The following discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported in the financial statements of
China HGS Real Estate Inc.for the fiscal years ended September 30, 2021and 2020 and should be read in conjunction with such financial statements and related notes included in this report.
Preliminary note regarding forward-looking statements.
We make forward-looking statements in Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report based on the beliefs and assumptions of our management and on information currently available to us. Forward-looking statements include information about our possible or assumed future results of operations which follow under the headings "Business and Overview," "Liquidity and Capital Resources," and other statements throughout this report preceded by, followed by or that include the words "believes," "expects," "anticipates," "intends," "plans," "estimates" or similar expressions. Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in these forward-looking statements, including the risks and uncertainties described below and other factors we describe from time to time in our periodic filings with the
SEC. We therefore caution you not to rely unduly on any forward-looking statements. The forward-looking statements in this report speak only as of the date of this report, and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new 43
information, future developments or otherwise. These forward-looking statements include, among other things, statements relating to:
? our ability to support the development of our projects
? our ability to obtain additional land use rights at favorable prices;
? the real estate market in Tier 3 and Tier 4 cities and counties;
? our ability to raise additional capital in future years to fund our
? associated economic, political, regulatory, legal and currency risks
with our operations. Our Business Overview We conduct substantially all of our business through
Shaanxi Guangsha Investmentand 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 2021, our sales and net income were approximately $58.9 millionand $6.4 million, respectively, representing an increase of approximately 353.9% and 549.6% from fiscal 2020, respectively. The increase in revenue, gross profit and net income was mainly due to more GFA sold during fiscal 2021. For fiscal 2021, our average selling price ("ASP") for real estate projects located in Yang County was approximately $585.7per square meter, decreased from ASP of $718per square meter in fiscal 2020 due to less commercial units sold in Yangzhou Palaceduring fiscal 2021. The ASP of our Hanzhong real estate projects was approximately $638per square meter for fiscal 2021, compared to the ASP of $419per square meter for fiscal 2020 due to the increased market price in
the Hangzhong area. Market Outlook The Chinese government is expected to continue implementing measures to cool down the real estate market. These measures may include restrictions on home purchase, increase the down-payment requirement against speculative buying, encourage the 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. The pressure on home sales and prices will be especially obvious in third and fourth-tier cities, while the property market in the first and second-tier cities is expected to be resilient.
The Company intends to remain focused on our existing construction projects in Hanzhong City and Yang County, deepening our institutional sales network, improving our cost and operating synergies, improving our cash flow and strengthening our balance sheet.
The Company has started the construction of the
December 2019, a novel strain of coronavirus (COVID-19) surfaced. COVID-19 has spread rapidly to many parts of the PRC and other parts of the world in the first quarter of 2020, which has caused significant volatility in the PRC and international markets. There is significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the PRC and international economies. For the year ended September 30, 2021, the COVID-19 pandemic did not have a material net impact on the Company's financial position and operating results. The extent of the impact on the Company's future financial results will be dependent on future developments such as the length and severity of the crisis, the potential resurgence of the pandemic, future government actions in response to the pandemic and the overall impact of the COVID-19 pandemic on the local economy and real estate markets, among many other factors, all of which remain highly uncertain and unpredictable. Given this uncertainty, the Company is currently unable to quantify 44
the future impact of the COVID-19 pandemic on its future business, financial condition, liquidity and results of operations if the current situation continues.
Liangzhou Road Related Projects
September 2013, the Company entered into an agreement ("Liangzhou Agreement") with the Hanzhong local government on the Liangzhou Roadreformation and expansion project (" Liangzhou Road Project"). Pursuant to the Liangzhou Agreement, the Company was 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 residents in the Liangzhou Road area. The government's original road construction budget was approximately $33 millionin 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 (approximately 65 acres) land use rights in a specified residential zone of Hanzhong City. The Liangzhou Road Project'sroad 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 was authorized by the local government to develop and manage the commercial and residential properties surrounding the Liangzhou Road project.
Oriental Garden Phase II Oriental Garden Phase II project is planned to consist of 8 high-rise [[Image Removed: Graphic]] residential buildings and 6 commercial buildings with total planned GFA of 370,298 square meters. The project will also include a farmer's market.
