As filed with the U.S. Securities and Exchange
Commission on June 25, 2021.
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
CHINA HGS REAL ESTATE INC.
(Exact name of registrant as specified in its charter)
Florida
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33-0961490
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(State or Other Jurisdiction of Incorporation)
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(I.R.S. Employer Identification Number)
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6 Xinghan Road, 19th Floor, Hanzhong City
Shaanxi Province, PRC 723000
(Address of principal executive offices, including
zip code)
Registrant’s phone number, including area
code
+(86) 091-62622612
Xiaojun Zhu
Chief Executive Officer
6 Xinghan Road, 19th Floor, Hanzhong City
Shaanxi Province, PRC 723000
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
Copies to:
Lawrence S. Venick, Esq.
Loeb & Loeb LLP
2206-19 Jardine House
1 Connaught Place
Central, Hong Kong SAR
Tel: +852.3923.1111
Fax: +852.3923.1100
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Approximate date of commencement
of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this
Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box:
x
If this Form is filed to register additional securities
for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed
pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed
pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. ¨
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 ¨
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Accelerated Filer ¨
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Non-accelerated Filer x
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Smaller Reporting Company x
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Emerging Growth Company ¨
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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. ¨
Calculation of Registration Fee
Title of Class of Securities to be Registered
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Amount to
Be
Registered(1)
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Proposed
Maximum
Offering
Price per
Share
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Proposed
Maximum
Aggregate
Offering
Price
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Amount of
Registration
Fee(2)
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Common Stocks, par value $0.001 per share
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3,092,114
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$
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2.13
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$
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6,586,202.82
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$
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718.55
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Total
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$
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$
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718.55
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(1)
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Represents the maximum number of common stocks offered by the selling stockholder named in this registration statement.
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(2)
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Amount of registration fee is calculated based on proposed maximum aggregate offering price multiplied by 0.0001091 based on the filing fee rate issued by the Securities and Exchange Commission for the period between October 1, 2020 and September 30, 2021.
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The registrant hereby amends this
registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further
amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
The information in this preliminary
prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities
and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities
in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JUNE
25, 2021
PRELIMINARY PROSPECTUS
CHINA HGS REAL ESTATE INC.
3,092,114 Shares of Common Stock
This prospectus relates to the resale from time
to time of an aggregate of 3,092,114 common stocks (the “Common Stock”). The Common Stock was issued to Shaanxi Tianhao Construction
Engineer Co., Ltd (the “Selling Stockholder”) in connection with an Equity Acquisition Agreement (the “Equity Acquisition
Agreement”) completed on March 24, 2021 (the “March Equity Acquisition Transaction”), whereby the Company allotted and
issued the Common Stock to the Selling Stockholder in exchange to settle its accounts payable balance with the Selling Stockholder. We
are registering for resale the Common Stock issued pursuant to the Equity Acquisition Agreement that we entered into with the Selling
Stockholder.
As of the date of this prospectus, our common
stock is listed on the NASDAQ Capital Market under the symbol “HGSH”. On June 24, 2021, the closing sale prices of our common
stocks was $2.15.
Investing in our common stock is highly speculative
and involves a significant degree of risk. See “Risk Factors” beginning on page of this prospectus for a discussion of information
that should be considered before making a decision to purchase our common stock.
Neither the Securities and Exchange Commission
nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus.
Any representation to the contrary is a criminal offense.
The date of this prospectus is ,
2021.
TABLE OF CONTENTS
You should rely only on information contained
in this prospectus. We have not, and the selling stockholder have not, authorized anyone to provide you with additional information or
information different from that contained in this prospectus. Neither the delivery of this prospectus nor the sale of our securities means
that the information contained in this prospectus is correct after the date of this prospectus. This prospectus is not an offer to sell
or the solicitation of an offer to buy our securities in any circumstances under which the offer or solicitation is unlawful or in any
state or other jurisdiction where the offer is not permitted.
The information in this prospectus is accurate
only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may
have changed since those dates.
No person is authorized in connection with this
prospectus to give any information or to make any representations about us, the securities offered hereby or any matter discussed in this
prospectus, other than the information and representations contained in this prospectus. If any other information or representation is
given or made, such information or representation may not be relied upon as having been authorized by us.
Neither we nor the selling stockholder have done
anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose
is required, other than the United States. You are required to inform yourself about, and to observe any restrictions relating to, this
offering and the distribution of this prospectus.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements,
including, without limitation, in the sections captioned “Risk Factors”, “Management’s Discussion and Analysis
of Financial Condition and Plan of Operations”, and “Business”. Known and unknown risks, uncertainties and other factors,
including those listed under “Risk Factors,” may cause our actual results, performance or achievements to be materially different
from those expressed or implied by the forward-looking statements.
You can identify some of these forward-looking
statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,”
“estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “potential,”
“continue” or other similar expressions. We have based these forward-looking statements largely on our current expectations
and projections about future events that we believe may affect our financial condition, results of operations, business strategy and financial
needs. These forward-looking statements include statements relating to:
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our ability to sustain our project development
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our ability to obtain additional land use rights at favorable prices;
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the market for real estate in Tier 3 and 4 cities and counties;
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our ability to obtain additional capital in future years to fund our planned expansion;
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the possibility that COVID-19 may adversely affect our results of operations, financial position and cash flows; or
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economic, political, regulatory, legal and foreign exchange risks associated with our operations.
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These forward-looking statements are based on
information available as of the date of this prospectus, and current expectations, forecasts and assumptions, and involve a number of
judgments, risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of
any subsequent date, we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after
the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable
securities laws.
As a result of a number of known and unknown
risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking
statements. For a discussion of the risks involved in our business and investing in our securities, see “Risk Factors.”
Should one or more of these risks or uncertainties
materialize, or should any of the underlying assumptions prove incorrect, actual results may vary in material respects from those expressed
or implied by these forward-looking statements. You should not place undue reliance on these forward-looking statements.
PROSPECTUS SUMMARY
This summary highlights information contained
elsewhere in this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you.
You should read this entire prospectus and should consider, among other things, the matters set forth under “Risk Factors,”
“Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and our consolidated financial
statements and related notes thereto appearing elsewhere in this prospectus before making your investment decision.
Overview
We conduct all of our business in China. All of
our business is conducted in mainland China. Guangsha was founded by Mr. Xiaojun Zhu, our Chairman and Chief Executive Officer and
commenced operations in 1995 in Hanzhong, a prefecture-level city in Shaanxi Province.
Since Guangsha was founded, management has been
focused on expanding our business in Tier 3 and Tier 4 cities and counties in China that we strategically select based on population and
urbanization growth rates, general economic conditions and growth rates, income and purchasing power of resident consumers, anticipated
demand for private residential properties, availability of future land supply and land prices, and governmental urban planning and development
policies. We utilize a standardized and scalable model that emphasizes rapid asset turnover, efficient capital management and strict cost
control. We plan to expand into strategically selected Tier 3 and Tier 4 cities and counties with real estate development potential in
Shaanxi Province, and expect to benefit from rising demand for residential housing as a result of increasing income levels of consumers
and growing populations in these cities and counties due to urbanization.
In September 2020, the Company started land
leveling and construction process for the Oriental Garden Phase II and Liangzhou Mansion real estate properties in the Liangzhou road
real estate project. Our Liangzhou Road related projects, which consist of residential buildings, office buildings and commercial plaza,
will start construction after the approval by the local government of the road and become a new city center of Hanzhong city.
Our Property Development Operations
We have a systematic and standardized process
of project development, which we implement through several well-defined phases. One critically significant portion of our process is the
land acquisition process, which is segmented into three stages: (i) opportunity identification, (ii) initial planning and budgeting,
and (iii) land use rights acquisition. The following diagram sets forth the key stages of our property development process.
LAND ACQUISITION PROCESS
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Project
planning and
design
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Project construction
and
Management
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Pre-sale, sale
and
marketing
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After-sale
and delivery
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Opportunity Identification
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Initial
Planning
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Land
Acquisition
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-Strategic planning
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-Feasibility study
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-Financial assessment
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-Outsource architectural and engineering design
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-Outsource construction
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-Pre-sale
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-Delivery
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-Geographic and market analysis
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-Preliminary design
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-Internal approval
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-Design management
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-Construction supervision
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-Marketing
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-Feedback collection
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-Project evaluation
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-Bidding process
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-Arrange financing
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-Quality control
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-Advertising
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-Completion inspection
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-Landscaping and fixture installation
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Our Projects
Overview
We develop the following three types of real estate
projects, which may be developed in one or more phases:
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multi-layer apartment buildings, which are typically six stories or less;
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·
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sub-high-rise apartment buildings, which are typically seven to 11 stories; and
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high-rise apartment buildings, which are typically 12 to 33 stories.
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At any one time, our projects (or phases of our
projects) are in one of the following three stages:
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completed projects, meaning properties for which construction has been completed;
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properties under construction, meaning properties for which construction permits have been obtained but construction has not been completed; and
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properties under planning, meaning properties for which we have entered into land grant contracts and are in the process of obtaining the required permits to begin construction.
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Our main projects located in Hanzhong City are:
Mingzhu Beiyuan, Oriental Pearl Garden and Liangzhou Road related projects. In Yang County, our project is Yangzhou Pearl Garden
and Yangzhou Palace. Most projects are being developed in multiple phases.
Our Competitive Strength
We believe the following strengths allow us to
compete effectively:
Well Positioned to Capture Opportunities in
Tier 3 and Tier 4 Cities and Counties.
With the increase in consumer disposable income
and urbanization rates, a growing middle-income consumer market has emerged driving demand for affordable and high quality housing in
many cities across northwest China. We focus on building large communities of modern, mid-sized residential properties for this market
segment and have accumulated substantial knowledge and experience about the residential preferences and demands of mid-income customers.
We believe we can leverage our experience to capture the growth opportunities in the markets.
Standardized and Scalable Business Model.
Our business model focuses on a standardized property
development process designed for rapid asset turnover. We break up the overall process into well-defined stages and closely monitor costs
and development schedules through each stage. These stages include (i) identifying land, (ii) pre-planning and budgeting, (iii) land
acquisition, (iv) detailed project design, (v) construction management, (vi) pre-sales, sales and (vii) after-sale
service. We commence pre-planning and budgeting prior to the land acquisition, which enables us to acquire land at costs that meet our
pre-set investment targeted returns and to quickly begin the development process upon acquisition. Our enterprise resource planning enables
us to collect and analyze information on a real-time basis throughout the entire property development process. We utilize our customer
relationship management system to track customer profiles and sales to forecast future individual preferences and market demand.
Experienced Management Team Supported by Trained
and Motivated Workforce.
Our CEO and founder, Mr. Xiaojun Zhu has
over 20 years of experience in the real estate industry and has gained considerable strategic planning and business management expertise
in the past decade. Our management and workforce are well-trained and motivated. Employees receive on-going training in their areas of
specialization at our head office in Hanzhong.
Guangsha is also an “AAA Enterprise in Shaanxi
Construction Industry” as recognized by the Credit Association of Agricultural Bank of China, Shaanxi Branch.
Our Strategies
Our goal is to become the leading residential
property developer focused on China’s Tier 3 and Tier 4 cities and counties by implementing the following strategies:
Continue Expanding in Selected Tier 3 and Tier
4 Cities. We believe that Tier 3 and Tier 4 cities and counties present development opportunities that are well suited for our scalable
business model of rapid asset turnover. Furthermore, Tier 3 and Tier 4 cities and counties currently tend to be in an early stage of market
maturity and have fewer large national developers. We believe that the fragmented market and relative abundance of land supply in Tier
3 and Tier 4 cities, as compared to Tier 1 and Tier 2 cities, offer more opportunities for us to generate attractive margins. And we also
believe that our experience affords us the opportunity to emerge as a leading developer in these markets. In the near future, we plan
to enter into other Tier 3 and Tier 4 cities that have:
·
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Increasing urbanization rates and population growth;
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High economic growth and increasing individual income; and
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Sustainable land supply for future developments.
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We plan to continue to closely monitor our capital
and cash positions and carefully manage our cost for land use rights, construction costs and operating expenses. We believe that we will
be able to use our working capital more efficiently by adhering to prudent cost management, which will help to maintain our profit margins.
When selecting a property project for development, we will continue to follow our established internal evaluation process, including utilizing
the analysis and input of our experienced management team and choosing third-party contractors through a tender process open only to bids
which meet our budgeted costs.
Competition
The real estate industry in China is highly competitive.
In the Tier 3 and Tier 4 cities and counties that we focus on, the markets are relatively more fragmented than in the Tier 1 or Tier 2
cities. We compete primarily with regional property developers and an increasing number of large national property developers who have
also started to enter these markets. Competitive factors include the geographical location of the projects, the types of products offered,
brand recognition, price, designing and quality. In the regional markets in which we operate, our major competitors include regional real
estate developers Wanbang Real Estate Development Co. Ltd., (“Wanbang”), Jingtai Real Estate Development Co. Ltd.,(“Jingtai”)
and Shaanxi Fenghui Real Estate Development Co. Ltd., (“Fenghui”) as well as other national real estate developers such as
Evergrande Real Estate Group (“Evergrande”) who have also started their projects in these local markets.
Nationally, there are numerous national real estate
developers that have real estate projects across China. There are many housing and land development companies listed on the Shanghai and
Shenzhen Stock Exchanges. However, such companies usually undertake large scale projects and are unlikely to compete with the Company
for business as the Company targets small to medium sized projects in Tier 3 and Tier 4 cities and counties.
In the regional market, the Company’s only
direct competitor with meaningful market share in the market is Wanbang. This company generally undertakes medium and small scale projects
and focuses on development of commercial real estate properties, such as hotels and shopping centers.
The March Equity Acquisition Transaction
On
March 24, 2021, we completed an equity acquisition transaction (the “March Equity Acquisition Transaction”) whereby the
Company allotted and issued 3,092,114 common stock to the selling stockholder in exchange to settle its accounts payable balance
with the selling stockholder. The selling stockholder received on a pro rata basis of the Company’s common stock, par
value $0.001, equivalent to an aggregate consideration of RMB 43 million based on a conversion price of $2.13 which was average
stock price of the Company during the five (5) trading days preceding to the closing date. After the allotment and issuance of the
Company’s common stock, the Company’s accounts payable balance of RMB 43 million payable to the selling stockholder was
satisfied.
Risk Factors
Our
business is subject to numerous risks and uncertainties, including those highlighted in the section entitled “Risk Factors”
immediately following this prospectus summary, that represent challenges that we face in connection with the successful implementation
of our strategy and the growth of our business.
Corporate Information
Our principal executive offices are located at
6 Xinghan Road, 19th Floor, Hanzhong City Shaanxi Province, PRC 723000. Our telephone number at this address is +(86) 091-62622612.
SUMMARY OF THE OFFERING
Issuer:
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China HGS Real Estate Inc..
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Securities offered by selling stockholder:
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3,092,114 shares of common stock.
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Offering price:
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The selling stockholder may offer, sell or distribute all or a portion of the securities hereby registered publicly or through private transactions at prevailing market prices or at negotiated prices. See “Plan of Distribution.”
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Shares outstanding prior to the offering:
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25,617,807
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Use of proceeds:
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We will not receive any proceeds from the sale
of our Common Stock by the Selling Stockholder. We will bear all other costs, fees and expenses incurred by us, or by the Selling Stockholder,
in effecting the registration of the shares covered by this prospectus. The Selling Stockholder, however, will pay any other expenses
incurred in selling its common stock, including any brokerage commissions or costs of sale.
For more information on the use of proceeds, see
“Use of Proceeds” on page .
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Trading symbol:
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Our common stock is listed on the NASDAQ Capital Market under the symbol “HGSH”.
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Risk factors:
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Investing in our securities involves a high degree of risk and purchasers of our securities may lose their entire investment. See “Risk Factors” and the other information included and incorporated by reference into this prospectus for a discussion of risk factors you should carefully consider before deciding to invest in our securities.
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Conventions that Apply to this Prospectus
Unless otherwise indicated or the context otherwise
requires, references in this prospectus to:
“$,” “USD,” “US$”
and “U.S. dollar” each refers to the United States dollar.
“Common Stock” means the 3,092,114
shares of common stocks that were issued to Shaanxi Tianhao Construction Engineer Co.
“Equity Acquisition Agreement” means
the equity acquisition agreement completed on March 24, 2021 between Shaanxi Tianhao Construction Engineer Co., Ltd and the Company.
“PRC” or “China” refers
to the People’s Republic of China, excluding, for the purpose of this prospectus, Taiwan, Hong Kong and Macau.
“RMB” or “Renminbi” each
refers to the legal currency of China.
“SEC” means the U.S. Securities and
Exchange Commission.
“U.S.” means the United States of
America.
“we,” “our,” “us,”
“the company” and other similar terms refer to China HGS Real Estate Inc. and its consolidated subsidiaries.
The Company’s financial information is presented
in U.S. dollars. The functional currency of the Company’s operating subsidiaries is RMB, the currency of the PRC. This prospectus
contains translations of RMB 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.
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2020
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2019
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Year end RMB : USD exchange rate
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6.7896
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7.1477
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Annual average RMB : USD exchange rate
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7.0056
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6.8753
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables summarize our historical
consolidated financial data. We have derived the historical consolidated statements of operations data for the years ended September 30,
2020 and 2019 from our consolidated financial statements included elsewhere in this prospectus. The following summary consolidated financial
data should be read in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. Our historical
results are not necessarily indicative of the results that may be expected in the future, and our results for any interim period are not
necessarily indicative of the results to be expected for a full fiscal year.
Consolidated Statements Of Income And Comprehensive
Income (Loss)
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2020
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2019
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Real estate sales
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$
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12,979,227
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$
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39,964,556
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Less: Sales tax
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193,719
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389,406
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Impairment losses on real estate property development completed
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2,703,031
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-
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Cost of real estate sales
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9,369,820
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30,253,511
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Gross profit
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712,657
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9,321,639
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Operating expenses
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Selling and distribution expenses
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580,639
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494,646
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General and administrative expenses
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2,324,057
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2,661,578
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Total operating expenses
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2,904,696
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3,156,224
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Operating income
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(2,192,039
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)
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6,165,415
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Interest expense, net
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(65,535
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)
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(131,270
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)
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Other income (expense), net
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4,080,945
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(309,930
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)
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Income before income taxes
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1,823,371
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5,724,215
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Provision for income taxes
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841,933
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2,022,043
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Net income
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981,438
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3,702,172
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Other comprehensive loss
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Foreign currency translation adjustment
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8,644,233
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(6,679,858
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)
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Comprehensive income (loss)
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$
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9,625,671
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$
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(2,977,686
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)
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Basic and diluted income per common share
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Basic and diluted
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$
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0.04
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$
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0.16
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Weighted average common shares outstanding
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Basic and diluted*
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22,525,000
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22,525,000
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*the number of common stock outstanding has been
restated to reflect the 2:1 stock reverse split on August 20, 2020.
CONSOLIDATED BALANCE SHEETS
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September 30,
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September 30,
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2020
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2019
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ASSETS
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Cash
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$
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457,699
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$
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263,139
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Restricted cash
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3,409,837
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3,938,978
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Contract assets
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14,255,328
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12,668,925
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Real estate property development completed
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|
|
94,671,258
|
|
|
|
101,933,030
|
|
Other assets
|
|
|
8,132,555
|
|
|
|
2,031,937
|
|
Property, plant and equipment, net
|
|
|
571,330
|
|
|
|
614,008
|
|
Security deposits
|
|
|
1,855,506
|
|
|
|
7,972,117
|
|
Real estate property under development
|
|
|
227,741,017
|
|
|
|
215,745,225
|
|
Due from local government for real estate property development completed
|
|
|
2,869,623
|
|
|
|
2,725,854
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
353,964,153
|
|
|
$
|
347,893,213
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
Construction loans
|
|
$
|
109,937,408
|
|
|
$
|
106,797,436
|
|
Accounts payables
|
|
|
25,415,352
|
|
|
|
27,368,510
|
|
Other payables
|
|
|
4,028,048
|
|
|
|
5,289,176
|
|
Construction deposits
|
|
|
3,202,730
|
|
|
|
3,042,273
|
|
Contract liabilities
|
|
|
1,847,685
|
|
|
|
1,907,828
|
|
Customer deposits
|
|
|
19,405,528
|
|
|
|
17,183,264
|
|
Shareholder loans
|
|
|
-
|
|
|
|
2,129,114
|
|
Accrued expenses
|
|
|
1,920,370
|
|
|
|
3,585,644
|
|
Taxes payable
|
|
|
19,881,211
|
|
|
|
21,889,818
|
|
Total liabilities
|
|
|
185,638,332
|
|
|
|
189,193,063
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 50,000,000 shares authorized, 22,525,000* shares issued and outstanding September 30, 2020 and 2019
|
|
|
22,525
|
|
|
|
22,525
|
|
Additional paid-in capital*
|
|
|
129,930,330
|
|
|
|
129,930,330
|
|
Statutory surplus
|
|
|
10,458,395
|
|
|
|
10,360,251
|
|
Retained earnings
|
|
|
34,954,061
|
|
|
|
34,070,767
|
|
Accumulated other comprehensive loss
|
|
|
(7,039,490
|
)
|
|
|
(15,683,723
|
)
|
Total stockholders' equity
|
|
|
168,325,821
|
|
|
|
158,700,150
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
353,964,153
|
|
|
$
|
347,893,213
|
|
*the number of common stock outstanding has been
restated to reflect the 2:1 stock reverse split on August 20, 2020.
RISK FACTORS
An investment in our securities involves a
high degree of risk. You should carefully consider the risks described below before making an investment decision. Our business, prospects,
financial condition, or operating results could be harmed by any of these risks, as well as other risks not currently known to us or that
we currently consider immaterial. The trading price of our securities could decline due to any of these risks, and, as a result, you may
lose all or part of your investment.
Risks Relating to Our Business and Industry
Our business is sensitive to China economy
and China real estate policies. A downturn in China economy and restrictive real estate polices could materially and adversely affect
our revenues and results of operations.
Any slowdown in China’s economic development
might lead to tighter credit markets, increased market volatility, sudden drops in business and consumer confidence and dramatic changes
in business and consumer behaviors. As exports slowed, China’s reported GDP growth dropped to 6.2% in the first nine months of 2019
calendar year from 8.1% in the first quarter of 2012, prompting the government to loosen economic policy to support growth. The current
package of economic support policies is designed to stabilize the economy against slowing exports. Ongoing government regulatory measures,
including the “Ten National Notices” announced in 2010, the “Eight National Notices” and property tax approved
in January 2011, have brought the PRC property market further down to the bottom in 2012 and the recovery of real market is shown
in the 2014 and in 2015. In the first nine months of 2020, the overall risk remained in tier 3 and 4 cities despite initial signs of improvement
in sales. In response to their perceived uncertainty in economic conditions, consumers might delay, reduce or cancel purchases of homes,
and our homebuyers may also defer, reduce or cancel purchases of our units and our results of operations may be materially and adversely
affected.
If we are unable to successfully manage our
expansion into other Tier 3 and Tier 4 cities, we will not be able to execute our business plan.
Historically, our business and operations have
been concentrated in Hanzhong City and other surrounding counties. If we are unable to successfully develop and sell projects outside
Hanzhong City, our future growth may be limited and we may not generate adequate returns to cover our investments in these Tier 3 and
Tier 4 cities. In addition, as we expand our operations to Tier 3 and Tier 4 cities with higher land prices, our costs may increase, which
may lead to a decrease in our profit margin.
We require substantial capital resources to
fund our land use rights acquisition and property developments, which may not be available.
Property development is capital intensive. Our
ability to secure sufficient financing for land use rights acquisition and property development depends on a number of factors that are
beyond our control, including market conditions in the capital markets, the PRC economy and the PRC government regulations that affect
the availability and cost of financing for real estate companies.
We may be unable to acquire desired development
sites at commercially reasonable costs.
Our revenue depends on the completion and sale
of our projects, which in turn depends on our ability to acquire development sites. Our land use rights costs are a major component of
our cost of real estate sales and increases in such costs could diminish our gross margin. In China, the PRC government controls the supply
of land and regulates land sales and transfers in the secondary market. As a result, the policies of the PRC government, including those
related to land supply and urban planning, affect our ability to acquire, and our costs of acquiring, land use rights for our projects.
In recent years, the PRC government has introduced various measures attempting to moderate investment in the property market in China.
Although we believe that these measures are
generally targeted at the luxury property market and speculative purchases of land and properties, the PRC government could
introduce other measures in the future that may adversely affect our ability to obtain land for development. We currently acquire
our development sites primarily by bidding for government land. Under current regulations, land use rights acquired from government
authorities for commercial and residential development purposes must be purchased through a public tender, auction or
listing-for-sale. Competition in these bidding processes has resulted in higher land use rights costs for us. We may also need to
acquire land use rights through acquisition, which could increase our costs. Moreover, the supply of potential development sites in
any given city will diminish over time and we may find it increasingly difficult to identify and acquire attractive development
sites at commercially reasonable costs in the future.
We provide guarantees for the mortgage loans
of our customers which expose us to risks of default by our customers.
We pre-sell properties before actual completion
and, in accordance with industry practice, our customers’ mortgage banks require us to guarantee our customers’ mortgage loans.
Typically, we provide guarantees to PRC banks with respect to loans procured by the purchasers of our properties for the total mortgage
loan amount until the completion of the registration of the mortgage with the relevant mortgage registration authorities, which generally
occurs within six to twelve months after the purchasers take possession of the relevant properties. In line with what we believe to be
industry practice, we rely on the credit evaluation conducted by mortgagee banks and do not conduct our own independent credit checks
on our customers. The mortgagee banks typically require us to maintain, as restricted cash, 5% to 10% of the mortgage proceeds paid to
us as security for our obligations under such guarantees (the security deposit).
If a purchaser defaults on its payment obligations
during the term of our guarantee, the mortgagee bank may deduct the delinquent mortgage payment from the security deposit. If the delinquent
mortgage payments exceed the security deposit, the banks may require us to pay the excess amount. If multiple purchasers default on their
payment obligations at around the same time, we will be required to make significant payments to the banks to satisfy our guarantee obligations.
If we are unable to resell the properties underlying defaulted mortgages on a timely basis or at prices higher than the amounts of our
guarantees and related expenses, we will suffer financial losses. For the years ended September 30, 2020 and 2019, the Company has
not experienced any delinquent mortgage loans and has not experienced any losses related to this guarantee. As of September 30, 2020
and 2019, our outstanding guarantees in respect of our customers' mortgage loans amounted to approximately $78 million and $70 million,
respectively. As of September 30, 2020 and 2019, the amount of security deposits provided for these guarantees was approximately
$3.4 million and $3.9 million respectively and the Company believes that such reserves are sufficient.
We rely on third-party contractors.
Substantially all of our project construction
and related work are outsourced to third-party contractors. We are exposed to risks that the performance of our contractors may not meet
our standards or specifications. Negligence or poor work quality by any contractors may result in defects in our buildings or residential
units, which could in turn cause us to suffer financial losses, harm our reputation or expose us to third-party claims. We work with multiple
contractors on different projects and we cannot guarantee that we can effectively monitor their work at all times.
Although our construction and other contracts
contain provisions designed to protect us, we may be unable to successfully enforce these rights and, even if we are able to successfully
enforce these rights, the third-party contractor may not have sufficient financial resources to compensate us. Moreover, the contractors
may undertake projects from other property developers, engage in risky undertakings or encounter financial or other difficulties, such
as supply shortages, labor disputes or work accidents, which may cause delays in the completion of our property projects or increases
in our costs.
We may be unable to complete our property developments
on time or at all. The progress and costs for a development project can be adversely affected by many factors, including, without limitation:
·
|
delays in obtaining necessary licenses, permits or approvals from government agencies or authorities;
|
·
|
shortages of materials, equipment, contractors and skilled labor;
|
·
|
disputes with our third-party contractors;
|
·
|
failure by our third-party contractors to comply with our designs, specifications or standards;
|
·
|
difficult geological situations or other geotechnical issues; and
|
·
|
onsite labor disputes or work accidents; and natural catastrophes or adverse weather conditions.
|
Any construction delays, or failure to complete
a project according to our planned specifications or budget, may delay our property sales, which could harm our revenues, cash flows and
our reputation.
Changes of laws and regulations with respect
to pre-sales may adversely affect our cash flow position and performance.
We depend on cash flows from pre-sale of properties
as an important source of funding for our property projects and servicing our indebtedness. Under current PRC laws and regulations, property
developers must fulfill certain conditions before they can commence pre-sale of the relevant properties and may only use pre-sale proceeds
to finance the construction of specific developments.
Our results of operations may fluctuate from
period to period.
Our results of operations tend to fluctuate from
period to period. The number of properties that we can develop or complete during any particular period is limited due to the substantial
capital required for land acquisition and construction, as well as the lengthy development periods required before positive cash flows
may be generated. In addition, several properties that we have developed or that are under development are large scale and are developed
in multiple phases over the course of one to several years. The selling prices of the residential units in larger scale property developments
tend to change over time, which may impact our sales proceeds and, accordingly, our revenues for any given period.
We rely on our key management members.
We depend on the services provided by key management
members. Competition for management talent is intense in the property development sector. In particular, we are highly dependent on Mr. Xiaojun
Zhu, our founder, Chairman and Chief Executive Officer. We do not maintain key employee insurance. In the event that we lose the services
of any key management member, we may be unable to identify and recruit suitable successors in a timely manner or at all, which will adversely
affect our business and operations. Moreover, we need to employ and retain more management personnel to support our expansion into other
Tier 3 and Tier 4 cities and counties. If we cannot attract and retain suitable human resources, especially at the management level, our
business and future growth will be adversely affected.
Increases in the price of raw materials may
increase our cost of sales and reduce our earnings.
Our third-party contractors are responsible for
procuring almost all of the raw materials used in our project developments. Our construction contracts typically provide for fixed or
capped payments, but the payments are subject to changes in government-suggested steel prices. The increase in steel prices could result
in an increase in our construction cost. In addition, the increases in the price of raw materials, such as cement, concrete blocks and
bricks, in the long run could be passed on to us by our contractors, which will increase our construction cost. Any such cost increase
could reduce our earnings to the extent we are unable to pass these increased costs to our customers.
Any unauthorized use of our brand or trademark
may adversely affect our business.
