The loan is guaranteed by Hanzhong City Hantai District Municipal Government and pledged by the Company’s Yang County Yangzhou Palace project with carrying value of $57,819,604 as of June 30, 2019 (September 30, 2018‑ $60,128,554). In addition, the Company was required to provide a security deposit for the loan received. As of June 30, 2019, the security deposits paid were $5,387,079 (September 30, 2018 - $5,384,726) for loans received. For the three and nine months ended June 30, 2019, interest paid was $1,692,826 and $4,986,267 (2018- $1,557,004 and $4,069,968), respectively, which was capitalized in to the development cost of Liangzhou road project. Due to local government’s delay in reallocation of residence in Liangzhou Road and related area, the Hanzhong Urban Construction Investment Development Co., Ltd has not released all the funds available in this loan to the Company and the Company’s withdraw will be based on the project’s development progress. The total required loan repayment schedule assuming total loan proceeds are borrowed are listed below:

 

 

 

 

 

 

For the periods ended:

    

Repayment in USD

    

Repayment in RMB

June 30, 2020

 

80,517,116

 

552,750,000

June 30, 2021

 

12,744,355

 

87,490,000

June 30, 2022

 

639,018

 

4,386,860

Total

 

93,900,489

 

644,626,860


(ii)

On January 8, 2016, the Company signed a loan agreement with Hanzhong Municipal Housing Provident Fund Management Center (“Housing Fund”) to borrow up to $11,653,314 (RMB 80,000,000) on development of Oriental Garden related projects. The loan carries interest at 3.575% per year and is due in January 2019. The Company fully repaid the loan upon maturity. The Company’s major shareholder Mr. Xiaojun Zhu pledged his personal assets as collateral for the loan. The Company has received all the proceeds from Housing Fund. The progress repayment was required based on certain sales milestones or a fixed repayment schedule starting in July 2018. The Housing Fund has rights to monitor the project’s future cash flow. For the three and nine months ended June 30, 2019, total interest was $Nil and $61,534 (2018 - $114,620 and $336,446), respectively, which was included in the interest expense, because the related Oriental Garden project was completed in fiscal year 2016. The loan has been fully repaid on January 16, 2019.

(iii)

In December 2016, the Company signed a loan agreement with Hantai District Urban Construction Investment Development Co., Ltd, a state owned Company, to borrow up to $17,334,304 (RMB 119,000,000) for the development of Hanzhong City Liangzhou Road project. As of June 30, 2019, the balance of loan was $17,294,854. The loan carries interest at a fixed interest of 1.2% and is due on June 20, 2031. The Company is required to repay the loan by equal annual principal repayment of $3,466,861 from December 2027 through June 2031. The Company pledged the assets of Liangzhou Road related projects with carrying value of $149,704,134 as collateral for the loan. Total interest of $53,516 and $158,632 for the three and nine months ended June 30, 2019, (2018 - $57,230 and $167,988) respectively, were capitalized in to the development cost of Hanzhong City Liangzhou Road project.

Additionally, in September 2017, the Urban Development Center Co., Ltd. approved a construction loan for the Company in the amount of $25,491,624 (RMB 175,000,000) with an annual interest rate of 1.2% per year in connection with the Liangzhou Road and related Project. The Company is required to repay the loan by equal annual principal repayment of $5,098,325 from December 2027 through May 2031. The amount of this loan is available to be drawn down as soon as the land use rights of the Liangzhou Road is approved and the construction starts, which is expected to begin in the 2019. Interest charge for three and nine months ended June 30, 2019 was $78,699 and $233,282 (2018-$84,161 and $247,041), respectively, which was included in the construction capitalized costs.

v3.19.2
CUSTOMER DEPOSITS
9 Months Ended
Jun. 30, 2019
CUSTOMER DEPOSITS  
CUSTOMER DEPOSITS

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:

 

 

 

 

 

 

 

 

 

    

June 30, 

    

September 30, 

 

 

2019

 

2018

Customer deposits by real estate projects

 

 

 

 

 

 

Mingzhu Garden (Mingzhu Nanyuan and Mingzhu Beiyuan)

 

$

7,834,441

 

$

8,246,058

Oriental Pearl Garden

 

 

4,709,862

 

 

4,648,784

Liangzhou road and related projects

 

 

1,452,294

 

 

1,914,677

Yang County Pearl Garden

 

 

986,391

 

 

997,312

Yang County Palace

 

 

5,540,579

 

 

6,341,918

 

 

 

 

 

 

 

Total

 

 

20,523,567

 

 

22,148,749

Less: Customer deposits - short-term

 

 

19,071,273

 

 

20,234,072

Customer deposits - long-term

 

$

1,452,294

 

$

1,914,677

 

Customer deposits are typically 10% - 20% of the unit price for those customers who purchase properties in cash and 30%‑50% of the unit price for those customers who purchase properties with mortgages. Buyers with mortgage loans pay customer deposits. The banks provide the balance of the funding to the Company upon consummation of the sales. The banks hold the properties as collateral for customers’ mortgage loans. If the customers default, the bank will repossess the collateral properties. Except during the Mortgage Loan Guarantee Period of approximately six to twelve months, the banks have no recourse to the Company for customers’ defaults. As of June 30, 2019 and September 30, 2018, approximately $4.0 million and $3.5 million was guaranteed by the Company, respectively.

v3.19.2
SHAREHOLDER'S LOANS
9 Months Ended
Jun. 30, 2019
SHAREHOLDER'S LOANS  
SHAREHOLDER'S LOANS

NOTE 6. SHAREHOLDER’S LOANS

 

 

 

 

 

 

 

 

 

 

As of

 

 

June 30, 

 

September 30, 

 

    

2019

    

2018

Shareholder loan – USD loan (a)

 

$

1,810,000

 

$

1,810,000

Shareholder loan – RMB loan (b)

 

 

332,255

 

 

332,110

Total

 

$

2,142,255

 

$

2,142,110


a.

The Company has a one year loan agreement (“USD Loan Agreement”) with our Chairman, CEO and major shareholder, pursuant to which the Company borrowed $1,810,000 to make a capital injection into Shaanxi HGS, the Company’s subsidiary. The interest rate for the loan is 4% per annum and the loan matured on July 19, 2014. The Company entered into the amendments to the USD Loan Agreement to extend the term until July 31, 2020 and the loan is due on demand. The Company recorded interest of $18,100  and $54,300 for the three and nine months ended June 30, 2019 and 2018, respectively. The Company has not yet paid this interest and it is recorded in accrued expenses in the accompanying consolidated balance sheets as of June 30, 2019 and September 30, 2018, respectively.

b.

On December 31, 2013, Shaanxi Guangsha Investment and Development Group Co., Ltd. (the “Guangsha”), the Company’s PRC operating subsidiary, entered into a loan agreement with the Chairman (the “Shareholder RMB Loan Agreement”), pursuant to which Guangsha is able to borrow funds from the Chairman in order to support the Company’s Liangzhou Road construction project development and the Company’s working capital needs. The Loan Agreement has a one-year term, and has been renewed upon maturity on September 25, 2019, with at an interest rate of 4.35% per year. For the three and nine months ended June 30, 2019, the interest was $5,148 and $25,686 (2018- $3,248 and $16,916), respectively, which is capitalized in the development cost of Liangzhou road project.

v3.19.2
TAXES
9 Months Ended
Jun. 30, 2019
TAXES  
TAXES

NOTE 7. TAXES

(A) Business sales tax and VAT

The Company is subject to a 5% business sales tax on revenue. It is the Company’s continuing practice to recognize the 5% business sales tax based on revenue as a cost of sales as the revenue is recognized. As of June 30, 2019, the Company had business sales tax payable of $8,441,691 (September 30, 2018 - $9,871,794), which is expected to be paid when the projects are completed and assessed by the local tax authority. In May of 2016, the Business Tax has been incorporated into Value Added Tax in China, which means there will be no more Business Tax and accordingly some business operations previously taxed in the name of Business Tax will be taxed in the manner of VAT thereafter. The Company is subject to 5% of VAT for its all existing real estate project based on the local tax authority’s practice.