Liangzhou Mansion[[Image Removed: Graphic]] Liangzhou Mansionproject is planned to consist of 7 high-rise building and commercial shops on the first floor with total planned GFA of 160,000 square meters. Pearl Commercial Plaza[[Image Removed: Graphic]] Pearl Commercial Plazais 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. 45 The Company plans to start these three real estate projects in 2022 after the road construction passes the local government's inspection and approval. These related projects may take 2-3 years to be fully completed.
Other road construction projects mainly included the Yang County
East 2nd Ring Roadconstruction project. The Company was engaged by the Yang County local government to construct the East 2nd Ring Roadwith a total length of 2.15 km. The local government is required to repay the Company's project investment costs within 3 years after completion of the project with interest at the interest rate based on the commercial borrowing rate with the similar term published by the China Construction Bank (which as of September 30, 2021-was 4.75%). The local government's repayment could be used by the Company to reduce local surcharges or taxes otherwise required in the real estate development. The road construction was substantially completed as of September 30, 2021and is in the process of government review and approval. For the year ended September 30, 2021, the Company received local government' installment payments of approximately $2.3 millionand the final payment approximately of $5 millionis pending the local government's approval. The installment received was included in the Company's customer deposits as of September 30, 2021. 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, 2021, the local government was still in the process of assessing the budget for these projects, which is expected to be
completed in fiscal 2022 Under development: Estimated Completion time of construction The road construction was substantially Hanzhong City Hanfeng Beiyuan completed and is pending local government's
East Roadacceptance. The road construction was substantially Hanzhong City Liangzhou Roadcompleted and is pending local government's related projects acceptance. Under planning stage and waiting for local Hanzhong City Beidajie project government's zoning plan The road construction was substantially completed and is pending local government's Yang County East 2nd Ring Roadacceptance. RESULTS OF OPERATIONS
Revenues The following is a breakdown of revenue for the years ended
September 30, 2021and 2020: For the years ended September 30, 20212020
Turnover recorded for completed condominium real estate projects,
$ 58,915,239 $ 12,979,227Less: sales tax (424,074) (193,719) Revenue net of sales tax $ 58,491,165 $ 12,785,508
Recognized revenue for completed condominium projects
The following table summarizes our revenues generated by different projects:
For the Years Ended September 30, 2021 2020 Variance Revenue % Revenue % Variance % Projects: Yangzhou Pearl Garden Phase I and II
$ 564,7581.0 % $ 1,312,92110.1 % $ (748,163)(57.0) % Oriental Pearl Garden 2,186,355 3.7 % 187,284 1.4 % 1,999,071 1,067.4 % 46 Nanyuan II Project 43,625,590 74.0 % - - 43,625,590 100 % Mingzhu Garden (Nanyuan and Beiyuan) Phase I and II 768,494 1.3 % 3,500,750 27.0 % (2,732,256) (78.0) % Yangzhou Palace 11,770,042 20.0 % 7,978,272 61.5 3,791,770 47.5 % Total Revenue 58,915,239 100 % 12,979,227 100 % 45,936,012 353.9 % Sales Tax (424,074) - (193,719) - (230,355) 118.9 % Revenue net of sales tax $ 58,491,165 $ 12,785,508 $ 45,705,657357.5 %
Our revenues are derived from the sale of residential buildings, commercial store-fronts and parking spaces in projects that we have developed. Compared to last year, revenues before sales tax increased by
$45.9 millionto approximately $58.9 millionfor the year ended September 30, 2021from approximately $13.0 millionin last year. For the year ended September 30, 2021, we sold all residential units in the Nanyuan II project to the local government for residence reallocation purposes with total revenue of approximately $43.6 million, which represented 74% of our revenue. The total GFA sold for the remaining real estate projects during the year September 30, 2021and 2020 was 25,687 square meters and 21,735 square meters, respectively. The sales tax for the years ended September 30, 2021was approximately $0.4 million, increased by 118.9% from fiscal 2020, consistent with the increased revenue in fiscal 2021. The percentage of increase in sales taxes was less than the growth rate in revenue was due to the fact that sales tax charged was based on the customers' payments, the location of the properties and other factors.