We own trademarks for “汉中广厦”,
in the form of Chinese characters and our company logo. We rely on the PRC intellectual property and anti-unfair competition laws
and contractual restrictions to protect brand name and trademarks. We believe our brand, trademarks and other intellectual property
rights are important to our success. Any unauthorized use of our brand, trademarks and other intellectual property rights could harm
our competitive advantages and business. Historically, China has not protected intellectual property rights to the same extent as
the United States, and infringement of intellectual property rights continues to pose a serious risk of doing business in China.
Monitoring and preventing unauthorized use is difficult. The measures we take to protect our intellectual property rights may not be
adequate. Furthermore, the application of laws governing intellectual property rights in China and abroad is uncertain and evolving,
and could involve substantial risks to us. If we are unable to adequately protect our brand, trademarks and other intellectual
property rights, our reputation may be harmed and our business may be adversely affected.
We may fail to obtain, or may experience material
delays in obtaining necessary government approvals for any major property development, which will adversely affect our business.
The real estate industry is strictly regulated
by the PRC government. Property developers in China must abide by various laws and regulations, including implementation rules promulgated
by local governments to enforce these laws and regulations. Before commencing, and during the course of, development of a property project,
we need to apply for various licenses, permits, certificates and approvals, including land use rights certificates, construction site
planning permits, construction work planning permits, construction permits, pre-sale permits and completion acceptance certificates. We
need to satisfy various requirements to obtain these certificates and permits. To date, we have not encountered serious delays or difficulties
in the process of applying for these certificates and permits, but we cannot guarantee that we will not encounter serious delays or difficulties
in the future. In the event that we fail to obtain the necessary governmental approvals for any of our major property projects, or a serious
delay occurs in the government’s examination and approval progress, we may not be able to maintain our development schedule and
our business and cash flows may be adversely affected.
We may forfeit land to the PRC government if
we fail to comply with procedural requirements applicable to land grants from the government or the terms of the land use rights grant
contracts.
According to the relevant PRC regulations, if
we fail to develop a property project according to the terms of the land use rights grant contract, including those relating to the payment
of land premiums, specified use of the land and the time for commencement and completion of the property development, the PRC government
may issue a warning, may impose a penalty or may order us to forfeit the land. Specifically, under current PRC law, if we fail to commence
development within one year after the commencement date stipulated in the land use rights grant contract, the relevant PRC land bureau
may issue a warning notice to us and impose an idle land fee on the land of up to 20% of the land premium. If we fail to commence development
within two years, the land will be subject to forfeiture to the PRC government, unless the delay in development is caused by government
actions or force majeure. Even if the commencement of the land development is compliant with the land use rights grant contract, if the
developed GFA on the land is less than one-third of the total GFA of the project or the total capital invested is less than one-fourth
of the total investment of the project and the suspension of the development of the land continues for more than one year without government
approval, the land will also be treated as idle land and be subject to penalty or forfeiture. We cannot assure you that circumstances
leading to significant delays in our development schedule or forfeiture of land will not arise in the future. If we forfeit land, we will
not only lose the opportunity to develop the property projects on such land, but may also lose all past investments in such land, including
land premiums paid and development costs incurred.
Any non-compliant GFA of our uncompleted and
future property developments will be subject to governmental approval and additional payments.
The local government authorities inspect property
developments after their completion and issue the completion acceptance certificates if the developments are in compliance with the relevant
laws and regulations. If the total constructed GFA of a property development exceeds the GFA originally authorized in the relevant land
grant contracts or construction permit, or if the completed property contains built-up areas that do not conform with the plan authorized
by the construction permit, the property developer may be required to pay additional amounts or take corrective actions with respect to
such non-compliant GFA before a completion acceptance certificate can be issued to the property development.
Our failure to assist our customers in applying
for property ownership certificates in a timely manner may lead to compensatory liabilities to our customers.
We are required to meet various requirements within 90 days after
delivery of property, or such other period contracted with our customers, in order for our customers to apply for their property ownership
certificates, including passing various governmental clearances, formalities and procedures. Under our sales contract, we are liable
for any delay in the submission of the required documents as a result of our failure to meet such requirements, and are required to compensate
our customers for delays. In the case of serious delays on one or more property projects, we may be required to pay significant compensation
to our customers and our reputation may be adversely affected.
We are subject to potential environmental liability.
We are subject to a variety of laws and regulations
concerning the protection of health and the environment. The particular environmental laws and regulations that apply to any given development
site vary significantly according to the site’s location and environmental condition, the present and former uses of the site and
the nature of the adjoining properties. Environmental laws and conditions may result in delays, may cause us to incur substantial compliance
and other costs and can prohibit or severely restrict project development activity in environmentally-sensitive regions or areas. Although
the environmental investigations conducted by local environmental authorities have not revealed any environmental liability that we believe
would have a material adverse effect on our business, financial condition or results of operations to date, it is possible that these
investigations did not reveal all environmental liabilities and that there are material environmental liabilities of which we are unaware.
We cannot assure you that future environmental investigations will not reveal material environmental liability. Also, we cannot assure
you that the PRC government will not change the existing laws and regulations or impose additional or stricter laws or regulations, the
compliance with which may cause us to incur significant capital expenditure.
We need to improve our internal financial reporting
controls. If we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail
to meet our reporting obligations, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our reported
financial information and have a negative effect on the market price for shares of our common stock.
Effective internal controls are necessary for
us to provide reliable financial reports and effectively prevent fraud. We maintain a system of internal control over financial reporting,
which is defined as a process designed by, or under the supervision of, our principal executive officer and principal financial officer,
or persons performing similar functions, and effected by our board of directors, management and other personnel, 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.
We cannot assure you that we will not, in the
future, identify areas requiring improvement in our internal control over financial reporting. We cannot assure you that the measures
we will take to remediate any areas in need of improvement will be successful or that we will implement and maintain adequate controls
over our financial processes and reporting in the future as we continue our growth.
As a public company, we are required to comply
with the reporting obligations of the Exchange Act and Section 404 of the Sarbanes-Oxley Act of 2013. If we fail to comply with the
reporting obligations of the Exchange Act and Section 404 of the Sarbanes-Oxley Act or if we fail to maintain adequate internal controls
over financial reporting, our business, results of operations and financial condition could be materially adversely affected.
As a public company, we are required to comply
with the periodic reporting obligations of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including
preparing annual reports and quarterly reports. Our failure to prepare and disclose this information in a timely manner could subject
us to penalties under U.S. federal securities laws, expose us to lawsuits and restrict our ability to access financing. In addition, we
are required under applicable law and regulations to design and implement internal controls over financial reporting, and evaluate our
existing internal controls with respect to the standards adopted by the U.S. Public Company Accounting Oversight Board.
The Company assessed its internal control
over financial reporting and still has significant and material deficiencies as of September 30, 2020 The Company’s
remediation plan is listed in Item 9A. However, we cannot assure you that our current remediation plan can resolve all the
significant deficiencies and material weaknesses in the internal control over financial reporting. As a result, we may be required
to implement further remedial measures and to design enhanced processes and controls to address issues identified through future
reviews. This could result in significant delays and costs to us and require us to divert substantial resources, including
management time, from other activities.
If we do not fully remediate the material weaknesses
identified by management or fail to maintain the adequacy of our internal controls in the future, we may not be able to ensure that we
can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with the Sarbanes-Oxley
Act. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent
fraud. As a result, any failure to satisfy the requirements of Section 404 on a timely basis could result in the loss of investor
confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price
of our common stock.
Risk Relating to the Residential Property Industry
in China
The PRC government may adopt further restrictive
measures to slow the increase in prices of real property and real property development.
Along with the economic growth in China, investments
in the property sectors have increased significantly in the past few years. In response to concerns over the scale of the increase in
property investments, the PRC government has introduced policies to curtail property development. We believe those regulations, among
others, significantly affect the property industry in China.
These restrictive regulations and measures could
increase our operating costs in adapting to these regulations and measures, limit our access to capital resources or even restrict our
business operations. We cannot be certain that the PRC government will not issue additional and more stringent regulations or measures,
which could further slowdown property development in China and adversely affect our business and prospects.
We are heavily dependent on the performance
of the residential property market in China, which is at a relatively early development stage.
The residential property industry in the PRC is
still in a relatively early stage of development. Although demand for residential property in the PRC has been growing rapidly in recent
years, such growth is often coupled with volatility in market conditions and fluctuation in property prices. It is extremely difficult
to predict how much and when demand will develop, as many social, political, economic, legal and other factors, most of which are beyond
our control, may affect the development of the market. The level of uncertainty is increased by the limited availability of accurate financial
and market information as well as the overall low level of transparency in the PRC, especially in Tier 3 and 4 cities which have lagged
in progress in these aspects when compared to Tier 1 cities.
The lack of a liquid secondary market for residential
property may discourage investors from acquiring new properties. The limited amount of property mortgage financing available to PRC individuals
may further inhibit demand for residential developments.
We face intense competition from other real
estate developers.
The property industry in the PRC is highly competitive.
In the Tier 3 and Tier 4 cities we focus on, local and regional property developers are our major competitors, and an increasing number
of large state-owned and private national property developers have started entering these markets. Many of our competitors, especially
the state-owned and private national property developers, are well capitalized and have greater financial, marketing and other resources
than we have. Some also have larger land banks, greater economies of scale, broader name recognition, a longer track record and more established
relationships in certain markets. In addition, the PRC government’s recent measures designed to reduce land supply further increased
competition for land among property developers.
Competition among property developers may
result in increased costs for the acquisition of land for development, increased costs for raw materials, shortages of skilled
contractors, oversupply of properties, decrease in property prices in certain parts of the PRC, a slowdown in the rate at which new
property developments will be approved and/or reviewed by the relevant government authorities and an increase in administrative
costs for hiring or retaining qualified personnel, any of which may adversely affect our business and financial condition.
Furthermore, property developers that are better capitalized than we are may be more competitive in acquiring land through the
auction process. If we cannot respond to changes in market conditions as promptly and effectively as our competitors, or effectively
compete for land acquisition through the auction systems and acquire other factors of production, our business and financial
condition will be adversely affected.
In addition, risk of property over-supply is increasing
in parts of China, where property investment, trading and speculation have become overly active. We are exposed to the risk that in the
event of actual or perceived over-supply, property prices may fall drastically, and our revenue and profitability will be adversely affected.
We may be deemed a PRC resident enterprise
for PRC tax purposes under the new Enterprise Income Tax Law, which could result in the imposition of a 25% enterprise income tax payable
on our taxable global income.
On March 16, 2007, the National People’s
Congress of the PRC passed the Enterprise Income Tax Law of the PRC (‘‘New Income Tax Law’’), which took effect
on January 1, 2008. On December 6, 2007, the Implementation Rules of Enterprise Income Tax Law of the PRC (‘‘Implementation
Rules’’) were also enacted, and took effect on January 1, 2008. In accordance with the new laws and regulations, a unified
enterprise income tax rate of 25% and unified tax deduction standards will be applied equally to both domestic enterprises and foreign-invested
enterprises.
Under the New Income Tax Law and the Implementation
Rules, enterprises established under the laws of foreign jurisdictions other than the PRC may nevertheless be considered as PRC-resident
enterprises for tax purposes if these enterprises have their ‘‘de facto management body’’ within the PRC. Under
the Implementation Rules, ‘‘de facto management body’’ is defined as a body that has material and overall management
and control over the manufacturing and business operations, personnel and human resources, finances and treasury, and acquisition and
disposition of properties and other assets of an enterprise. At present, it is unclear what factors will be used by the PRC tax authorities
to determine whether we are a ‘‘de facto management body’’ in China. All of our management personnel are located
in the PRC, and all of our revenues arise from our operations in China. If the PRC tax authorities determine that we are a PRC resident
enterprise, we will be subject to PRC tax on our worldwide income at the 25% uniform tax rate, which may have a material adverse effect
on our financial condition and results of operations. Notwithstanding the foregoing provision, the New Income Tax Law also provides that,
if a PRC resident enterprise already invests in another PRC resident enterprise, the dividends received by the investing resident enterprise
from the invested resident enterprise are exempt from income tax, subject to certain qualifications. Therefore, if we are classified as
a PRC resident enterprise, the dividends received from our PRC subsidiaries may be exempt from income tax. However, due to the limited
history of the New Income Tax Law, it is unclear as to (i) the detailed qualification requirements for such exemption and (ii) whether
dividend payments by our PRC subsidiaries to us will meet such qualification requirements, even if we are considered a PRC resident enterprise
for tax purposes.
We face uncertainty from the Circular on Strengthening
the Administration of Enterprise Income Tax on Non-resident Enterprises' Share Transfer (“Circular 698”) released in December 2009
by China's State Administration of Taxation (SAT), effective as of January 1, 2008.
Where a foreign investor indirectly transfers
equity interests in a Chinese resident enterprise by selling the shares in an offshore holding company, and the latter is located in a
country (jurisdiction) where the effective tax burden is less than 12.5% or where the offshore income of her residents is not taxable,
the foreign investor is required to provide the tax authority in charge of that Chinese resident enterprise with the relevant information
within 30 days of the transfers.
Where a foreign investor indirectly transfers
equity interests in a Chinese resident enterprise through the abuse of form of organization and there are no reasonable commercial purposes
such that the corporate income tax liability is avoided, the tax authority has the power to re-assess the nature of the equity transfer
in accordance with the “substance-over-form” principle and deny the existence of the offshore holding company that is used
for tax planning purposes. “Income derived from equity transfers” as mentioned in this circular refers to income derived by
non-resident enterprises from direct or indirect transfers of equity interest in China resident enterprises, excluding share in Chinese
resident enterprises that are bought and sold openly on the stock exchange.
While the term "indirectly
transfer" is not defined, we understand that the relevant PRC tax authorities have jurisdiction regarding requests for
information over a wide range of foreign entities having no direct contact with China. The relevant authority has not yet
promulgated any formal provisions or formally declared or stated how to calculate the effective tax in the country (jurisdiction)
and the process of the disclosure to the tax authority in charge of that Chinese resident enterprise. Meanwhile, there are no formal
declarations with regard to how to decide “abuse of form of organization” and “reasonable commercial
purpose,” which can be utilized by us to determine if our company complies with the Circular 698.
Failure to comply with PRC regulations relating
to the establishment of offshore special purpose companies by PRC residents may materially adversely affect us.
On July 15, 2014, SAFE issued the Notice
on Relevant Issues in the Foreign Exchange Control over Investment, Financing and Return Investment Through Special Purpose Companies
by Residents Inside China, generally referred to as Circular 37, which required PRC residents to register with the competent local SAFE
branch before establishing or acquiring control over an offshore special purpose company, or SPV, for the purpose of engaging in an equity
financing outside of China on the strength of domestic PRC assets originally held by those residents. Internal implementing guidelines
issued by SAFE, which became public in June 2007 (known as Notice 106), expanded the reach of Circular 37 by (1) purporting
to cover the establishment or acquisition of control by PRC residents of offshore entities which merely acquire “control”
over domestic companies or assets, even in the absence of legal ownership; (2) adding requirements relating to the source of the
PRC resident's funds used to establish or acquire the offshore entity; (3) covering the use of existing offshore entities for offshore
financings; (4) purporting to cover situations in which an offshore SPV establishes a new subsidiary in China or acquires an unrelated
company or unrelated assets in China; and (5) making the domestic affiliate of the SPV responsible for the accuracy of certain documents
which must be filed in connection with any such registration, notably, the business plan which describes the overseas financing and the
use of proceeds. Amendments to registrations made under Circular 37 are required in connection with any increase or decrease of capital,
transfer of shares, mergers and acquisitions, equity investment or creation of any security interest in any assets located in China to
guarantee offshore obligations, and Notice 106 makes the offshore SPV jointly responsible for these filings. In the case of an SPV which
was established, and which acquired a related domestic company or assets, before the implementation date of Circular 37, a retroactive
SAFE registration was required to have been completed before March 31, 2006. This date was subsequently extended indefinitely by
Notice 106, which also required that the registrant establish that all foreign exchange transactions undertaken by the SPV and its affiliates
were in compliance with applicable laws and regulations. Failure to comply with the requirements of Circular 37, as applied by SAFE in
accordance with Notice 106, may result in fines and other penalties under PRC laws for evasion of applicable foreign exchange restrictions.
Any such failure could also result in the SPV's affiliates being impeded or prevented from distributing their profits and the proceeds
from any reduction in capital, share transfer or liquidation to the SPV, or from engaging in other transfers of funds into or out of China.
We have asked our stockholders, who are PRC residents
as defined in Circular 37, to register with the relevant branch of SAFE, as currently required, in connection with their equity interests
in us and our acquisitions of equity interests in our PRC subsidiary. However, we cannot provide any assurances that they can obtain the
above SAFE registrations required by Circular 37 and Notice 106. Moreover, because of uncertainty over how Circular 37 will be interpreted
and implemented, and how or whether SAFE will apply it to us, we cannot predict how it will affect our business operations or future strategies.
For example, our present and prospective PRC subsidiaries' ability to conduct foreign exchange activities, such as the remittance of dividends
and foreign currency-denominated borrowings, may be subject to compliance with Circular 37 and Notice 106 by our PRC resident beneficial
holders.
In addition, such PRC residents may not always
be able to complete the necessary registration procedures required by Circular 37 and Notice 106. We also have little control over either
our present or prospective direct or indirect stockholders or the outcome of such registration procedures. A failure by our PRC resident
beneficial holders or future PRC resident stockholders to comply with Circular 37 and Notice 106, if SAFE requires it, could subject these
PRC resident beneficial holders to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries'
ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.
PRC economic, political and social conditions as well as government
policies can affect our business.
The PRC economy differs from the economies of
most developed countries in many aspects, including:
|
·
|
degree of government involvement;
|
|
·
|
level and control of capital reinvestment;
|
|
·
|
control of foreign exchange; and
|
|
·
|
allocation of resources.
|
The PRC economy has been transitioning from a
centrally planned economy to a more market-oriented economy. For more than two decades, the PRC government has implemented economic reform
measures emphasizing utilization of market forces in the development of the PRC economy. Although we believe these reforms will have a
positive effect on China’s overall and long-term development, we cannot predict whether changes in the PRC economic, political and
social conditions, laws, regulations and policies will have any adverse effect on our current or future business, financial condition
or results of operations.
Changes in foreign exchange regulations may
adversely affect our results of operations.
We currently receive all of our revenues in RMB.
The PRC government regulates the conversion between RMB and foreign currencies. Over the years, the government has significantly reduced
its control over routine foreign exchange transactions under current accounts, including trade and service related foreign exchange transactions,
payment of dividends and service of foreign debt. However, foreign exchange transactions by our PRC subsidiaries under capital accounts
continue to be subject to significant foreign exchange controls and require the approval of, or registration with, PRC governmental authorities.
There can be no assurance that these PRC laws and regulations on foreign investment will not cast uncertainties on our financing and operating
plans in China. Under current foreign exchange regulations in China, subject to the relevant registration at SAFE, we will be able to
pay dividends in foreign currencies, without prior approval from SAFE, by complying with certain procedural requirements. However, there
can be no assurance that the current PRC foreign exchange policies regarding debt service and payment of dividends in foreign currencies
will continue in the future. Changes in PRC foreign exchange policies might have a negative impact on our ability to service our foreign
currency-denominated indebtedness and to distribute dividends to our shareholders in foreign currencies.
Interpretation of PRC laws and regulations
involves uncertainty.
Our core business is conducted within China and
is governed by PRC laws and regulations. The PRC legal system is based on written statutes, and prior court decisions can only be used
as a reference. Since 1979, the PRC government has promulgated laws and regulations in relation to economic matters such as foreign investment,
corporate organization and governance, commerce, taxation and trade, with a view to developing a comprehensive system of commercial law,
including laws relating to property ownership and development. However, due to the fact that these laws and regulations have not been
fully developed, and because of the limited volume of published cases and the non-binding nature of prior court decisions, interpretation
of PRC laws and regulations involves a degree of uncertainty. Some of these laws may be changed without being immediately published or
may be amended with retroactive effect. Depending on the government agency or how an application or case is presented to such agency,
we may receive less favorable interpretations of laws and regulations than our competitors, particularly if a competitor has long been
established in the locality of, and has developed a relationship with, such agency. In addition, any litigation in China may be protracted
and result in substantial costs and diversion of resources and management attention. All these uncertainties may cause difficulties in
the enforcement of our land use rights, entitlements under its permits, and other statutory and contractual rights and interests.
The Chinese government exerts substantial influence
over the manner in which we must conduct our business activities.
China only recently has permitted provincial
and local economic autonomy and private economic activities, and, as a result, we are dependent on our relationship with the local
government in the province in which we operate our business. Chinese government has exercised and continues to exercise substantial
control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China
may be harmed by changes in its laws and regulations, including those relating to taxation, environmental regulations, land use
rights, property and other matters. We believe that our operations in China are in material compliance with all applicable legal and
regulatory requirements. However, the central or local governments of these jurisdictions may impose new, stricter regulations or
interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance
with such regulations or interpretations. Accordingly, government actions in the future, including any decision not to continue to
support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the
implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof,
and could require us to divest ourselves of any interest we then hold in Chinese properties.
Future inflation in China may inhibit our activity
to conduct business in China.
In recent years, the Chinese economy has experienced
periods of rapid expansion and high rates of inflation, which have led to the adoption by the Chinese government, from time to time, of
various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. While inflation
has been more moderate since 1995, high inflation may in the future cause Chinese government to impose controls on credit and/or prices,
or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products.
Because Chinese law governs almost all of our
material agreements, we may not be able to enforce our legal rights within China or elsewhere, which could result in a significant loss
of business, business opportunities, or capital.
Chinese law governs almost all of our material
agreements. We cannot assure you that we will be able to enforce any of our material agreements or that remedies will be available outside
of China. The system of laws and the enforcement of existing laws in China may not be as certain in implementation and interpretation
as in the United States. The inability to enforce or obtain a remedy under any of our current or future agreements could result in a significant
loss of business, business opportunities or capital. It will be extremely difficult to acquire jurisdiction and enforce liabilities against
our officers, directors and assets based in China.
Substantially all of our assets are located in
the PRC and all of our officers and most of our present directors reside outside of the United States. As a result, it may not be
possible for United States investors to enforce their legal rights, to effect service of process upon our directors or officers or to
enforce judgments of United States courts predicated upon civil liabilities and criminal penalties of our directors and officers under
Federal securities laws. Moreover, we have been advised that China does not have treaties providing for the reciprocal recognition and
enforcement of judgments of courts with the United States. Further, it is unclear if extradition treaties now in effect between the United
States and China would permit effective enforcement of criminal penalties of the Federal securities laws.
Failure to comply with the United States Foreign
Corrupt Practices Act could subject us to penalties and other adverse consequences.
We are subject to the United States Foreign Corrupt
Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials
for the purpose of obtaining or retaining business. Foreign companies, including some that may compete with us, are not subject to these
prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in the PRC. We can
make no assurance, however, that our employees or other agents will not engage in such conduct for which we might be held responsible.
If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences
that may have a material adverse effect on our business, financial condition and results of operations.
We may have difficulty establishing adequate
management, legal and financial controls in the PRC.
The PRC historically has been deficient in
Western style management and financial reporting concepts and practices, as well as in modern banking, computer and other control
systems. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. As a result
of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data
and preparing financial statements, books of account and corporate records and instituting business practices that meet Western
standards. We may have difficulty establishing adequate management, legal and financial controls in the PRC.
Risks Related to our Securities and this Offering
We may be subject to the penny stock rules which
will make the shares of our common stock more difficult to sell.
We may be subject now and in the future to the
SEC’s “penny stock” rules if our shares of common stock sell below $1.00 per share. Penny stocks generally are
equity securities with a price of less than $1.00. The penny stock rules require broker-dealers to deliver a standardized risk disclosure
document prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market.
The broker-dealer must also provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer
and its salesperson, and monthly account statements showing the market value of each penny stock held in the customer's account. The bid
and offer quotations, and the broker-dealer and salesperson compensation information must be given to the customer orally or in writing
prior to completing the transaction and must be given to the customer in writing before or with the customer's confirmation.
On June 21, 2019, the “Company received
a letter from the Listing Qualifications staff of The Nasdaq Stock Market (“Nasdaq”) notifying the Company that it is no longer
in compliance with the minimum bid price requirement for continued listing on the Nasdaq Capital Market. Nasdaq Listing Rule 5550(a)(2) requires
listed companies to maintain a minimum bid price of $1.00 per share. The letter noted that the bid price of the Company’s common
stock was below $1.00 for the 30-day period ending June 20, 2019. The notification letter has no immediate effect on the Company’s
listing on the Nasdaq Capital Market. Nasdaq has provided the Company with 180 days, or until January 14, 2020, to regain compliance
with the minimum bid price requirement by having a closing bid price of at least $1.00 per share for a minimum of 10 consecutive business
days. On December 19, 2019, Nasdaq determined that the Company is eligible for an additional 180 calendar day period, or until June 15,
2020, to regain compliance. Given the extraordinary market conditions caused by COVID-19, Nasdaq has determined to toll the compliance
periods for bid price and market value of publicly held shares requirements through June 30, 2020. In that regard, on April 16,
2020, Nasdaq filed an immediately effective rule change with the Securities and Exchange Commission. Accordingly, the Company has
until August 31, 2020, to regain compliance. As of November 3, 2020, The Company has been advised that March 1, 2021
represents the full extent of the Panel’s discretion to grant continued listing while it is non-compliant. Should the company fail
to demonstrate compliance with Nasdaq Listing Rule 5550(a)(2) by that date, the Panel will issue a final delist determination
and the Company will be suspended from trading on The Nasdaq Stock Market.
In addition, the penny stock rules require
that prior to a transaction, the broker-dealer must make a special written determination that the penny stock is a suitable investment
for the purchaser and receive the purchaser's written agreement to the transaction. The penny stock rules are burdensome and may
reduce purchases of any offerings and reduce the trading activity for shares of our common stock. As long as our shares of common stock
are subject to the penny stock rules, the holders of such shares of common stock may find it more difficult to sell their securities.
Our shares of common stock are very thinly
traded, and the price if traded may not reflect our value. There can be no assurance that there will be an active market for our shares
of common stock either now or in the future.
Our shares of common stock are very thinly traded,
and the price if traded may not reflect our value. There can be no assurance that there will be an active market for our shares of common
stock either now or in the future. The market liquidity will be dependent on the perception of our operating business and any steps that
our management might take to bring us to the awareness of investors. There can be no assurance given that there will be any awareness
generated. Consequently, investors may not be able to liquidate their investment or liquidate it at a price that reflects the value of
the business. If a more active market should develop, the price may be highly volatile. Because there may be a low price for our shares
of common stock, many brokerage firms may not be willing to effect transactions in the securities. Even if an investor finds a broker
willing to effect a transaction in the shares of our common stock, the combination of brokerage commissions, transfer fees, taxes, if
any, and any other selling costs may exceed the selling price. Further, many lending institutions will not permit the use of such shares
of common stock as collateral for any loans.
We have never paid cash dividends and are not
likely to do so in the foreseeable future.
We have never declared or paid any cash dividends
on our common stock. We currently intend to retain any future earnings for use in the operation and expansion of our business. We do not
expect to pay any cash dividends in the foreseeable future but will review this policy as circumstances dictate.
USE OF PROCEEDS
We will not receive any proceeds from the sale
of the Common Stock by the Selling Stockholder. We will bear all other costs, fees and expenses incurred by us, or by the Selling Stockholder,
in effecting the registration of the shares covered by this prospectus. The Selling Stockholder, however, will pay any other expenses
incurred in selling its Common Stock, including any brokerage commissions or costs of sale.
CORPORATE HISTORY AND STRUCTURE
China HGS Real Estate Inc. (the “Company”
or “China HGS,” “we”, “our”, “us”), formerly known as China Agro Sciences Corp., is a
corporation organized under the laws of the State of Florida.
HGS Investment is a Delaware corporation and owns
100% of the equity interest in Shaanxi HGS Management and Consulting Co., Ltd. (“Shaanxi HGS”), a wholly owned foreign
entity incorporated under the laws of the People’s Republic of China (“PRC” or “China”).
China HGS does not conduct any substantive operations
of its own. Instead, through its subsidiary, Shaanxi HGS, it entered into certain exclusive contractual agreements with Shaanxi Guangsha
Investment and Development Group Co., Ltd. (“Guangsha”). Pursuant to these agreements, Shaanxi HGS is obligated to absorb
a majority of the risk of loss from Guangsha’s activities and entitles Shaanxi HGS to receive a majority of Guangsha’s expected
residual returns. In addition, Guangsha’s shareholders have pledged their equity interest in Guangsha to Shaanxi HGS, irrevocably
granted Shaanxi HGS an exclusive option to purchase, to the extent permitted under PRC Law, all or part of the equity interests in Guangsha
and agreed to entrust all the rights to exercise their voting power to the person(s) appointed by Shaanxi HGS.
Our Company engages in real estate development,
primarily in the construction and sale of residential apartments, car parks and commercial properties.
Guangsha was organized in August 1995 as
a limited liability company under the laws of the PRC. Guangsha is headquartered in the city of Hanzhong, Shaanxi Province. Guangsha is
engaged in developing large scale and high quality commercial and residential projects, including multi-layer apartment buildings, sub-high-rise
apartment buildings, high-rise apartment buildings, and office buildings.
Our corporate structure is set forth below:
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
You should read the following discussion and
analysis of our financial condition and results of operations in conjunction with the section headed “Summary Consolidated Financial
Data” and our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially
from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk
Factors” and elsewhere in this prospectus.
Our 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 fiscal 2020, our sales and net loss were approximately
$13.0 million and $1.0 million, respectively, representing a decrease of approximately 67.5% and 73.5% from fiscal 2019, respectively.
The decrease in revenue, gross profit and net income was mainly due to less GFA sold during fiscal 2020.
For fiscal 2020, our average selling price (“ASP”)
for real estate projects (excluding sales of parking spaces) located in Yang County was approximately $718 per square meter, consistent
from ASP of $720 per square meter in fiscal 2019. The ASP of our Hanzhong real estate projects (excluding sales of parking spaces) was
approximately $419 per square meter for fiscal 2020, decreased by 25.2% as compared to the ASP of $560 per square meter for fiscal 2019.
The decrease ASP in Hanzhong real estate projects was mainly due to the fact that many units sold in fiscal 2020 was for government’s
reallocation of residence purpose with lower ASP.