B) Corporate income taxes (“CIT”)

The Company’s PRC subsidiaries and VIE are governed by the Income Tax Law of the People’s Republic of China concerning the privately run enterprises, which are generally subject to income tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments. However, as approved by the local tax authority of Hanzhong City, the Company’s CIT was assessed annually at a pre-determined fixed rate as an incentive to stimulate the local economy and encourage entrepreneurship. The local income tax rate in Hanzhong is 2.5% and in Yang County is 1.25% on revenue for the year ended September 30, 2017. Starting from fiscal 2018, the Company’s CIT changed to 25% on taxable income. The change in the income tax policy could negatively affect the Company’s net income in future years. Although the possibility exists for reinterpretation of the application of the tax regulations by higher tax authorities in the PRC, potentially overturning the decision made by the local tax authority, the Company has not experienced any reevaluation of the income taxes for prior years. The PRC tax rules are different from the local tax rules and the Company is required to comply with local tax rules. The difference between the two tax rules will not be a liability of the Company. There will be no further tax payments for the difference As of June 30, 2019 and September 30, 2018, the Company’s income tax payable balances were $8,047,787 and $8,331,026, respectively. The Company expects to pay off the income tax payable balance when the related real estate projects are completely sold.

The following table reconciles the statutory rates to the Company’s effective tax rate for the three and nine months ended June 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2019

    

2018

 

2019

    

2018

 

Chinese statutory tax rate

 

25

%  

25

%

 

25

%  

25

%

Valuation allowance change and other adjustments*

 

0.8

%  

(0.2)

%

 

2.7

%  

0.3

%

 

 

 

 

 

 

 

 

 

 

 

Effective tax rate

 

25.8

%  

24.8

%

$

27.7

%  

25.3

%

 

Income tax expense for the three and nine months ended June 30, 2019 and 2018 is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

June 30, 

 

June 30, 

 

    

2019

    

2018

    

2019

    

2018

Current tax provision

 

$

 —

 

$

160,154

 

$

 —

 

$

910,124

Deferred tax provision

 

 

53,243

 

 

953,268

 

 

374,582

 

 

1,334,056

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax provision

 

$

53,243

 

$

1,113,422

 

$

374,582

 

$

2,244,180

 

The components of deferred taxes As of June 30, 2019 and September 30, 2018 consist of the following:

 

 

 

 

 

 

 

 

 

 

June 30, 

 

September 30, 

 

    

2019

    

2018

Deferred tax liability:

 

 

 

 

 

 

Revenue recognized based on percentage of completion

 

$

2,441,642

 

$

2,068,257

 

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 June 30, 2019 and September 30, 2018, the Company recognized a one-time transition toll tax liability 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 one-time 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. The Company provided an additional $0.2 million tax 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 June 30, 2019, the outstanding LAT payable balance was $64,892 with respect to completed real estate properties sold up to June 30, 2019. As at September 30, 2018 the Company has an outstanding LAT payable balance of $ 141,765 with respect to completed real estate properties sold up to September 30, 2018.

(D) Taxes payable consisted of the following:

 

 

 

 

 

 

 

 

 

 

June 30, 

 

September 30, 

 

    

2019

    

2018

 

 

 

 

 

 

 

CIT

 

$

8,047,787

 

$

8,331,026

Business tax

 

 

8,523,008

 

 

9,871,794

Other taxes and fees

 

 

2,300,493

 

 

2,250,861

Total taxes payable

 

 

18,871,288

 

 

20,453,681

Less: current portion

 

 

13,908,342

 

 

15,492,902

Tax payable – long term

 

$

4,962,946

 

$

4,960,779

 

v3.19.2
COMMITMENTS AND CONTINGENCIES
9 Months Ended
Jun. 30, 2019
COMMITMENTS AND CONTINGENCIES  
COMMITMENTS AND CONTINGENCIES

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 expect any liability from the disposition of such claims and litigation individually or in the aggregate would have a material adverse impact on the Company’s consolidated financial position, results of operations and cash flows.

As an industry practice, the Company provides guarantees to PRC banks with respect to loans procured by the purchasers of the Company’s real estate properties for the total mortgage loan amount until the completion of obtaining the “Certificate of Ownership” of the properties from the government, which generally takes six to twelve months. Because the banks provide loan proceeds without getting the “Certificate of Ownership” as loan collateral during this six to twelve months’ period, the mortgage banks require the Company to maintain, as restricted cash, 5% to 10% of the mortgage proceeds as security for the Company’s obligations under such guarantees. If a purchaser defaults on its payment obligations, the mortgage bank may deduct the delinquent mortgage payment from the security deposit and require the Company to pay the excess amount if the delinquent mortgage payments exceed the security deposit. The Company has made necessary reserves in its restricted cash account to cover any potential mortgage defaults as required by the mortgage lenders. The Company has not experienced any losses related to this guarantee and believes that such reserves are sufficient. As of June 30, 2019 and September 30, 2018, the amount of security deposits provided for these guarantees was approximately $4.0 million and $3.5 million respectively.

On June 21, 2019, the "Company received a letter from the Listing Qualifications staff of The Nasdaq Stock Market ("Nasdaq") notifying the Company that it is no longer in compliance with the minimum bid price requirement for continued listing on the Nasdaq Capital Market. Nasdaq Listing Rule 5550(a)(2) requires listed companies to maintain a minimum bid price of $1.00 per share. The letter noted that the bid price of the Company's common stock was below $1.00 for the 30-day period ending June 20, 2019. The notification letter has no immediate effect on the Company's listing on the Nasdaq Capital Market. Nasdaq has provided the Company with 180 days, or until December 18, 2019, to regain compliance with the minimum bid price requirement by having a closing bid price of at least $1.00 per share for a minimum of 10 consecutive business days.

v3.19.2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)
9 Months Ended
Jun. 30, 2019
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  
Principles of consolidation

Principles of consolidation

The unaudited condensed consolidated financial statements include the financial statements of China HGS Real Estate Inc. (the “Company” or “China HGS”), China HGS Investment Inc. (“HGS Investment”), Shaanxi HGS Management and Consulting Co., Ltd. (“Shaanxi HGS”) and its variable interest entity (“VIE”), Shaanxi Guangsha Investment and Development Group Co., Ltd. (“Guangsha”). All inter-company transactions and balances between the Company and its subsidiaries have been eliminated upon consolidation.

Use of estimates

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes, and disclosure of contingent liabilities at the date of the consolidated financial statements. Estimates are used for, but not limited to, the assumptions and estimates used by management in recognizing development revenue under the percentage of completion method, the selection of the useful lives of property and equipment, provision necessary for contingent liabilities, revenue recognition, taxes and budgeted costs. Management believes that the estimates utilized in preparing its consolidated financial statements are reasonable and prudent. Actual results could differ from these estimates.

Fair value of financial instruments

Fair value of financial instruments

The Company follows the provisions of Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures. It clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

Level 1‑Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

Level 2‑Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.

Level 3‑Inputs are unobservable inputs which reflect the reporting entity’s own assumptions or what assumptions the market participants would use in pricing the asset or liability based on the best available information.

The carrying amounts reported in the accompanying condensed consolidated balance sheets for cash, restricted cash and all other current assets, security deposits for land use rights, loans and all current liabilities approximate their fair value based on the short-term maturity of these instruments. The fair value of the long term customer, construction and security deposits approximate their carrying amounts because the deposits are received in cash. It was impractical to estimate the fair value of the amount due from the local government and the long term other loans payable.

Revenue recognition

Revenue recognition

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 obligations 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. Otherwise, revenue is recognized at a point in time when the customer obtains control of the asset.

Under percentage completion method, revenue and profit from the sales of long term real estate development properties is recognized by the percentage of completion method on the sale of individual units when all the following criteria are met:

a.

Construction is beyond a preliminary stage.

b.

The buyer is committed to the extent of being unable to require a refund except for non-delivery of the unit or interest.

c.

