SUNRISE REAL ESTATE GROUP, INC. The following Management's Discussion and Analysis ("MD&A") is intended to help
the reader understand Sunrise Real Estate Group, Inc. ("SRRE"). MD&A is provided
as a supplement to, and should be read in conjunction with, our financial
statements and the accompanying notes.
OVERVIEW
InOctober 2004 , the former shareholders ofSunrise Real Estate Development Group, Inc. (Cayman Islands ) ("CY-SRRE") andLIN RAY YANG Enterprise Ltd. ("LRY") acquired a majority of our voting interests in a share exchange. Before the completion of the share exchange, SRRE had no continuing operations, and its historical results would not be meaningful if combined with the historical results of CY-SRRE, LRY and their subsidiaries. As a result of the acquisition, the former owners of CY-SRRE and LRY hold a majority interest in the combined entity. Generally accepted accounting principles require in certain circumstances that a company whose shareholders retain the majority voting interest in the combined business be treated as the acquirer for financial reporting purposes. Accordingly, the acquisition has been accounted for as a "reverse acquisition" arrangement whereby CY-SRRE and LRY are deemed to have purchased SRRE. However, SRRE remains the legal entity and the Registrant forSecurities and Exchange Commission reporting purposes. The historical financial statements prior toOctober 5, 2004 are those of CY-SRRE and LRY and their subsidiaries. All equity information and per share data prior to the acquisition have been restated to reflect the stock issuance as a recapitalization of CY-SRRE and LRY. 20
SRRE and its subsidiaries, namely, CY-SRRE, LRY,Shanghai Xin Ji Yang Real Estate Consultation Company Limited ("SHXJY"),Shanghai Shang Yang Investment Management andConsulting Company Limited ("SHSY"),Suzhou Shang Yang Real Estate Consultation Company Limited ("SZSY"),Suzhou Xin Ji Yang Real Estate Consultation Company Limited ("SZXJY"),Linyi Rui Lin Construction and Design Company Limited ("LYRL"),Linyi Shang Yang Real Estate Development Company Limited ("LYSY"),Shangqiu Shang Yang Real Estate Consultation Company Limited ("SQSY"),Wuhan Gao Feng Hui Consultation Company Limited ("WHGFH"),Sanya Shang Yang Real Estate Consultation Company Limited ("SYSY"),Shanghai Rui Jian Design Company Limited ("SHRJ"),Putian Xin Ji Yang Real Estate Consultation Company Limited ("PTXJY"), and its equity investments in affiliates, namelyWuhan Yuan Yu Long Real Estate Development Company Limited ("WHYYL"),Shanghai Xin Xing Yang Real Estate Brokerage Company Limited ("SHXXY") andXin Guang Investment Management andConsulting Company Limited ("XG") are sometimes hereinafter collectively referred to as "the Company," "our" or "us".
The principal activities of the Company are real estate agency sales, real estate marketing services, real estate investments, property leasing services and property management services in the PRC.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-K In addition to historical information, this Form 10-K contains forward-looking statements. Forward-looking statements are based on our current beliefs and expectations, information currently available to us, estimates and projections about our industry, and certain assumptions made by our management. These statements are not historical facts. We use words such as "anticipates", "expects", "intends", "plans", "believes", "seeks", "estimates", and similar expressions to identify our forward-looking statements, which include, among other things, our anticipated revenue and cost of our agency and investment business. Because we are unable to control or predict many of the factors that will determine our future performance and financial results, including future economic, competitive, and market conditions, our forward-looking statements are not guarantees of future performance. They are subject to risks, uncertainties, and errors in assumptions that could cause our actual results to differ materially from those reflected in our forward-looking statements. We believe that the assumptions underlying our forward-looking statements are reasonable. However, the investor should not place undue reliance on these forward-looking statements. They only reflect our view and expectations as of the date of this Form 10-K. We undertake no obligation to publicly update or revise any forward-looking statement in light of new information, future events, or other occurrences.
There are several risks and uncertainties, including those relating to our ability to raise money and grow our business and potential difficulties in integrating new acquisitions with our current operations, especially as they pertain to foreign markets and market conditions. These risks and uncertainties can materially affect the results predicted. The Company's future operating results over both the short and long term will be subject to annual and quarterly fluctuations due to several factors, some of which are outside our control. These factors include but are not limited to fluctuating market demand for our services, and general economic conditions.