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, 2021 2020 Variance Cost Percentage Cost Percentage Variance % Land use rights
$ 4,418,4509.5 % $ 843,2849.0 % $ 3,575,166424.0 % Construction costs 42,091,551 90.5 % 8,526,536 91.0 % 33,565,015 393.7 % Total $ 46,510,001100 % $ 9,369,820100 % $ 37,140,181396.4 % 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 $46.5 millionfor the year ended September 30, 2021compared to $9.4 millionfor last year. The $36.7 millionincrease in cost of sales was mainly attributable to more GFA sold for the year ended September 30, 2021, which led to more cost of sales. Land use rights cost: The cost of land use rights includes the land premium we pay to acquire land use rights for our property development sites, plus taxes. Our land use rights cost varies for different projects according to the size and location of the site and the minimum land premium set for the site, all of which are influenced by government policies, as well as prevailing market conditions. Costs for land use rights for the year ended September 30, 2021were approximately $4.4 million, as compared to approximately $0.8 millionfor fiscal 2020, representing an increase of approximately $3.6 millionfrom the same period of last year. The increase was consistent with the fact that total GFA sold in fiscal 2021 was significantly increased from last year. Construction cost: We outsource the construction of all of our projects to third party contractors, whom we select through a competitive tender process. Our construction contracts provide a fixed payment which covers substantially all labor, materials and equipment costs, subject to adjustments for some types of excess, such as design changes during construction or changes in government-suggested steel prices. Our construction costs consist primarily of the payments to our third-party contractors, which are paid over the construction period based on specified milestones. In addition, we purchase and supply a limited range of fittings and equipment, including elevators, window frames and door frames. Our construction 47 costs for the year ended September 30, 2021were approximately $42.1 millionas compared to approximately $8.5 millionfor last year, representing an increase of approximately $33.6 million. The increase in construction cost was due to more real estate property units sold during fiscal 2020.
In addition, for the year ended
Gross profit was approximately
$12.0 millionfor the year ended September 30, 2021as compared to gross profit of approximately $0.7 millionin the prior year, representing an increase of $11.3 million, which was mainly attributable to approximately $8.6 milliongross profit from the sales of the Nanyuan II project to the local government and no impairment charge recognized for the real estate property completed during fiscal 2021. The gross margin was 20.3% in fiscal 2021 as compared to gross margin of 5.5% in last year. For year ended September 30, 2020, we recognized approximately $2.7 millionimpairment losses for certain slow moving real estate property development completed. For the year ended September 30, 2021, the ASP for our real estate projects located in Yang County was approximately $585.7per square meter, decreased from the ASP of $719per square meter due to less commercial units sold in Yangzhou Palaceand Yangzhou Pearl Garden Phase II project during fiscal 2021. For the years ended September 30,2021and 2020, the Company sold commercial units at average ASP of approximately $1,500per square meter in the Yang County area with higher margin comparing to the residential units. The ASP of our Hanzhong real estate projects (excluding sales of parking spaces) was approximately $638per square meter for the year ended September, 30, 2021, increased from the ASP of $419per square meter for fiscal 2020 due to increasing real estate prices in the local market and more commercial units sold in fiscal 2021. The overall gross profit as a percentage of real estate sales was 20.3% for the year ended September 30, 2021, increased from 5.5% for the year ended September 30, 2020, was mainly due to no impairment losses recognized in fiscal 2021.