Sufficient units have already been sold to assure that the entire property will not revert to rental property.

d.

Sales prices are collectible.

e.

Aggregate sales proceeds and costs can be reasonably estimated.

If any of the above criteria is not met, proceeds shall be accounted for as deposits until the criteria are met.

Under the percentage of completion method, revenues from individual real estate condominium units sold under development and related costs are recognized over the course of the construction period, based on the completion progress of a project. The progress towards complete satisfaction of the performance obligation is measured based on the Company’s efforts or inputs to the satisfaction of the performance obligation, by reference to the contract costs incurred up to the end of reporting period as a percentage of total estimated costs for each contract. In relation to any project, revenue is determined by calculating the ratio of incurred costs, including land use rights costs and construction costs, to total estimated costs and applying that ratio to the contracted sales amounts. Cost of sales is recognized by determining the ratio of contracted sales during the period to total estimated sales value, and applying that ratio to the incurred costs. Current period amounts are calculated based on the difference between the life-to-date project totals and the previously recognized amounts.

Any changes in significant judgments and/or estimates used in determining construction and development revenue could significantly change the timing or amount of construction and development revenue recognized. Changes in total estimated project costs or losses, if any, are recognized in the period in which they are determined.

Revenue from the sales of 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.

Disaggregation of Revenues

Disaggregated revenues was as follows:

 

 

 

 

 

 

 

 

 

 

For the three months ended June 30, 

 

    

2019

    

2018

Revenue recognized  for completed condominium real estate projects

 

$

149,448

 

$

6,003,371

Revenue recognized for condominium real estate projects under development

 

 

8,006,756

 

 

8,548,463

Total

 

$

8,156,204

 

$

14,551,834

 

 

 

 

 

 

 

 

 

For the nine months ended June 30,

 

    

2019

    

2018

Revenue recognized  for completed condominium real estate projects

 

$

1,126,013

 

24,965,928

Revenue recognized for condominium real estate projects under development

 

 

24,134,543

 

25,939,844

Total

 

$

25,260,556

 

50,905,772

 

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.

The following table presents the Company’s contract balances As of June 30, 2019 and September 30, 2018.

 

 

 

 

 

 

 

 

 

    

As of June 30, 

    

As of September 30, 

 

 

2019

 

2018

Contract assets

 

 

 

 

 

 

Cost and earnings in excess of billings

 

$

10,570,966

 

$

12,582,965

 

 

 

 

 

 

 

Contract liabilities

 

 

 

 

 

 

Billings in excess of cost and earnings

 

$

1,864,978

 

$

5,844,189

 

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.

Foreign currency translation

Foreign currency translation

The Company’s financial information is presented in U.S. dollars. The functional currency of the Company’s operating subsidiaries is Renminbi (“RMB”), the currency of the PRC. The financial statements of the Company have been translated into U.S. dollars in accordance with ASC 830‑30 “Translation of Financial Statements”. The financial information is first prepared in RMB and then is translated into U.S. dollars at year-end exchange rates as to assets and liabilities and average exchange rates as to revenue and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income in stockholders’ equity.

 

 

 

 

 

 

 

 

 

 

For nine months

 

 

 

 

ended June 30, 

 

September 30, 

 

    

2019

    

2018

    

2018

Period end RMB : USD exchange rate

 

6.8650

 

6.6171

 

6.8680

Period average RMB : USD exchange rate

 

6.8265

 

6.4463

 

6.5368

 

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. As of August 8, 2019, the foreign exchange rate between U.S. dollars to RMB was 7.0039.

Cash

Cash

Cash includes cash on hand and demand deposits in accounts maintained with commercial banks within the PRC. The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. The Company maintains bank accounts in the PRC. Cash balances in bank accounts in PRC are not insured by the Federal Deposit Insurance Corporation or other programs.

Restricted cash

Restricted Cash

The restricted cash is required by the banks as collateral for mortgage loans given to the home buyers before obtaining the certificates of ownership of the properties as collateral. In order to provide the banks with the certificates of ownership, the Company is required to complete certain procedures with the Chinese government, which normally takes six to twelve months. Because the banks provide the loan proceeds to the Company without obtaining certificates of ownership as loan collateral during this six to twelve months’ period, the mortgage banks require the Company to maintain, as restricted cash, 5% to 10% of the mortgage proceeds as security for the Company’s obligations under such guarantees. The restricted cash is released by the banks once they receive the certificates of ownership. These deposits are not covered by insurance. The Company has not experienced any losses in such accounts and management believes its restricted cash account is not exposed to any risks.

Advances to vendors

Advances to vendors

Advances to vendors consist of balances paid to contractors and vendors for services and materials that have not been provided or received and generally relate to the development and construction of residential and commercial units in the PRC. Advances to vendors are reviewed periodically to determine whether their carrying value has become impaired. Historically, the Company has not experienced any losses as a result of these advances.

Security deposits for land use rights

Security deposits for land use rights

Security deposits for land use rights consist of the deposit held by the PRC government for the purchase of land use rights and the deposit held by an unrelated party to transfer its land use rights to the Company. The deposits will be reclassified to real estate property under development upon the transfers of legal title.

Real estate property development completed and under development

Real estate property 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

Real estate property development completed and real estate property under development are reclassified on the balance sheet into current and non-current portions based on the estimated date of construction completion and sales. The real estate property development completed classification is based on the estimated date that each property is expected to be sold within the Company’s normal operating cycle of the business and the Company’s sales plan. Real estate property development completed is classified as a current asset if the property is expected to be sold within the normal operating cycle of the business. Otherwise, it is classified as a non-current asset. The majority of real estate projects the Company has completed in the past were multi-layer or sub-high-rise real estate projects. The Company considers its normal operating cycle is 12 months.

Real estate property development completed and under development are subject to valuation adjustments when the carrying amount exceeds fair value. An impairment loss is recognized only if the carrying amount of the assets is not recoverable and exceeds fair value. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to be generated by the assets. The Company reviewed all of its real estate projects for future losses and impairment by comparing the estimated future undiscounted cash flows for each project to the carrying value of such project. For the three and nine months ended June 30, 2019 and 2018, the Company did not recognize any impairment for real estate property under development or completed.

Capitalization of Interest

Capitalization of Interest

Interest incurred during and directly related to real estate development projects is capitalized to the related real estate property under development during the active development period, which generally commences when borrowings are used to acquire real estate assets and ends when the properties are substantially complete or the property becomes inactive. Interest is capitalized based on the interest rate applicable to specific borrowings or the weighted average of the rates applicable to other borrowings during the period. Interest capitalized to real estate property under development is recorded as a component of cost of real estate sales when related units are sold. All other interest is expensed as incurred. For the three and nine months ended June 30, 2019, the total interest capitalized in the real estate property development was $1,857,424 and $5,403,867, respectively. For the three and nine months ended June 30, 2018, the total interest capitalized in the real estate property development was $1,701,643 and $4,501,913, respectively.

Impairment of long-lived assets

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 estimated expected undiscounted future cash flows, the Company measures the amount of impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally determined by using the asset’s expected future discounted cash flows or market value. The Company estimates fair value of the assets based on certain assumptions such as budgets, internal projections, and other available information as considered necessary. There is no impairment of long-lived assets during the three and nine months ended June 30, 2019 and 2018.

Customer deposits

Customer deposits

Customer deposits consist of amounts received from customers relating to the sale of residential units in the PRC. In the PRC, customers will generally obtain permanent financing for the purchase of their residential unit prior to the completion of the project. The lending institution will provide the funding to the Company upon the completion of the financing rather than the completion of the project. The Company receives these funds and recognizes them as a liability until the revenue can be recognized.