Recently Adopted Accounting Standards
InAugust 2018 , theSEC issued Release No. 33-10532 that amends and clarifies certain financial reporting requirements. The principal change to our financial reporting will be the inclusion of the annual disclosure requirement of changes in stockholders' equity in Rule 3-04 of Regulation S-X to interim periods. We adopted this new rule onJanuary 1, 2019 . Upon adoption, the Company include its Statements of Stockholders' Deficit with each interim reporting. InJune 2018 , the FASB issued Accounting Standards Update ("ASU")ASU 2018-07, Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting , which simplifies the accounting for share-based payments granted to nonemployees for goods and services and aligns most of the guidance on such payments to nonemployees with the requirements for share-based payments granted to employees. ASU 2018-07 is effective onJanuary 1, 2019 . Early adoption is permitted. The Company adopted this ASU onJanuary 1, 2019 with no material impact on the Company's financial statements. InFebruary 2016 , the FASB issued ASU No. 2016-02, Leases. The standard requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in its balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The guidance in ASU 2016-02 is effective for annual and interim reporting periods beginning afterDecember 15, 2018 . The Company adopted this ASU onJanuary 1, 2019 with no material impact on the Company's financial statements. 21
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. These financial statements are prepared in accordance with generally accepted accounting principles inthe United States ("U.S. GAAP"), which requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities and revenues and expenses, to disclose contingent assets and liabilities on the date of the consolidated financial statements, and to disclose the reported amounts of revenues and expenses incurred during the financial reporting period. The most significant estimates and assumptions include the collection of accounts receivable, and the useful lives and impairment of property and equipment, goodwill and intangible assets, the valuation of deferred tax assets and inventories and the provisions for income taxes. We continue to evaluate these estimates and assumptions that we believe to be reasonable under the circumstances. We rely on these evaluations as the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We believe critical accounting policies as disclosed in this Form 10-K reflect the more significant judgments and estimates used in preparation of our consolidated financial statements. We believe there have been no material changes to our critical accounting policies and estimates.
The following critical accounting policies rely upon assumptions and estimates and were used in the preparation of our consolidated financial statements:
Revenue Recognition
Most of the Company's revenue is derived from real estate sales 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. Otherwise, revenue is recognized at a point in time when the customer obtains control of the asset.
All revenues represent gross revenues less sales and business tax.
ASC 606 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of the contract(s) which include (i) identifying the contract(s) with the customer, (ii) identifying the separate performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the separate performance obligations, and (v) recognizing revenue when each performance obligation is satisfied. ASC 606 also specifies the accounting for the incremental costs of obtaining a contract and the costs directly related to fulfilling a contract. In addition, ASC 606 requires extensive disclosures. The Company adopted ASC 606 onJanuary 1, 2018 using the modified retrospective approach with no restatement of comparative periods and no cumulative-effect adjustment to retained earnings recognized as of the date of adoption. A significant portion of the Company's revenue is derived from development and sales of condominium real estate property in the PRC, with revenue previously recognized using the percentage of completion method. Under the new standard, to recognize revenue over time is similar to the percentage of completion method, contractual provisions need to provide the Company with an enforceable right to payment and the Company has no alternative use of the asset. Historically, all contracts executed contained an enforceable right to home purchase payments and the Company had no alternative use of assets, therefore, the adoption of ASC 606 did not have a material impact on the Company's consolidated financial statements.
Real estate property under development, which consists of residential unit sites
and commercial and residential unit sites under development, is stated at the
lower of carrying amounts or fair value less selling costs.
Expenditures for land development, including cost of land use rights, deed tax,
pre-development costs and engineering costs, 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 value of
units to the estimated total sales value times the total project costs.
Costs of amenities transferred to buyers are allocated as common costs of the
project that are allocated to specific units as a component of total
construction costs. For amenities retained by the Company, costs in excess of
the related fair value of the amenity are also treated as common costs. Results
of operations of amenities retained by the Company are included in current
operating results.
In accordance with ASC 360, "Property, Plant and Equipment" ("ASC 360"), real
estate property under development is 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.
There is no impairment of real estate property under development during the
years ended
22
Impairment of Long-lived Assets
In accordance with ASC 360, "Accounting for the Impairment or Disposal of Long-Lived Assets", the Company is required to review 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. The Company tests long-lived assets, including property and equipment, investment properties and other assets, for recoverability when events or circumstances indicate that the net carrying amount is greater than its fair value. Assets are grouped and evaluated at the lowest level for their identifiable cash flows that are largely independent of the cash flows of other groups of assets. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the future estimated cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, the Company measures the amount of impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally determined by using the asset's expected future discounted cash flows or market value. The Company estimates fair value of the assets based on certain assumptions such as budgets, internal projections, and other available information as considered necessary. There is no impairment of long-lived assets during the years endedDecember 31, 2019
and
2018.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740, "Income Taxes"
("ASC 740"), which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each period end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized.