Market Outlook
In Fiscal 2019, the macro-economic backdrop will
continue to be uncertain with unrelenting downside pressure, while the overall inventory level of properties will remain high. The central
government will continue to adopt policies aimed to ensure stability, economic growth and improved employment. The details of implementation
by local government will vary among different PRC cities.
In 2020, the Company expects to start the construction
of the real estate projects surrounding the Liangzhou Road area after the approval by the local government of the road. These projects
will comprise of residential for end-users and upgraders, shopping malls as well as serviced apartments and offices to satisfy different
market demands. Our customers continue to experience growth of their disposable income. With a lower housing price to family disposable
income ratio and an increasing urbanization level, there is a growing demand for high quality residential housing. From this perspective,
the Company is positive about the outlook for the local real estate market in a long term. In the meantime, the Company is diversifying
its revenue and developing more commercial and municipal projects.
We intend to remain focused on our existing construction
projects in Hanzhong City and Yang County, deepening our institutional sales network, enhancing our cost and operational synergies and
improving cash flows and strengthening our balance sheet. In this respect, we began the construction of the following large high rise
residential projects in Hanzhong City and Yang County:
Liangzhou road related projects
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
September 30, 2020, the main Liangzhou road construction is substantially completed, due to the complicated multiple level of
government review process. Since the Company started land leveling and construction process for the Oriental Garden Phase II and
Liangzhou Mansion real estate properties in the Liangzhou road real estate project in September, 2020, the Company expected to the
government’s acceptance to be completed before the end of fiscal 2021. The Company’s development cost incurred on
Liangzhou Road Project is treated as the Company’s deposit on purchasing the related land use rights, as agreed by the local
government. As of September 30, 2020, the actual costs incurred by the Company were $164,879,955 (September 30, 2019 -
$146,958,903) and the incremental cost related to residence resettlement approved by the local government.
The Liangzhou Road related projects mainly consists
Oriental Garden Phase II, Liangzhou Mansion and Pearl Commercial Plaza surrounding the Liangzhou road area. The Company started land leveling
and construction process for the Oriental Garden Phase II and Liangzhou Mansion real estate properties in the Liangzhou road real estate
project in September, 2020.
Oriental 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.
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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.
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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.
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The Company plans to start these three real estate
projects after the road construction passes local government’s inspection and approval. These related projects may take 2-3 years
to fully complete.
Road Construction
Other road construction projects mainly included
a Yang County East 2nd Ring Road construction project. The Company was engaged by the Yang County local government to construct the East
2nd Ring Road with a total length of 2.15 km. The local government is required to repay the Company’s project investment costs within
3 years with interest at the interest rate based on the commercial borrowing rate with the similar term published by China construction
bank ( September 30, 2020 and 2019 - 4.75%). The local government has approved a refund to the Company by reducing local surcharges
or taxes otherwise required in the real estate development. The road construction was substantially completed as of September 30,
2020 and in process of government review and approval.
In September 2012, the Company was approved
by the Hanzhong local government to construct four municipal roads with a total length of approximately 1,192 meters. The project was
deferred and then restarted during the quarter ended March 31, 2014. As of September 30, 2020, the local government was still
in the process of assessing the budget for these projects.
Under development:
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Estimated Completion time of construction
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Hanzhong City Hanfeng Beiyuan East Road
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To be delivered to the government in 2021
|
Hanzhong City Liangzhou Road related projects
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The road construction was substantially completed in September 2018, the other related projects started in September 2020.
|
Hanzhong City Beidajie project
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Under planning stage
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Yang County East 2nd Ring Road
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To be delivered to the government in 2021
|
Results of Operations
Year ended September 30, 2020 as compared
to year ended September 30, 2019
Revenues
The following is a breakdown of revenue for the
years ended September 30, 2020 and 2019:
|
|
For the years ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Revenue recognized for completed condominium real estate projects
|
|
$
|
12,979,227
|
|
|
$
|
13,400,491
|
|
Revenue recognized for condominium real estate projects under development
|
|
|
-
|
|
|
|
26,564,065
|
|
Total
|
|
$
|
12,979,227
|
|
|
$
|
39,964,556
|
|
Revenue recognized for completed condominium
real estate projects
The following table summarizes our revenue generated
by different projects:
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|
For the Years Ended September 30,
|
|
|
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2020
|
|
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2019
|
|
|
|
|
|
Variance
|
|
|
|
Revenue
|
|
|
%
|
|
|
Revenue
|
|
|
%
|
|
|
Variance
|
|
|
%
|
|
Projects
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yangzhou Pearl Garden Phase I and II
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|
$
|
1,312,921
|
|
|
|
10.1
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%
|
|
$
|
2,726,864
|
|
|
|
20.3
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%
|
|
$
|
(1,413,943
|
)
|
|
|
(51.9
|
)%
|
Oriental Pearl Garden
|
|
|
187,284
|
|
|
|
1.4
|
%
|
|
|
2,627,563
|
|
|
|
19.6
|
%
|
|
|
(2,440,279
|
)
|
|
|
(92.9
|
)%
|
Mingzhu Garden (Nanyuan and Beiyuan) Phase I and II
|
|
|
3,500,750
|
|
|
|
27.0
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%
|
|
|
8,046,064
|
|
|
|
60.1
|
%
|
|
|
(4,545,314
|
)
|
|
|
(56.5
|
)%
|
Yangzhou Palace
|
|
|
7,978,272
|
|
|
|
61.5
|
%
|
|
|
-
|
|
|
|
|
|
|
|
7,978,272
|
|
|
|
100
|
%
|
Total Revenue
|
|
|
12,979,227
|
|
|
|
100
|
%
|
|
|
13,400,491
|
|
|
|
100
|
%
|
|
|
(1421,264
|
)
|
|
|
(3.1
|
)%
|
Sales Tax
|
|
|
(193,719
|
)
|
|
|
|
|
|
|
(133,803
|
)
|
|
|
|
|
|
|
(59,916
|
)
|
|
|
(44.8
|
)%
|
Revenue net of sales tax
|
|
$
|
12,785,508
|
|
|
|
|
|
|
$
|
13,266,688
|
|
|
|
|
|
|
$
|
(481,180
|
)
|
|
|
(3.6
|
)%
|
Our revenues are derived from the sale of residential
buildings, commercial store-fronts and parking spaces in projects that we have developed. Comparing to last year, revenues before sales
tax decreased by 3.1% to approximately $13.0 million in fiscal 2020 from approximately $13.4 million in fiscal 2019. The total GFA sold
during fiscal 2020 was 21,735 square meters, consistent from the 22,339 square meters sold during last year. Currently, our Mingzhu Garden
Phase I and Phase II, Yangzhou Pearl Garden Phase I and Phase II and Oriental Garden Phase I have all been completed in prior years as
well as Yangzhou Palace projects has been completed during the third quarter of fiscal 2019, therefore only limited models are available
for customer selection, which limited our ability to promote our existing house model to broader range of customers and resulted in lower
sales for current year. The sales tax for fiscal 2020 increased by 44.8% from fiscal 2019, due to more surcharge tax charged for the completed
real estate properties during fiscal 2020.
Revenue recognized for condominium real
estate projects under development
We started to recognize revenue under the percentage
of completion method for Yangzhou Palace real estate project since second quarter of fiscal 2017. For the year ended September 30,
2020, there was no revenue recognized under the percentage of completion method, because Yangzhou Palace real estate project was completed
by September 30, 2019 and our current real estate projects under development in Liangzhou Road and related project under development
as of September 30, 2020 have not met the criteria for revenue recognition under the percentage of completion method.
|
|
|
|
|
For the year ended September 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 Yang County
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yangzhou Palace
|
|
|
297,450
|
|
|
|
100
|
%
|
|
$
|
77,979,739
|
|
|
$
|
26,564,065
|
|
|
$
|
77,979,739
|
|
|
(1)
|
Percentage of Completion progress is calculated by dividing total costs incurred by total estimated costs for the relevant buildings in each real estate building , estimated as of the date of our financial statements as of and for the year indicated.
|
|
(2)
|
Qualified contract sales only include all contract sales with customer deposits balance as of September 30, 2019 and 2019 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.
|
Cost of sales
The following table sets forth a breakdown of
our cost of revenues for the years indicated.
|
|
For the Years Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
Variance
|
|
|
|
Cost
|
|
|
Percentage
|
|
|
Cost
|
|
|
Percentage
|
|
|
Variance
|
|
|
%
|
|
Land use rights
|
|
$
|
843,284
|
|
|
|
9.0
|
%
|
|
$
|
2,692,563
|
|
|
|
8.9
|
%
|
|
$
|
(1,849,279
|
)
|
|
|
(68.7
|
)%
|
Construction costs
|
|
|
8,526,536
|
|
|
|
91.0
|
%
|
|
|
27,560,950
|
|
|
|
91.1
|
%
|
|
|
(19,034,414
|
)
|
|
|
(69.1
|
)%
|
Total
|
|
$
|
9,369,820
|
|
|
|
100
|
%
|
|
$
|
30,253,513
|
|
|
|
100
|
%
|
|
$
|
(20,883,693
|
)
|
|
|
(69.0
|
)%
|
Our cost of sales consists primarily of
costs associated with land use rights and construction costs. Cost of sales are capitalized and allocated to development projects
using a specific identification method. Costs are allocated to specific units within a project based on the ratio of the sales area
of units to the estimated total sales area of the project or phase of the project times the total cost of the project or phase of
the project.
Cost of sales was approximately $9.4 million for
the year ended September 30, 2020 compared to $30.3 million for the year ended September 30, 2019. The 69% decrease in cost
of sales was mainly attributable to the decrease in total GFA sold for Oriental Pearl Garden, Mingzhu Garden (Nanyuan and Beiyuan) Phase
I and II and Yang County Yangzhou Palace project during fiscal 2020 which led to decreased revenue and cost of sales during fiscal 2020.
Land use rights cost: The cost of land use rights
includes the land premium we pay to acquire land use rights for our property development sites, plus taxes. Our land use rights cost varies
for different projects according to the size and location of the site and the minimum land premium set for the site, all of which are
influenced by government policies, as well as prevailing market conditions. Costs for land use rights for the year ended September 30,
2020 were approximately $0.8 million, as compared to $2.7 million for the year ended September 30, 2019, representing a decrease
of $1.8 million from last year. The decrease in costs of land use rights was due to less GFA sold during fiscal 2020.
Construction cost: We outsource the construction
of all of our projects to third party contractors, whom we select through a competitive tender process. Our construction contracts provide
a fixed payment which covers substantially all labor, materials and equipment costs, subject to adjustments for some types of excess,
such as design changes during construction or changes in government-suggested steel prices, which are paid over the construction period
based on specified milestones. In addition, we purchase and supply a limited range of fittings and equipment, including elevators, window
frames and door frames. Our construction costs for the year ended September 30, 2020 were approximately $8.5 million as compared
to approximately $27.6 million for the year ended September 30, 2019, representing a decrease of $10.0 million. The decrease in construction
cost was due to the decrease in units sold in fiscal 2020.
Gross profits
Gross profit was approximately $0.7 million for
the year ended September 30, 2020 as compared to approximately $9.3 million for the year ended September 30, 2019, representing
a decrease of approximately $8.6 million, which was mainly attributable to less GFA sold in Oriental Pearl Garden and Yang County Yangzhou
Palace project during fiscal 2020 and addition impairment of $2.7 million recognized during the year. We have only limited models available
for customer selection in Oriental Pearl Garden project and Yangzhou Yangzhou Palace project, therefore, the sales from these completed
projects decreased from last year. For fiscal 2020, our average selling price (“ASP”) for real estate projects (excluding
sales of parking spaces) located in Yang County was approximately $719 per square meter, consistent from the ASP of $720 per square meter
for fiscal 2019. The ASP of our Hanzhong real estate projects (excluding sales of parking spaces) was approximately $419 per square meter
for fiscal 2020, decreased by 25.2% as compared to the ASP of $560 per square meter for fiscal 2019. The decrease ASP in Hanzhong real
estate projects was mainly due to the fact that many units sold in fiscal 2020 was for government’s reallocation of residence purpose
with lower selling price.
The overall gross profit as a percentage of real
estate sales was 5.5% for the year ended September 30, 2020, decreased from 23.3% for the year ended September 30, 2019, was
mainly due to the additional impairment loss of $2.7 million recognized for the year ended September 30, 2020.
|
|
For the Year Ended September 30
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
Project
|
|
Gross Profit
|
|
|
Gross
Margin
|
|
|
Gross Profit
|
|
|
Gross
Margin
|
|
|
Variance
|
|
|
Variance
%
|
|
Yangzhou Pearl Garden Phase I and II
|
|
$
|
289,032
|
|
|
|
22
|
%
|
|
$
|
1,619,575
|
|
|
|
59
|
%
|
|
$
|
(1,330,543
|
)
|
|
|
82
|
%
|
Yangzhou Palace
|
|
|
2,424,864
|
|
|
|
30
|
%
|
|
|
5,210,427
|
|
|
|
20
|
%
|
|
|
(2,785,563
|
)
|
|
|
(54
|
)%
|
Mingzhu Garden
(Mingzhu Nanyuan and Beiyuan) Phase I and II
|
|
|
842,776
|
|
|
|
24
|
%
|
|
|
2,105,274
|
|
|
|
26
|
%
|
|
|
(1,262,498
|
)
|
|
|
(60
|
)%
|
Oriental Garden
|
|
|
52,735
|
|
|
|
28
|
%
|
|
|
775,767
|
|
|
|
30
|
%
|
|
|
(723,032
|
)
|
|
|
(93
|
)%
|
Sales Tax
|
|
|
(193,719
|
)
|
|
|
-
|
|
|
|
(389,406
|
)
|
|
|
-
|
|
|
|
195,687
|
|
|
|
(50
|
)%
|
Impairment losses on real estate property development completed
|
|
|
(2,703,031
|
)
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,703,031
|
)
|
|
|
-
|
|
Total Gross Profit
|
|
$
|
712,657
|
|
|
|
5.5
|
%
|
|
$
|
9,321,637
|
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
12,979,227
|
|
|
|
|
|
|
$
|
39,964,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
Total operating expenses decreased by 8.0% or
approximately $0.3 million to approximately $2.9 million for the year ended September 30, 2020 from approximately $3.2 million for
the year ended September 30, 2019, as a result of a decrease in general administrative expense of approximately $0.3 million, but
offset with a slight increase in selling expense of $0.1 million. The Company incurred more marketing expense in fiscal 2020 to promote
the sales in Yangzhou Palace project, which resulted higher selling expense in last year. The $0.3 million decrease in general and administrative
expense was due to less consulting and professional fee incurred for the year ended September 30, 2020.
|
|
For the years ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
General and administrative expenses
|
|
$
|
2,324,057
|
|
|
$
|
2,661,578
|
|
Selling expenses
|
|
|
580,639
|
|
|
|
494,646
|
|
Total Operating expenses
|
|
$
|
2,904,696
|
|
|
$
|
3,156,224
|
|
Percentage of Revenue before sales tax
|
|
|
22.4
|
%
|
|
|
7.9
|
%
|
Interest expense, net
Net interest expense was approximately $0.1 million
for the year ended September 30, 2020 and 2019.
Other income, net
For the year ended September 30, 2020, the
Company had net other income of $1.4 million due to the fact that the Company disposed certain real estate properties in the existing
real estate property completed and under-development to suppliers with settlement of their related payables. For the year ended September 30,
2019, the Company incurred net other expense of $0.3 million for certain non-operating related expenditures.
Income taxes
U.S. Taxes
China HGS is a Florida corporation. However, all
of our operations are conducted solely by our subsidiaries in the PRC. No income is earned in the United States and we do not repatriate
any earnings outside the PRC. As a result, we did not generate any U.S. taxable income for the years ended September 30, 2020 and
2019.
For the year ended September 30, 2020, the
income tax provision was approximately $0.8 million, decreased from approximately $2.0 million in fiscal 2019 due to loss incurred in
fiscal 2020.
Recent U.S. federal tax legislation,
commonly referred to as the Tax Cuts and Jobs Act (the “U.S. Tax Reform”), was signed into law on December 22,
2017. The U.S. Tax Reform significantly modified the U.S. Internal Revenue Code by, among other things, reducing the statutory U.S.
federal corporate income tax rate from 35% to 21% for taxable years beginning after December 31, 2017; limiting and/or
eliminating many business deductions; migrating the U.S. to a territorial tax system with a one-time transition tax on a mandatory
deemed repatriation of previously deferred foreign earnings of certain foreign subsidiaries; subject to certain limitations,
generally eliminating U.S. corporate income tax on dividends from foreign subsidiaries; and providing for new taxes on certain
foreign earnings. Taxpayers may elect to pay the one-time transition tax over eight years or in a single lump sum. The U.S. Tax
Reform also includes provisions for a new tax on GILTI effective for tax years of foreign corporations beginning after
December 31, 2017. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of
controlled foreign corporations (“CFCs”), subject to the possible use of foreign tax credits and a deduction equal to 50
percent to offset the income tax liability, subject to some limitations. For the year ended September 30, 2018, the Company
recognized a one-time transition toll tax of approximately $2.3 million that represented management’s estimate of the amount
of U.S. corporate income tax based on the deemed repatriation to the United States of the Company’s share of previously
deferred earnings of certain non-U.S. subsidiaries and VIE of the Company mandated by the U.S. Tax Reform. The Company’s
estimate of the onetime transition toll Tax is subject to the finalization of management’s analysis related to certain
matters, such as developing interpretations of the provisions of the Tax Act and amounts related to the earnings and profits of
certain foreign VIEs and the filing of our tax returns. U.S. Treasury regulations, administrative interpretations or court decisions
interpreting the Tax Act may require further adjustments and changes in our estimates. As of September 30, 2020, the Company
provided an additional $1.0 million provision due to delinquent U.S. tax return fillings.
PRC Taxes
Our Company is governed by the Enterprise Income
Tax Law of the People’s Republic of China concerning private-run enterprises, which are generally subject to tax at a statutory
rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments. For years ended September 30,
2020 and 2019, the Company is subject to income tax rate of 25% on taxable income. Although the possibility exists for reinterpretation
of the application of the tax regulations by higher tax authorities in the PRC, potentially overturning the decision made by the local
tax authority, the Company has not experienced any reevaluation of the income taxes for prior years. The PRC tax rules are different
from the local tax rules and the Company is required to comply with local tax rules. The difference between the two tax rules will
not be a liability of the Company. There will be no further tax payments for the difference.
Net income
We reported approximately net income of $1.0 million
in net income for the year ended September 30, 2020, representing a decrease of 73.5% or approximately $2.7 million as compared to
net income of approximately $3.7 million for the year ended September 30, 2019. The decrease in net income was mainly due to less
GFA sold during fiscal 2020.
Other comprehensive income
We operate primarily in the PRC and the functional
currency of our operating subsidiary is the Chinese Renminbi (”RMB”). The RMB is not freely convertible into foreign
currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB
amounts could have been, or could be, converted into USD at the rates used in translation.
Translation adjustments amounted to approximately
$8.6 million and negative $6.7 million for the years ended September 30, 2020 and 2019, respectively. The balance sheet amounts
with the exception of equity at September 30, 2020 were translated at 6.7896 RMB to 1.00 USD as compared to 7.1477 RMB to 1.00 USD
at September 30, 2019. The equity accounts were stated at their historical rate. The average translation rates applied to the income
statements accounts for the years ended September 30, 2020 and 2019 were 7.0056 RMB to 1.00 USD and 6.8753 RMB to 1.00 USD, respectively.
Liquidity and Capital Resources
Our principal need for liquidity and capital resources
is to maintain working capital sufficient to support our operations and to make capital expenditures to finance the growth of our business.
Historically we mainly financed our operations primarily through cash flows from operations and borrowings from our principal shareholder.
In recent years, the Chinese government has
implemented measures to control overheating residential and commercial property prices including but not limited to restriction on
home purchase, increase the down-payment requirement against speculative buying, development of low-cost rental housing property to
help low-income groups while reducing the demand in the commercial housing market, increase the real estate property tax to
discourage speculation, and control of the land supply and slowdown the construction land auction process, etc. In addition, in
December 2019, a novel strain of coronavirus (COVID-19) surfaced. COVID-19 has spread rapidly throughout China and worldwide,
which has caused significant volatility in the PRC and international markets. There is significant uncertainty around the breadth
and duration of business disruptions related to COVID-19, as well as its impact on the PRC and international economies. To reduce
the spread of the COVID-19, the Chinese government has employed measures including city lockdowns, quarantines, travel restrictions,
suspension of business activities and school closures. Due to difficulties resulting from the COVID-19 outbreak, including, but not
limited to, the temporary closure of the Company’s facilities and operations beginning in early February through early
March 2020, limited support from the Company’s employees, delayed access to construction raw material supplies, reduced
customer visit to the Company’s sales office, and inability to promote the real estate property sales to customers on a timely
basis, our revenue decreased by approximately $27.0 million in fiscal 2020 as compared to fiscal 2019 due to decreased sales volume
of both residential and commercial properties developed by us. Based on assessment of current economic environment, customer demand
and sales trend, and the negative impact from COVID-19 outbreak and spread, we believe that the real estate market downturn will
continue to be uncertain in the coming periods. As a result, the developing period of real estate properties and our operating cycle
has been extended and we may not be able to liquidate our large balance of completed real estate property within a short term as we
originally expected. In addition, as of September 30, 2020, we had large construction loans payable balance of approximately
$109.9 million and large accounts payable balance of approximately $25.4 million to be paid to subcontractors within one year. The
above mentioned facts raised substantial doubt about the Company's ability to continue as a going concern from the date of this
filing.
In assessing its liquidity, management monitors
and analyzes the Company’s cash on-hand, its ability to generate sufficient revenue sources in the future, and its operating and
capital expenditure commitments. As of September 30, 2020, our total cash and restricted cash balance decreased to approximately
$3.9 million as compared to approximately $4.2 million as of September 30, 2019. With respect to capital funding requirements, the
Company budgeted our capital spending based on ongoing assessments of needs to maintain adequate cash. As of September 30, 2020,
we had approximately $109.0 million completed residential apartments and commercial units available for sale to potential buyers when
needed. Although we reported approximately $25.4 million accounts payable as of September 30, 2020, due to the long term relationship
with our construction suppliers and subcontractors, we were able to effectively manage cash spending on construction and negotiate with
them to adjust the payment schedule based on our cash on hand. In addition, most of our existing real estate development projects related
to old town renovation which are supported by local government. As of September 30, 2020, we reported approximately $109.9 million
construction loan borrowed from financial institutions controlled by local government and such loans can only be used on old town renovation
related project development. We expect that we will be able to renew all of the existing construction loans upon their maturity and borrow
additional new loans from local financial institutions when necessary, based on our past experience and the Company’s good credit
history. Also, the Company’s cash flows from pre-sales and current sales should provide financial support for our current developments
and operations. As of September 30, 2020, we had approximately $19.4 million customer deposits representing cash advance from buyers
for pre-sales of our residential units and we believe such cash advance can be used to fund our ongoing construction projects whenever
necessary. For the year ended September 30, 2020, we had five large ongoing construction projects, which were under preliminary development
stage due to delayed inspection and acceptance of the development plans by local government. In June 2020, we completed the residence
relocation surrounding Liangzhou Road related projects and expects to construct the Liangzhou Road related projects starting from the
fourth quarter of fiscal year 2020. For other four projects, we expect we will be able to obtain government’s approval of the development
plans on these projects in the coming fiscal year and start the pre-sale of the real estate property to generate cash when certain property
development milestones have been achieved. For the years ended September 30, 2020 and 2019, the Company had positive cash flow from
operating activities. In addition, our principal shareholder, Mr. Xiaojun Zhu has been providing and has committed to continue to
provide his personal funds to support the Company’s operation whenever necessary.
Cash Flow
Year ended September 30, 2020 as compared
to year ended September 30, 2019
Comparison of cash flows results for the fiscal
year ended September 30, 2020 and fiscal year ended September 30, 2019 are summarized as follows:
|
|
For the years ended September 30,
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Variance
|
|
Net cash provided by operating activities
|
|
$
|
2,217,264
|
|
|
$
|
8,937,581
|
|
|
$
|
(6,720,317
|
)
|
Net cash used in provided by financing activities
|
|
$
|
(2,415,924
|
)
|
|
$
|
(11,337,359
|
)
|
|
$
|
8,921,435
|
|
Effect of changes of foreign exchange rate on cash
|
|
$
|
(135,921
|
)
|
|
$
|
(173,682
|
)
|
|
$
|
37,761
|
|
Net increase (decrease) in cash
|
|
$
|
(334,581
|
)
|
|
$
|
(2,573,460
|
)
|
|
$
|
2,238,879
|
|
Operating activities
Net cash provided by operating activities during
fiscal 2020 was approximately $2.2 million, consisting of net income of approximately $1.0 million, noncash adjustments of approximately
$2.7 million impairment on the real estate property completed and deficit of $5.0 million due to gain on settlement of certain payables
with suppliers and settlements on shareholder loans and net changes in our operating assets and liabilities, which mainly included a decrease
in real estate property completed of approximately $9.4 million due to the sales of real estate properties, a decrease of security deposit
with government of $6.3 million due to the fact that the Company started the construction of Liangzhou road and affiliated projects in
September 2020 and the local government refunded such deposits to support the Company’s working capital and an increase of
$1.3 million in customers deposit received from buyers, offset by the continuous spending on real estate property under development of
$7.5 million, a reduction of accounts payable of $1.5 million due to payments to suppliers based on development progress and a reduction
of tax payable of $2.6 million.
Net cash provided by operating activities during
fiscal 2019 was approximately $8.9 million, consisting of net income of approximately $3.7 million, noncash adjustments of approximately
$1.4 million and net changes in our operating assets and liabilities, which mainly included an increase in real estate property completed
of approximately $45.8 million and a decrease in real estate property under development of approximately $51.0 million due to the completion
of Yangzhou Palace real estate project during the year and reclassification from real estate property under development to real estate
property completed, an increase of accounts payable of $8.0 million due to continuous spending on the real estate under developments,
an increase of $1.2 million in tax payable, offset by a reduction of customer deposits of $4.3 million and reduction of contract balance
of $3.9 million due to recognition of revenue.
Financing activities
Net cash used in financing activities was approximately
$4.6 million for fiscal 2020, mainly representing the repayment of construction loan of $2.4 million during fiscal 2020 and a settlement
of shareholder loan of $2.1 million.
Net cash used in financing activities was approximately
$11.3 million for fiscal 2019, mainly representing the repayment of loans during fiscal 2019.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
As an industry practice, the Company
provides guarantees to PRC banks with respect to loans procured by the purchasers of the Company’s real estate properties for
the total mortgage loan amount until the completion of obtaining the “Certificate of Ownership” of the properties from
the government, which generally takes six to twelve months. Because the banks provide loan proceeds without getting the
“Certificate of Ownership” as loan collateral during this six to twelve months’ period, the mortgage banks require
the Company to maintain, as restricted cash, 5% to 10% of the mortgage proceeds as security for the Company’s obligations
under such guarantees. If a purchaser defaults on its payment obligations, the mortgage bank may deduct the delinquent mortgage
payment from the security deposit and require the Company to pay the excess amount if the delinquent mortgage payments exceed the
security deposit. If the delinquent mortgage payments exceed the security deposit, the banks may require us to pay the excess
amount. If multiple purchasers default on their payment obligations at around the same time, we will be required to make significant
payments to the banks to satisfy our guarantee obligations. If we are unable to resell the properties underlying defaulted mortgages
on a timely basis or at prices higher than the amounts of our guarantees and related expenses, we will suffer financial losses. The
Company has made necessary reserves in its restricted cash account to cover any potential mortgage defaults as required by the
mortgage lenders. For the years ended September 30, 2020 and 2019, the Company has not experienced any delinquent mortgage
loans and has not experienced any losses related to this guarantee. As of September 30, 2020 and 2019, our outstanding
guarantees in respect of our customers' mortgage loans amounted to approximately $68 million and $78 million, respectively. As of
September 30, 2020 and 2019, the amount of security deposits provided for these guarantees was approximately $3.4 million and
$3.9 million respectively and the Company believes that such reserves are sufficient.
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.
Critical Accounting Policies and Management Estimates
Revenue recognition
The Company adopted FASB ASC Topic 606 Revenue
from Contracts with Customers (“ASC 606”) on October 1, 2018 using the modified retrospective approach. Under ASC 606, Revenue
from Contracts with Customers, revenue is recognized in accordance with the transfer of goods and services to customers at an amount that
reflects the consideration that the Company expects to be entitled to for those goods and services. The Company determines revenue recognition
through the following steps:
|
·
|
identification of the contract, or contracts, with a customer;
|
|
·
|
identification of the performance obligations in the contract;
|
|
·
|
determination of the transaction price, including the constraint on variable consideration;
|
|
·
|
allocation of the transaction price to the performance obligations in the contract; and
|
|
·
|
recognition of revenue when (or as) the Group satisfy a performance obligation.
|
Most of the Company’s revenue is derived
from real estate sales of condominiums and commercial property in the PRC. The majority of the Company’s contracts contain a single
performance obligation involving significant real estate development activities that are performed together to deliver a real estate property
to customers. Revenues arising from real estate sales are recognized when or as the control of the asset is transferred to the customer.
The control of the asset may transfer over time or at a point in time. For the sales of individual condominium units in a real estate
development project, the Company has an enforceable right to payment for performance completed to date, revenue is recognized over time
by measuring the progress towards complete satisfaction of that performance obligation (“percentage completion method”). Otherwise,
revenue is recognized at a point in time when the customer obtains 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.
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The buyer is committed to the extent of being unable to require a refund except for non-delivery of the unit or interest.
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c.
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Sufficient units have already been sold to assure that the entire property will not revert to rental property.
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d.
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Sales prices are collectible.
|
e.
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Aggregate sales proceeds and costs can be reasonably estimated.
|
If any of the above criteria is not met, proceeds
shall be accounted for as deposits until the criteria are met.