Property warranty

Property warranty

The Company provides its customers with warranties which cover major defects of building structure and certain fittings and facilities of properties sold. The warranty period varies from two years to five years, depending on different property components the warranty covers. The Company continually estimates potential costs for materials and labor with regard to warranty-type claims expected to be incurred subsequent to the delivery of a property. Reserves are determined based on historical data and trends with respect to similar property types and geographical areas. The Company continually monitors the warranty reserve and makes adjustments to its pre-existing warranties, if any, in order to reflect changes in trends and historical data as information becomes available. The Company may seek further recourse against its contractors or any related third parties if it can be proved that the faults are caused by them. In addition, the Company also withholds up to 2% of the contract cost from sub-contractors for periods of two to five years. These amounts are included in construction deposits, and are only paid to the extent that there has been no warranty claim against the Company relating to the work performed or materials supplied by the subcontractors. For the three and nine months ended June 30, 2019 and 2018, the Company had not recognized any warranty costs in excess of the amount retained from subcontractors and therefore, no warranty reserve is considered necessary at the balance sheet dates.

Construction Deposits

Construction Deposits

Construction deposits are the warranty deposits the real estate contractors provide to the Company upon signing the construction contracts. The Company can use such deposits to reimburse customers in the event of customer claims due to construction defects. The remaining balance of the deposits are returned to the contractors when the terms of the after-sale property warranty expires, which normally occurs within two to five years after the date of the deposit.

Share-based compensation

Share-based compensation

Share-based payment transactions are measured based on the grant-date fair value of the equity instrument issued and recognized as compensation expense over the requisite service period, or vesting period.

Forfeitures to be estimated at the time of grant and revised, if necessary, in the subsequent period if actual forfeitures differ from initial estimates. Forfeiture rate is estimated based on historical and future expectation of employee turnover rate and are adjusted to reflect future change in circumstances and facts, if any. Share-based compensation expense is recorded net of estimated forfeitures such that expense was recorded only for those stock options and common stock awards that are expected to vest.

Income taxes

Income taxes

Deferred tax assets and liabilities are for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

ASC 740‑10‑25 prescribes a more-likely-than-not threshold for consolidated financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax return. It also provides guidance on the recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, years open for tax examination, accounting for income taxes in interim periods and income tax disclosures. There are no material uncertain tax positions as of June 30, 2019 and September 30, 2018.

The Company is a corporation organized under the laws of the State of Florida. However, all of the Company’s operations are conducted solely by its subsidiaries in the PRC. No income is earned in the United States and the management does not repatriate any earnings outside the PRC.  As a result, the Company did not generate any U.S. taxable income for the three and nine months ended June 30, 2019 and 2018. As of June 30, 2019, the Chinese entities’ income tax returns filed in China for the years ended December 31, 2018, 2017, 2016, 2015 and 2014 are subject to examination by the Chinese taxing authorities.

As of June 30, 2019, the tax years ended September 30, 2010 through September 30, 2018 for the Company’s PRC entities remain open for statutory examination by PRC tax authorities. The parent Company China HGS Real Estate Inc.’s both U.S. federal tax returns and Florida state tax returns are delinquent since 2009. Its tax years ended September 30, 2014 through September 30, 2018 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 June 30, 2019 and September 30, 2018, including an approximately $2.3 million provision on the deemed repatriation of undistributed foreign earnings and an additional $0.2 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.

Land appreciation tax ("LAT")

Land appreciation tax (“LAT”)

In accordance with the relevant taxation laws in the PRC, the Company is subject to LAT based on progressive rates ranging from 30% to 60% on the appreciation of land value, which is calculated as the proceeds of sales of properties less deductible expenditures including borrowing costs and all property development expenditures. LAT is exempted if the appreciation values do not exceed certain thresholds specified in the relevant tax laws.

The whole project must be completed before the LAT obligation can be assessed. Accordingly, the Company should record the liability and the total related expense at the completion of a project unless the tax authorities impose an assessment at an earlier date. The methods to implement this tax law vary among different geographic areas. Hanzhong, where the project Mingzhu Garden, Nan Dajie and Central Plaza are located, implements this tax rule by requiring real estate companies prepay the LAT based upon customer deposits received. The tax rate in Hanzhong is 1%. Yang County, where the project Yangzhou Pearl Garden and Yangzhou Palace are located, requires a tax rate of 0.5%.

Comprehensive income (loss)

Comprehensive income (loss)

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 nine months ended June 30, 2019 and 2018 were net income and foreign currency translation adjustments.

Basic and diluted earnings per share

Basic and diluted earnings per share

Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.

Concentration risk

Concentration risk

The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC’s economy. The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. All of the Company’s cash is maintained with state-owned banks within the People’s Republic of China of which no deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts

Recent Accounting Pronouncements

Recent Accounting Pronouncements

On October 31, 2018 the FASB issued new guidance (ASU 2018‑17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities) that expands the application of a specific private company accounting alternative related to VIEs and changes the guidance for determining whether a decision-making fee is a variable interest. The amendments in the ASU provide that indirect interests held through related parties under common control will be considered on a proportional basis when determining whether fees paid to decision makers and service providers are variable interests. Such indirect interests were previously treated the same as direct interests. The consideration of indirect interests on a proportional basis is consistent with how indirect interests held through related parties under common control are treated when determining if a reporting entity within a related party group is the primary beneficiary of a VIE. The new guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Retrospective adoption is required. Early adoption is permitted, including adoption in an interim period. The Company does not expect this new guidance to have a material impact on our financial position and results of operations.

Excepts as mentioned above, the Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the Company’s consolidated balance sheets, statements of income and comprehensive income (loss), stockholders’ equity and cash flow.

v3.19.2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)
9 Months Ended
Jun. 30, 2019
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  
Schedule of Disaggregated revenues

Disaggregated revenues was as follows:

 

 

 

 

 

 

 

 

 

 

For the three months ended June 30, 

 

    

2019

    

2018

Revenue recognized  for completed condominium real estate projects

 

$

149,448

 

$

6,003,371

Revenue recognized for condominium real estate projects under development

 

 

8,006,756

 

 

8,548,463

Total

 

$

8,156,204

 

$

14,551,834

 

 

 

 

 

 

 

 

 

For the nine months ended June 30,

 

    

2019

    

2018

Revenue recognized  for completed condominium real estate projects

 

$

1,126,013

 

24,965,928

Revenue recognized for condominium real estate projects under development

 

 

24,134,543

 

25,939,844

Total

 

$

25,260,556

 

50,905,772

 

Schedule of Company's contract balances

 

The following table presents the Company’s contract balances As of June 30, 2019 and September 30, 2018.

 

 

 

 

 

 

 

 

 

    

As of June 30, 

    

As of September 30, 

 

 

2019

 

2018

Contract assets

 

 

 

 

 

 

Cost and earnings in excess of billings

 

$

10,570,966

 

$

12,582,965

 

 

 

 

 

 

 

Contract liabilities

 

 

 

 

 

 

Billings in excess of cost and earnings

 

$

1,864,978

 

$

5,844,189

 

Schedule of Currency exchange rate

 

 

 

 

 

 

 

 

 

 

For nine months

 

 

 

 

ended June 30, 

 

September 30, 

 

    

2019

    

2018

    

2018

Period end RMB : USD exchange rate

 

6.8650

 

6.6171

 

6.8680

Period average RMB : USD exchange rate

 

6.8265

 

6.4463

 

6.5368

 

v3.19.2
REAL ESTATE PROPERTY DEVELOPMENT COMPLETED AND UNDER DEVELOPMENT (Tables)
9 Months Ended
Jun. 30, 2019
REAL ESTATE PROPERTY DEVELOPMENT COMPLETED AND UNDER DEVELOPMENT  
Components of Real Estate Property Completed and under Development

 

The following summarizes the components of real estate property development completed and under development as of June 30, 2019 and September 30, 2018:

 

 

 

 

 

 

 

 

 

 

Balance as of

 

    

June 30, 2019

    

September 30, 2018

Development completed:

 

 

 

 

 

 

Hanzhong City Mingzhu Garden Phase I

 

$

655,555

 

$

655,268

Hanzhong City Mingzhu Garden Phase II

 

 

30,317,279

 

 

31,096,125

Hanzhong City Nan Dajie (Mingzhu Xinju)

 

 

1,205,222

 

 

1,204,695

Hanzhong City Oriental Pearl Garden

 