The Company recognizes tax benefits that satisfy a greater than 50% probability
threshold and provides for the estimated impact of interest and penalties for
such tax benefits. The Company did not incur any interest or penalties related
to potential underpaid income tax expenses during the years ended December31, 2019 and 2018. Government Subsidies
Government subsidies include cash subsidies received by the Company's subsidiaries in the PRC from local governments.
In recognizing the benefit of government subsidies in accordance withU.S. GAAP, the Company considers intended use of and restrictions of the subsidy, the requirements for the receipt of funds, and whether or not the incentive is given for immediate financial support, or to encourage activities such as land development in specified area. Each grant is evaluated to determine the propriety of classification on the consolidated statements of operations and consolidated balance sheets. Those grants that are substantively reimbursements of specified costs are matched with those costs and recorded as a reduction in costs. Those benefits that are more general in nature or driven by business performance measures are classified as revenue.
As of
RESULTS OF OPERATIONS We provide the following discussion and analyses of our changes in financial condition and results of operations for the year endedDecember 31, 2019 with comparisons to the historical year endedDecember 31, 2018 . Net Revenues
The following table shows the detail for net revenues by line of business:
Years Ended December 31,
2019 % to total 2018 % to total % change
Agency sales 230,150 1 763,622 9 (69 )
Property management 576,346 2 697,760 9 (17 )
House sales 32,183,282 97 6,782,184 82 375
Net revenues 32,989,778 100 8,243,566 100 300
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The net revenue for 2019 was $32,989,778 , an increase of 300% from $8,243,566 in
2018. In 2019, agency sales, property management, and house sales represented
1%, 2%, and 97% of our total net revenue. The increase in 2019 was mainly due to
the net revenue recognized for the GXL project.
Agency Sales
In 2019, 1% of our net revenue was derived from agency sales, which was
primarily from the business activities of SHXJY, SHSY and their subsidiaries and
branches. As compared with 2018, net revenue of agency sales in 2019 decreased
by 69%. The decrease was mainly due to less sales collection of projects during
this year.
Government policies enacted in 2018 as well as similar subsequent policies aiming to stabilize real estate prices affected many businesses in the real estate industry. These restrictive policies had a substantial effect in our agency sales revenue. We are continually seeking stable growth in our agency sales business in 2020. However, there can be no assurance that we will be
able to do so. Property Management
Property management represented 2% of our revenue in year of 2019 and revenue from property management decreased by 17% compared with 2018.
House Sales
House sales represented 97% of our revenue in year of 2019. The company has recognized a proportion of net revenue from GXL project.
Cost of Revenues
The following table shows the Cost of Revenues detail by line of business:
Years Ended December 31,
2019 % to total 2018 % to total % change
Agency sales 289,304 1 374,147 6 (22 )
Property management 1,256,678 5 474,820 7 165
House sales 25,265,134 94 5,840,978 87 332
Cost of revenues 26,811,115 100 6,689,945 100 301
The cost of revenues for 2019 was $26,811,115 ,an increase of 301% from
$6,689,945 for 2018. In 2019, agency sales, property management, and house sales
represented 1%, 5%, and 94% of total cost of revenues. The increase in cost of
revenues is mainly due to the recognition of cost of revenue of house sales from
the GXL project at a certain proportion.
Agency Sales
As compared with 2018, cost of agency sales in 2019 decreased by 22%. The decrease was mainly due to fewer sales project operation of projects during this year.
Property Management
The cost of revenue from property management for 2019 was
House Sales
House sales represented 94% of our cost of revenue in year of 2019. The Company has recognized its cost of revenue from GXL project at a certain proportion.
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Operating Expenses
The following table shows operating expenses detailed by line of business:
Years Ended December 31,
2019 % to total 2018 % to total % changeAgency sales 112,657 4 256,839 14 (56 ) Property management 1,213,328 39 675,514 37 80 House sales 1,754,076 57 905,105 49 94 Operating expenses 3,080,061 100 1,837,458
100 68
The operating expenses for 2019 were $3,080,061 , an increase from $1,837,458 in
2018. In 2019, the expenses related to agency sales, property management, and
house sales represented 4%, 39%, and 57% of the total operating expenses.
Agency Sales
Compared to 2018, the operating expenses for agency sales decreased by 56% in 2019. The primary reason for the decrease in 2019 was a decrease in staff costs and service expense. Property Management
Compared to 2018, the operating expenses for property management increased by 80% compared to the amount in 2019. The primary reason for the increase was due to relevant consulting service costs and property renewing cost. House sales The operating expenses related to our house sales business in 2019 increased by 97% compared to 2018. This increase was mainly due to the increase in our sales promotion activities in HATX project and Linyi project.