Under the percentage of completion method, revenues
from individual real estate condominium units sold under development and related costs are recognized over the course of the construction
period, based on the completion progress of a project. The progress towards complete satisfaction of the performance obligation is measured
based on the Company’s efforts or inputs to the satisfaction of the performance obligation, by reference to the contract costs incurred
up to the end of reporting period as a percentage of total estimated costs for each contract. In relation to any project, revenue is determined
by calculating the ratio of incurred costs, including land use rights costs and construction costs, to total estimated costs and applying
that ratio to the contracted sales amounts. Cost of sales is recognized by determining the ratio of contracted sales during the period
to total estimated sales value, and applying that ratio to the incurred costs. Current period amounts are calculated based on the difference
between the life-to-date project totals and the previously recognized amounts.
Any changes in significant judgments and/or estimates
used in determining construction and development revenue could significantly change the timing or amount of construction and development
revenue recognized. Changes in total estimated project costs or losses, if any, are recognized in the period in which they are determined.
Revenue from the sales of completed real estate
condominium units is recognized at the time of the closing of an individual unit sale. This occurs when the customer obtains the physical
possession, the legal title, or the significant risks and rewards of ownership of the assets and the Company has present right to payment
and the collection of the consideration is probable. For municipal road construction projects, fees are generally recognized at the time
of the projects are completed.
Contract balances
Timing of revenue recognition may differ from
the timing of billing and cash receipts from customers. The Company records a contract asset when revenue is recognized prior to invoicing,
or a contract liability when cash is received in advance of recognizing revenue. A contract asset is a right to consideration that is
conditional upon factors other than the passage of time. Contract assets include billed and billable receivables, which are the Company’s
unconditional rights to consideration other than to the passage of time. Contract liabilities include cash collected in excess of revenues.
Customer deposit are excluded from contract liabilities.
The Company has elected to apply the optional
practical expedient for costs to obtain a contract which allows the Company to immediately expense sales commissions (included under selling
expenses) because the amortization period of the asset that the Company otherwise would have used is one year or less. Contract assets
and liabilities are generally classified as current based on our contract operating cycle.
The Company provides “mortgage loan guarantees”
only with respect to buyers who make down-payments of 20%-50% of the total purchase price of the property. The period of the mortgage
loan guarantee begins on the date the bank approves the buyer’s mortgage and we receive the loan proceeds in our bank account and
ends on the date the “Certificate of Ownership” evidencing that title to the property has been transferred to the buyer. The
procedures to obtain the Certificate of Ownership take six to twelve months (the “Mortgage Loan Guarantee Period”). If, after
investigation of the buyer’s income and other relevant factors, the bank decides not to grant the mortgage loan, our mortgage-loan
based sales contract terminates and there will be no guarantee obligation. If, during the Mortgage Loan Guarantee Period, the buyer defaults
on his or her monthly mortgage payment for three consecutive months, we are required to return the loan proceeds back to the bank, although
we have the right to keep the customer's deposit and resell the property to a third party. Once the Certificate of Property has been issued
by the relevant government authority, our loan guarantee terminates. If the buyer then defaults on his or her mortgage loan, the bank
has the right to take the property back and sell it and use the proceeds to pay off the loan. The Company is not liable for any shortfall
that the bank may incur in this event. To date, no buyer has defaulted on his or her mortgage payments during the Mortgage Loan Guarantee
Period and the Company has not returned any loan proceeds pursuant to its mortgage loan guarantees.
Use of estimates
The preparation of financial statements in
conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes, and disclosure of contingent liabilities at the date of the consolidated financial
statements. Estimates are used for, but not limited to, the assumptions and estimates used by management in recognizing development
revenue under the percentage of completion method, the selection of the useful lives of property and equipment, provision necessary
for contingent liabilities, revenue recognition, taxes and budgeted costs. Management believes that the estimates utilized in
preparing its consolidated financial statements are reasonable and prudent. Actual results could differ from these estimates.
Real estate property development completed
and under development
Real estate property consists of finished residential
unit sites, commercial offices and residential unit sites under development. The Company leases the land for the residential unit sites
under land use right leases with various terms from the PRC government. The cost of land use rights is included in the development cost
and allocated to each project. Real estate property development completed and real estate property under development are stated at the
lower of cost or fair value.
Expenditures for land development, including cost
of land use rights, deed tax, pre-development costs, and engineering costs, exclusive of depreciation, are capitalized and allocated to
development projects by the specific identification method. Costs are allocated to specific units within a project based on the ratio
of the sales area of units to the estimated total sales area of the project (or phase of the project) multiplied by the total cost of
the project (or phase of the project).
Cost of amenities transferred to buyers is allocated
to specific units as a component of total construction cost. The amenity cost includes landscaping, road paving, etc. Once the projects
are completed, the amenities are under control of the property management companies.
Real estate property development completed and
under development are subject to valuation adjustments when the carrying amount exceeds fair value. An impairment loss is recognized only
if the carrying amount of the assets is not recoverable and exceeds fair value. The carrying amount is not recoverable if it exceeds the
sum of the undiscounted cash flows expected to be generated by the assets. The Company reviewed all of its real estate projects for future
losses and impairment by comparing the estimated future undiscounted cash flows for each project to the carrying value of such project.
For the years ended September 30, 2020 and 2019, the Company recognized $2,703,031 and nil impairment for real estate property completed,
respectively.
Capitalization of Interest
Interest incurred during and directly related
to real estate development projects is capitalized to the related real estate property under development during the active development
period, which generally commences when borrowings are used to acquire real estate assets and ends when the properties are substantially
complete or the property becomes inactive. Interest is capitalized based on the interest rate applicable to specific borrowings or the
weighted average of the rates applicable to other borrowings during the period. Interest capitalized to real estate property under development
is recorded as a component of cost of real estate sales when related units are sold. All other interest is expensed as incurred.
BUSINESS
Overview
We conduct all of our business in China. All of
our business is conducted in mainland China. Guangsha was founded by Mr. Xiaojun Zhu, our Chairman and Chief Executive Officer and
commenced operations in 1995 in Hanzhong, a prefecture-level city in Shaanxi Province.
Since Guangsha was founded, management has been
focused on expanding our business in Tier 3 and Tier 4 cities and counties in China that we strategically select based on population and
urbanization growth rates, general economic conditions and growth rates, income and purchasing power of resident consumers, anticipated
demand for private residential properties, availability of future land supply and land prices, and governmental urban planning and development
policies. We utilize a standardized and scalable model that emphasizes rapid asset turnover, efficient capital management and strict cost
control. We plan to expand into strategically selected Tier 3 and Tier 4 cities and counties with real estate development potential in
Shaanxi Province, and expect to benefit from rising demand for residential housing as a result of increasing income levels of consumers
and growing populations in these cities and counties due to urbanization.
In September 2020, the Company started land
leveling and construction process for the Oriental Garden Phase II and Liangzhou Mansion real estate properties in the Liangzhou road
real estate project. Our Liangzhou Road related projects, which consist of residential buildings, office buildings and commercial plaza,
will start construction after the approval by the local government of the road and become a new city center of Hanzhong city.
Real Estate Industry Overview
During the volatile real estate market, the Company
has been capitalizing on its inherent strengths and market opportunities in Tier 3 and Tier 4 cities and counties to deliver value for
our shareholders. We feel confident and also competent to take on every challenge and grasp every opportunity during market consolidation.
We expect to provide rapid response to the market on the basis of our projected business plans together with a flexible approach in seizing
market opportunities; strict investment standard and prudent attitude towards investment opportunities, and appropriate replenishment
of quality land resources in existing regions to realize value within the Tier 3 and Tier 4 cities and counties in Western China.
Company Positioning
The Company is headquartered in Hanzhong in the
southwestern part of the Shaanxi province, in the center of the Hanzhong Basin, on the Han River, near the Sichuan border. According to
the China City Statistical Yearbook, Hanzhong had a population of about 3.8 million in 2018 calendar year.
Hanzhong is a key transportation hub connecting
China’s Middle Economic zone and Western Economic Zone. The travel time from Xi’an, the provincial capital of Shaanxi province,
to Hanzhong takes less than 2 hours. The new airport in Hanzhong was completed and put into service in 2014. The airport handled 650,000
passengers and 2,200 tons of cargo in 2019. Xicheng, a high-speed railway between Chengdu, the provincial capital of Sichuan province,
and Xi’an with a major stop in Hanzhong was completed in 2017. It takes 1.5 hours from Hanzhong to Xi’an and 2.5 hours from
Hanzhong to Chengdu. The railway passenger’s volume is expected to increase from 1.5 million to 6 million by 2020.
In accordance with Hanzhong Government’s
2019 annual report, Hanzhong’s GDP reached RMB 154.8 billion (approximately $22.8 billion) by 2019 calendar year, representing a
5.1% increase from 2018 calendar year. Residents’ annual disposable income for 2019 calendar year was RMB32,828 (equivalent to $4,835),
representing a 8.1% increase as compared to 2018 calendar year.
Many
Tier 3 and Tier 4 cities and counties in China provide a major source of migration workers for the Tier 1 and Tier 2 cities in China.
The income from migration workers also is becoming a significant factor in supporting the hometown economy. Based on Hanzhong Government’s
2019 annual report, the number of Hanzhong’s migration workers reached approximately 865,000 as of December 31, 2019 (2018
– 834,700).
The target
market of the Company is in Western China. The Company continues to focus on Tier 3 and Tier 4 cities and counties in acquiring sizable
quality land reserves at low cost in a flexible and diversified manner. There has been an increasing demand for high quality residential
housing, largely driven by the “Go West” policy and accelerated urbanization. Many buyers in Tier 3 and Tier 4 cities and
counties are first time home buyers. In order to mitigate default risk, the Company generally requires from its homebuyer customers a
deposit in the range of 30%-50% of the purchase price, which is higher than the percentage required by the government for the mortgage
down payment.
The Company
received the National Grade-I real-estate development qualification granted by the Ministry of Housing and Urban-Rural Development of
the People's Republic of China ("MOHURD")"on October 12, 2011. The Grade-I real-estate development qualification is
the highest qualification for real-estate developers in China and requires meeting several strict criteria, including:
a. Registered
capital of at least RMB 50 million (approximately $7.3 million);
b. At
least five years of experience in real estate development and operation;
c. The
completion of construction of a total over 300,000 square meters. of ground floor area (GFA) within the last three years and, in the most
recent year, developed real estate projects of at least 150,000 square meters; and
d. The
completed real estate projects have no quality issues in each of the past five years; and an established, comprehensive quality control
and guarantee system.
The National
Grade-I real-estate development qualification provides significant opportunities for the Company to expand its operations beyond Shaanxi
province into new regional real estate markets in China.
Looking
ahead, the Company will continue to focus on developing high quality and large scale real estate projects in the suburban areas of
Tier 3 and Tier 4 cities and counties with promising economic growth potential. Leveraging on its unique competitive strengths, and
under the direction and guidance of the government’s macro policies, the Company expects to further replicate its successful
business model into new high growth regions through strategic selection of project locations, a short project development schedule
characterized by fast asset turnover and excellent execution ability, as well as innovative product offering closely in line with
market demand. The Company aims at becoming a leading large-scale residential property developer in Western China and a
well-recognized brand name.
Pre-Sales and Sales
In the
PRC, real estate developers are allowed to begin to market properties before construction is completed. Like other developers, we pre-sell
properties prior to completion of construction. Under PRC pre-sales regulations, property developers must satisfy specific conditions
before properties under construction can be pre-sold. These mandatory conditions include:
|
·
|
the land premium must have been paid in full;
|
|
·
|
the land use rights certificate, the construction site planning permit, the construction work planning
permit and the construction permit must have been obtained;
|
|
·
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at least 25% of the total project development cost must have been incurred;
|
|
·
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the progress and the expected completion and delivery date of the construction must be fixed;
|
|
·
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the pre-sale permit must have been obtained; and
|
|
·
|
the completion of certain milestones in the construction processes must be specified by the local government
authorities.
|
These
mandatory conditions are designed to require a certain level of capital expenditure and substantial progress in project construction before
the commencement of pre-sales. Generally, the local governments also require developers and property purchasers to have standard pre-sale
contracts prepared under the auspices of the government. Developers are required to file all pre-sale contracts with local land bureaus
and real estate administrations after entering into such contracts.
After-Sale
Services and Delivery
We assist
customers in arranging for and providing information related to financing. We also assist our customers in various title registration
procedures related to their properties, and we have set up an ownership certificate team to assist purchasers to obtain their property
ownership certificates. We offer various communication channels to customers to facilitate customer feedback collection. We also cooperate
with property management companies that manage our properties and ancillary facilities, to handle customer feedback.
We endeavor
to deliver the units to our customers on a timely basis. We closely monitor the progress of construction of our property projects and
conduct pre-delivery property inspections to ensure timely delivery. The time frame for delivery is set out in the sale and purchase agreements
entered into with our customers, and we are subject to penalty payments to the purchasers for any delay in delivery caused by us. The
Company has never incurred any delay penalties. Once a property development has been completed, has passed the requisite government inspections
and is ready for delivery, we will notify our customers and hand over keys and possession of the properties.
Marketing
and Distribution Channel
We maintain
a marketing and sales force for our development projects, which at September 30, 2020 consisted of 78 employees specializing in marketing
and sales. We also train and use outside real estate agents to market and increase the public awareness of our projects, and spread the
acceptance and influence of our brand. However, our marketing and sales are primarily conducted by our own sales force because we believe
our own dedicated sales representatives are better motivated to serve our customers as well as to control our property pricing and selling
expenses.
Our marketing
and sales team develops the appropriate advertising and selling plan for each project. We develop public awareness through marketing and
advertising as well as referrals from customers. We utilize a customer relationship management system to track customer profiles, which
helps us to forecast future customer requirements and general demand for our projects. This allows us to have real-time information on
the status of individual customer transactions as well as available inventory by project, which enables us to better anticipate the preferences
of current and future customers.
We
use various advertising media to market our developments and enhance our brand name, including newspapers, magazines, television,
radio, e-marketing and outdoor billboards. We also participate in real estate exhibitions. We have also developed a strong
relationship with local institutional purchasers and governments. The Company has entered into various significant
residential-apartment group-purchase agreements with local government and institutional purchasers.
A typical
real estate property sales transaction usually consists of three steps. First, the customer pays a deposit to the Company. Within a week,
after paying the deposit, the customer will sign a purchase contract with us and make a down payment to us in cash. After making the down
payment, the customer arranges for a mortgage loan for the balance of the purchase price. Once the loan is approved, the mortgage loan
proceeds are paid to us directly by the bank. Finally, we deliver the property to the customer. Legal title, as evidenced by a property
ownership certificate issued by local land and construction bureaus, will be delivered to the customer.
For customers
purchasing properties with mortgage financing, under current PRC laws, their minimum down payment is 30% of the total purchase price for
the purchase of the first self-use residential unit with total GFA of 90 square meters (about 970 square feet) or more on all existing
units and those yet to be completed, and a down payment of 20% on the first residential units for self-use with total GFA of under 90
square meters. In order to mitigate the default risk, the Company requires from its homebuyer customers deposits ranging from 30% - 50%
of the purchase price, which is higher than the percentage required by the government for the mortgage down payment.
Like
most real estate companies in China, we generally provide guarantees to mortgagee banks in respect of the mortgage loans provided to the
purchasers of our properties up until completion of the registration of the mortgage with the relevant mortgage registration authorities.
As of September 30, 2020, the Company had security deposits for these guarantees amounted to approximately $3.4 million. Guarantees
for mortgages on residential properties are typically discharged when the individual property ownership certificates are issued. In our
experience, the issuance of the individual property ownership certificates typically takes six to twelve months, so our mortgage guarantees
typically remain outstanding for up to twelve months after we deliver the underlying property.
Our Property Development Operations
We have a systematic and standardized process
of project development, which we implement through several well-defined phases. One critically significant portion of our process is the
land acquisition process, which is segmented into three stages: (i) opportunity identification, (ii) initial planning and budgeting, and
(iii) land use rights acquisition. The following diagram sets forth the key stages of our property development process.
LAND ACQUISITION PROCESS
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Project
planning and design
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Project construction
and
Management
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Pre-sale, sale
and marketing
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After-sale
and delivery
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Opportunity Identification
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Initial
Planning
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Land Acquisition
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-Strategic planning
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-Feasibility study
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-Financial assessment
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-Outsource architectural and engineering design
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-Outsource construction
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-Pre-sale
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|
-Delivery
|
-Geographic and market analysis
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-Preliminary design
|
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-Internal approval
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-Design management
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-Construction supervision
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-Marketing
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-Feedback collection
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-Project evaluation
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-Bidding process
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-Arrange financing
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-Quality control
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-Advertising
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-Completion inspection
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-Landscaping and fixture installation
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Our Projects
Overview
We develop the following three types of real estate
projects, which may be developed in one or more phases:
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·
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multi-layer apartment buildings, which are typically six stories or less;
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·
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sub-high-rise apartment buildings, which are typically seven to 11 stories; and
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|
·
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high-rise apartment buildings, which are typically 12 to 33 stories.
|
At any one time, our projects (or phases of our
projects) are in one of the following three stages:
|
·
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completed projects, meaning properties for which construction has been completed;
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|
·
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properties under construction, meaning properties for which construction permits have been obtained but
construction has not been completed; and
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·
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properties under planning, meaning properties for which we have entered into land grant contracts and
are in the process of obtaining the required permits to begin construction.
|
Our main projects located in Hanzhong City are:
Mingzhu Beiyuan, Oriental Pearl Garden and Liangzhou Road related projects. In Yang County, our project is Yangzhou Pearl Garden and Yangzhou
Palace. Most projects are being developed in multiple phases.
Real Estate Projects located in Hanzhong City
Mingzhu Garden - Mingzhu Nanyuan
Mingzhu Nanyuan consists of multi-layer residential
buildings and sub-high-rise and high-rise residential buildings with commercial shops on the first floors, all of which were completed
by fiscal 2012 with total GFA of 35,220 square meters. As of September 30, 2020, the remaining unsold GFA was Nil.
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Mingzhu Garden - Mingzhu Beiyuan
This project is located in the southwest part
of Hanzhong City. The Phase I project includes two high-rise residential buildings with commercial shops located on the first floor with
unsold GFA of Nil square meters as of September 30, 2020. The Phase II Mingzhu Beiyuan project includes 17 high-rise residential
buildings with GFA of 358,058 square meters. The Company started construction in the third quarter of fiscal 2012 and completed the construction
in the last quarter of fiscal 2015. As of September 30, 2020, the unsold GFA was 80,894.
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Mingzhu Xinju
This project is located in the downtown of Hanzhong
City. It consists of two residential buildings, with commercial shops located on the first floors with total GFA of 21,137 square meters. One
building was completed by fiscal 2010 and the other one completed by fiscal 2011 with remaining unsold GFA of Nil square meters as at
September 30, 2020, which are primarily underground parking units.
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Oriental Pearl Garden
This project is located in the downtown of Hanzhong
City. The Company started construction in the third quarter of fiscal 2012. It consists of 12 high-rise residential buildings with commercial
shops on the first and second floors with GFA of approximately 275,014 square meters. The project was fully completed in fiscal 2016.
As of September 30, 2020, the unsold GFA was 57,418 square meters.
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Real Estate Projects located in Yang County
Yangzhou Pearl Garden
Yangzhou Pearl Garden mainly consists of multi-layer
residential buildings and sub-high-rise residential buildings with commercial shops on the first floors. As of September 30, 2020,
the remaining unsold GFA of Phase I of Yangzhou Pearl Garden, which includes multi-layer residential buildings, commercial units, sub-high-rise
and high-rise residential buildings was a total GFA of Nil square meters. Yangzhou Pearl Garden Phase II consists of five high-rise residential
buildings and one multi-layer residential building, with a total GFA of 67,653 square meters. The construction was completed in fiscal
2015. As of September 30, 2020, the unsold GFA of Yangzhou Pearl Garden Phase II was 12,458 square meters.
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 297,450 square meters in
Yangzhou Palace located in Yang County. The construction started in the fourth quarter of fiscal 2013 and was completed by for the year
ended September 30, 2019. The Company received the pre-sale license on September 1, 2016 and started to promote and sell the
property in November 2016. As of September 30, 2020, the remaining unsold GFA of Yangzhou Palace, which includes multi-layer
residential buildings, commercial units, sub-high-rise and high-rise residential buildings was a total GFA of 131,354 square meters.
The following table sets forth our real estate
projects in the year ended September 30, 2020:
Project Name
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Location
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Type of Buildings
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GFA sold / disposed
during the year
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Unsold GFA as
of September
30, 2019
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Yangzhou Pearl Garden Phase I
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Yang County
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Multi-layer residential
|
|
|
|
|
|
|
|
|
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Sub-high-rise residential
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|
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7,240
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|
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|
-
|
|
|
|
|
|
|
|
|
|
|
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Mingzhu Garden
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|
|
|
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(Mingzhu Nanyuan)
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Hanzhong City
|
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Sub-high-rise residential
|
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343
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|
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|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Mingzhu Garden
|
|
|
|
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|
|
|
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(Mingzhu Beiyuan) Phase I
|
|
Hanzhong City
|
|
High-rise residential
|
|
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2,151
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nan Dajie
|
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|
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(Mingzhu Xinju)
|
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Hanzhong City
|
|
High-rise residential
|
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3,541
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Mingzhu Garden
|
|
|
|
|
|
|
|
|
|
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(Mingzhu Beiyuan) Phase II
|
|
Hanzhong City
|
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High-rise residential
|
|
|
8,579
|
|
|
|
80,894
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Oriental Pearl Garden
|
|
Hanzhong City
|
|
High-rise residential
|
|
|
230
|
|
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|
57,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yangzhou Pearl Garden Phase II
|
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Yang County
|
|
High-rise residential
|
|
|
299
|
|
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|
12,458
|
|
Yangzhou Palace
|
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Yang County
|
|
High-rise residential
|
|
|
10,854
|
|
|
|
131,354
|
|
Total
|
|
|
|
|
|
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33,237
|
|
|
|
282,124
|
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(1)
|
The amounts for “total GFA” in this table are the amounts of total saleable gross floor area and are derived on the following basis:
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·
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for properties that are sold, the stated GFA is based on that sales contracts relating to such property;
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·
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for unsold properties that are completed, the stated GFA is calculated based on the detailed construction blueprint and the calculation method approved by the PRC government for saleable GFA, after necessary adjustments; and
|
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·
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for properties that are under planning, the stated GFA is based on the land grant contract and our internal projections.
|
Suppliers
Land Bank
In China, the supply of land is controlled by
the government. Since the early 2000s, the real estate industry in China has been transitioning from an arranged system controlled
by the PRC government to a more market-oriented system. At present, although the Chinese government still owns all urban land in China,
land use rights with terms of up to 70 years can be granted to, owned or leased by, private individuals and companies.
Land - under planning and development
In May 2011, the Company entered into a development
agreement with the local government. Pursuant to the agreement, the Company will prepay the development cost of approximately $17.6 million
(RMB 119,700,000) and the Company has the right to acquire the land use rights through public bidding. The prepaid development cost will
be deducted from the final purchase price of the land use rights. As of September 30, 2020, a deposit of approximately $1.9 million
was paid by the Company (2019- $2.8 million). The local government is still in a slow process of re- zoning the property. The Company expects to make
payment of the remaining development cost based on the government’s current work progress.
All land transactions are required to be reported
to and authorized by the local Bureau of Land and Natural Resources. With respect to real estate project design and construction services,
the Company typically selects the lowest-cost provider based on quality selected through an open bidding process. Such service providers
are numerous in China and the Company foresees no difficulties in securing alternative sources of services as needed.
Other Suppliers
The Company uses various suppliers in the construction
of its projects. For the year ended September 30, 2020 and 2019, none suppliers accounted for more than 10% of the total project
expenditures.
Competition
The real estate industry in China is highly competitive.
In the Tier 3 and Tier 4 cities and counties that we focus on, the markets are relatively more fragmented than in the Tier 1 or Tier 2
cities. We compete primarily with regional property developers and an increasing number of large national property developers who have
also started to enter these markets. Competitive factors include the geographical location of the projects, the types of products offered,
brand recognition, price, designing and quality. In the regional markets in which we operate, our major competitors include regional real
estate developers Wanbang Real Estate Development Co. Ltd., (“Wanbang”), Jingtai Real Estate Development Co. Ltd.,(“Jingtai”)
and Shaanxi Fenghui Real Estate Development Co. Ltd., (“Fenghui”) as well as other national real estate developers such as
Evergrande Real Estate Group (“Evergrande”) who have also started their projects in these local markets.
Nationally, there are numerous national real estate
developers that have real estate projects across China. There are many housing and land development companies listed on the Shanghai and
Shenzhen Stock Exchanges. However, such companies usually undertake large scale projects and are unlikely to compete with the Company
for business as the Company targets small to medium sized projects in Tier 3 and Tier 4 cities and counties.
In the regional market, the Company’s only
direct competitor with meaningful market share in the market is Wanbang. This company generally undertakes medium and small scale projects
and focuses on development of commercial real estate properties, such as hotels and shopping centers.
Competitive Strength:
We believe the following strengths allow us to
compete effectively:
Well Positioned to Capture Opportunities in
Tier 3 and Tier 4 Cities and Counties.
With the increase in consumer disposable income
and urbanization rates, a growing middle-income consumer market has emerged driving demand for affordable and high quality housing in
many cities across northwest China. We focus on building large communities of modern, mid-sized residential properties for this market
segment and have accumulated substantial knowledge and experience about the residential preferences and demands of mid-income customers.
We believe we can leverage our experience to capture the growth opportunities in the markets.
Standardized and Scalable Business Model.
Our business model focuses on a standardized property
development process designed for rapid asset turnover. We break up the overall process into well-defined stages and closely monitor costs
and development schedules through each stage. These stages include (i) identifying land, (ii) pre-planning and budgeting, (iii) land
acquisition, (iv) detailed project design, (v) construction management, (vi) pre-sales, sales and (vii) after-sale
service. We commence pre-planning and budgeting prior to the land acquisition, which enables us to acquire land at costs that meet our
pre-set investment targeted returns and to quickly begin the development process upon acquisition. Our enterprise resource planning enables
us to collect and analyze information on a real-time basis throughout the entire property development process. We utilize our customer
relationship management system to track customer profiles and sales to forecast future individual preferences and market demand.
Experienced Management Team Supported by Trained
and Motivated Workforce.
Our CEO and founder, Mr. Xiaojun Zhu has
over 20 years of experience in the real estate industry and has gained considerable strategic planning and business management expertise
in the past decade. Our management and workforce are well-trained and motivated. Employees receive on-going training in their areas of
specialization at our head office in Hanzhong.
Guangsha is also an “AAA Enterprise in Shaanxi
Construction Industry” as recognized by the Credit Association of Agricultural Bank of China, Shaanxi Branch.
Strategies
Our goal is to become the leading residential
property developer focused on China’s Tier 3 and Tier 4 cities and counties by implementing the following strategies:
Continue Expanding in Selected Tier 3 and Tier
4 Cities. We believe that Tier 3 and Tier 4 cities and counties present development opportunities that are well suited for our scalable
business model of rapid asset turnover. Furthermore, Tier 3 and Tier 4 cities and counties currently tend to be in an early stage of market
maturity and have fewer large national developers. We believe that the fragmented market and relative abundance of land supply in Tier
3 and Tier 4 cities, as compared to Tier 1 and Tier 2 cities, offer more opportunities for us to generate attractive margins. And we also
believe that our experience affords us the opportunity to emerge as a leading developer in these markets. In the near future, we plan
to enter into other Tier 3 and Tier 4 cities that have:
·
|
Increasing urbanization rates and population growth;
|
·
|
High economic growth and increasing individual income; and
|
·
|
Sustainable land supply for future developments.
|
We plan to continue to closely monitor our capital
and cash positions and carefully manage our cost for land use rights, construction costs and operating expenses. We believe that we will
be able to use our working capital more efficiently by adhering to prudent cost management, which will help to maintain our profit margins.
When selecting a property project for development, we will continue to follow our established internal evaluation process, including utilizing
the analysis and input of our experienced management team and choosing third-party contractors through a tender process open only to bids
which meet our budgeted costs.
Quality Control
We emphasize quality control to ensure that our
buildings and residential units meet our standards and provide high quality service. We select only experienced design and construction
companies. We, through our contracts with construction contractors, provide customers with warranties covering the building structure
and certain fittings and facilities of our property developments in accordance with the relevant regulations. To ensure construction quality,
our construction contracts contain quality warranties and penalty provisions for poor work quality. In the event of delay or poor work
quality, the contractor may be required to pay pre-agreed damages under our construction contracts. Our construction contracts do not
allow our contractors to subcontract or transfer their contractual arrangements with us to third parties. We typically withhold 2% of
the agreed construction fees for two to five years after completion of the construction as security to guarantee quality, which provides
us with assurance for our contractors’ work quality.
Our contractors are also subject to our quality
control procedures, including examination of materials and supplies, on-site inspection and production of progress reports. We require
our contractors to comply with relevant PRC laws and regulations, as well as our own standards and specifications. We set up a profile
for each and every unit constructed and monitor the quality of such unit throughout its construction period until its delivery. We also
employ independent surveyors to supervise the construction progress.
In addition, the construction of real estate projects is regularly inspected and supervised by the PRC governmental authorities.
Environmental Matters
As a developer of property in the PRC, we are
subject to various environmental laws and regulations set by the PRC national, provincial and municipal governments. These include regulations
on air pollution, noise emissions, as well as water and waste discharge. As of September 30, 2020, we have never paid any penalties
associated with the breach of any such laws and regulations. Compliance with existing environmental laws and regulations has not had a
material adverse effect on our financial condition and results of operations, and we do not believe it will have such an impact in the
future.
Our projects are normally required to undergo
an environmental impact assessment by government-appointed third parties, and a report of such assessment needs to be submitted to the
relevant environmental authorities in order to obtain their approval before commencing construction.
Upon completion of each project, the relevant
environmental authorities inspect the site to ensure the applicable environmental standards have been complied with, and the resulting
report is presented together with other specified documents to the relevant construction administration authorities for their approval
and record. Approval from the environmental authorities on such report is required before we can deliver our completed work to our customers.
As of September 30, 2020, we have not experienced any difficulties in obtaining those approvals for commencement of construction
and delivery of completed projects.
Employees
We currently have 139 full-time employees.