 

21,332,166

 

 

21,397,560

Yang County Yangzhou Pearl Garden Phase I

 

 

1,674,083

 

 

1,673,351

Yang County Yangzhou Pearl Garden Phase II

 

 

4,152,530

 

 

4,189,829

Yang County Yangzhou Palace (a)

 

 

57,819,604

 

 

 —

Real estate property development completed

 

 

117,156,439

 

 

60,216,828

Less:  Real estate property completed – short-term

 

 

115,938,257

 

 

58,999,178

Real estate property completed – long-term

 

$

1,218,182

 

$

1,217,650

Under development:

 

 

 

 

 

 

Yang County Yangzhou Palace (a)

 

$

 —

 

$

60,128,554

Hanzhong City Shijin Project

 

 

7,055,751

 

 

7,052,669

Hanzhong City Liangzhou Road and related projects (b)

 

 

149,704,134

 

 

135,011,975

Hanzhong City Hanfeng Beiyuan East (c)

 

 

735,275

 

 

734,953

Hanzhong City Beidajie

 

 

55,338,732

 

 

67,793,750

Yang County East 2nd Ring Road (d)

 

 

4,840,683

 

 

4,838,568

Real estate property under development

 

 

217,674,575

 

 

275,560,469

Less:  Short-term portion

 

 

 —

 

 

60,128,554

Real estate property under development –long-term

 

$

217,674,575

 

$

215,431,915


(a)

The Company recognized $6,987,371 and $19,561,666 of development cost in cost of real estate sales under the percentage of completion method for the three and nine months ended June 30, 2019 (2018 - $4,735,391 and $20,603,618), respectively. The construction of project was fully completed on June 30, 2019, as a result, the carrying value of the project was reclassified from real estate property under development to real estate property completed.

(b)

In September 2013, the Company entered into an agreement (“Liangzhou Agreement”) with the Hanzhong local government on the Liangzhou Road reformation and expansion project (Liangzhou Road Project”). Pursuant to the agreement, the Company is contracted to reform and expand the Liangzhou Road, a commercial street in downtown Hanzhong City, with a total length of 2,080 meters and width of 30 meters and to resettle the existing residences in the Liangzhou road area. The government’s original road construction budget was approximately $33 million in accordance with the Liangzhou Agreement. The Company, in return, is being compensated by the local government to have an exclusive right on acquiring at least 394.5 Mu land use rights in a specified location of Hanzhong City. The Liangzhou Road Project’s road construction started at the end of 2013. In 2014, the original scope and budget on the Liangzhou road reformation and expansion project was extended, because the local government included more area and resettlement residences into the project, which resulted in additional investments from the Company. In return, the Company is authorized by the local government to develop and manage the commercial and residential properties surrounding the Liangzhou Road project. As of June 30, 2019, the main Liangzhou road construction is substantially completed and is expected to be approved by the local government later in fiscal 2019.

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 June 30, 2019, the actual costs incurred by the Company were $149,704,134 (September 30, 2018 - $135,011,975) 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.

(c)

In September 2012, the Company was approved by the Hanzhong local government to construct four municipal roads with a total length of approximately 1,192 meters. The project was deferred and then restarted during the quarter ended June 30, 2014. As of June 30, 2019, the local government was still in the process of assessing the budget for these projects.

(d)

The Company was engaged by the Yang County local government to construct the East 2nd Ring Road with a total length of 2.15 km. The local government is required to repay the Company’s project investment costs within 3 years with interest at the interest rate based on the commercial borrowing rate with the similar term published by China construction bank (June 30, 2019 and 2017 - 4.75%). The local government has approved a refund to the Company by reducing local surcharges or taxes otherwise required in the real estate development. The road construction was substantially completed As of June 30, 2019 and in process of government review and approval.

v3.19.2
CONSTRUCTION LOANS (Tables)
9 Months Ended
Jun. 30, 2019
Schedule of Long-term Debt Instruments

 

 

 

 

 

 

 

 

 

    

June 30, 

    

September 30, 

 

 

2019

 

2018

Loan A (i)

 

$

93,900,489

 

$

96,472,714

Loan B (ii)

 

 

 —

 

 

8,736,168

Loan C (iii)

 

 

17,294,854

 

 

17,287,299

 

 

 

111,195,343

 

 

122,496,181

Less: current maturities of construction loans

 

 

80,517,116

 

 

55,610,803

Construction loans – long-term portion

 

$

30,678,227

 

$

66,885,378

 

 

(i)

On June 26, 2015 and March 10, 2016, the Company signed phase I and Phase II agreements with Hanzhong Urban Construction Investment Development Co., Ltd, a state owned Company, to borrow up to $112,719,075 (RMB 775,000,000) for a long term loan at 4.75% interest per year to develop Liangzhou Road Project. As of December 31, 2018, the Company borrowed $95,927,839 under this credit line (September 30, 2018‑ $96,472,714) with final due date in October 2021. The loan is guaranteed by Hanzhong City Hantai District Municipal Government and pledged by the Company’s Yang County Yangzhou Palace project with carrying value of $57,211,691 as of December 31, 2018 (September 30, 2018‑ $60,128,554). In addition, the Company was required to provide a security deposit for the loan received. As of December 31, 2018, the security deposits paid were $5,378,852 (September 30, 2018 - $5,384,726) for loans received. For the three months ended December 31, 2018 and 2017, interest paid was $1,607,998 and $1,237,090, respectively, which was capitalized in to the development cost of Liangzhou road project. Due to local government’s delay in reallocation of residence in Liangzhou Road and related area, the Hanzhong Urban Construction Investment Development Co., Ltd has not released all the funds available in this loan to the Company and the Company’s withdraw will be based on the project’s development progress.

(ii)

On January 8, 2016, the Company signed a loan agreement with Hanzhong Municipal Housing Provident Fund Management Center (“Housing Fund”) to borrow up to $11,635,517 (RMB 80,000,000) on development of Oriental Garden related projects. The loan carries interest at 3.575% per year and is due in January 2019. The Company’s major shareholder Mr. Xiaojun Zhu pledged his personal assets as collateral for the loan. The Company has received all the proceeds from Housing Fund. The progress repayment was required based on certain sales milestones or a fixed repayment schedule starting in July 2018. The Housing Fund has rights to monitor the project’s future cash flow. For the three months ended December 31, 2018 and 2017, total interest was $49,981 and $109,320, which was included in the interest expense, because the related Oriental Garden project was completed in fiscal year 2016. Subsequently in January 2019, the Company fully repaid the balance of the loan upon maturity.

(iii)

In December 2016, the Company signed a loan agreement with Hantai District Urban Construction Investment Development Co., Ltd, a state owned Company, to borrow up to $17,307,832 (RMB 119,000,000) for the development of Hanzhong City Liangzhou Road project. As of December 31, 2018, the balance of loan was $17,268,442. The loan carries interest at a fixed interest of 1.2% and is due on June 20, 2031. The Company is required to repay the loan by equal annual principal repayment of $3,453,688 from December 2027 through June 2031. The Company pledged the assets of Liangzhou Road related projects with carrying value of $136,946,859 as collateral for the loan. Total interest of $52,260 and $54,584 for the three months ended December 31, 2018 and 2017, respectively, were capitalized in to the development cost of Hanzhong City Liangzhou Road project.

Additionally, in September 2017, the Urban Development Center Co., Ltd. approved a construction loan for the Company in the amount of $25,452,694 (RMB 175,000,000) with an annual interest rate of 1.2% per year in connection with the Liangzhou Road and related Project. The Company is required to repay the loan by equal annual principal repayment of $5,090,539 from December 2027 through May 2031. The amount of this loan is available to be drawn down as soon as the land use rights of the Liangzhou Road is approved and the construction starts, which is expected to begin in the 2019. Interest charge for three months ended December 31, 2018 and 2017 was $76,773 and $80,271, respectively, which was included in the construction capitalized costs.