For the Year Ended September 30 2021 2020 Gross Gross Gross Gross Variance Project Profit Margin Profit Margin Variance % Yangzhou Pearl Garden Phase I and II
$ 122,00722 % $ 289,03222 % $ (167,025)(57.8) % Yangzhou Palace 2,822,485 24 % 2,424,864 30 % 397,621 16.4) % Mingzhu Garden (Mingzhu Nanyuan and Beiyuan) Phase I and II 211,825 28 % 842,776 24 % (630,951) (74.9) % Nanyuan II project 8,619,750 20 % - - 8,619,750 100 % Oriental Garden 629,171 29 % 52,735 28 % 576,436 1093.1 % Sales Tax (424,074) 0 (193,719) - (230,355) (118.9) %
Impairment losses on real estate property development completed 0 (2,703,031) (2,703,031) 100 % Total Gross Profit
$ 11,981,16420.3 % $ 712,6575.5 % $ 11,268,5071581 % Operating expenses Total operating expenses remained fairly constant at approximately $2.9 millionfor each of the year sended September 30, 2021and 2020, as a result of increases in general administrative expenses of approximately $0.4 millionoffset with a decrease in selling expenses of $0.4 million. The Company incurred more marketing expense in fiscal 2020 to promote the sales in Yangzhou Palaceproject, which resulted higher selling expense in last year. The $0.4 millionincrease in general and administrative expense was due to more consulting and professional fees incurred for the year ended September 30, 2021. For the years ended September 30, 2021 2020 General and administrative expenses $ 2,691,170 $ 2,324,05748 Selling expenses 186,886 580,639 Total Operating expenses $ 2,878,056 $ 2,904,696Percentage of Revenue before sales tax 4.9 % 22.4 % Interest expense, net
Net interest expense was less than
Other income, net For the year ended
September 30, 2020, the Company had net other income of $4.1 milliondue 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, 2021, the Company incurred net other expense of $0.2 millionfor certain non-operating related expenditures. Income taxes PRC Taxes Our Company is governed by the Enterprise Income Tax Law of the People's Republic of Chinaconcerning private-run enterprises, which are generally subject to tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments. For the years ended September 30, 2021and 2020, the Company is subject to income tax rate of 25% on taxable income. Although the possibility exists for reinterpretation of the application of the tax regulations by higher tax authorities in the PRC, potentially overturning the decision made by the local tax authority, the Company has not experienced any reevaluation of the income taxes for prior years. The PRC tax rules are different from the local tax rules and the Company is required to comply with local tax rules. The difference between the two tax rules will not be a liability of the Company. There will be no further tax payments for the difference. For the years ended September 30, 2021, the Company's effective income tax rate was 28%, decreased from effective income tax rate of 46% for the year ended September 30, 2020. The higher effective income tax rate in fiscal 2020 was caused by additional tax accruals out of PRC.
We reported net income of approximately
$6.4 millionfor the year ended September 30, 2021, as compared to approximately $1.0 millionfor fiscal 2020. The increase of $5.4 millionin our net income was primarily due to more revenue reported for fiscal 2021 as discussed above under Revenues and Gross Profit
The other extended result
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
$9.4 millionand $8.6 millionfor the years ended September 30, 2021and 2020, respectively. The balance sheet amounts with the exception of equity at September 30, 2021were translated at RMB6.4434to 1.00 USDas compared to 6.7896 RMBto 1.00 USDat September 30, 2020. 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, 2021and 2020 were 6.5072 RMBto 1.00 USDand 7.0056 RMBto 1.00 USD, respectively. 49
Cash and capital resources
Our principal need for liquidity and capital resources is to maintain working capital sufficient to support our operations and to make capital expenditures to finance the growth of our business. Historically we mainly financed our operations primarily through cash flows from operations and borrowings from our principal shareholder. In recent years, the Chinese government has implemented measures to control overheating residential and commercial property prices including but not limited to restrictions on home purchase, increasing the down-payment requirement against speculative buying, development of low-cost rental housing properties to help low-income groups while reducing the demand in the commercial housing market, increasing real estate property taxes to discourage speculation, control of the land supply and slowdown the construction land auction process, etc. In addition, in
December 2019, a novel strain of coronavirus (COVID-19) surfaced. COVID-19 has spread rapidly throughout Chinaand 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 pandemic, including, but not limited to, the temporary closure of the Company's facilities and operations beginning in early February through early March 2020, limited support from the Company's employees, delayed access to construction raw material supplies, reduced customer visits to the Company's sales office, and inability to promote real estate property sales to customers on a timely basis, our revenue during the year ended September 30, 2020were significantly lower. The Company is experiencing recovery of its real estate development business in fiscal 2021 due to increasing demand from the local real estate market. The Company had revenue of approximately $58.9 millionfor the year ended September 30, 2021, increased from $13.0 millionin last year. Based on