Department
|
|
|
|
Management
|
|
|
27
|
|
Accounting Staff
|
|
|
7
|
|
Sales and marketing staff
|
|
|
78
|
|
Administrative
|
|
|
27
|
|
Total
|
|
|
139
|
|
MANAGEMENT
Directors and Executive Officers
The following table sets forth
information regarding our executive officers and directors as of the date of this prospectus:
Name
|
|
Age
|
|
Position
|
Xiaojun Zhu
|
|
53
|
|
President, Chief Executive Officer and Chairman of the Board of Directors
|
Shenghui Luo
|
|
51
|
|
Director
|
Christy Young Shue
|
|
57
|
|
Independent Director
|
John Chen
|
|
48
|
|
Independent Director
|
Yuankai Wen
|
|
73
|
|
Independent Director
|
Wei (Samuel) Shen
|
|
41
|
|
Chief Financial Officer
|
Xiaojun Zhu, the President, Chief
Executive Officer, and Chairman of the Board of Directors of China HGS, began his entrepreneurial career in 1995 by creating a privately-run
real estate company in Hanzhong, Shaanxi Province. With more than 20 years’ experience, Mr. Zhu is considered to be one of
China’s most influential business leaders in the real estate industry. In October 2005, Mr. Zhu received the “Top
100 Management Elites in China’s Building Industry 2005” award by the Chinese Academy of Management Science. Mr. Zhu
also received the “Innovative Shaanxi - Person of the Year 2007” award and the “Outstanding Socialism Builder of Shaanxi
Province in 2008” award. In August 2009, Mr. Zhu joined China Agro as Chairman and Chief Executive Officer. In 2007, before
joining China Agro, Mr. Zhu served as the Chairman and General Manager of Shaanxi Guangsha Investment and Development Group Co., Ltd.
From 1995 to 2007, Mr. Zhu was the Chairman and General Manager of Hanzhong Guangsha Real Estate Development Co, Ltd., a real
estate development company. From 1992 to 1995, prior to starting his own business, Mr. Zhu served as a Vice General Manager in the
real estate-based subsidiary of Hanjiang Building Material Group Corporation. From 1985 to 1988, Mr. Zhu studied at Shaanxi Metallurgy
College. As the founder of the Company, Mr. Zhu is acknowledged to be one of China’s leading business executives in the real
estate industry and is able to provide the Board with an understanding of the Company’s business as well as provide expert perspective
on industry trends and opportunities. Mr. Zhu’s experience with the Company from its founding also offers the Board insight
to the evolution of the Company, including from execution, cultural, operational, competitive and industry points of view.
Shenghui Luo has served as a director
since January 2010. Ms. Luo joined Shaanxi Guangsha Investment and Development Group Co., Ltd., the Company’s
subsidiary, in 1997. From 2000 through March 2009, Ms. Luo served as Vice Director of the Finance Department of Shaanxi
Guangsha Investment and Development Group Co., Ltd. In March 2009, Ms. Luo was appointed a Manager of the Finance
Department of Shaanxi Guangsha Investment and Development Group Co., Ltd. Ms. Luo received her Bachelor’s degree in Accounting
from Shaanxi Finance College. As a result of Ms. Luo’s service as a member of the Company’s finance department, she developed
an extensive understanding of the Company’s business. In addition, her knowledge and experience in finance and accounting provides
her with a broad understanding of the Company’s financial reporting under both PRC and US GAAP.
Christy Young Shue has served as an
independent director since August 2012. Ms. Shue served as Executive Vice President, Finance and Investor Relations and Corporate
Secretary of Harbin Electric, Inc. (NASDAQ: HRBN) from 2007 through April 2012, when Harbin went private as a result of a management
buyout transaction. From 2006 through 2007, Ms. Shue was a Vice President, a Senior Investor Relations Consultant at Christensen,
an Investor Relations advisory firm. From 2003 through 2006, Ms. Shue served as Investor Relations Manager at International Paper
(NYSE: IP). Ms. Shue received her MBA degree in finance/international business from Stern School of Business, New York University,
a Ph.D. in Chemistry from Purdue University, and a Bachelor of Science degree in Chemistry from Sichuan University. Ms. Shue’s
previous experience as an officer and Investor Relations manager for public companies has given her insights into various challenges that
public companies experience, as well as extensive knowledge and understanding of capital market related issues such as corporate governance
and financial reporting.
John Chen has served as an independent
since August 2012. Mr. Chen is a California Certified Public Accountant. Mr. Chen has been the Chief Financial Officer
of General Steel Holdings Inc. (NYSE: GSI) since May 2004. From 1997 to 2003, Mr. Chen was a Senior Accountant at Moore Stephens
Frazer and Torbet. Mr. Chen received his Bachelor of Science degree in Business Administration, Accounting from California State
Polytechnic University. Mr. Chen’s experience as a California Certified Public Accountant and his experience as a chief financial
officer of a public company have provided him with broad experience in finance including accounting and financial reporting. This experience
has led our Board of Directors to determine that he is an “audit committee financial expert” as that term is defined in Item
407(d)(5) of Regulation S-K under the 1934 Act.
Yuankai Wen has served as an independent
since January 2010. Since 1998, Mr. Wen has served as the Chairman of Beijing Neolinde Management Training Center. From
1997 to 1998, he was also the Chairman of Beijing Neolinde Management Consulting Co. From 1994 through 1997, Mr. Wen was a Vice President
of Roosevelt China Investment Co., an investment firm. Mr. Wen received his Bachelor’s degree in Chemistry from Nanjing University.
He was also a visiting scholar of Physical and Chemical Biology Institute, University of Paris in France. Mr. Wen’s experience
as Chairman of the Beijing Neolinde Management Graining Center and as Chairman of the Beijing Neolinde Management Consulting Co. has provided
him with broad leadership and executive experience. Moreover, his management experience in China provides him with a perspective on Chinese
business operations.
Wei (Samuel) Shen has been the Chief Financial
Officer of the Company since May 2012. From November 2011 to May 2012, Mr. Shen was the Vice President for Finance
of the Company. Mr. Shen is also the Director at Bluehill Investment Advisory Group, a PRC based financial consulting firm. From
2006 to 2011, Mr. Shen served as an Audit Assurance Manager for a national public accounting firm, where he managed audit engagements
for U.S. public companies. Mr. Shen holds both Chartered Accountant and Certified Public Accountant designations and is experienced
with financial reporting under IFRS and US GAAP. Mr. Shen holds a Master of Management and Public Accounting.
Employment Agreements
The Company is under a contract with Mr. Samuel
Shen to serve as Chief Financial Officer of the Company for an indefinite period upon mutual agreement between Mr. Shen and the Company,
subject to parties’ right to terminate on reasonable notice. Pursuant to the contract, Mr. Shen receives a monthly salary of
RMB 60,000 ($8,565) and a discretional bonus of up to RMB 180,000 ($25,694). Mr. Shen is also entitled to 100,000 shares of restricted
common stock of the Company at the end of the term, subject to his continuing employment with the Company and the board’s approval.
Mr. Shen did not receive any bonus or restricted stock for the years ended September 30, 2020, 2019 and 20178. According to
the contract, the Company may terminate the contract with Mr. Shen for causes defined in the contract with thirty days’ advance
written notice. Under certain circumstances provided in the contract, the Company may elect to pay an additional month’s salary
in lieu of providing advance written notice to terminate Mr. Shen. Mr. Shen may terminate the contract with the Company by giving
ninety days’ advance written notice to the Company. The contract also contains covenants regarding non-competition and confidentiality.
The Company has entered into Independent Director
Agreements with Ms. Shue, and Messrs. Chen and Wen pursuant to which the Company has agreed to pay each of these directors annual
cash compensation in the amount of $24,000, $36,000 and RMB 100,000, respectively. In addition, the Company has agreed to reimburse each
director for all reasonable, out-of-pocket expenses, subject to the advance approval of the Company incurred in connection with the performance
of Director’s duties.
Board of Directors and Committees
The Board of Directors has the following standing
committees: Audit, Compensation, and Nominating and Corporate Governance. The Board of Directors has adopted written charters for each
of these committees. All members of the committees appointed by the Board of Directors are non-employee directors and the Board of Directors
has determined that all such members are independent under the applicable rules and regulations of NASDAQ and the SEC, as currently
in effect. In addition, all directors who served on a committee during any portion of the fiscal year ended September 30, 2019 were
independent under the applicable rules and regulations of NASDAQ and the SEC during such director’s period of service.
Audit Committee
Our audit committee comprises of Mr. Chen, Ms.
Shue and Mr. Wen, and is chaired by Mr. Chen. All of the directors satisfy the “independence” requirement of Rule 5605(a)(2)
of the Listing Rules of the Nasdaq Stock Market and meets the independence standards under Rule 10A-3 under the Exchange Act. Our
audit committee is responsible for, among other things, appointing, retaining, setting compensation of, and supervising our independent
accountants, reviewing the results and scope of the audit and other accounting related services and reviewing our accounting practices
and systems of internal accounting and disclosure controls.
The Audit Committee oversees our accounting,
financial reporting and audit processes; appoints, determines the compensation of, and oversees, the independent registered public accountants;
pre-approves audit and non-audit services provided by the independent registered public accountants; reviews the results and scope of
audit and other services provided by the independent registered public accountants; reviews the accounting principles and practices and
procedures used in preparing our financial statements; oversees the Company’s internal audit function; and reviews our internal
controls.
The Audit Committee works closely with management
and our independent registered public accountants. The Audit Committee also meets with our independent registered public accountants without
members of management present, on a quarterly basis, following completion of our independent registered public accountants’ quarterly
reviews and annual audit and prior to our earnings announcements, to review the results of their work. The Audit Committee also meets
with our independent registered public accountants to approve the annual scope and fees for the audit services to be performed.
It is determined that Mr. Chen possesses accounting
or related financial management experience that qualifies him as an “audit committee financial expert” as defined by the rules
and regulations of the SEC.
Compensation Committee
Our compensation committee consists of Mr. Chen,
Ms. Shue and Mr. Wen, and is chaired by Mr. Wen. Mr. Wen satisfies the “independence requirement” of Rule 5605(a)(2)
of the Listing Rules of the Nasdaq Stock Market and meets the independence standards under Rule 10A-3 under the Exchange Act. The
compensation committee is responsible for reviewing and approving compensation paid to our officers and directors and to administer our
incentive compensation plans, including authority to make and modify awards under such plans. It assists the board in determining its
responsibilities in relation to remuneration, including, amongst other matters, making recommendations to the Board on policy on executive
compensation, determining the individual remuneration and benefits package of each of the executive directors and recommending and monitoring
the remuneration of senior management below board level.
Nominating and Governance Committee
Our nominating and corporate governance committee
consists of Mr. Chen, Ms. Shue and Mr. Wen, and is chaired by Ms. Shue. Ms. Shue satisfies the “independence requirement”
of Rule 5605(a)(2) of the Listing Rules of the Nasdaq Stock Market and meets the independence standards under Rule 10A-3 under
the Exchange Act. The nominating and corporate governance committee assists the board of directors in selecting individuals qualified
to become our directors and in determining the composition of the board and its committees.
Director Independence
Family Relationships
No family relationships exist among our directors,
executive officers, or persons nominated or chosen by us to become directors or executive officers.
All directors hold office until the next annual
stockholders’ meeting or until their death, resignation, retirement, removal, disqualification, or until their successors have been
elected and are qualified. Our officers serve at the will of the Board of Directors.
Board Leadership Structure and Role in Risk
Oversight
One person currently holds the positions of principal
executive officer and chairman of the Board of Company. The Board does not have a policy on whether or not the roles of the Chief Executive
Officer and Chairman should be separate. Instead, the Company’s By-Laws provide that the directors may designate a Chairman
of the Board from among any of the directors. Accordingly, the Board reserves the right to vest the responsibilities of the Chief
Executive Officer and Chairman in the same person or in two different individuals depending on what it believes is in the best interest
of the Company. The Board has determined that the consolidation of these roles is appropriate because it allows Mr. Zhu to bring
a wider perspective to the deliberations of the Board on matters of corporate strategy and policy. The Board believes that there
is no single Board leadership structure that would be most effective in all circumstances and therefore retains the authority to modify
this structure to best address the Company’s and the Board’s then current circumstances as and when appropriate.
The Company’s management is responsible
for identifying, assessing and managing the material risks facing the business. The Board and, in particular, the Audit Committee are
responsible for overseeing the Company’s processes for assessing and managing risk. Each of the Chief Executive Officer and
Chief Financial Officer, with input as appropriate from other appropriate management members, report and provide relevant information
directly to either the Board and/or the Audit Committee on various types of identified material financial, reputational, legal, operational,
environmental and business risks to which the Company is or may be subject, as well as mitigation strategies for certain salient risks. In
accordance with NASDAQ requirements and as set forth in its charter, the Audit Committee periodically reviews and discusses the Company’s
business and financial risk management and risk assessment policies and procedures with senior management, the Company’s independent
auditor. The Audit Committee reports its risk assessment function to the Board. The roles of the Board and the Audit Committee
in the risk oversight process have not affected the Board leadership structure. Although the board has not formally designated a lead
independent director, Mr. Sherman, the chairman of the audit committee, has led the meetings of the audit committee which include
at least a majority of the independent directors and at which matters appropriate for consideration at executive sessions of the board
of directors were discussed.
Compensation Committee
Interlocks and Insider Participation
None of our executive
officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee of any entity
that has one or more executive officers on our board of directors or compensation committee.
Code of Conduct
The Board of Directors has adopted a Code of Conduct
which sets forth the standards by which the Company’s employees, officers and directors should conduct themselves. The Company will
disclose any amendment to the Code of Conduct or waiver of a provision of the Code of Conduct that applies to the Company’s Chief
Executive Officer, Chief Financial Officer and any other principal financial officer, and any other person performing similar functions
and relates to certain elements of the Code of Conduct, including the name of the officer to whom the waiver was granted.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors
or executive officers have been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors, or has been
a party to any judicial or administrative proceeding during the past five years that resulted in a judgment, decree or final order enjoining
the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation
of federal or state securities laws, except for matters that were dismissed without sanction or settlement. Except as set forth in our
discussion below in “Certain Relationships and Related Transactions,” none of our directors, director nominees or executive
officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are
required to be disclosed pursuant to the rules and regulations of the SEC.
Executive And Director Compensation
Compensation Discussion and Analysis
Our primary goal with
respect to our compensation programs has been to attract and retain the most talented and dedicated employees in key positions in order
to compete effectively in the market place, successfully execute our growth strategies, and create lasting shareholder value. The Compensation
Committee evaluates both individual and Company performance when determining the compensation of our executives. Our executives’
overall compensation is tied to the Company financial and operational performance, as measured by revenues and net income, as well as
to accomplishing strategic goals such as merger and acquisitions and fund raising. We apply our compensation policies consistently for
determining compensation of our Chief Executive Officer as we do with the other executives. The Compensation Committee assesses the performance
of our Chief Executive Officer annually and determines the base salary and incentive compensation of our Chief Executive Officer. Our
Chief Executive Officer is primarily responsible for the assessment of our other executive officers’ performance.
Summary Compensation Table
The following identified persons (the “Named
Executive Officers”) of the Company received compensation in the amounts set forth in the chart below for the fiscal years ended
September 30, 2020 and 2019. All compensation listed is in US dollars. No other item of compensation was paid to any officer or director
of the Company other than reimbursement of expenses.
Name and Principal Position
|
|
Year
|
|
|
Salary ($)
|
|
|
Bonus ($)
|
|
|
All Other
Compensation ($)
|
|
|
Totals ($)
|
|
Xiaojun Zhu, Chief Executive Officer and
|
|
|
2020
|
|
|
|
28,549
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28,549
|
|
Chairman of the Board (1)
|
|
|
2019
|
|
|
|
29,089
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wei Shen, Chief Financial Officer
|
|
|
2020
|
|
|
|
102,775
|
|
|
|
-
|
|
|
|
-
|
|
|
|
102,775
|
|
|
|
|
2019
|
|
|
|
104,723
|
|
|
|
-
|
|
|
|
-
|
|
|
|
104,723
|
|
|
(1)
|
Mr. Zhu was paid in Renminbi. His annual salary was RMB 200,000 for fiscal 2020 and 2019. The amounts reflected in this column have been converted to U.S. dollars at the exchange rate of RMB 7.0056 to the U.S. dollar for fiscal 2020 and RMB 6.8753 to the U.S. dollar for fiscal 2019.
|
The following table provides information regarding
compensation earned by non-employee directors who served during fiscal 2020.
Option Grants Table. There were no individual
grants of stock options to purchase our common stock made to the executive officers named in the Summary Compensation Table in fiscal
2020 and 2019.
Aggregated Option Exercises and Fiscal Year-End
Option Value Table. There were no stock options exercised during fiscal 2020 and 2019 by any executive officer named in the Summary Compensation
Table.
Long-Term Incentive Plan (“LTIP”)
Awards Table. There were no awards made to a Named Executive Officer in fiscal 2020 and 2019 under any LTIP.
Our executive officers are reimbursed by us for
any out-of-pocket expenses incurred in connection with activities conducted on our behalf. There is no limit on the amount of these out-of-pocket
expenses and there will be no review of the reasonableness of such expenses by anyone other than our board of directors, which includes
persons who may seek reimbursement, or a court of competent jurisdiction if such reimbursement is challenged.
FISCAL 2020 DIRECTOR COMPENSATION
Name
|
|
Fees Earned
or Paid in
Cash ($)
|
|
|
Stock
Awards ($)
|
|
|
Option
Awards ($)
|
|
|
Non-Equity
Incentive Plan
Compensation ($)
|
|
|
Nonqualified
Deferred
Compensation
Earnings ($)
|
|
|
All Other
Compensation ($)
|
|
|
Total ($)
|
|
Yuankai Wen *
|
|
$
|
14,274
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
14,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Chen
|
|
$
|
36,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
36,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christy Young Shue
|
|
$
|
24,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
24,000
|
|
These amounts reflect the value determined by
the Company for accounting purposes for these awards and do not reflect whether the recipient has actually realized a financial benefit
from the award (such as by exercising stock options). These amounts represents a compensation expense for fiscal year 2020. Pursuant to
SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. No stock option
awards were forfeited by any of our non-employee directors in fiscal year 2020.
* Mr. Wen receives annual compensation in
the amount of RMB 100,000. The amount set forth in this column is based on an exchange rate of RMB7.0056 to the U.S. dollar.
RELATED PARTY TRANSACTIONS
The Audit Committee is responsible for reviewing,
approving or ratifying all material transactions between us and any related person. Related persons can include any of our directors or
executive officers, certain of our shareholders, and any of their immediate family members. This obligation is set forth in our Audit
and Finance Committee Charter. Although we do not have a formal written policy with respect to our Audit Committee’s policies and
procedures for reviewing related party transactions, in evaluating such transactions, the Audit Committee members apply the same standards
of good faith and fiduciary duty they apply to their general responsibilities as a committee of the board and as individual directors.
In any transaction involving a related party, our Audit Committee considers all available material facts and circumstances of the transaction,
including: (i) the direct and indirect interests of the related party; (ii) if the related party is a director (or immediate
family member of a director or an entity with which a director is affiliated), the impact such transaction would have on the director’s
independence; (iii) the risks, costs and benefits to us; and (iv) whether any alternative transactions for comparable purposes
are available. Our Audit Committee then makes a determination as to whether the proposed terms of the transaction are in the best interests
of the Company and otherwise consistent with arm’s length dealings with unrelated third-parties.
The following related party transactions occurred
during the fiscal year ended September 30, 2020:
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.
The Company recorded interest of $72,400 for each of the years ended September 30, 2020 and 2019. The Company has not yet paid this
interest and it is recorded in accrued expenses in the accompanying consolidated balance sheets as of September 30, 2020 and 2019.
On December 31, 2013, Shaanxi Guangsha Investment
and Development Group Co., Ltd. (the “Guangsha”), the Company's PRC operating subsidiary, entered into a loan agreement
with the Chairman (the “Shareholder RMB Loan Agreement”), pursuant to which Guangsha is able to borrow funds from the Chairman
in order to support the Company’s Liangzhou Road construction project development and the Company’s working capital needs.
The Loan Agreement has a one-year term, and has been renewed upon maturity to September 25, 2020, with at an interest rate of 4.35%
per year. For years ended September 30, 2020 and 2019, the interest was $20,661 and $20,403, respectively, which is capitalized in
the development cost of Liangzhou road project.
On September 30, 2020, the Company entered
into an agreement with Mr. Zhu Xiaojun and an unrelated party (the “buyer group”) to sell Shijin project at price of
$7,364,204 (or RMB 50 million). Pursuant to the agreement, a portion of selling price of approximately $3.4 million was fully settled
by the Company’s shareholder’s loan payable with accrued interest payable to Mr. Zhu Xiaojun and the rest of proceeds
will be collected from the unrelated party by September 30, 2021. The transaction resulted in a gain of $1.9 million for the year
ended September 30, 2020.
BENEFICIAL OWNERSHIP OF SECURITIES
The following table sets forth information regarding
the beneficial ownership of our common stock as of June 24, 2021 as to (i) each person who is known by us to own beneficially more
than 5% of our outstanding common stock, (ii) each of the executive officers and other persons named in the Summary Compensation
Table, (iii) each director and nominee for director, and (iv) all directors and executive officers as a group. Except as otherwise
indicated in the footnotes, all information with respect to share ownership and voting and investment power has been furnished to us by
the persons listed. Except as otherwise indicated in the footnotes, each person listed has sole voting power with respect to the shares
shown as beneficially owned. Unless otherwise indicated, the address of each listed shareholder is c/o China HGS Real Estate Inc., 6 Xinghan
Road, 19th Floor, Hanzhong City, Shaanxi Province, PRC 723000.
Name and Address of Beneficial Owner
|
|
Amount and
Nature of
Beneficial
Ownership(1)
|
|
|
Percent
of
Class (2)
|
|
5% Holders
|
|
|
|
|
|
|
|
|
Rising Pilot, Inc. (a British Virgin Islands company)(3)
|
|
|
7,000,000
|
|
|
|
27.3
|
%
|
Shaanxi Tianhao Construction Engineer Co., Ltd
|
|
|
3,092,114
|
|
|
|
12.1
|
%
|
Directors and Officers
|
|
|
|
|
|
|
|
|
Mr. Xiaojun Zhu(4)
|
|
|
14,900,000
|
|
|
|
58.2
|
%
|
Shenghui Luo
|
|
|
840,000
|
|
|
|
3.3
|
%
|
Yuankai Wen
|
|
|
-
|
|
|
|
-
|
|
Christy Young Shue
|
|
|
-
|
|
|
|
-
|
|
John Chen
|
|
|
-
|
|
|
|
-
|
|
Wei (Samuel) Shen
|
|
|
-
|
|
|
|
-
|
|
All directors and executive officers as a group (5 persons)
|
|
|
15,740,000
|
|
|
|
61.4
|
%
|
|
(1)
|
Except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock owned by such person. The number of shares beneficially owned includes common stock that such individual has the right to acquire as of June 24, 2021 or within 60 days thereafter, including through the exercise of stock options.
|
|
(2)
|
Percentage of beneficial ownership is based upon 25,617,807 shares of common stock outstanding as of June 24, 2021. For each named person, this percentage includes common stock that the person has the right to acquire either currently or within 60 days of June 24, 2021, including through the exercise of an option; however, such common stock is not deemed outstanding for the purpose of computing the percentage owned by any other person.
|
|
(3)
|
Mr. Xiaojun Zhu has voting and dispositive control over securities held by Rising Pilot, Inc.
|
|
(4)
|
Includes 7,900,000 shares of common stock owned by Mr. Zhu directly and 7,000,000 shares owned through Rising Pilot, Inc.
|
Changes in Control
There are no arrangements known to us, including
any pledge by any person of our securities, the operation of which may at a subsequent date result in a change in control of the Company.
DESCRIPTION OF CAPITAL
STOCK
We have authorized
capital stock consisting of 50,000,000 shares of common stock, par value $0.001 per share. As of June 24, 2021, we had 25,617,807
shares of common stock issued and outstanding and no shares of preferred stock issued and outstanding.
Common Stock
All outstanding shares of common stock are of
the same class and have equal rights and attributes. The holders of common stock are entitled to one vote per share on all matters submitted
to a vote of stockholders of the company. All stockholders are entitled to share equally in dividends, if any, as may be declared from
time to time by the Board of Directors out of funds legally available. In the event of liquidation, the holders of common stock are entitled
to share ratably in all assets remaining after payment of all liabilities. The stockholders do not have cumulative or preemptive rights.
Options and Restricted
Stock
As of June 24, 2021,
other than the securities described above, we do not have any outstanding options or restricted stock.
Other Convertible
Securities
As of June 24, 2021,
other than the securities described above, we do not have any outstanding convertible securities.
Securities Authorized
for Issuance under Equity Compensation Plans
On September 25, 2012, our shareholders approved
the Company’s 2012 Omnibus Securities and Incentive Plan (the “2012 Plan”). The 2012 Plan provides for the grant of
awards which are distribution equivalent rights, incentive stock options, non-qualified stock options, performance shares, performance
units, restricted shares of common stock, restricted stock units, stock appreciation rights (“SARs”), tandem stock appreciation
rights, unrestricted shares of common stock or any combination of the foregoing, to key management employees and nonemployee directors
of, and nonemployee consultants of, the Company or any of its subsidiaries (each a “participant”). We have reserved a total
of 1,000,000 shares of common stock for issuance as or under awards to be made under the 2012 Plan. The number of shares of common stock
for which awards which are options or SARs may be granted to a participant under the 2012 Plan during any calendar year is limited to
500,000.
The following table summarizes information with
respect to shares of the Company’s common stock that may be issued under the Company’s existing equity compensation plans
as of September 30, 2020
Plan Category
|
|
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights
|
|
|
Weighted-average
exercise price of
outstanding
options, warrants
and rights
|
|
|
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities
reflected in
column (a))
|
|
Equity compensation plans approved by security holders
|
|
|
-
|
|
|
$
|
-
|
|
|
|
1,000,000
|
|
Total
|
|
|
-
|
|
|
$
|
-
|
|
|
|
1,000,000
|
|
Market for Common
Equity and Related Stockholder Matters
As of the date of this prospectus, our common
stocks are listed on the NASDAQ Capital Market under the symbols “HGSH”. On June 24, 2021, the closing sale prices of our
common stocks was $2.15.
SELLING STOCKHOLDER
This prospectus relates to the resale from time
to time of an aggregate of 3,092,114 shares of Common Stock issued to Shaanxi Tianhao Construction Engineer Co., Ltd in connection with
an Equity Acquisition Agreement (the “Equity Acquisition Agreement”) on March 24, 2021, whereby the Company allotted
and issued the Common Stock to the Selling Stockholder to settle its accounts payable balance with the Selling Stockholder.
We are registering for resale the Common Stock
issuable pursuant to the Equity Acquisition Agreement that we entered into with the Selling Stockholder on March 24, 2021.
Unless otherwise indicated in the footnotes below,
no selling stockholder has any material relationship with us or any of our affiliates within the past three years other than as a security
holder.
The table below (i) lists the Selling Stockholder
and other information regarding the beneficial ownership (as determined in accordance with Rule 13d-3(d) promulgated by the SEC under
the Exchange Act) of our Common Stock by the Selling Stockholder; (ii) has been prepared based upon information furnished to us by the
Selling Stockholder; and (iii) to our knowledge, is accurate as of the date of this prospectus. The Selling Stockholder may sell all,
some or none of its securities in this offering. The Selling Stockholder identified in the table below may have sold, transferred or otherwise
disposed of some or all of its securities since the date of this prospectus in transactions exempt from or not subject to the registration
requirements of the Securities Act. Information concerning the Selling Stockholder may change from time to time and, if necessary, we
will amend or supplement this prospectus accordingly as required.
Name of Selling Stockholder
|
|
Number of
shares of
Common Stocks Owned
Prior to This
Offering(1)
|
|
|
Maximum
Number of
Common Stocks to
be Sold(2)
|
|
|
Number of
Ordinary
Shares
Owned
after This
Offering(1)(2)
|
|
|
Percentage
Ownership
After This
Offering (%)(1)(2)
|
|
Shaanxi Tianhao Construction Engineer Co., Ltd(3)
|
|
|
3,092,114
|
|
|
|
3,092,114
|
|
|
|
0
|
|
|
|
0
|
|
|
(1)
|
The amounts reported by such Selling Stockholder are as of date of this prospectus, with percentages based on 25,617,807 shares of common stocks outstanding. Under the rules of the SEC, “beneficial ownership” is deemed to include shares for which an individual, directly or indirectly, has or shares voting or dispositive power, whether or not they are held for the individual’s benefit, and includes shares that may be acquired within 60 days, including, but not limited to, the right to acquire.
|
|
(2)
|
Assumes that (i) all of the securities registered by the registration statement of which this prospectus is a part are sold in this offering; (ii) the Selling Stockholder does not (a) sell any of the common stock, if any, that have been issued to them other than those covered by this prospectus, and (b) acquire additional common stock after the date of this prospectus and prior to the completion of this offering.
|
|
(3)
|
Includes an aggregate of 3,092,114 shares of common stock that were issued and allotted to the Selling Stockholder pursuant to the Equity Acquisition Agreement.
|
PLAN OF DISTRIBUTION
The Selling Stockholder and any of his/her/their
pledgees, donees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock being offered
under this prospectus on any stock exchange, market or trading facility on which shares of our common stock are traded or in private transactions.
These sales may be at fixed or negotiated prices. The Selling Stockholder may use any one or more of the following methods when disposing
of shares:
|
●
|
ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
|
|
|
|
|
●
|
block trades in which the broker-dealer will attempt to sell the shares as agent but may position; and resell a portion of the block as principal to facilitate the transaction;
|
|
|
|
|
●
|
purchases by a broker-dealer as principal and resales by the broker-dealer for its account;
|
|
|
|
|
●
|
an exchange distribution in accordance with the rules of the applicable exchange;
|
|
|
|
|
●
|
privately negotiated transactions;
|
|
|
|
|
●
|
to cover short sales made after the date that the registration statement of which this prospectus is a part is declared effective by the SEC;
|
|
|
|
|
●
|
broker-dealers may agree with the selling stockholder to sell a specified number of such shares at a stipulated price per share;
|
|
|
|
|
●
|
a combination of any of these methods of sale; and
|
|
|
|
|
●
|
any other method permitted pursuant to applicable law.
|
The shares may also be sold under Rule 144 under
the Securities Act of 1933, as amended, if available for a selling stockholder, rather than under this prospectus. The Selling Stockholder
have the sole and absolute discretion not to accept any purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The Selling Stockholder may pledge his/her/their
shares to his/her/their brokers under the margin provisions of customer agreements. If a selling stockholder defaults on a margin loan,
the broker may, from time to time, offer and sell the pledged shares.