Hanzhong Urban Construction Investment Development Co., Ltd [Member]  
Schedule of Maturities of Long-term Debt

(i)

The total required loan repayment schedule assuming total loan proceeds are borrowed are listed below:

 

 

 

 

 

 

For the periods ended:

    

Repayment in USD

    

Repayment in RMB

June 30, 2020

 

80,517,116

 

552,750,000

June 30, 2021

 

12,744,355

 

87,490,000

June 30, 2022

 

639,018

 

4,386,860

Total

 

93,900,489

 

644,626,860

 

v3.19.2
CUSTOMER DEPOSITS (Tables)
9 Months Ended
Jun. 30, 2019
CUSTOMER DEPOSITS  
Schedule of Customer deposits from pre-sale of residential units

 

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:

 

 

 

 

 

 

 

 

 

    

June 30, 

    

September 30, 

 

 

2019

 

2018

Customer deposits by real estate projects

 

 

 

 

 

 

Mingzhu Garden (Mingzhu Nanyuan and Mingzhu Beiyuan)

 

$

7,834,441

 

$

8,246,058

Oriental Pearl Garden

 

 

4,709,862

 

 

4,648,784

Liangzhou road and related projects

 

 

1,452,294

 

 

1,914,677

Yang County Pearl Garden

 

 

986,391

 

 

997,312

Yang County Palace

 

 

5,540,579

 

 

6,341,918

 

 

 

 

 

 

 

Total

 

 

20,523,567

 

 

22,148,749

Less: Customer deposits - short-term

 

 

19,071,273

 

 

20,234,072

Customer deposits - long-term

 

$

1,452,294

 

$

1,914,677

 

v3.19.2
SHAREHOLDER'S LOANS (Tables)
9 Months Ended
Jun. 30, 2019
SHAREHOLDER'S LOANS  
Schedule of Shareholder's Loans

 

 

 

 

 

 

 

 

 

 

As of

 

 

June 30, 

 

September 30, 

 

    

2019

    

2018

Shareholder loan – USD loan (a)

 

$

1,810,000

 

$

1,810,000

Shareholder loan – RMB loan (b)

 

 

332,255

 

 

332,110

Total

 

$

2,142,255

 

$

2,142,110


a.

The Company has a one year loan agreement (“USD Loan Agreement”) with our Chairman, CEO and major shareholder, pursuant to which the Company borrowed $1,810,000 to make a capital injection into Shaanxi HGS, the Company’s subsidiary. The interest rate for the loan is 4% per annum and the loan matured on July 19, 2014. The Company entered into the amendments to the USD Loan Agreement to extend the term until July 31, 2020 and the loan is due on demand. The Company recorded interest of $18,100  and $54,300 for the three and nine months ended June 30, 2019 and 2018, respectively. The Company has not yet paid this interest and it is recorded in accrued expenses in the accompanying consolidated balance sheets as of June 30, 2019 and September 30, 2018, respectively.

b.

On December 31, 2013, Shaanxi Guangsha Investment and Development Group Co., Ltd. (the “Guangsha”), the Company’s PRC operating subsidiary, entered into a loan agreement with the Chairman (the “Shareholder RMB Loan Agreement”), pursuant to which Guangsha is able to borrow funds from the Chairman in order to support the Company’s Liangzhou Road construction project development and the Company’s working capital needs. The Loan Agreement has a one-year term, and has been renewed upon maturity on September 25, 2019, with at an interest rate of 4.35% per year. For the three and nine months ended June 30, 2019, the interest was $5,148 and $25,686 (2018- $3,248 and $16,916), respectively, which is capitalized in the development cost of Liangzhou road project.

v3.19.2
TAXES (Tables)
9 Months Ended
Jun. 30, 2019
TAXES  
Schedule of reconciliation of statutory rates to the Company's effective tax rate

 

The following table reconciles the statutory rates to the Company’s effective tax rate for the three and nine months ended June 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2019

    

2018

 

2019

    

2018

 

Chinese statutory tax rate

 

25

%  

25

%

 

25

%  

25

%

Valuation allowance change and other adjustments*

 

0.8

%  

(0.2)

%

 

2.7

%  

0.3

%

 

 

 

 

 

 

 

 

 

 

 

Effective tax rate

 

25.8

%  

24.8

%

$

27.7

%  

25.3

%

 

Schedule of Income tax expenses

Income tax expense for the three and nine months ended June 30, 2019 and 2018 is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

June 30, 

 

June 30, 

 

    

2019

    

2018

    

2019

    

2018

Current tax provision

 

$

 —

 

$

160,154

 

$

 —

 

$

910,124

Deferred tax provision

 

 

53,243

 

 

953,268

 

 

374,582

 

 

1,334,056

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax provision

 

$

53,243

 

$

1,113,422

 

$

374,582

 

$

2,244,180

 

Schedule of components of deferred taxes

The components of deferred taxes As of June 30, 2019 and September 30, 2018 consist of the following:

 

 

 

 

 

 

 

 

 

 

June 30, 

 

September 30, 

 

    

2019

    

2018

Deferred tax liability:

 

 

 

 

 

 

Revenue recognized based on percentage of completion

 

$

2,441,642

 

$

2,068,257

 

Schedule of Taxes payable

(D) Taxes payable consisted of the following:

 

 

 

 

 

 

 

 

 

 

June 30, 

 

September 30, 

 

    

2019

    

2018

 

 

 

 

 

 

 

CIT

 

$

8,047,787

 

$

8,331,026

Business tax

 

 

8,523,008

 

 

9,871,794

Other taxes and fees

 

 

2,300,493

 

 

2,250,861

Total taxes payable

 

 

18,871,288

 

 

20,453,681

Less: current portion

 

 

13,908,342

 

 

15,492,902

Tax payable – long term

 

$

4,962,946

 

$

4,960,779

 