General and Administrative Expenses
The general and administrative expenses in 2019 were$10,047,005 , a 244% increase from$2,920,376 in 2018. The primary reason for the increase was due to the write-off of the receivable borrowing due from WHYYL, consulting expenses that relevant to HATX's real estate development and the estimated land appreciation tax ("LAT taxes") relevant to the GXL project. Operating Loss
In 2019, we had an operating loss of
The decrease in profit was mainly due to the write-off of the receivable borrowing due from WHYYL, consulting expenses that were relevant to HATX's real estate development, and the estimated LAT taxes relevant to the GXL project.
Interest Expense
The interest expense in 2019 was NIL, compared with the interest expenses of
Equity Income (Loss) of Affiliate
Equity in net gain in 2019 was
OnDecember 2019 , SHDEW had an employee stock bonus where many of its employee received their vested shares. This resulted in the dilution of our ownership of SHDEW from 20.38% to 19.91% thereby changing out accounting method for the SHDEW investment from the equity method to the alternative measurement going forward.
Major Related Party Transaction
A related party is an entity that can control or significantly influence the management or operating policies of another entity to the extent one of the entities may be prevented from pursuing its own interests. A related party may also be any party the entity deals with that can exercise that control. Amount Due To Directors
The amounts due to directors as of
25
Amount Due To Lin Chi-Jung The amount due to
Amount Due fromPan Yu-Jen
The balance due from
Amount Due ToLin Hsin Hung
The balance due to
Amount Due From An Unconsolidated Affiliates
Advances to the unconsolidated affiliate, SHTX, as of
Amount Due to Affiliates
As of
LIQUIDITY AND CAPITAL RESOURCES
In 2019, our principal sources of cash were revenues from our agency sales, receipts in advance from real estate development projects, property management business, as well as the dividend distribution from our affiliates. Most of our cash resources were used to fund our property development investment and revenue related expenses, such as salaries and commissions paid to the sales force, daily administrative expenses and the maintenance of regional offices.
We ended the period with a cash position of
Net cash used in the Company's operating activities in 2019 was$49,352,565 , representing a decrease of receipts in cash in the amount of$40,822,812 as compared to the cash received for 2018. The decrease was primarily attributable to the decrease in cash used in the investment of the HATX project of$47,252,768 . Net cash provided by the Company's investment activities was$59,959,803 , representing an increase of$17,016,869 as compared to the cash received in investing activities for 2018. The increase in cash from investment activities was primarily attributable to the increase in cash provided in dividend distribution from SHDEW, an affiliate, of$39,151,920 in 2019. The Company also invested a total of$21,096,379 in short term bank wealth management products with varying terms and rates of return.
Net cash used by the Company's financing activities was
The cash needs for 2020 were for the funds required to finance the Company's future projects in property agency and real estate developments.
If our business otherwise grows more rapidly than we predict, we plan to raise
funds through the issuance of additional shares of our equity securities in one
or more public or private offerings. We will also consider raising funds through
credit facilities obtained with lending institutions and affiliates, as we have
done previously, but there can be no guarantee that we will be able to obtain
such funds through the issuance of debt or equity with terms satisfactory to
management and our board of directors.
Management believes that the Company will generate sufficient cash flows to fund
its operations and to meet its obligations on a timely basis for the next twelve
months by successfully implementing its business plans, obtaining continued
support from its lenders to roll over debts when they became due, and securing
additional financing as needed. Based upon the equity income generated by SHDEW
in 2019, we expect a substantial cash dividend from SHDEW in 2020, which will be
our principal source of liquidity. We have been able to secure new bank lines of
credit from banks and secure additional loans from affiliates to fund our
operations to date. However, if events or circumstances occur such that the
Company is unable to successfully implement its business plans, fails to obtain
continued support from its lenders or to secure additional financing, the
Company may be required to suspend operations or cease business entirely.
26
Indebtedness
The Company's indebtedness is described under "Note 12-Promissory Notes Payable"
and "Note 13- Amounts Due to Directors" to the Company's accompanying
consolidated financial statements for the years ended December 31, 2019 and2018 in Item 8. Promissory Notes: As ofDecember 31, 2019 , the Company had an aggregate amount due under outstanding promissory notes to parties other than banks in the amount of$1,433,445 bearing interest at a rate of 0%. The interest expense on promissory notes amounted to $NIL and $NIL as ofDecember 31, 2019 and 2018, respectively. Advances from Officers and Directors: The Company has also financed its operations in part with advances from officers and directors. AtDecember 31, 2019 , the Company had loans with unpaid principals and interest expenses as ofDecember 31, 2019 andDecember 31, 2018 totaling$1,472,995 and$1,767,609 , respectively. The balances are unsecured and interest free.
Amount due to affiliates: As of
OFF BALANCE SHEET ARRANGEMENTS
We do not have any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency forward contracts. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development services with us.
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