Broker-dealers engaged by the Selling Shareholder
may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling shareholder
(or, if any broker-dealer acts as agent for the purchaser of securities, from the purchaser) in amounts to be negotiated, but, except
as set forth in a supplement to this Prospectus, in the case of an agency transaction not in excess of a customary brokerage commission
in compliance with FINRA Rule 2121; and in the case of a principal transaction a markup or markdown in compliance with FINRA Rule 2121.
In connection with the sale of the securities
or interests therein, the Selling Stockholder may enter into hedging transactions with broker-dealers or other financial institutions,
which may in turn engage in short sales of the securities in the course of hedging the positions they assume. The Selling Stockholder
may also sell securities short and deliver these securities to close out its short positions, or loan or pledge the securities to broker-dealers
that in turn may sell these securities. The Selling Stockholder may also enter into option or other transactions with broker-dealers or
other financial institutions or create one or more derivative securities which require the delivery to such broker-dealer or other financial
institution of securities offered by this prospectus, which securities such broker-dealer or other financial institution may resell pursuant
to this prospectus (as supplemented or amended to reflect such transaction).
The Selling Stockholder and any broker-dealers
or agents that are involved in selling the securities may be deemed to be “underwriters” within the meaning of the Securities
Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale
of the securities purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. The Selling Stockholder
has informed the Company that he/she/it does not have any written or oral agreement or understanding, directly or indirectly, with any
person to distribute the securities.
The Company is required to pay certain fees and
expenses incurred by the Company incident to the registration of the securities. The Company has agreed to indemnify the selling shareholder
against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.
This registration statement is effective until
the earlier of (i) the date on which the securities may be resold by the Selling Stockholder without registration and without regard to
any volume or manner-of-sale limitations by reason of Rule 144 under the Securities Act, without the requirement for the Company to be
in compliance with the current public information under Rule 144 under the Securities Act or any other rule of similar effect or (ii)
all of the securities have been sold pursuant to this prospectus or Rule 144 or any other rule of similar effect. The resale securities
will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in
certain states, the resale securities covered hereby may not be sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is available and is complied with.
Under applicable rules and regulations under the
Exchange Act, any person engaged in the distribution of the resale securities may not simultaneously engage in market making activities
with respect to the Common Stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution.
In addition, the Selling Stockholder will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder,
including Regulation M, which may limit the timing of purchases and sales of the Common Stock by the Selling Stockholder or any other
person. Copies of this registration statement will be available to the Selling Stockholder and have informed them of the need to deliver
a copy of this prospectus to each purchaser at or prior to the time of the sale (including by compliance with Rule 172 under the Securities
Act).
LEGAL MATTERS
The legality of the securities offered by this
prospectus and certain federal securities law matters will be passed upon for us by Loeb & Loeb LLP, New York.
EXPERTS
The consolidated financial statements of China
HGS Real Estate Inc., as of and for the year ended September 30, 2020, appearing in this prospectus and registration statement have
been audited by Wei, Wei & Co., LLP, an independent registered public accounting firm, as set forth in their reports appearing elsewhere
herein, and are included in reliance upon such reports given on the authority of such firm as an expert in accounting and auditing.
The consolidated financial statements for China
HGS Real Estate Inc., as of and for the year ended September 30, 2019, appearing in this prospectus and registration statement have
been audited by Friedman LLP, an independent registered public accounting firm, as set forth in their reports appearing elsewhere herein,
and are included in reliance upon such reports given on the authority of such firm as an expert in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement
on Form F-1 under the Securities Act with respect to underlying common stocks to be sold by this prospectus . This prospectus, which is
part of the registration statement, omits certain information, exhibits, schedules and undertakings set forth in the registration statement.
For further information pertaining to us and our common stock, reference is made to the registration statement and the exhibits and schedules
to the registration statement. Statements contained in this prospectus as to the contents or provisions of any documents referred to in
this prospectus are not necessarily complete, and in each instance where a copy of the document has been filed as an exhibit to the registration
statement, reference is made to the exhibit for a more complete description of the matters involved.
You may read and copy all or any portion of the
registration statement without charge at the public reference room of the SEC at 100 F Street, N. E., Washington, D.C. 20549. Copies of
the registration statement may be obtained from the SEC at prescribed rates from the public reference room of the SEC at such address.
You may obtain information regarding the operation of the public reference room by calling 1-800-SEC-0330. In addition, registration statements
and certain other filings made with the SEC electronically are publicly available through the SEC’s web site at http://www.sec.gov.
The registration statement, including all exhibits and amendments thereto, has been filed electronically with the SEC.
Government Filings
We file reports, proxy statements and other information
with the SEC as required by the Exchange Act. You may access information on Proficient at the SEC web site containing reports, proxy statements
and other information at: http://www.sec.gov.
INDEX TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors and Shareholders of
China HGS Real Estate Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated
balance sheets of China HGS Real Estate Inc. and subsidiaries (the “Company”) as of September 30, 2020, and the related consolidated
statements of income and comprehensive income, stockholders’ equity, and cash flows for the year then ended, and the related notes
(collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of September 30, 2020, and the results of its operations and its cash
flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks
of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond
to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated
financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable
basis for our opinion
/s/ Wei, Wei & Co., LLP
We have served as the Company’s auditor
since 2020
New York, NY
January 13, 2021
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
China HGS Real Estate Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheets of China HGS Real Estate Inc. (the “Company”) as of September 30, 2019 and 2018, and the related consolidated
statements of income and comprehensive loss, stockholders’ equity and cash flows for each of the yeas in the two-year period
ended September 30, 2019, and the related notes and schedules (collectively referred to as the financial statements). In our opinion,
the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2019 and
2018, and the results of its operations and its cash flows for each of the years in the two-year period ended September 30, 2019, in conformity
with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our
audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks
of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Friedman LLP
We have served as the Company’s auditor from 2009 through 2020
New York, New York
January 14, 2020
CHINA HGS REAL ESTATE INC.
CONSOLIDATED BALANCE SHEETS
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
457,699
|
|
|
$
|
263,139
|
|
Restricted cash
|
|
|
3,409,837
|
|
|
|
3,938,978
|
|
Contract assets
|
|
|
14,255,328
|
|
|
|
12,668,925
|
|
Real estate property development completed
|
|
|
94,671,258
|
|
|
|
101,933,030
|
|
Other assets
|
|
|
8,132,555
|
|
|
|
2,031,937
|
|
Property, plant and equipment, net
|
|
|
571,330
|
|
|
|
614,008
|
|
Security deposits
|
|
|
1,855,506
|
|
|
|
7,972,117
|
|
Real estate property under development
|
|
|
227,741,017
|
|
|
|
215,745,225
|
|
Due from local government for real estate property development completed
|
|
|
2,869,623
|
|
|
|
2,725,854
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
353,964,153
|
|
|
$
|
347,893,213
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Construction loans
|
|
$
|
109,937,408
|
|
|
$
|
106,797,436
|
|
Accounts payables
|
|
|
25,415,352
|
|
|
|
27,368,510
|
|
Other payables
|
|
|
4,028,048
|
|
|
|
5,289,176
|
|
Construction deposits
|
|
|
3,202,730
|
|
|
|
3,042,273
|
|
Contract liabilities
|
|
|
1,847,685
|
|
|
|
1,907,828
|
|
Customer deposits
|
|
|
19,405,528
|
|
|
|
17,183,264
|
|
Shareholder loans
|
|
|
-
|
|
|
|
2,129,114
|
|
Accrued expenses
|
|
|
1,920,370
|
|
|
|
3,585,644
|
|
Taxes payable
|
|
|
19,881,211
|
|
|
|
21,889,818
|
|
Total liabilities
|
|
|
185,638,332
|
|
|
|
189,193,063
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 50,000,000 shares authorized, 22,525,000* shares issued and outstanding September 30, 2020 and 2019
|
|
|
22,525
|
|
|
|
22,525
|
|
Additional paid-in capital*
|
|
|
129,930,330
|
|
|
|
129,930,330
|
|
Statutory surplus
|
|
|
10,458,395
|
|
|
|
10,360,251
|
|
Retained earnings
|
|
|
34,954,061
|
|
|
|
34,070,767
|
|
Accumulated other comprehensive loss
|
|
|
(7,039,490
|
)
|
|
|
(15,683,723
|
)
|
Total stockholders' equity
|
|
|
168,325,821
|
|
|
|
158,700,150
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
353,964,153
|
|
|
$
|
347,893,213
|
|
*the number of common stock outstanding has been
restated to reflect the 2:1 stock reverse split on August 20, 2020 (Note 11).
The accompanying notes are an integral part of
these consolidated financial statements
CHINA HGS REAL ESTATE INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME (LOSS)
FOR THE YEARS ENDED SEPTEMBER 30, 2020 and 2019
|
|
2020
|
|
|
2019
|
|
Real estate sales
|
|
$
|
12,979,227
|
|
|
$
|
39,964,556
|
|
Less: Sales tax
|
|
|
193,719
|
|
|
|
389,406
|
|
Impairment losses on real estate property development completed
|
|
|
2,703,031
|
|
|
|
-
|
|
Cost of real estate sales
|
|
|
9,369,820
|
|
|
|
30,253,511
|
|
Gross profit
|
|
|
712,657
|
|
|
|
9,321,639
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Selling and distribution expenses
|
|
|
580,639
|
|
|
|
494,646
|
|
General and administrative expenses
|
|
|
2,324,057
|
|
|
|
2,661,578
|
|
Total operating expenses
|
|
|
2,904,696
|
|
|
|
3,156,224
|
|
Operating income
|
|
|
(2,192,039
|
)
|
|
|
6,165,415
|
|
Interest expense, net
|
|
|
(65,535
|
)
|
|
|
(131,270
|
)
|
Other income (expense), net
|
|
|
4,080,945
|
|
|
|
(309,930
|
)
|
Income before income taxes
|
|
|
1,823,371
|
|
|
|
5,724,215
|
|
Provision for income taxes
|
|
|
841,933
|
|
|
|
2,022,043
|
|
Net income
|
|
|
981,438
|
|
|
|
3,702,172
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
8,644,233
|
|
|
|
(6,679,858
|
)
|
Comprehensive income (loss)
|
|
$
|
9,625,671
|
|
|
$
|
(2,977,686
|
)
|
Basic and diluted income per common share
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.04
|
|
|
$
|
0.16
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
Basic and diluted*
|
|
|
22,525,000
|
|
|
|
22,525,000
|
|
*the number of common stock outstanding has been restated to reflect
the 2:1 stock reverse split on August 20, 2020 (Note 11).
The accompanying notes are an integral part of
these consolidated financial statements
CHINA HGS REAL ESTATE INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2020 AND 2019
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Statutory
|
|
|
Retained
|
|
|
Accumulated
Other
Comprehensive
|
|
|
|
|
|
|
Shares*
|
|
|
Amount
|
|
|
Capital
|
|
|
Surplus
|
|
|
Earnings
|
|
|
Loss
|
|
|
Total
|
|
Balance at September 30, 2018
|
|
|
22,525,000
|
|
|
$
|
22,525
|
|
|
$
|
129,930,330
|
|
|
$
|
9,925,794
|
|
|
$
|
30,803,052
|
|
|
$
|
(9,003,865
|
)
|
|
$
|
161,677,836
|
|
Appropriation of statutory reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
434,457
|
|
|
|
(434,457
|
)
|
|
|
|
|
|
|
-
|
|
Net income for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,702,172
|
|
|
|
|
|
|
|
3,702,172
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,679,858
|
)
|
|
|
(6,679,858
|
)
|
Balance at September 30, 2019
|
|
|
22,525,000
|
|
|
$
|
22,525
|
|
|
$
|
129,930,330
|
|
|
$
|
10,360,251
|
|
|
$
|
34,070,767
|
|
|
$
|
(15,683,723
|
)
|
|
$
|
158,700,150
|
|
Appropriation of statutory reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Net income for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
981,438
|
|
|
|
|
|
|
|
981,438
|
|
Appropriation of statutory reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,144
|
|
|
|
(98,144
|
)
|
|
|
|
|
|
|
-
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,644,233
|
|
|
|
8,644,233
|
|
Balance at September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,525,000
|
|
|
$
|
22,525
|
|
|
$
|
129,930,330
|
|
|
$
|
10,458,395
|
|
|
$
|
34,954,061
|
|
|
$
|
(7,039,490
|
)
|
|
$
|
168,325,821
|
|
*the number of common stock outstanding has been restated to reflect
the 2:1 stock reverse split on August 20, 2020 (Note 11).
The accompanying notes are an integral part of
these consolidated financial statements
CHINA HGS REAL ESTATE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2020 and 2019
|
|
2020
|
|
|
2019
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
981,438
|
|
|
$
|
3,702,172
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Deferred tax provision
|
|
|
-
|
|
|
|
1,302,606
|
|
Depreciation
|
|
|
72,748
|
|
|
|
79,270
|
|
Impairment losses on real estate property development completed
|
|
|
2,703,031
|
|
|
|
-
|
|
Gain on settlement of shareholder loan and payables with suppliers
|
|
|
(4,998,762
|
)
|
|
|
-
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Advances to vendors
|
|
|
-
|
|
|
|
20,395
|
|
Security deposits
|
|
|
6,335,525
|
|
|
|
-
|
|
Contract assets
|
|
|
(889,901
|
)
|
|
|
(601,265
|
)
|
Real estate property development completed
|
|
|
9,369,820
|
|
|
|
(45,818,735
|
)
|
Real estate property under development
|
|
|
(7,511,989
|
)
|
|
|
50,974,817
|
|
Other assets
|
|
|
(398,747
|
)
|
|
|
(725,508
|
)
|
Accounts payables
|
|
|
(1,498,176
|
)
|
|
|
7,967,500
|
|
Other payables
|
|
|
23,918
|
|
|
|
609,156
|
|
Contract liabilities
|
|
|
(155,809
|
)
|
|
|
(3,854,568
|
)
|
Customer deposits
|
|
|
1,275,401
|
|
|
|
(4,261,166
|
)
|
Construction deposits
|
|
|
-
|
|
|
|
8,538
|
|
Accrued expenses
|
|
|
(474,420
|
)
|
|
|
700,527
|
|
Taxes payables
|
|
|
(2,616,813
|
)
|
|
|
(1,166,158
|
)
|
Net cash provided by operating activities
|
|
|
2,217,264
|
|
|
|
8,937,581
|
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from construction loans
|
|
|
-
|
|
|
|
488,307
|
|
Repayment of construction loans
|
|
|
(2,415,924
|
)
|
|
|
(11,825,666
|
)
|
Repayment of shareholder loans
|
|
|
-
|
|
|
|
-
|
|
Net cash (used in) financing activities
|
|
|
(2,415,924
|
)
|
|
|
(11,337,359
|
)
|
Effect of changes of foreign exchange rate on cash
|
|
|
(135,921
|
)
|
|
|
(173,682
|
)
|
Net (decrease) in cash
|
|
|
(334,581
|
)
|
|
|
(2,573,460
|
)
|
Cash, restricted cash, beginning of year
|
|
|
4,202,117
|
|
|
|
6,775,577
|
|
Cash, restricted cash, end of year
|
|
$
|
3,867,536
|
|
|
$
|
4,202,117
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
6,847,515
|
|
|
$
|
7,199,086
|
|
Income taxes paid
|
|
$
|
782,836
|
|
|
$
|
347,675
|
|
|
|
|
|
|
|
|
|
|
Representing
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
457,699
|
|
|
$
|
263,139
|
|
Restricted cash
|
|
$
|
3,409,837
|
|
|
$
|
3,938,978
|
|
|
|
$
|
3,867,536
|
|
|
$
|
4,202,117
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
Settlement of shareholder loan and related accrued interest
|
|
$
|
(3,402,313
|
)
|
|
|
-
|
|
Settlement of payables with suppliers
|
|
|
(3,415,572
|
)
|
|
|
-
|
|
The accompanying notes are an integral part of
these consolidated financial statements
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
China HGS Real Estate Inc. (the “Company”
or “China HGS” or “we”, “our”, “us”) is a corporation organized under the laws of
the State of Florida.
China HGS does not conduct any substantive operations
of its own. Instead, through its subsidiary, Shaanxi HGS Management and Consulting Co., Ltd (“Shaanxi HGS”), it entered into
certain exclusive contractual agreements with the management of the Company’s PRC operating subsidiary, Shaanxi Guangsha Investment
and Development Group Co., Ltd (“Guangsha”). Pursuant to these agreements, Shaanxi HGS is obligated to absorb a majority of
the risk of loss from Guangsha’s activities and entitles Shaanxi HGS to receive a majority of Guangsha’s expected residual
returns. In addition, Guangsha’s shareholders have pledged their equity interest in Guangsha to Shaanxi HGS, irrevocably granted
Shaanxi HGS an exclusive option to purchase, to the extent permitted under PRC Law, all or part of the equity interests in Guangsha and
agreed to entrust all the rights to exercise their voting power to the person(s) appointed by Shaanxi HGS.
Based on these contractual arrangements, management
believes that Guangsha should be considered a “Variable Interest Entity” (“VIE”) under ASC 810 “Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51”, because the equity investors in Guangsha no longer have the
characteristics of a controlling financial interest, and the Company, through Shaanxi HGS, is the primary beneficiary of Guangsha. Accordingly,
Guangsha has been consolidated.
The Company, through its subsidiaries and VIE,
engages in real estate development, in the construction and sale of residential apartments, parking lots and commercial properties. Total
assets and liabilities presented on the consolidated balance sheets and sales, cost of sales, net income presented on Consolidated Statement
of Income and Comprehensive Loss as well as the cash flow from operation, investing and financing activities presented on the Consolidated
Statement of Cash Flows are substantially the financial position, operation and cash flow of Guangsha. The Company has not provided any
financial support to Guangsha for the years ended September 30, 2020 and 2019.
The following assets and liabilities of the consolidated
VIE are included in the accompanying consolidated financial statements of the Company as of September 30, 2020 and 2019:
|
|
Balance as of
|
|
|
|
September 30,
2020
|
|
|
September 30,
2019
|
|
Total assets
|
|
|
353,600,159
|
|
|
|
347,536,362
|
|
Total liabilities
|
|
$
|
181,104,861
|
|
|
$
|
184,937,708
|
|
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation and basis of presentation
The Company’s consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
The consolidated financial statements include the accounts of China HGS Real Estate Inc. (the “Company” or “China HGS”),
China HGS Investment Inc. (“HGS Investment”), Shaanxi HGS Management and Consulting Co., Ltd. (“Shaanxi HGS”)
and its variable interest entity (“VIE”), Shaanxi Guangsha Investment and Development Group Co., Ltd. (“Guangsha”).
All inter-company transactions and balances between the Company and its subsidiaries have been eliminated upon consolidation.
The Company’s operations involve real estate
development and sales. Starting from the year ended September 30, 2020, the Company has been involved in larger real estate property
development with an extended development cycle. As a result, it is not possible to precisely measure the duration of its operating cycle.
The accompanying consolidated balance sheets of the Company have been prepared on an unclassified basis in accordance with real estate
industry practice and the prior year balance sheet has been adjusted to reflect this change.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Liquidity
In recent years, the Chinese government has
implemented measures to control overheating residential and commercial property prices including but not limited to restriction on
home purchase, increase the down-payment requirement against speculative buying, development of low-cost rental housing property to
help low-income groups while reducing the demand in the commercial housing market, increase the real estate property tax to
discourage speculation, and control of the land supply and slowdown the construction land auction process, etc. In addition, in
December 2019, a novel strain of coronavirus (COVID-19) surfaced. COVID-19 has spread rapidly throughout China and worldwide,
which has caused significant volatility in the PRC and international markets. There is significant uncertainty around the breadth
and duration of business disruptions related to COVID-19, as well as its impact on the PRC and international economies. To reduce
the spread of the COVID-19, the Chinese government has employed measures including city lockdowns, quarantines, travel restrictions,
suspension of business activities and school closures. Due to difficulties resulting from the COVID-19 outbreak, including, but not
limited to, the temporary closure of the Company’s facilities and operations beginning in early February through early
March 2020, limited support from the Company’s employees, delayed access to construction raw material supplies, reduced
customer visit to the Company’s sales office, and inability to promote the real estate property sales to customers on a timely
basis, our revenue decreased by approximately $27.0 million in fiscal 2020 as compared to fiscal 2019 due to decreased sales volume
of both residential and commercial properties developed by us, as a result, we reported a net income of approximately $1.0 million
for the year ended September 30,2020. Based on assessment of current economic environment, customer demand and sales trend, and
the negative impact from COVID-19 outbreak and spread, we believe that the real estate market downturn will continue to be uncertain
in the coming periods. As a result, the developing period of real estate properties and our operating cycle has been extended and we
may not be able to liquidate our large balance of completed real estate property within a short term as we originally expected. In
addition, as of September 30, 2020, we had large construction loans payable balance of approximately $109.9 million and large
accounts payable balance of approximately $25.4 million to be paid to subcontractors within one year. The above mentioned facts
raised substantial doubt about the Company's ability to continue as a going concern from the date of this filing.
In assessing its liquidity, management monitors
and analyzes the Company’s cash on-hand, its ability to generate sufficient revenue sources in the future, and its operating and
capital expenditure commitments. As of September 30, 2020, our total cash and restricted cash balance decreased to approximately
$3.9 million as compared to approximately $4.2 million as of September 30, 2019. With respect to capital funding requirements, the
Company budgeted our capital spending based on ongoing assessments of needs to maintain adequate cash. As of September 30, 2020,
we had approximately $94.7 million completed residential apartments and commercial units available for sale to potential buyers. Although
we reported approximately $25.4 million accounts payable as of September 30, 2020, due to the long term relationship with our construction
suppliers and subcontractors, we were able to effectively manage cash spending on construction and negotiate with them to adjust the payment
schedule based on our cash on hand. In addition, most of our existing real estate development projects related to old town renovation
which are supported by local government. As of September 30, 2020, we reported approximately $109.9 million construction loan borrowed
from financial institutions controlled by local government and such loans can only be used on old town renovation related project development.
We expect that we will be able to renew all of the existing construction loans upon their maturity and borrow additional new loans from
local financial institutions when necessary, based on our past experience and the Company’s good credit history. Also, the Company’s
cash flows from pre-sales and current sales should provide financial support for our current developments and operations. As of September 30,
2020, we had approximately $19.4 million customer deposits representing cash advance from buyers for pre-sales of our residential units
and we believe such cash advance can be used to fund our ongoing construction projects whenever necessary. For the year ended September 30,
2020, we had five large ongoing construction projects (see Note 3, real estate property under development) which were under preliminary
development stage due to delayed inspection and acceptance of the development plans by local government. In June 2020, we completed
the residence relocation surrounding Liangzhou Road related projects and expects to construct the Liangzhou Road related projects starting
from the fourth quarter of fiscal year 2020. For other four projects, we expect we will be able to obtain government’s approval
of the development plans on these projects in the coming fiscal year and start the pre-sale of the real estate property to generate cash
when certain property development milestones have been achieved. For the years ended September 30, 2020 and 2019, the Company had
positive cash flow from operating activities. In addition, our principal shareholder, Mr. Xiaojun Zhu has been providing and has
committed to continue to provide his personal funds to support the Company’s operation whenever necessary.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Revenue recognition
The Company adopted FASB ASC Topic 606 Revenue
from Contracts with Customers (“ASC 606”) on October 1, 2018 using the modified retrospective approach. Under ASC 606, Revenue
from Contracts with Customers, revenue is recognized in accordance with the transfer of goods and services to customers at an amount that
reflects the consideration that the Company expects to be entitled to for those goods and services. The Company determines revenue recognition
through the following steps:
|
·
|
identification of the contract, or contracts, with a customer;
|
|
·
|
identification of the performance obligations in the contract;
|
|
·
|
determination of the transaction price, including the constraint
on variable consideration;
|
|
·
|
allocation of the transaction price to the performance obligations
in the contract; and
|
|
·
|
recognition of revenue when (or as) the Group satisfy a performance
obligation.
|
Most of the Company’s revenue is derived
from real estate sales of condominiums and commercial property in the PRC. The majority of the Company’s contracts contain a single
performance obligation involving significant real estate development activities that are performed together to deliver a real estate property
to customers. Revenues arising from real estate sales are recognized when or as the control of the asset is transferred to the customer.
The control of the asset may transfer over time or at a point in time. For the sales of individual condominium units in a real estate
development project, the Company has an enforceable right to payment for performance completed to date, revenue is recognized over time
by measuring the progress towards complete satisfaction of that performance obligation (“percentage completion method”). Otherwise,
revenue is recognized at a point in time when the customer obtains control of the asset.
Under percentage completion method, revenue and
profit from the sales of long term real estate development properties is recognized by the percentage of completion method on the sale
of individual units when all the following criteria are met:
a.
|
Construction is beyond a preliminary stage.
|
b.
|
The buyer is committed to the extent of being unable to require a refund except for non-delivery of the unit or interest.
|
c.
|
Sufficient units have already been sold to assure that the entire property will not revert to rental property.
|
d.
|
Sales prices are collectible.
|
e.
|
Aggregate sales proceeds and costs can be reasonably estimated.
|
If any of the above criteria is not met, proceeds
shall be accounted for as deposits until the criteria are met.
Under the percentage of completion method, revenues
from individual real estate condominium units sold under development and related costs are recognized over the course of the construction
period, based on the completion progress of a project. The progress towards complete satisfaction of the performance obligation is measured
based on the Company’s efforts or inputs to the satisfaction of the performance obligation, by reference to the contract costs incurred
up to the end of reporting period as a percentage of total estimated costs for each contract. In relation to any project, revenue is determined
by calculating the ratio of incurred costs, including land use rights costs and construction costs, to total estimated costs and applying
that ratio to the contracted sales amounts. Cost of sales is recognized by determining the ratio of contracted sales during the period
to total estimated sales value, and applying that ratio to the incurred costs. Current period amounts are calculated based on the difference
between the life-to-date project totals and the previously recognized amounts.
Any changes in significant judgments and/or estimates
used in determining construction and development revenue could significantly change the timing or amount of construction and development
revenue recognized. Changes in total estimated project costs or losses, if any, are recognized in the period in which they are determined.
Revenue from the sales of previously completed
real estate condominium units is recognized at the time of the closing of an individual unit sale. This occurs when the customer obtains
the physical possession, the legal title, or the significant risks and rewards of ownership of the assets and the Company has present
right to payment and the collection of the consideration is probable. For municipal road construction projects, fees are generally recognized
at the time of the projects are completed.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Revenue recognition - continued
Disaggregation of Revenues
Disaggregated revenues was as follows:
|
|
For the years ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Revenue recognized for completed condominium real estate projects
|
|
$
|
12,979,227
|
|
|
$
|
13,400,491
|
|
Revenue recognized for condominium real estate projects under development
|
|
|
-
|
|
|
|
26,564,065
|
|
Total
|
|
$
|
12,979,227
|
|
|
$
|
39,964,556
|
|
Contract balances
Timing of revenue recognition may differ from
the timing of billing and cash receipts from customers. The Company records a contract asset when revenue is recognized prior to invoicing,
or a contract liability when cash is received in advance of recognizing revenue. A contract asset is a right to consideration that is
conditional upon factors other than the passage of time. Contract assets include billed and billable receivables, which are the Company’s
unconditional rights to consideration other than to the passage of time. Contract liabilities include cash collected in excess of revenues.
Customer deposits are excluded from contract liabilities.
The Company has elected to apply the optional
practical expedient for costs to obtain a contract which allows the Company to immediately expense sales commissions (included under selling
expenses) because the amortization period of the asset that the Company otherwise would have used is one year or less.
The Company provides “mortgage loan guarantees”
only with respect to buyers who make down-payments of 20%-50% of the total purchase price of the property. The period of the mortgage
loan guarantee begins on the date the bank approves the buyer’s mortgage and we receive the loan proceeds in our bank account and
ends on the date the “Certificate of Ownership” evidencing that title to the property has been transferred to the buyer. The
procedures to obtain the Certificate of Ownership take six to twelve months (the “Mortgage Loan Guarantee Period”). If, after
investigation of the buyer’s income and other relevant factors, the bank decides not to grant the mortgage loan, our mortgage-loan
based sales contract terminates and there will be no guarantee obligation. If, during the Mortgage Loan Guarantee Period, the buyer defaults
on his or her monthly mortgage payment for three consecutive months, we are required to return the loan proceeds back to the bank, although
we have the right to keep the customer's deposit and resell the property to a third party. Once the Certificate of Property has been issued
by the relevant government authority, our loan guarantee terminates. If the buyer then defaults on his or her mortgage loan, the bank
has the right to take the property back and sell it and use the proceeds to pay off the loan. The Company is not liable for any shortfall
that the bank may incur in this event. To date, no buyer has defaulted on his or her mortgage payments during the Mortgage Loan Guarantee
Period and the Company has not returned any loan proceeds pursuant to its mortgage loan guarantees.
Use of estimates
The preparation of financial statements in conformity
with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements
and accompanying notes, and disclosure of contingent liabilities at the date of the consolidated financial statements. Estimates are used
for, but not limited to, the assumptions and estimates used by management in recognizing development revenue under the percentage of completion
method, the selection of the useful lives of property and equipment, provision necessary for contingent liabilities, revenue recognition,
taxes and budgeted costs. Management believes that the estimates utilized in preparing its consolidated financial statements are reasonable
and prudent. Actual results could differ from these estimates.
Changes of estimated gross profit margins
related to revenue recognized under the percentage of completion method are made in the period in which circumstances requiring the
revisions become known. For the year ended September 30, 2020 and 2019, the Company did not change the estimated revenue and
related gross profit margin from fiscal 2019. .
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Fair value of financial instruments
The Company follows the provisions of Accounting
Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures. It clarifies the definition of fair value, prescribes
methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
Level 1-Inputs are unadjusted quoted prices in
active markets for identical assets or liabilities available at the measurement date.
Level 2-Inputs are unadjusted quoted prices for
similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not
active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.