v3.19.2
ORGANIZATION AND BASIS OF PRESENTATION (Details) - USD ($)
Jun. 30, 2019
Sep. 30, 2018
Jun. 30, 2018
Sep. 30, 2017
ORGANIZATION AND BASIS OF PRESENTATION        
Working Capital $ (27,200,000)      
Total cash and restricted cash $ 4,579,877 $ 6,775,577 $ 6,154,806 $ 4,716,604
v3.19.2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Disaggregation of Revenue (Details) - USD ($)
3 Months Ended 9 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES        
Revenue recognized for completed condominium real estate projects $ 149,448 $ 6,003,371 $ 1,126,013 $ 24,965,928
Revenue recognized for condominium real estate projects under development 8,006,756 8,548,463 24,134,543 25,939,844
Total $ 8,156,204 $ 14,551,834 $ 25,260,556 $ 50,905,772
v3.19.2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Contract with Customer, Asset and Liability (Details) - USD ($)
Jun. 30, 2019
Sep. 30, 2018
Contract assets    
Cost and earnings in excess of billings $ 10,570,966 $ 12,582,965
Contract liabilities    
Billings in excess of cost and earnings $ 1,864,978 $ 5,844,189
v3.19.2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Currency Exchange Rate (Details)
9 Months Ended 12 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Sep. 30, 2018
Aug. 08, 2019
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES        
Period end RMB : USD exchange rate 6.8650 6.6171 6.8680 7.0039
Period average RMB : USD exchange rate 6.8265 6.4463 6.5368  
v3.19.2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Additional Information (Details)
3 Months Ended 9 Months Ended 12 Months Ended
Jun. 30, 2019
USD ($)
Jun. 30, 2018
USD ($)
Jun. 30, 2019
USD ($)
Jun. 30, 2018
USD ($)
Dec. 31, 2018
Sep. 30, 2018
USD ($)
Dec. 31, 2017
Aug. 08, 2019
Significant Accounting Policies [Line Items]                
Percentage Of Contract Cost Withholds     2.00%          
Real Estate Property Plant And Equipment Interest Capitalization $ 1,857,424 $ 1,701,643 $ 5,403,867 $ 4,501,913        
Impairment of long lived assets $ 0 $ 0 0 $ 0        
Effective Income Tax Rate Reconciliation, Repatriation of Foreign Earnings, Amount     2,300,000     $ 2,300,000    
Effective Income Tax Rate Reconciliation Provision For Delinquent Tax Filings     $ 200,000     $ 200,000    
Effective Income Tax Rate Reconciliation, at Federal Statutory Income Tax Rate, Percent 25.00% 25.00% 25.00% 25.00% 21.00%   35.00%  
Foreign exchange rate between U.S. dollars to RMB 6.8650 6.6171 6.8650 6.6171   6.8680   7.0039
Hanzhong                
Significant Accounting Policies [Line Items]                
Land appreciation tax rate     1.00%          
Yang County                
Significant Accounting Policies [Line Items]                
Land appreciation tax rate     0.50%          
Minimum                
Significant Accounting Policies [Line Items]                
Percentage of down payments to total purchase price of property to receive mortgage loan guarantees     20.00%          
Percentage Of Mortgage Proceeds As Security     5.00%          
Land appreciation tax rate     30.00%          
Maximum                
Significant Accounting Policies [Line Items]                
Percentage of down payments to total purchase price of property to receive mortgage loan guarantees     50.00%          
Percentage Of Mortgage Proceeds As Security     10.00%          
Land appreciation tax rate     60.00%          
v3.19.2
REAL ESTATE PROPERTY DEVELOPMENT COMPLETED AND UNDER DEVELOPMENT - Components Of Real Estate (Details) - USD ($)
Jun. 30, 2019
Sep. 30, 2018
Real Estate Properties [Line Items]    
Real estate property development completed $ 117,156,439 $ 60,216,828
Less: Real estate property completed - short-term 115,938,257 58,999,178
Real estate property completed - long-term 1,218,182 1,217,650
Real estate property under development 217,674,575 275,560,469
Less: Short-term portion 0 60,128,554
Real estate property under development -long-term 217,674,575 215,431,915
Hanzhong City Mingzhu Garden Phase I    
Real Estate Properties [Line Items]    
Real estate property development completed 655,555 655,268
Hanzhong City Mingzhu Garden Phase II    
Real Estate Properties [Line Items]    
Real estate property development completed 30,317,279 31,096,125
Hanzhong City Nan Dajie (Mingzhu Xinju)    
Real Estate Properties [Line Items]    
Real estate property development completed 1,205,222 1,204,695
Hanzhong City Oriental Pearl Garden    
Real Estate Properties [Line Items]    
Real estate property development completed 21,332,166 21,397,560
Yang County Yangzhou Pearl Garden Phase I    
Real Estate Properties [Line Items]    
Real estate property development completed 1,674,083 1,673,351
Yang County Yangzhou Pearl Garden Phase II    
Real Estate Properties [Line Items]    
Real estate property development completed 4,152,530 4,189,829
Yang County Yangzhou Palace    
Real Estate Properties [Line Items]    
Real estate property development completed 57,819,604 0
Real estate property under development 0 60,128,554
Hanzhong City Shijin Project    
Real Estate Properties [Line Items]    
Real estate property under development 7,055,751 7,052,669
Hanzhong City Liangzhou Road and related projects    
Real Estate Properties [Line Items]    
Real estate property under development 149,704,134 135,011,975
Hanzhong City Hanfeng Beiyuan East    
Real Estate Properties [Line Items]    
Real estate property under development 735,275 734,953
Hanzhong City Beidajie    
Real Estate Properties [Line Items]    
Real estate property under development 55,338,732 67,793,750
Yang County East 2nd Ring Road    
Real Estate Properties [Line Items]    
Real estate property under development $ 4,840,683 $ 4,838,568
v3.19.2
REAL ESTATE PROPERTY DEVELOPMENT COMPLETED AND UNDER DEVELOPMENT - Additional Information (Details) - USD ($)
3 Months Ended 9 Months Ended 12 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
Sep. 30, 2018
Jun. 30, 2017
Real Estate Properties [Line Items]            
Land use right included in real estate property under development $ 7,052,076   $ 7,052,076   $ 14,749,085  
Hanzhong City Oriental Pearl Garden            
Real Estate Properties [Line Items]            
Actual Construction And Development Costs Incurred $ 6,987,371 $ 4,735,391 19,561,666 $ 20,603,618    
Hanzhong City Liangzhou Road and related projects            
Real Estate Properties [Line Items]            
Budgeted Price For Municipal Roads     33,000,000      
Actual Construction And Development Costs Incurred     $ 149,704,134   $ 135,011,975  
Yang County East 2nd Ring Road            
Real Estate Properties [Line Items]            
Debt Instrument, Interest Rate, Stated Percentage 4.75%   4.75%     4.75%
v3.19.2
CONSTRUCTION LOANS - Other Loans-Long Term Portion (Details) - USD ($)
Jun. 30, 2019
Sep. 30, 2018
Construction loans $ 111,195,343 $ 122,496,181
Less: current maturities of construction loans 80,517,116 55,610,803
Construction loans - long-term portion 30,678,227 66,885,378
Loan A    
Construction loans 93,900,489 96,472,714
Loan B    
Construction loans 0 8,736,168
Loan C    
Construction loans $ 17,294,854 $ 17,287,299
v3.19.2
CONSTRUCTION LOANS - Schedule Of Repayment Loan (Details) - 9 months ended Jun. 30, 2019
CNY (¥)
USD ($)
Debt Instrument Scheduled Repayment Amount ¥ 644,626,860 $ 93,900,489
June 30, 2020    
Debt Instrument Scheduled Repayment Amount 552,750,000 80,517,116
June 30, 2021    
Debt Instrument Scheduled Repayment Amount 87,490,000 12,744,355
June 30, 2022    
Debt Instrument Scheduled Repayment Amount ¥ 4,386,860 $ 639,018
v3.19.2
CONSTRUCTION LOANS - Additional Information (Details)
3 Months Ended 9 Months Ended 12 Months Ended
Jun. 30, 2019
USD ($)
Jun. 30, 2018
USD ($)
Jun. 30, 2019
USD ($)
Jun. 30, 2018
USD ($)
Sep. 30, 2017
USD ($)
Jun. 30, 2019
CNY (¥)
Jun. 30, 2019
USD ($)
Sep. 30, 2018
USD ($)
Sep. 30, 2017
CNY (¥)
Sep. 30, 2017
USD ($)
Dec. 31, 2016
CNY (¥)
Dec. 31, 2016
USD ($)
Jan. 08, 2016
CNY (¥)
Jan. 08, 2016
USD ($)
Debt Instrument [Line Items]                            
Debt Instrument, Face Amount             $ 149,704,134              
Security Deposit             8,300,408 $ 8,296,782            
Debt Instrument, Periodic Payment, Principal     $ 3,466,861                      
Hantai District Urban Construction Investment Development Co., Ltd [Member]                            
Debt Instrument [Line Items]                            