the assessment of current economic environment, customer demand and sales trends, we believe that consumer spending has been restored in the local real estate market and the real estate sales are expected to grow in the coming periods. On the other side, due to the negative impact from the COVID-19 pandemic and spread, the development period of real estate properties and our operating cycle has been extended and we may not be able to liquidate our large balance of completed real estate property within the short term as we originally expected. In addition, as of September 30, 2021, we had large construction loans payable of approximately $119.6 millionand large accounts payable of approximately $18.3 millionto be paid to subcontractors. The extent of the impact of COVID-19 on the Company's future financial results will be dependent on future developments such as the length and severity of the crisis, the potential resurgence of the crisis, future government actions in response to the crisis and the overall impact of the COVID-19 pandemic on the local economy and real estate markets, among many other factors, all of which remain highly uncertain and unpredictable. Given this uncertainty, the Company is currently unable to quantify the expected impact of the COVID-19 pandemic on its future operations, financial condition, liquidity and results of operations if the current situation continues. The above- mentioned facts raise substantial doubt about the Company's ability to continue as a going concern from the date of this filing. In assessing its liquidity, management monitors and analyzes the Company's cash on-hand, its ability to generate sufficient revenue sources in the future, and its operating and capital expenditure commitments. As of September 30, 2021, our total cash balance was approximately $0.2 milliondecreased from approximately $0.5 millionas of September 30, 2020. With respect to capital funding requirements, the Company budgeted its capital spending based on ongoing assessments of needs to maintain adequate cash. As of September 30, 2021, we had approximately $88.1 millionof completed residential apartments and commercial units available for sale to potential buyers. Although we reported approximately $18.3 millionaccounts payable as of September 30, 2021, due to the long-term relationship with our construction suppliers and subcontractors, we were able to effectively manage cash spending on construction and negotiate with them to adjust the payment schedule based on our cash on hand. In addition, most of our existing real estate development projects relate to the old town renovation which are supported by the local government. As of September 30, 2021, we reported approximately $119.6 millionof construction loans borrowed from financial institutions controlled by the local government and such loans can only be used on the old town renovation related project development. We expect that we will be able to renew all of the existing construction loans upon their maturity and borrow additional new loans from local financial institutions, when necessary, based on our past experience and the Company's good credit history. Also, the Company's cash flows from pre-sales and current sales should provide financial support for our current developments and operations. For the year ended September 30, 2021, we had six large ongoing construction projects, which were under the preliminary development stage due to delayed inspection and acceptance of the development plans by the local 50 government. In June 2020, we completed the residence relocation surrounding the Liangzhou Road related projects and launched the construction of these projects in December 2020. For the other four projects, we expect we will be able to obtain the government's approval of the development plans on these projects in the coming fiscal year and start the pre-sale of the real estate properties to generate cash when certain property development milestones have been achieved. Cash Flow
Comparison of cash flow results for the year ended
and the year ended
For the years ended September 30, 2021 2020 Variance
Net cash (used in) provided by operating activities
Net cash (used) from financing activities $
$ (2,415,924) $ 2,415,924Effect of changes of foreign exchange rate on cash $ 201,820
$ 337,741Net (decrease) in cash $ (402,347)$ (334,581) $ (67,766)Operating activities
Net cash used in operating activities during fiscal 2021 was approximately
$0.6 million, consisting of net income of approximately $6.4 million, noncash adjustments of approximately $0.04 millionand net changes in our operating assets and liabilities, which mainly included a decrease in real estate property completed of approximately $11.5 milliondue to the sales of real estate properties, a $2.2 millionincrease in other payables to suppliers and an increase of $2.2 millionin tax payables, offset by the continuous spending on real estate property under development of $21.8 million. 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 millionimpairment on the real estate property completed and deficit of $5.0 milliondue 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 milliondue to the sales of real estate properties, a decrease of security deposit with government of $6.3 milliondue to the fact that the Company started the construction of Liangzhou road and affiliated projects in September 2020and the local government refunded such deposits to support the Company's working capital and an increase of $1.3 millionin 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 milliondue to payments to suppliers based on development progress and a reduction of tax payable of $2.6 million.