Level 3-Inputs are unobservable inputs which reflect
the reporting entity’s own assumptions or what assumptions the market participants would use in pricing the asset or liability based
on the best available information.
The carrying amounts reported in the accompanying
consolidated balance sheets for cash, restricted cash and all other current assets, security deposits for land use rights, loans and all
current liabilities approximate their fair value based on the short-term maturity of these instruments. The fair value of the long term
customer, construction and security deposits approximate their carrying amounts because the deposits are received in cash. It was impractical
to estimate the fair value of the amount due from the local government and the long term other loans payable.
Foreign currency translation
The Company’s financial information is presented
in U.S. dollars. The functional currency of the Company’s operating subsidiaries is Renminbi (“RMB”), the currency of
the PRC. The consolidated financial statements of the Company have been translated into U.S. dollars in accordance with ASC 830-30 “Translation
of Financial Statements”. The financial information is first prepared in RMB and then is translated into U.S. dollars at year-end
exchange rates as to assets and liabilities and average exchange rates as to revenue and expenses. Capital accounts are translated at
their historical exchange rates when the capital transactions occurred. The effects of foreign currency translation adjustments are included
as a component of accumulated other comprehensive income in stockholders’ equity.
|
|
2020
|
|
|
2019
|
|
Year end RMB : USD exchange rate
|
|
|
6.7896
|
|
|
|
7.1477
|
|
Annual average RMB : USD exchange rate
|
|
|
7.0056
|
|
|
|
6.8753
|
|
The RMB is not freely convertible into foreign currency and all foreign
exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been,
or could be, converted into U.S. dollars at the rates used in translation.
Cash
Cash includes cash on hand and demand deposits
in accounts maintained with large reputable commercial banks within the PRC. The Company considers all highly liquid investments with
original maturities of three months or less when purchased to be cash equivalents.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Restricted cash
The restricted cash is required by the banks as
collateral for mortgage loans given to the home buyers before obtaining the certificates of ownership of the properties as collateral.
In order to provide the banks with the certificates of ownership, the Company is required to complete certain procedures with the Chinese
government, which normally takes six to twelve months. Because the banks provide the loan proceeds to the Company without obtaining certificates
of ownership as loan collateral during this six to twelve months’ period, the mortgage banks require the Company to maintain, as
restricted cash, 5% to 10% of the mortgage proceeds as security for the Company’s obligations under such guarantees. The restricted
cash is released by the banks once they receive the certificates of ownership. These deposits are not covered by insurance. The Company
has not experienced any losses in such accounts and management believes its restricted cash account is not exposed to any significant
risks.
Advances to vendors
Advances to vendors consist of balances paid to
contractors and vendors for services and materials that have not been provided or received and generally relate to the development and
construction of residential and commercial units in the PRC. Advances to vendors are reviewed periodically to determine whether their
carrying value has become impaired. Historically, the Company has not experienced any losses as a result of these advances.
Security deposits for land use rights
Security deposits for land use rights consist
of the deposit held by the PRC government for the purchase of land use rights and the deposit held by an unrelated party to transfer its
land use rights to the Company. The deposits will be reclassified to real estate property under development upon the transfers of legal
title.
Real estate property development completed
and under development
Real estate property consists of finished residential
unit sites, commercial offices and residential unit sites under development. The Company leases the land for the residential unit sites
under land use right leases with various terms from the PRC government. The cost of land use rights is included in the development cost
and allocated to each project. Real estate property development completed and real estate property under development are stated at the
lower of cost or fair value.
Expenditures for land development, including cost
of land use rights, deed tax, pre-development costs, and engineering costs, exclusive of depreciation, are capitalized and allocated to
development projects by the specific identification method. Costs are allocated to specific units within a project based on the ratio
of the sales area of units to the estimated total sales area of the project (or phase of the project) multiplied by the total cost of
the project (or phase of the project).
Cost of amenities transferred to buyers is allocated
to specific units as a component of total construction cost. The amenity cost includes landscaping, road paving, etc. Once the projects
are completed, the amenities are under control of the property management companies.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Real estate property development completed
and under development- continued
Real estate property development completed and
under development are subject to valuation adjustments when the carrying amount exceeds fair value. An impairment loss is recognized only
if the carrying amount of the assets is not recoverable and exceeds fair value. The carrying amount is not recoverable if it exceeds the
sum of the undiscounted cash flows expected to be generated by the assets. The Company reviewed all of its real estate projects for future
losses and impairment by comparing the estimated future undiscounted cash flows for each project to the carrying value of such project.
For the years ended September 30, 2020 and 2019, the Company recognized $2,703,031 and nil impairment for real estate property completed,
respectively.
Capitalization of interest
Interest incurred during and directly related
to real estate development projects is capitalized to the related real estate property under development during the active development
period, which generally commences when borrowings are used to acquire real estate assets and ends when the properties are substantially
complete or the property becomes inactive. Interest is capitalized based on the interest rate applicable to specific borrowings or the
weighted average of the rates applicable to other borrowings during the period. Interest capitalized to real estate property under development
is recorded as a component of cost of real estate sales when related units are sold. All other interest is expensed as incurred. For the
years ended September 30, 2020 and 2019, the total interest capitalized in the real estate property development was $7,086,018 and
$7,158,391, respectively.
Property, plant and equipment, net
Property, plant and equipment are recorded at
cost less accumulated depreciation and any impairment losses. The cost of an asset comprises its purchase price and any directly
attributable costs of bringing the asset to its working condition and location for its intended use.
Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, less any estimated residual value. Estimated useful lives of the assets are
as follows:
Buildings
|
39 years
|
Machinery and office equipment
|
5-10 years
|
Vehicles
|
8 years
|
Any gain or loss on disposal or retirement of
a fixed asset is recognized in the profit and loss account and is the difference between the net sales proceeds and the net carrying amount
of the asset. When property and equipment are retired or otherwise disposed of, the asset and accumulated depreciation are removed from
the accounts and the resulting profit or loss is reflected in income (loss).
Maintenance, repairs and minor renewals are charged
directly to expense as incurred unless such expenditures extend the useful life or represent a betterment, in which case they are capitalized.
Impairment of long-lived assets
The Company reviews its long-lived assets for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the
estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment
exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Impairment of long-lived assets - continued
Assets are grouped and evaluated at the lowest
level for their identifiable cash flows that are largely independent of the cash flows of other groups of assets. The Company considers
historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of
the asset to the future estimated cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds
estimated expected undiscounted future cash flows, the Company measures the amount of impairment by comparing the carrying amount of the
asset to its fair value. The estimation of fair value is generally determined by using the asset's expected future discounted cash flows
or market value. The Company estimates fair value of the assets based on certain assumptions such as budgets, internal projections, and
other available information as considered necessary. There is no impairment of long-lived assets for the years ended September 30,
2020 and 2019.
Customer deposits
Customer deposits consist of amounts received
from customers relating to the sale of residential units in the PRC. In the PRC, customers will generally obtain permanent financing for
the purchase of their residential unit prior to the completion of the project. The lending institution will provide the funding to the
Company upon the completion of the financing rather than the completion of the project. The Company receives these funds and recognizes
them as a liability until the revenue can be recognized.
Property warranties
The Company provides its customers with warranties
which cover major defects of the building structure and certain fittings and facilities of properties sold. The warranty period varies
from two years to five years, depending on different property components the warranty covers. The Company continually estimates potential
costs for materials and labor with regard to warranty-type claims expected to be incurred subsequent to the delivery of a property. Reserves
are determined based on historical data and trends with respect to similar property types and geographical areas. The Company continually
monitors the warranty reserve and makes adjustments to its pre-existing warranties, if any, in order to reflect changes in trends and
historical data as information becomes available. The Company may seek further recourse against its contractors or any related third parties
if it can be proved that the faults are caused by them. In addition, the Company also withholds up to 2% of the contract cost from sub-contractors
for periods of two to five years. These amounts are included in construction deposits, and are only paid to the extent that there has
been no warranty claim against the Company relating to the work performed or materials supplied by the subcontractors. For the years ended
September 30, 2020 and 2019, the Company had not recognized any warranty costs in excess of the amount retained from subcontractors
and therefore, no warranty reserve is considered necessary at the balance sheet dates.
Stock-based compensation
Share-based payment transactions are measured
based on the grant-date fair value of the equity instrument issued and recognized as compensation expense over the requisite service period,
or vesting period.
Forfeitures to be estimated at the time of grant
and revised, if necessary, in the subsequent period if actual forfeitures differ from initial estimates. Forfeiture rate is estimated
based on historical and future expectation of employee turnover rate and are adjusted to reflect future change in circumstances and facts,
if any. Share-based compensation expense is recorded net of estimated forfeitures such that expense was recorded only for those stock
options and common stock awards that are expected to vest.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Construction deposits
Construction deposits are the warranty deposits
the real estate contractors provide to the Company upon signing the construction contracts. The Company can use such deposits to reimburse
customers in the event of customer claims due to construction defects. The remaining balance of the deposits are returned to the
contractors when the terms of the after-sale property warranty expires, which normally occurs within two to five years after the date
of the deposit.
Income taxes
Deferred tax assets and liabilities are for the
expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred
income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income. A valuation allowances is established, when necessary, to reduce deferred tax assets
to the amount expected to be realized.
ASC 740-10-25 prescribes a more-likely-than-not
threshold for consolidated financial statement recognition and measurement of a tax position taken (or expected to be taken) in a tax
return. It also provides guidance on the recognition of income tax assets and liabilities, classification of current and deferred income
tax assets and liabilities, accounting for interest and penalties associated with tax positions, years open for tax examination, accounting
for income taxes in interim periods and income tax disclosures. There are no material uncertain tax positions as of September 30,
2020 and 2019.
The Company is a corporation organized under the
laws of the State of Florida. However, all of the Company’s operations are conducted solely by its subsidiaries in the PRC. No income
is earned in the United States and the management does not repatriate any earnings outside the PRC. As a result, the Company did not generate
any U.S. taxable income for the years ended September 30, 2020 and 2019. As of September 30, 2020, the Chinese entities’
income tax returns filed in China for the years ended December 31, 2019, 2018, 2017, 2016 and 2015 are subject to examination by
the Chinese taxing authorities.
As of September 30, 2020, the tax years ended
September 30, 2010 through September 30, 2019 for the Company’s PRC entities remain open for statutory examination by
PRC tax authorities. The parent Company China HGS Real Estate Inc.’s both U.S. federal tax returns and Florida state tax returns
are delinquent since 2009. Its tax years ended September 30, 2014 through September 30, 2019 remain open for statutory examination
by U.S. federal and state tax authorities.
On December 22, 2017, the Tax Cuts and Jobs
Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but
are not limited to, a U.S. corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017,
the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the
mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. Due to the complexity involved in applying
the provisions of the Tax Act, we made reasonable estimates of the effects and recorded accrued amounts in our consolidated financial
statements As of September 30, 2020 and 2019, including an approximately $2.3 million provision on the deemed repatriation of undistributed
foreign earnings and an additional $1.0 million provision for delinquent U.S. and State tax fillings. The Company is in the process of
engaging a tax professional to file its delinquent tax returns. Failure to furnish any income tax and information returns with respect
to any foreign business entity required, within the time prescribed by the IRS, subjects the Company to civil penalties. Management is
of the opinion that penalties, if any, that may be assessed would not be material to the consolidated financial statements.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Land appreciation tax (“LAT”)
In accordance with the relevant taxation laws
in the PRC, the Company is subject to LAT based on progressive rates ranging from 30% to 60% on the appreciation of land value, which
is calculated as the proceeds of sales of properties less deductible expenditures including borrowing costs and all property development
expenditures. LAT is exempted if the appreciation values do not exceed certain thresholds specified in the relevant tax laws.
The whole project must be completed before the
LAT obligation can be assessed. Accordingly, the Company should record the liability and the total related expense at the completion of
a project unless the tax authorities impose an assessment at an earlier date. The methods to implement this tax law vary among different
geographic areas. Hanzhong, where the project Mingzhu Garden, Nan Dajie and Central Plaza are located, implements this tax rule by
requiring real estate companies prepay the LAT based upon customer deposits received. The tax rate in Hanzhong is 1%. Yang County, where
the project Yangzhou Pearl Garden and Yangzhou Palace are located, requires a tax rate of 0.5%.
Comprehensive income (loss)
In accordance with ASC 220-10-55, comprehensive
income (loss) is defined as all changes in equity except those resulting from investments by owners and distributions to owners. The Company’s
only components of comprehensive income (loss) for the years ended September 30, 2020 and 2019 were net income and foreign currency
translation adjustments.
Advertising expenses
Advertising costs are expensed as incurred. For
the years ended September 30, 2020 and 2019, the Company recorded advertising expenses of $271,811 and $57,448, respectively.
Basic and diluted earnings per share
The Company computes earnings per share (“EPS”)
in accordance with the ASC 260, “Earnings per share”, which requires companies to present basic and diluted EPS. Basic
EPS is measured as net income divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to
basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options and
warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares
that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation
of diluted EPS.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Concentration risk
The Company's operations are carried out in
the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political,
economic and legal environment in the PRC, and by the general state of the PRC's economy. The Company's operations in the PRC are
subject to specific considerations and significant risks not typically associated with companies in North America. The Company's
results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. Financial instruments
which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable.
The company’s cash and restricted cash were on deposit at financial institutions in the PRC, which the management believes are
of high credit quality. In May 1, 2015, China’s new Deposit Insurance Regulation came into effect, pursuant to which banking
financial institutions, such as commercial banks, established in China are required to purchase deposit insurance for deposits in
RMB and in foreign currency placed with them. Such Deposit Insurance Regulation would not be effective in providing complete
protection for the Company’s accounts, as its aggregate deposits are much higher than the compensation limit. However, the
Company believes that the risk of failure of any of these Chinese banks is remote. Bank failure is uncommon in China and the Company
believes that those Chinese banks that hold the Company’s cash and restricted cash are financially sound based on public
available information.
For the years ended September 30, 2020 and 2019, the Company has not experienced any delinquent mortgage
loans and has not experienced any losses related to this guarantee. The Company believes that such reserves are sufficient.
The Company is dependent on third-party sub-contractors,
manufacturers, and distributors for all construction services and supply of construction materials. For the year ended September 30,
2020 and 2019, none supplier accounted for more than 10% of the total project expenditure.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13,
“Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires
the Company to measure and recognize expected credit losses for financial assets held and not accounted for at fair value through net
income. In November 2018, April 2019 and May 2019, the FASB issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial
Instruments - Credit Losses,” “ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses,”
“Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” and “ASU No. 2019-05, Financial Instruments
- Credit Losses (Topic 326): Targeted Transition Relief,” which provided additional implementation guidance on the previously issued
ASU. The ASU is effective for fiscal years beginning after December 15, 2020. The ASU requires a modified retrospective adoption method.
The Company is still evaluating the impact of adoption on its financial statements and disclosures.
In October 2018, the FASB issued ASU No. 2018-17
(“ASU 2018-17”), Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities.
The updated guidance requires entities to consider indirect interests held through related parties under common control on a proportional
basis rather than as the equivalent of a direct interest in its entirety when determining whether a decision-making fee is a variable
interest. The amendments in this update are effective for non-public business entities for fiscal years beginning after December 15,
2020, and interim periods within fiscal years beginning after December 15, 2021, with early adoption permitted. These amendments
should be applied retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented.
The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income
Taxes (Topic 740): Simplifying the Accounting for Income Taxes, to simplify the accounting for income taxes. The new guidance eliminates
certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim
period and the recognition of deferred tax liabilities for outside basis differences. It also simplifies aspects of the accounting for
franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the
tax basis of goodwill. This ASU will become effective for the Company's annual and interim periods beginning in January 1, 2021,
and early adoption is permitted. The Company is evaluating the impact of this standard on its consolidated financial statements.
Excepts as mentioned above, the Company does not
believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the Company’s
consolidated balance sheets, statements of income and comprehensive loss, stockholders’ equity and cash flow.
Reclassifications
The Company changed its presentation of its consolidated
balance sheet to an unclassified format as of September 30, 2020. Certain amounts in the prior year consolidated balance sheet have been
reclassified for comparative purposes to conform to the current year’s presentation.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. REAL ESTATE PROPERTY COMPLETED
AND UNDER DEVELOPMENT
The following summarizes the components of real
estate property completed and under development as of September 30, 2020 and 2019:
|
|
Balance as of
|
|
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
Development completed:
|
|
|
|
|
|
|
|
|
Hanzhong City Mingzhu Garden Phase I (e)
|
|
$
|
-
|
|
|
$
|
530,314
|
|
Hanzhong City Mingzhu Garden Phase II
|
|
|
22,801,439
|
|
|
|
24,264,216
|
|
Hanzhong City Nan Dajie (Mingzhu Xinju) (e)
|
|
|
-
|
|
|
|
1,157,554
|
|
Hanzhong City Oriental Pearl Garden
|
|
|
19,937,105
|
|
|
|
19,070,129
|
|
Yang County Yangzhou Pearl Garden Phase I (e)
|
|
|
-
|
|
|
|
1,514,241
|
|
Yang County Yangzhou Pearl Garden Phase II
|
|
|
2,559,977
|
|
|
|
3,054,412
|
|
Yang County Yangzhou Palace
|
|
|
49,372,737
|
|
|
|
52,342,164
|
|
Real estate property development completed
|
|
|
94,671,258
|
|
|
|
101,933,030
|
|
Under development:
|
|
|
|
|
|
|
|
|
Hanzhong City Shijin Project (“’Shijin Project) (d)
|
|
|
-
|
|
|
|
6,776,688
|
|
Hanzhong City Liangzhou Road and related projects (a)
|
|
|
164,879,955
|
|
|
|
146,958,903
|
|
Hanzhong City Hanfeng Beiyuan East (b)
|
|
|
824,496
|
|
|
|
706,194
|
|
Hanzhong City Beidajie (b)
|
|
|
57,142,127
|
|
|
|
56,654,212
|
|
Yang County East 2nd Ring Road (c)
|
|
|
4,894,439
|
|
|
|
4,649,228
|
|
Real estate property under development
|
|
|
227,741,017
|
|
|
|
215,745,225
|
|
|
(a)
|
In September 2013, the Company entered into
an agreement (“Liangzhou Agreement”) with the Hanzhong local government on the Liangzhou Road reformation and expansion project
(Liangzhou Road Project”). Pursuant to the agreement, the Company is contracted to reform and expand the Liangzhou Road, a commercial
street in downtown Hanzhong City, with a total length of 2,080 meters and width of 30 meters and to resettle the existing residences in
the Liangzhou road area. The government’s original road construction budget was approximately $33 million in accordance with the
Liangzhou Agreement. The Company, in return, is being compensated by the local government to have an exclusive right on acquiring at least
394.5 Mu land use rights in a specified location of Hanzhong City. The Liangzhou Road Project’s road construction started at the
end of 2013. In 2014, the original scope and budget on the Liangzhou road reformation and expansion project was extended, because the
local government included more area and resettlement residences into the project, which resulted in additional investments from the Company.
In return, the Company is authorized by the local government to develop and manage the commercial and residential properties surrounding
the Liangzhou Road project. As of June 30, 2020, the main Liangzhou road construction is substantially completed. The Company also
completed the relocation of residence by the end of June 2020 and expects to launch the construction of the Liangzhou Road related
projects starting from the fourth quarter of fiscal year 2020.
The Company’s development cost incurred
on Liangzhou Road Project is treated as the Company’s deposit on purchasing the related land use rights, as agreed by the local
government. As of September 30,2020, the actual costs incurred by the Company were $164,879,955 (September 30, 2019 - $146,958,903)
and the incremental cost related to residence resettlement approved by the local government. The Company determined that the Company’s
Investment in Liangzhou Road Project in exchange for interests in future land use rights is a barter transaction with commercial substance.
|
|
(b)
|
In September 2012, the Company was approved by the Hanzhong local government to construct four municipal roads with a total length of approximately 1,192 meters. The project was deferred and then restarted during the quarter ended June 30, 2014. As of September 30, 2020, the local government has not completed the budget for these projects therefore the delivery to these projects for government’s acceptance and related settlement were extended to 2021.
|
|
(c)
|
The Company was engaged by the Yang County local government to construct the East 2nd Ring Road with a total length of 2.15 km. The local government is required to repay the Company’s project investment costs within 3 years with interest at the interest rate based on the commercial borrowing rate with the similar term published by China construction bank (September 30, 2020 and 2019 - 4.75%). The local government has approved a refund to the Company by reducing local surcharges or taxes otherwise required in the real estate development. The road construction was substantially completed as of September 30, 2020 and in process of government review and approval.
|
|
(d)
|
For the year ended September 30, 2020, the Company entered into an agreement with Mr. Zhu Xiaojun and an unrelated party (the “buyer group”) to dispose Shijin project at price of $8,984,329 (or RMB 61 million). The carrying value of Shijin project prior to the disposal was $7,134,107. Pursuant to the agreement, a portion of selling price of $3,402,313 was fully settled by the Company’s shareholder’s loan of $2,145,945 and accrued interest payable of $1,256,368 to Mr. Zhu Xiaojun. The rest of proceeds approximately $5.6 million will be collected from the unrelated party by September 30, 2021 (Note 9). The transaction resulted in a gain of approximately $1.9 million for the year ended September 30, 2020.
|
|
(e)
|
For the year ended September 30, 2020, the Company entered into an agreement with certain suppliers to settle the related payables balances of $3,415,572 with these suppliers by disposal of the remaining real estate properties in Hanzhong City Mingzhu Garden Phase I, Hanzhong City Nan Dajie and Yang County Yangzhou Pearl Garden Phase I projects with the aggregated carrying value of $267,032 (after recognized an impairment loss of $2,703,031 during the year ended September 30, 2020). The transaction resulted in a gain of approximately $3.1 million for the year ended September 30, 2020.
|
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. PROPERTY, PLANT AND EQUIPMENT, NET
As of September 30, 2020 and 2019, property,
plant and equipment was as follows:
|
|
As of September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Buildings
|
|
$
|
805,208
|
|
|
$
|
764,867
|
|
Automobiles
|
|
|
97,823
|
|
|
|
207,186
|
|
Total
|
|
|
903,031
|
|
|
|
972,053
|
|
Less: accumulated depreciation
|
|
|
(331,701
|
)
|
|
|
(358,045
|
)
|
Property, plant and equipment, net
|
|
$
|
571,330
|
|
|
$
|
614,008
|
|
Depreciation expense for the years ended September 30,
2020 and 2019 was $72,748 and $79,270, respectively.
NOTE 5. RECEIVABLE FROM LOCAL GOVERNMENT
In June 2012, the Company was approved by
Hanzhong local government to construct two municipal roads with total length of 1,064.09 meters. The Company completed and delivered these
two roads to the local government on March 21, 2014 with local government’s approval. The Company recognized such revenue during
the year ended September 30, 2014. As of September 30, 2020, a receivable balance from the Hanzhong local government was $2,869,623
(September 30, 2018 - $2,725,854) and the Company expected to realize the receivable to offset municipal surcharges from local government
for the Liangzhou Road related projects when the Company started the Liangzhou Road related real estate property construction in 2021
and later years.
NOTE 6. SECURITY DEPOSITS
As of September 30, 2020 and 2019, security
deposits were as follows:
|
|
As of September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Security deposit for land use right (1)
|
|
$
|
1,855,506
|
|
|
$
|
2,798,103
|
|
Security deposits for other loan (2)
|
|
|
-
|
|
|
|
5,174,014
|
|
Security deposits
|
|
$
|
1,855,506
|
|
|
$
|
7,972,117
|
|
|
(1)
|
In May 2011, the Company entered into a development agreement with the Hanzhong local government. Pursuant to the agreement, the Company prepaid $1,855,506 and $2,798,103 to Hanzhong Urban Construction Investment Development Co., Ltd with the purpose to acquire certain land use rights through public bidding as of September 30, 2020 and 2019, respectively. The Company currently expects to make payment of the remaining development cost as the government’s work progresses.
|
|
(2)
|
In connection with financing from Hanzhong Urban Construction Investment Development Co., Ltd (See note 7), the Company provided a security deposit for the loan received. As of September 30, 2020, the security deposit balances were nil (September 30, 2019 - $5,174,014) for other loan with Hanzhong Urban Construction Investment Development Co., Ltd. Since the Company commenced the preliminary construction of Liangzhou road and affiliated project in September 30, 2020, the previous security deposits was refunded by Hanzhong Urban Construction Investment Development Co., Ltd as of September 30, 2020.
|
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. CONSTRUCTION LOANS
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
Loan A (i)
|
|
$
|
92,450,491
|
|
|
$
|
90,186,614
|
|
Loan C (ii)
|
|
|
17,486,917
|
|
|
|
16,610,822
|
|
|
|
|
109,937,408
|
|
|
|
106,797,436
|
|
(i)
|
On June 26, 2015 and March 10, 2016, the Company signed phase I and Phase II agreements with Hanzhong Urban Construction Investment Development Co., Ltd, a state owned Company, to borrow up to approximately $114.1 million (RMB 775,000,000) for a long term loan at 4.75% interest per year to develop Liangzhou Road Project. As of September 30, 2020, the Company borrowed $92,450,491 under this credit line (September 30, 2019 - $90,186,614) with final due date in October 2021. The loan is guaranteed by Hanzhong City Hantai District Municipal Government and pledged by the Company’s Yang County Yangzhou Palace project with carrying value of $49,372,737 as of September 30, 2020 (September 30, 2019- $52,342,164). In addition, the Company was required to provide a security deposit for the loan received (see note 6). As of September 30, 2020, the security deposits paid was released due to the Company’ commence of construction of Liangzhou Road and affiliated project (2019 -$5,174,014). For the years ended September 30, 2020 and 2019, the interest paid was $6,537,079 and $6,617,720, respectively, which was capitalized in to the development cost of Liangzhou road project. Due to local government’s delay in reallocation of residence in Liangzhou Road and related area, the Hanzhong Urban Construction Investment Development Co., Ltd has not released all the funds available in this loan to the Company and the Company’s withdraw will be based on the project’s development progress. The total required loan repayment schedule assuming total loan proceeds are borrowed are listed below:
|
For the years ending:
|
|
Repayment in USD
|
|
|
Repayment in RMB
|
|
September 30, 2021
|
|
|
92,098,945
|
|
|
|
625,315,000
|
|
September 30, 2022
|
|
|
351,546
|
|
|
|
2,386,860
|
|
Total
|
|
|
92,450,491
|
|
|
|
627,701,860
|
|
(ii)
|
In December 2016, the Company signed a loan agreement with Hantai District Urban Construction Investment Development Co., Ltd, a state owned Company, to borrow up to approximately $17.5 million (RMB 119,000,000) for the development of Hanzhong City Liangzhou Road project. As of September 30, 2020, the Company received all the proceeds and repaid unused fund of $39,888 (RMB 270,829). The loan carries interest at a fixed annual interest of 1.2% and is due on June 20, 2031. The Company is required to repay the loan by equal annual principal repayment of approximately $3.3 million from December 2027 through June 2031 and the interest is payable on annual basis. The Company pledged the assets of Liangzhou Road related projects with carrying value of $164,879,955 as collateral for the loan. Total interest of $213,827 and $157,506 for the years ended September 30, 2020 and 2019, respectively, were capitalized in to the development cost of Hanzhong City Liangzhou Road project.
|
|
Additionally, in September 2017, the Urban Development Center Co., Ltd. approved a construction loan for the Company in the amount of approximately $25.8 million (RMB 175,000,000) with an annual interest rate of 1.2% per year in connection with the Liangzhou Road and related Project. The Company is required to repay the loan by equal annual principal repayment of approximately $5 million from December 2027 through May 2031 and the interest is payable on annual basis. The amount of this loan is available to be drawn down as soon as the land use rights of the Liangzhou Road is approved and the construction starts, which is expected to begin in the 2021. As of September 30, 2020 and 2019, the outstanding balance of loan was Nil. Interest charge for the year ended September 30, 2020 and 2019 was $314,452 (2019- $231,626), respectively, which was included in the construction capitalized costs.
|
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. CUSTOMER DEPOSITS
Customer deposits consist of amounts received
from customers for the pre-sale of residential units in the PRC. The details of customer deposits are as follows:
|
|
As of September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Customer deposits by real estate projects
|
|
|
|
|
|
|
|
|
Mingzhu Garden (Mingzhu Nanyuan and Mingzhu Beiyuan)
|
|
$
|
7,606,944
|
|
|
$
|
7,029,356
|
|
Oriental Pearl Garden
|
|
|
4,358,467
|
|
|
|
4,182,454
|
|
Liangzhou road related projects
|
|
|
888,123
|
|
|
|
1,043,692
|
|
Yang County Pearl Garden
|
|
|
1,243,137
|
|
|
|
1,163,407
|
|
Yangzhou Palace
|
|
|
5,308,857
|
|
|
|
3,764,355
|
|
Total
|
|
$
|
19,405,528
|
|
|
$
|
17,183,264
|
|
Customer deposits are typically 10% - 20% of the
unit price for those customers who purchase properties in cash and 30%-50% of the unit price for those customers who purchase properties
with mortgages. Buyers with mortgage loans pay customer deposits. The banks provide the balance of the funding to the Company upon consummation
of the sales. The banks hold the properties as collateral for customers’ mortgage loans. If the customers default, the bank will
repossess the collateral properties. Except during the Mortgage Loan Guarantee Period of approximately six to twelve months, the banks
have no recourse to the Company for customers’ defaults. As of September 30, 2020 and 2019, approximately $3.4 million and
$3.9 million was guaranteed by the Company, respectively.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. SHAREHOLDERS LOANS
|
|
As of September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Shareholder loan – USD loan (*)
|
|
$
|
-
|
|
|
$
|
1,810,000
|
|
Shareholder loan – RMB loan (**)
|
|
|
-
|
|
|
|
319,114
|
|
Total
|
|
$
|
-
|
|
|
$
|
2,129,114
|
|
*.
|
The Company has a one year loan agreement (“USD Loan Agreement”) with our Chairman, CEO and major shareholder”), pursuant to which the Company borrowed $1,810,000 to make a capital injection into Shaanxi HGS, the Company’s subsidiary. The interest rate for the loan is 4% per annum and the loan matured on July 19, 2014. The Company entered into the amendments to the USD Loan Agreement to extend the term until July 31, 2020 and the loan is due on demand. The Company recorded interest of $72,400 for each of the years ended September 30, 2020 and 2019. The Company has not yet paid this interest. As of September 30, 2020 and 2019, the accrued interest payable amounted to $669,700 and $597,300, respectively.
|
**.
|
On December 31, 2013, Shaanxi Guangsha Investment and Development Group Co., Ltd. (the “Guangsha”), the Company's PRC operating subsidiary, entered into a loan agreement with the Chairman (the “Shareholder RMB Loan Agreement”), pursuant to which Guangsha is able to borrow funds from the Chairman in order to support the Company’s Liangzhou Road construction project development and the Company’s working capital needs. The Loan Agreement has a one-year term, and has been renewed upon maturity to September 25, 2021, with at an interest rate of 4.35% per year. For years ended September 30, 2020 and 2019, the interest was $20,661 and $20,403, respectively, which is capitalized in the development cost of Liangzhou road project. As of September 30, 2020 and 2019, the accrued interest payable amounted to $586,668 and $537,651, respectively.
|
|
On September 30, 2020, the Company entered into an agreement with Mr. Zhu Xiaojun and an unrelated party (the “buyer group”) to sell Shijin project at price of $7,364,204 (or RMB 50 million) (Note 3). Pursuant to the agreement, a portion of selling price of approximately $3.4 million was fully settled by the Company’s shareholder’s loan payable with accrued interest payable to Mr. Zhu Xiaojun and the rest of proceeds will be collected from the unrelated party by September 30, 2021 (Note 9). The transaction resulted in a gain of $1.9 million for the year ended September 30, 2020.
|
NOTE 10. TAXES
(A) Business sales tax and VAT
The Company is subject to a 5% business sales
tax on revenue. It is the Company’s continuing practice to recognize the 5% business sales tax based on revenue as a cost of
sales as the revenue is recognized. As of September 30, 2020, the Company had business sales tax payable of $5,159,296 (2019 - $7,819,884),
which is expected to be paid when the projects are completed and assessed by the local tax authority. In May of 2016, the Business
Tax has been incorporated into Value Added Tax in China, which means there will be no more Business Tax and accordingly some business
operations previously taxed in the name of Business Tax will be taxed in the manner of VAT thereafter. The Company is subject to 5% of
VAT for its all existing real estate project based on the local tax authority’s practice.