Interest Costs Capitalized $ 53,516 $ 57,230 158,632 $ 167,988                    
Urban Development Center Co., Ltd [Member]                            
Debt Instrument [Line Items]                            
Line of Credit Facility, Remaining Borrowing Capacity             $ 17,294,854              
Agreement Wth Hanzhong Urban Construction Investment Development Co Ltd [Member]                            
Debt Instrument [Line Items]                            
Debt Instrument, Interest Rate, Stated Percentage           4.75% 4.75%              
Long-term Line of Credit             $ 93,900,489 96,472,714            
Line of Credit Facility, Maximum Borrowing Capacity           ¥ 775,000,000 112,891,479              
Long-term Debt, Gross             57,819,604 60,128,554            
Debt Instrument, Periodic Payment, Interest 1,692,826 1,557,004 4,986,267 4,069,968                    
Security Deposit             $ 5,387,079 $ 5,384,726            
Agreement With Hanzhong Municipal Housing Provident Fund Management Center [Member]                            
Debt Instrument [Line Items]                            
Debt Instrument, Interest Rate, Stated Percentage           1.20% 1.20%           3.575% 3.575%
Line of Credit Facility, Maximum Borrowing Capacity                     ¥ 119,000,000 $ 17,334,304 ¥ 80,000,000 $ 11,653,314
Debt Instrument, Periodic Payment, Principal 0 114,620 61,534 336,446                    
Construction Loan [Member] | Urban Development Center Co., Ltd [Member]                            
Debt Instrument [Line Items]                            
Debt Instrument, Face Amount                 ¥ 175,000,000 $ 25,491,624        
Debt Instrument, Interest Rate, Stated Percentage                 1.20% 1.20%        
Interest Costs Capitalized         $ 5,098,325                  
Debt Instrument, Periodic Payment $ 78,699 $ 84,161 $ 233,282 $ 247,041                    
v3.19.2
CUSTOMER DEPOSITS - Customer Deposits From Pre-Sale Of Residential Units (Details) - USD ($)
Jun. 30, 2019
Sep. 30, 2018
Customer deposits by real estate projects    
Total $ 20,523,567 $ 22,148,749
Less: Customer deposits - short-term 19,071,273 20,234,072
Customer deposits - long-term 1,452,294 1,914,677
Hanzhong City Mingzhu Garden Phase I    
Customer deposits by real estate projects    
Total 7,834,441 8,246,058
Oriental Pearl Garden    
Customer deposits by real estate projects    
Total 4,709,862 4,648,784
Liangzhou road and related projects    
Customer deposits by real estate projects    
Total 1,452,294 1,914,677
Yang County Yangzhou Pearl Garden Phase I    
Customer deposits by real estate projects    
Total 986,391 997,312
Yang County Palace    
Customer deposits by real estate projects    
Total $ 5,540,579 $ 6,341,918
v3.19.2
CUSTOMER DEPOSITS - Additional Information (Details) - USD ($)
$ in Millions
9 Months Ended
Jun. 30, 2019
Sep. 30, 2018
Deposit Liabilities [Line Items]    
Mortgage loan guarantee amount $ 4.0 $ 3.5
Minimum    
Deposit Liabilities [Line Items]    
Percentage of down payments to total purchase price of property to receive mortgage loan guarantees 20.00%  
Minimum | Customer deposits [Member]    
Deposit Liabilities [Line Items]    
Percentage of customer deposit of unit price for cash purchase 10.00%  
Percentage of down payments to total purchase price of property to receive mortgage loan guarantees 30.00%  
Maximum    
Deposit Liabilities [Line Items]    
Percentage of down payments to total purchase price of property to receive mortgage loan guarantees 50.00%  
Maximum | Customer deposits [Member]    
Deposit Liabilities [Line Items]    
Percentage of customer deposit of unit price for cash purchase 20.00%  
Percentage of down payments to total purchase price of property to receive mortgage loan guarantees 50.00%  
v3.19.2
SHAREHOLDER'S LOANS - Schedule of Other Short-term Loans (Details)
Jun. 30, 2019
CNY (¥)
Jun. 30, 2019
USD ($)
Sep. 30, 2018
CNY (¥)
Sep. 30, 2018
USD ($)
Shareholder Loans [Line Items]        
Shareholder loan   $ 2,142,255   $ 2,142,110
Shareholder USD Loan Agreement        
Shareholder Loans [Line Items]        
Shareholder loan   $ 1,810,000   $ 1,810,000
Shareholder RMB Loan Agreement        
Shareholder Loans [Line Items]        
Shareholder loan | ¥ ¥ 332,255   ¥ 332,110  
v3.19.2
SHAREHOLDER'S LOANS - Additional Information (Details) - USD ($)
3 Months Ended 9 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
Sep. 30, 2018
Shareholder Loans [Line Items]          
Interest (expense) $ 11,307 $ 130,166 $ 152,149 $ 384,851  
Shareholder loan 2,142,255   2,142,255   $ 2,142,110
Shareholder USD Loan Agreement          
Shareholder Loans [Line Items]          
Interest (expense) $ 18,100 54,300 $ 18,100 54,300  
Debt instrument, stated interest rate 4.00%   4.00%    
Shareholder loan $ 1,810,000   $ 1,810,000   $ 1,810,000
Shareholder's RMB Loan Agreement          
Shareholder Loans [Line Items]          
Interest (expense) $ 5,148 $ 3,248 $ 25,686 $ 16,916  
Debt instrument, stated interest rate 4.35%   4.35%    
v3.19.2
TAXES - Reconciliation Of Statutory Rates To Effective Tax Rate (Details)
3 Months Ended 9 Months Ended 12 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
Dec. 31, 2018
Dec. 31, 2017
TAXES            
Chinese statutory tax rate 25.00% 25.00% 25.00% 25.00% 21.00% 35.00%
Valuation allowance change and other adjustments 0.80% (0.20%) 2.70% 0.30%    
Effective tax rate 25.80% 24.80% 27.70% 25.30%    
v3.19.2
TAXES - Components of Income Tax Expenses (Details) - USD ($)
3 Months Ended 9 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
TAXES        
Current tax provision $ 0 $ 160,154 $ 0 $ 910,124
Deferred tax provision 53,243 953,268 374,582 1,334,056
Income tax provision $ 53,243 $ 1,113,422 $ 374,582 $ 2,244,180
v3.19.2
TAXES - Components Of Deferred Taxes (Details) - USD ($)
Jun. 30, 2019
Sep. 30, 2018
Deferred tax liability:    
Revenue recognized based on percentage of completion $ 2,441,642 $ 2,068,257
v3.19.2
TAXES - Taxes Payable (Details) - USD ($)
Jun. 30, 2019
Sep. 30, 2018
TAXES    
CIT $ 8,047,787 $ 8,331,026
Business tax 8,523,008 9,871,794
Other taxes and fees 2,300,493 2,250,861
Total taxes payable 18,871,288 20,453,681
Less: current portion 13,908,342 15,492,902
Tax payable - long term $ 4,962,946 $ 4,960,779
v3.19.2
TAXES - Additional Information (Details) - USD ($)
3 Months Ended 9 Months Ended 12 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
Dec. 31, 2018
Sep. 30, 2018
Dec. 31, 2017
Sep. 30, 2017
Income Taxes [Line Items]                
Business sales tax, rate     5.00%          
Business sales tax $ 8,523,008   $ 8,523,008     $ 9,871,794    
Income tax at statutory tax rate 25.00% 25.00% 25.00% 25.00% 21.00%   35.00%  
Provision for income taxes $ 53,243 $ 1,113,422 $ 374,582 $ 2,244,180        
Land appreciation tax payable $ 64,892   $ 64,892     141,765    
Effective Value Added Tax Rate Percentage 5.00% 5.00% 5.00% 5.00%        
Effective Income Tax Rate Reconciliation, Deduction, Percent     50.00%          
Provision Due To Delinquent US Tax Return     $ 200,000          
Effective Income Tax Rate Reconciliation, Repatriation of Foreign Earnings, Amount     $ 2,300,000     2,300,000    
Effective Income Tax Rate Reconciliation, at Federal Statutory Income Tax Rate, Percent 25.00% 25.00% 25.00% 25.00% 21.00%   35.00%  
Minimum                
Income Taxes [Line Items]                
Land appreciation tax rate     30.00%          
Maximum                
Income Taxes [Line Items]                
Land appreciation tax rate     60.00%          
Hanzhong                
Income Taxes [Line Items]                
Local income tax rate               2.50%
Land appreciation tax rate     1.00%          
Yang County                
Income Taxes [Line Items]                
Local income tax rate               1.25%
Land appreciation tax rate     0.50%          
Provision for income taxes     $ 8,047,787     $ 8,331,026    
v3.19.2
COMMITMENTS AND CONTINGENCIES (Details) - USD ($)
$ in Millions
9 Months Ended
Jun. 30, 2019
Sep. 30, 2018
Commitments And Contingencies [Line Items]    
Security deposit provided for guarantee $ 4.0 $ 3.5
Minimum    
Commitments And Contingencies [Line Items]    
Percentage Of Mortgage Proceeds As Security 5.00%  
Maximum    
Commitments And Contingencies [Line Items]    
Percentage Of Mortgage Proceeds As Security 10.00%