Net cash from financing activities in fiscal 2021 was nil.
Net cash used in financing activities was approximately
$2.4 millionfor fiscal 2020, mainly representing the repayment of construction loan of $2.4 millionduring fiscal 2020.
Off-balance sheet arrangements
We have no off-balance sheet arrangements.
As an industry practice, the Company provides guarantees to PRC banks with respect to loans procured by the purchasers of the Company's real estate properties for the total mortgage loan amount until the completion of obtaining the "Certificate of Ownership" of the properties from the government, which generally takes six to twelve months. Because the banks provide loan proceeds without getting the "Certificate of Ownership" as loan collateral during the six to twelve months' period, the mortgage banks require the Company to maintain, as security for the Company's obligations under such 51 guarantees, restricted cash of at least 5% of the mortgage proceeds. If a purchaser defaults on its payment obligations, the mortgage bank may deduct the delinquent mortgage payment from the security deposit and require the Company to pay the excess amount if the delinquent mortgage payments exceed the security deposit. If the delinquent mortgage payments exceed the security deposit, the banks may require us to pay the excess amount. If multiple purchasers default on their payment obligations at around the same time, we will be required to make significant payments to the banks to satisfy our guarantee obligations. If we are unable to resell the properties underlying defaulted mortgages on a timely basis or at prices higher than the amounts of our guarantees and related expenses, we will suffer financial losses. The Company has made necessary reserves in its restricted cash account to cover any potential mortgage defaults as required by the mortgage lenders. The Company has not experienced any delinquent mortgage loans and has not experienced any losses related to this guarantee. As of
September 30, 2021and September 30, 2020, our outstanding guarantees in respect of our customers' mortgage loans amounted to approximately $66 millionand $68 million, respectively. As of September 30, 2021and September 30, 2020, the amount of security deposits provided for these guarantees was approximately $3.3 millionand $3.4 million, respectively, and the Company believes that such reserves are sufficient.
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.
Significant Accounting Policies and Management Estimates
Revenue recognition The Company adopted FASB ASC Topic 606 Revenue from Contracts with Customers ("ASC 606") on
October 1, 2018using 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(s) with a customer;
? identification of performance obligations in the contract;
? determination of the transaction price, including the constraint on the
? allocation of the transaction price to the performance obligations in the
? recognition of revenue when (or as and when) the Group satisfies 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 projects, 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 the stage of completion method, revenue and profits from sales of long-term real estate development properties are recognized under the stage of completion method on the sale of individual units when all of the following criteria are met:
a. Construction is beyond a preliminary stage.
b. The buyer agrees to the extent of not being able to demand reimbursement
except non-delivery of the share or interest.
vs. Enough units have already been sold to ensure that the entire property
will not revert to the rental property.
D. Sale prices are collectible.
e. The proceeds and total costs of sales can be reasonably estimated.
If any of the above criteria are not met, proceeds will be counted 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 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. 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 53 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 promotion 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).
The cost of amenities transferred to buyers is allocated to specific units as a component of the total construction cost. The cost of amenities includes landscaping, road paving, etc. Once the projects are completed, the developments are under the 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 asset 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 asset. 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, 2021, the Company did not recognize any impairment for real estate property under development or completed. For the years ended September 30, 2020, the Company recognized approximately $2.7 millionimpairment for real estate property under development or completed.
Capitalization of interest
Interest incurred during and directly related to real estate development projects is capitalized to the related real estate property under development during the active development period, which generally commences when borrowings are used to acquire real estate assets and ends when the properties are substantially complete or the property becomes inactive. Interest is capitalized based on the interest rate applicable to specific borrowings or the weighted average of the rates applicable to other borrowings during the period. Interest capitalized to real estate property under development is recorded as a component of cost of real estate sales when related units are sold. All other interest is expensed as incurred.
© Edgar Online, source