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. TAXES (continued)
(B) Corporate income taxes (“CIT”)
The Company’s PRC subsidiaries and VIE
are governed by the Income Tax Law of the People’s Republic of China concerning the privately run enterprises, which are
generally subject to income tax at a statutory rate of 25% on income reported in the statutory financial statements after
appropriate tax adjustments. However, as approved by the local tax authority of Hanzhong City, the Company’s CIT was assessed
annually at a pre-determined fixed rate as an incentive to stimulate the local economy and encourage entrepreneurship. The local
income tax rate in Hanzhong is 2.5% and in Yang County is 1.25% on revenue prior to the year ended September 30, 2018. Starting
from fiscal 2018, the Company’s CIT changed to 25% on taxable income. The change in the income tax policy could negatively
affect the Company’s net income in future years. Although the possibility exists for reinterpretation of the application of
the tax regulations by higher tax authorities in the PRC, potentially overturning the decision made by the local tax authority, the
Company has not experienced any reevaluation of the income taxes for prior years. The PRC tax rules are different from the
local tax rules and the Company is required to comply with local tax rules. The difference between the two tax rules will
not be a liability of the Company. There will be no further tax payments for the difference. For the years ended September 30,
2020 and 2019, the Company’s total income tax payable amounted to $11,639,537 and $11,720,848, respectively, which included
the income tax payable balances in PRC of $8,342,537 and $8,691,848, respectively and the Company expects to pay off the income tax
payable balance when the related real estate projects are completely sold.
The following table reconciles the statutory rates
to the Company’s effective tax rate for the years ended September 30, 2020 and 2019:
|
|
For the years ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Chinese statutory tax rate
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
Valuation allowance change
|
|
|
18.7
|
%
|
|
|
0.2
|
%
|
Net impact of Exemption rendered by local tax authorities and other adjustments Effective tax rate
|
|
|
2.5
|
%
|
|
|
10.1
|
%
|
|
|
|
46.2
|
%
|
|
|
35.3
|
%
|
Income tax expense for the years ended September 30,
2020 and 2019 is summarized as follows:
|
|
For the years ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Current tax provision
|
|
$
|
841,933
|
|
|
$
|
719,437
|
|
Deferred tax provision
|
|
|
-
|
|
|
|
1,302,606
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
841,933
|
|
|
$
|
2,022,043
|
|
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. TAXES (continued)
Recent U.S. federal tax legislation, commonly
referred to as the Tax Cuts and Jobs Act (the “U.S. Tax Reform”), was signed into law on December 22, 2017. The U.S.
Tax Reform significantly modified the U.S. Internal Revenue Code by, among other things, reducing the statutory U.S. federal corporate
income tax rate from 35% to 21% for taxable years beginning after December 31, 2017; limiting and/or eliminating many business deductions;
migrating the U.S. to a territorial tax system with a one-time transition tax on a mandatory deemed repatriation of previously deferred
foreign earnings of certain foreign subsidiaries; subject to certain limitations, generally eliminating U.S. corporate income tax on dividends
from foreign subsidiaries; and providing for new taxes on certain foreign earnings. Taxpayers may elect to pay the one-time transition
tax over eight years or in a single lump sum. The U.S. Tax Reform also includes provisions for a new tax on GILTI effective for tax years
of foreign corporations beginning after December 31, 2017. The GILTI provisions impose a tax on foreign income in excess of a deemed
return on tangible assets of controlled foreign corporations (“CFCs”), subject to the possible use of foreign tax credits
and a deduction equal to 50 percent to offset the income tax liability, subject to some limitations.
For the years ended September 30, 2018,
the Company recognized a one-time transition toll tax of approximately $2.3 million that represented management’s estimate of
the amount of U.S. corporate income tax based on the deemed repatriation to the United States of the Company’s share of
previously deferred earnings of certain non-U.S. subsidiaries and VIE of the Company mandated by the U.S. Tax Reform. The
Company’s estimate of the onetime transition toll Tax is subject to the finalization of management’s analysis related to
certain matters, such as developing interpretations of the provisions of the Tax Act and amounts related to the earnings and profits
of certain foreign VIEs and the filing of our tax returns. U.S. Treasury regulations, administrative interpretations or court
decisions interpreting the Tax Act may require further adjustments and changes in our estimates. As of September 30, 2020 and
2019, the Company provided an additional $0.8 million provision due to delinquent U.S. tax return fillings.
(C) Land appreciation tax (“LAT”)
Since January 1, 1994, LAT has been applicable
at progressive tax rates ranging from 30% to 60% on the appreciation of land values, with an exemption provided for the sales of ordinary
residential properties if the appreciation values do not exceed certain thresholds specified in the relevant tax laws. However, the Company’s
local tax authority in Hanzhong City has not imposed the regulation on real estate companies in its area of administration. Instead, the
local tax authority has levied the LAT at the rate of 0.5% in Yang County and 1.0% in Hanzhong against total cash receipts from sales
of real estate properties, rather than according to the progressive rates.
As at September 30, 2020 and 2019, the outstanding
LAT payable balance was Nil with respect to completed real estate properties sold up to September 30, 2020 and 2019, respectively.
(D) Taxes payable consisted of the following:
|
|
September 30,
2020
|
|
|
September 30,
2019
|
|
CIT
|
|
$
|
12,213,470
|
|
|
$
|
11,720,848
|
|
Business tax
|
|
|
5,159,296
|
|
|
|
7,819,884
|
|
Other taxes and fees
|
|
|
2,508,445
|
|
|
|
2,349,086
|
|
Total taxes payables
|
|
$
|
19,881,211
|
|
|
$
|
21,889,818
|
|
CHINA HGS REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. STOCKHOLDERS’ EQUITY
(a) Common stock
As of September 30, 2019, the Company had
a total of 45,050,000 shares of common stock issued and outstanding.
On August 19, 2020, the Company filed an
Amendment to the Company’s Articles of Incorporation (the “Certificate of Amendment”) with the Florida Secretary of
State to effect a one-for-two reverse split of the Company’s authorized and issued and outstanding shares of common stock (the “Reverse
Stock Split”). The Reverse Stock Split became effective in accordance with the terms of the Certificate of Amendment on August 20,
2020 (the “Effective Time”). At the Effective Time, every two shares of the Company’s common stock authorized and issued
and outstanding were automatically combined into one share of common stock, without any change in the par value per share. The Company
will not issue any fractional shares in connection with the Reverse Stock Split. Instead, fractional shares will be rounded up to the
nearest full share. As a result of the reverse split, the number of common stock outstanding as of September 30, 2020 and 2019 was
restated to reflect the effect of the reverse split.
As of September 30, 2020, the Company has
a total of 22,525,000 shares of common stock issued and outstanding.
(b) Statutory surplus reserves
The Company is required to make appropriations
to reserve funds, comprising the statutory surplus reserve and discretionary surplus reserve, based on after-tax net income determined
in accordance with generally accepted accounting principles of the PRC (“PRC GAAP”).
Appropriations to the statutory surplus reserve
is required to be at least 10% of the after tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of
the entities’ registered capital. Appropriations to the discretionary surplus reserve are made at the discretion of the Board of
Directors. The statutory surplus reserve fund is non-discretionary other than during liquidation and can be used to fund previous years’
losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders
in proportion to their shareholding or by increasing the par value of shares currently held by them, provided that the remaining statutory
surplus reserve balance after such issue is not less than 25% of the registered capital before the conversion. Pursuant to the Company’s
articles of incorporation, the Company is to appropriate 10% of its net profits as statutory surplus reserve. As of September 30,
2020 and 2019, the balance of statutory surplus reserve was $10,458,395 and $10,360,251, respectively.
The discretionary surplus reserve may be used
to acquire fixed assets or to increase the working capital to expend on production and operation of the business. The Company’s
Board of Directors decided not to make an appropriation to this reserve for the years ended September 30, 2020 and 2019.
NOTE 12. CONTINGENCIES AND COMMITMENTS
From time to time, the Company is a party to various
legal actions arising in the ordinary course of business. The Company accrues costs associated with these matters when they become probable
and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. The Company's
management does not expect any liability from the disposition of such claims and litigation individually or in the aggregate would have
a material adverse impact on the Company's consolidated financial position, results of operations and cash flows.
As an industry practice, the Company provides
guarantees to PRC banks with respect to loans procured by the purchasers of the Company’s real estate properties for the total mortgage
loan amount until the completion of obtaining the “Certificate of Ownership” of the properties from the government, which
generally takes six to twelve months. Because the banks provide loan proceeds without getting the “Certificate of Ownership”
as loan collateral during this six to twelve months’ period, the mortgage banks require the Company to maintain, as restricted cash,
5% to 10% of the mortgage proceeds as security for the Company’s obligations under such guarantees. If a purchaser defaults on its
payment obligations, the mortgage bank may deduct the delinquent mortgage payment from the security deposit and require the Company to
pay the excess amount if the delinquent mortgage payments exceed the security deposit. If the delinquent mortgage payments exceed the
security deposit, the banks may require us to pay the excess amount. If multiple purchasers default on their payment obligations at around
the same time, we will be required to make significant payments to the banks to satisfy our guarantee obligations. If we are unable to
resell the properties underlying defaulted mortgages on a timely basis or at prices higher than the amounts of our guarantees and related
expenses, we will suffer financial losses. The Company has made necessary reserves in its restricted cash account to cover any potential
mortgage defaults as required by the mortgage lenders. For the years ended September 30, 2020 and 2019, the Company has not experienced
any delinquent mortgage loans and has not experienced any losses related to this guarantee. As of September 30, 2020 and 2019, our
outstanding guarantees in respect of our customers' mortgage loans amounted to approximately $68 million and $78 million, respectively.
As of September 30, 2020 and 2019, the amount of security deposits provided for these guarantees was approximately $3.4 million and
$3.9 million respectively and the Company believes that such reserves are sufficient.
NOTE 13. PENDING NASDAQ COMPLIANCE ISSUE
On June 21, 2019, the “Company
received a letter from the Listing Qualifications staff of The Nasdaq Stock Market (“Nasdaq”) notifying the Company that
it is no longer in compliance with the minimum bid price requirement for continued listing on the Nasdaq Capital Market. Nasdaq
Listing Rule 5550(a)(2) requires listed companies to maintain a minimum bid price of $1.00 per share. The letter noted
that the bid price of the Company’s common stock was below $1.00 for the 30-day period ending June 20, 2019. The
notification letter has no immediate effect on the Company’s listing on the Nasdaq Capital Market. Nasdaq has provided the
Company with 180 days, or until January 14, 2020, to regain compliance with the minimum bid price requirement by having a
closing bid price of at least $1.00 per share for a minimum of 10 consecutive business days. On December 19, 2019, Nasdaq
determined that the Company is eligible for an additional 180 calendar day period, or until June 15, 2020, to regain
compliance. Given the extraordinary market conditions caused by COVID-19, Nasdaq has determined to toll the compliance periods for
bid price and market value of publicly held shares requirements through June 30, 2020. In that regard, on April 16, 2020,
Nasdaq filed an immediately effective rule change with the Securities and Exchange Commission. Accordingly, the Company has
until August 31, 2020, to regain compliance. As of November 3, 2020, The Company has been advised that March 1,
2021 represents the full extent of the Panel’s discretion to grant continued listing while it is non-compliant. Should the
company fail to demonstrate compliance with Nasdaq Listing Rule 5550(a)(2) by that date, the Panel will issue a final
delist determination and the Company will be suspended from trading on The Nasdaq Stock Market.
CHINA HGS REAL ESTATE INC.
SCHEDULE I- PARENT COMPANY BALANCE SHEETS
(UNAUDITED)
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
ASSETS
|
|
|
|
|
|
|
Investment in subsidiary
|
|
$
|
171,622,821
|
|
|
$
|
164,136,450
|
|
Total assets
|
|
$
|
171,622,821
|
|
|
$
|
164,136,450
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
-
|
|
|
$
|
597,300
|
|
Tax payable
|
|
|
3,297,000
|
|
|
|
3,029,000
|
|
Shareholder loan
|
|
|
-
|
|
|
|
1,810,000
|
|
Total liabilities
|
|
|
3,297,000
|
|
|
|
5,436,300
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 50,000,000 shares authorized, 22,525,000 shares
issued and outstanding
|
|
|
22,525
|
|
|
|
22,525
|
|
Additional paid-in capital
|
|
|
129,930,330
|
|
|
|
129,930,330
|
|
Statutory surplus
|
|
|
10,458,395
|
|
|
|
10,360,251
|
|
Retained earnings
|
|
|
34,954,061
|
|
|
|
34,070,767
|
|
Accumulated other comprehensive loss
|
|
|
(7,039,490
|
)
|
|
|
(15,683,723
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity
|
|
|
168,325,821
|
|
|
|
158,700,150
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
171,622,821
|
|
|
$
|
164,136,450
|
|
The accompanying notes are integral part of Schedule
I
CHINA HGS REAL ESTATE INC.
SCHEDULE I - STATEMENTS OF INCOME AND COMPREHENSIVE
LOSS
FOR THE YEARS ENDED SEPTEMBER 30, 2020 AND 2019
(UNAUDITED)
|
|
2020
|
|
|
2019
|
|
Equity in profit of subsidiary
|
|
$
|
1,321,838
|
|
|
$
|
4,344,572
|
|
General and administrative expenses
|
|
|
-
|
|
|
|
-
|
|
Interest expense
|
|
|
72,400
|
|
|
|
72,400
|
|
Income before income taxes
|
|
|
1,249,438
|
|
|
|
4,272,172
|
|
Provision for income taxes
|
|
|
268,000
|
|
|
|
570,000
|
|
Net income
|
|
|
981,438
|
|
|
|
3,702,172
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
8,644,233
|
|
|
|
(6,679,858
|
)
|
Comprehensive loss
|
|
$
|
9,625,671
|
|
|
$
|
(2,977,686
|
)
|
The accompanying notes are integral part of Schedule
I
CHINA HGS REAL ESTATE INC.
SCHEDULE I - STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2020 AND 2019
(UNAUDITED)
|
|
2020
|
|
|
2019
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
981,438
|
|
|
$
|
3,702,172
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
Equity in profit of subsidiary
|
|
|
(1,321,838
|
)
|
|
|
(4,344,572
|
)
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Tax payable
|
|
|
268,000
|
|
|
|
570,000
|
|
Accrued expenses
|
|
|
72,400
|
|
|
|
72,400
|
|
Net cash used in operating activities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
-
|
|
|
|
-
|
|
Cash, beginning of year
|
|
|
-
|
|
|
|
-
|
|
Cash, end of year
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
-
|
|
|
$
|
-
|
|
Income taxes paid
|
|
$
|
-
|
|
|
$
|
-
|
|
The accompanying notes are integral part of Schedule
I
CHINA HGS REAL ESTATE INC.
NOTES TO SCHEDULE I
NOTE 1. BASIS OF PRESENTATION
Certain information and footnote disclosures normally
included in financial statements prepared in conformity with generally accepted accounting principles have been condensed or omitted.
The Company’s investment in subsidiary and variable interest entity (“VIE”) is stated at cost plus equity in undistributed
earnings of subsidiaries.
NOTE 2. RESTRICTED ASSETS
The Company’s PRC VIE and subsidiary are
restricted in their ability to transfer a portion of their net assets to the Company. The payment of dividends by entities organized in
China is subject to limitations, procedures and formalities. Regulations in the PRC currently permit payment of dividends only out of
accumulated profits as determined in accordance with accounting standards and regulations in China. The Company’s subsidiaries and
its VIEs are also required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its statutory
reserves account until the accumulative amount of such reserves reaches 50% of its respective registered capital. The aforementioned reserves
can only be used for specific purposes and are not distributable as cash dividends.
In addition, the Company’s operations and
revenues are conducted and generated in China, all of the Company’s revenues being earned and currency received are denominated
in RMB. RMB is subject to the foreign exchange control regulation in China, and, as a result, the Company may be unable to distribute
any dividends outside of China due to PRC foreign exchange control regulations that restrict the Company’s ability to convert RMB
into US Dollars.
Schedule I of Article 5-04 of Regulation
S-X requires the condensed financial information of registrant shall be filed when the restricted net assets of consolidated subsidiaries
exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year. For purposes of the above test,
restricted net assets of consolidated subsidiaries shall mean that amount of the registrant’s proportionate share of net assets
of consolidated subsidiaries (after intercompany eliminations) which as of the end of the most recent fiscal year may not be transferred
to the parent company by subsidiaries in the form of loans, advances or cash dividends without the consent of a third party. The condensed
parent company financial statements have been prepared in accordance with Rule 12-04, Schedule I of Regulation S-X as the restricted
net assets of the Company’s PRC subsidiary and VIE exceed 25% of the consolidated net assets of the Company.
NOTE 3. COMMITMENTS
The Company did not have any significant commitments or long-term obligations
as at September 30, 2020 and 2019.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant is a Florida corporation. Section
607.0851(1) of the Florida Business Corporation Act, as amended (the “FBCA”), provides that, in general, a corporation may
indemnify an individual who is a party to a proceeding because the individual is or was a director or officer of the corporation against
liability incurred in the proceeding if the director or officer acted in good faith, in a manner he or she reasonably believed to be in,
or not opposed to, the best interests of the corporation and, in the case of any criminal proceeding, had no reasonable cause to believe
that his or her conduct was unlawful. Section 607.0851(3) of the FBCA provides that, in general, a corporation may not indemnify a director
or an officer in connection with a proceeding by or in the right of the corporation except for expenses and amounts paid in settlement
not exceeding, in the judgment of the board of directors, the estimated expense of litigating the proceeding to conclusion, actually and
reasonably incurred in connection with the defense or settlement of such proceeding, including any appeal thereof, where such person acted
in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the corporation, unless
ordered to provide indemnification or advance expenses to such director or officer by a court, pursuant to Section 607.0854(1)(c) of the
FCBA, if the court determines, in view of all the relevant circumstances, that it is fair and reasonable to indemnify or to advance expenses
to the director or officer. If the director or officer was adjudged liable, pursuant to Section 607.0854(1)(c) of the FBCA, indemnification
shall be limited to expenses incurred in connection with the proceeding. Section 607.0853(1) of the FCBA also permits the corporation,
before final disposition of a proceeding, to advance funds to pay for or reimburse expenses incurred in connection with the proceeding
by an individual who is a party to the proceeding because that individual is or was a director or an officer if the director or officer
delivers to the corporation a signed written undertaking of the director or officer to repay any funds advanced if the director or officer
is not entitled to mandatory indemnification under the FCBA and it is ultimately determined under the FCBA that the director or officer
has not met the relevant standard of conduct described in Section 607.0851 of the FCBA or the director or officer is not entitled to indemnification
under Section 607.0859 of the FCBA. Section 607.0858(1) of the FCBA provides that the indemnification and advancement of expense provisions
contained in the FCBA are not exclusive, and a corporation may, by a provision in its articles of incorporation, bylaws or any agreement,
or by vote of shareholders or disinterested directors, or otherwise, obligate itself in advance of the act or omission giving rise to
a proceeding to provide any other or further indemnification or advancement of expenses to any of its directors or officers. To the extent
that any officers or directors are successful on the merits or otherwise in the defense of any of the proceedings described above, Section
607.0852 of the FBCA provides that the corporation is required to indemnify such officers or directors against expenses actually and reasonably
incurred in connection therewith. However, Section 607.0859(1) of the FBCA further provides that, in general, indemnification or advancement
of expenses shall not be made to or on behalf of any officer or director if a judgment or other final adjudication establishes that his
actions, or omissions to act, were material to the cause of the action so adjudicated and constitute: (i) willful or intentional misconduct
or a conscious disregard for the best interests of the corporation in a proceeding by or in the right of the corporation to procure a
judgment in its favor or in a proceeding by or in the right of a shareholder; (ii) a transaction from which the director or officer derived
an improper personal benefit; (iii) a violation of the criminal law, unless the director or officer had reasonable cause to believe his
or her conduct was lawful or had no reasonable cause to believe his or her conduct was unlawful; or (iv) in the case of a director, a
circumstance under which the director has voted for or assented to a distribution made in violation of the FBCA or the corporation’s
articles of incorporation .
Section 607.0857 of the FCBA also provides that
a corporation shall have the power to purchase and maintain insurance on behalf of and for the benefit of an individual who is or was
a director or officer of the corporation, or who, while a director or officer of the corporation, is or was serving at the corporation’s
request as a director, officer, manager, member, partner, trustee, employee, or agent of another domestic or foreign corporation, limited
liability company, partnership, joint venture, trust, employee benefit plan, or other enterprise or entity, against liability asserted
against or incurred by the individual in that capacity or arising from his or her status as a director or officer, whether or not the
corporation would have power to indemnify or advance expenses to the individual against the same liability under the FCBA.
Our bylaws provides that we shall indemnify any
director, officer, employee or agent or any former director, officer, employee or agent, and advance his or her related expenses, to the
fullest extent permitted by Florida law. The Registrant has purchased insurance with respect to, among other things, any liabilities that
may arise under the statutory provisions referred to above.
ITEM 15. RECENT SALE OF UNREGISTERED SECURITIES
There was no recent sale of unregistered securities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS
Exhibits
See the Exhibit Index attached to this registration
statement, which is incorporated by reference herein.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes
to:
(1) File, during any period in which offers or
sells are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change
in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration
statement.
(iii) To include material information with respect
to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration
statement; provided, however, that paragraphs (1)(i), (1)(ii) and (1)(iii) above do not apply if the information required to be
included in a post-effective amendment by those paragraphs is contained in reports filed with or furnished to the Commission by the Registrant
pursuant to Section 13 and Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration
statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) That, for the purpose of determining liability
under the Securities Act of 1933 to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating
to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall
be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however,
that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated
or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser
with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement
or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
SIGNATURES
Pursuant to the requirements of the Securities
Act of 1933, as amended, the Registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned,
thereunto duly authorized, in Hanzhong City, Shaanxi Province, PRC, on June 25, 2021.
|
CHINA HGS REAL ESTATE INC.
|
|
|
|
|
By:
|
/s/ Xiaojun Zhu
|
|
Name:
|
Xiaojun Zhu
|
|
Title:
|
President, Chief Executive Officer, and Chairman of the Board of Directors
|
|
|
|
By:
|
/s/ Samuel Shen
|
|
Name:
|
Samuel Shen
|
|
Title:
|
Chief Financial Officer
|
Pursuant
to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and
on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
President, Chief Executive Officer,
|
|
June 25, 2021
|
/s/ Xiaojun Zhu
|
|
and Chairman of the Board of Directors
|
|
|
Xiaojun Zhu
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Samuel Shen
|
|
Chief Financial Officer
|
|
June 25, 2021
|
Samuel Shen
|
|
(Principal Financial and Accounting Officer)
|
|
|
|
|
|
|
|
/s/ Shenghui Luo
|
|
Director
|
|
June 25, 2021
|
Shenghui Luo
|
|
|
|
|
|
|
|
|
|
/s/ Christy Young Shue
|
|
Independent Director
|
|
June 25, 2021
|
Christy Young Shue
|
|
|
|
|
|
|
|
|
|
/s/ John Chen
|
|
Independent Director
|
|
June 25, 2021
|
John Chen
|
|
|
|
|
|
|
|
|
|
/s/ Yuankai Wen
|
|
Independent Director
|
|
June 25, 2021
|
Yuankai Wen
|
|
|
|
|
EXHIBIT INDEX
Exhibit
Number
|
|
Description
|
3.1
|
|
Articles of Incorporation(1)
|
3.2
|
|
Articles of incorporation of the registrant as amended with the Secretary of State of Florida on October 8, 2009(2)
|
3.3
|
|
Bylaws(1)
|
5.1
|
|
Opinion of Loeb & Loeb LLP
|
10.1
|
|
Share Exchange Agreement by and between the Company, China HGS Investment, Inc., and Rising Pilot, Inc. dated August 21, 2009(3)
|
10.2
|
|
Entrusted Management Agreement, dated as of September 18, 2009, by and among the Company, Mr. Xiaojun Zhu and his management staff (English translation)(4)
|
10.3
|
|
Independent Director Agreement between China HGS Real Estate Inc. and Yuankai Wen(2)
|
10.4
|
|
Form of Indemnification Agreement(2)
|
10.5
|
|
Form of Nonstatutory Stock Option Agreement(5)
|
10.6
|
|
Residential Apartment Bulk Purchasing Agreement dated May 28, 2011 between Hanzhong Municipal Public Security Bureau and Shaanxi Guangsha Investment and Development Group Co., Ltd. (English translation)(6)
|
10.7
|
|
Residential Apartment Bulk Purchasing Agreement dated June 8, 2011 between Hanzhong Municipal Bureau of Justice and Shaanxi Guangsha Investment and Development Group Co., Ltd. (English translation)(7)
|
10.8
|
|
USD Shareholder Loan Agreement by and between the Company and Mr. Xiaojun Zhu dated July 28, 2011(English translation)(8)
|
10.9
|
|
Land Use Rights Transfer Agreement between Shaanxi Guangsha Investment and Development Group Co., Ltd. and Hanzhong Guangxia Real Estate Development Limited dated March 16, 2011 (English translation)(9)
|
10.10
|
|
Loan Agreement by and between Shaanxi Guangsha Investment and Development Group Co. and Mr. Xiaojun Zhu dated November 14, 2011 (English translation)(9)
|
10.11
|
|
Independent Director Agreement by and between China HGS Real Estate Inc. and John Chen, dated August 22, 2012(12)
|
10.12
|
|
Independent Director Agreement by and between China HGS Real Estate Inc. and Christy Young Shue, dated August 22, 2012(13)
|
10.13
|
|
Labor Contract by and between Shaanxi Guangsha Investment and Development Group Co., Ltd. and Wei (Samuel) Shen, dated May 28, 2012(14)
|
10.14
|
|
Form of Indemnification Agreement(15)
|
10.15
|
|
Loan Amendment Agreement by and between China HGS Real Estate Inc. and Mr. Xiaojun Zhu, dated July 19, 2013(16)
|
10.16
|
|
Loan Agreement by and between Shaanxi Guangxia Investment Development Group Co., Ltd. and China Construction Bank, dated August 23, 2013(17)
|
(1) Incorporated herein by reference
to the SB-2 Registration Statement filed on August 31, 2001.
(2) Incorporated by reference to Exhibit 3.2
to registrant’s quarterly report on Form 10-Q filed on August 16, 2010.
(3) Incorporated herein by reference
to the current report on Form 8-K filed on August 21, 2009.
(4) Incorporated herein by reference
to the current report on Form 8-K filed on September 18, 2009.
(5) Incorporated herein by reference
to Exhibit 10.1 to the current report on Form 8-K filed on March 17, 2011.
(6) Incorporated herein by reference
to Exhibit 10.1 to the current report on Form 8-K filed on June 3, 2011.
(7) Incorporated herein by reference
to Exhibit 10.1 to the current report on Form 8-K filed on June 14, 2011.
(8) Incorporated herein by reference
to registrant’s quarterly report on Form 10-Q filed August 15, 2011.
(9) Incorporated herein by reference
to the current report on Form 8-K filed on December 23, 2011.
(10) Incorporated herein by reference
to the current report on Form 8-K filed on January 22, 2010.
(11) Incorporated by reference to Exhibit 21
to registrant’s annual report on Form 10-K filed on December 29, 2010.
(12) Incorporated by reference to Exhibit 10.1
to the current report on Form 8-K filed on August 22, 2012.
(13) Incorporated by reference to Exhibit 10.2
to the current report on Form 8-K filed on August 22, 2012.
(14) Incorporated by reference to Exhibit 10.1
to the current report on Form 8-K filed on May 29, 2012.
(15) Incorporated by reference to Exhibit 10.1
to the current report on Form 8-K filed on March 15, 2013.
(16) Incorporated by reference to Exhibit 10.1
to the current report on Form 8-K filed on July 22, 2013.
(17) Incorporated by reference to Exhibit 10.1
to the current report on Form 8-K filed on October 15, 2013.
(18) Incorporated by reference to Exhibit 10.1
to the current report on Form 8-K filed on January 7, 2014.
(19) Incorporated by reference to Exhibit 10.1
to the current report on Form 8-K filed on March 26, 2021.
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