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.
In October 2004, the former shareholders of Sunrise Real Estate Development
Group, Inc. (Cayman Islands) ("CY-SRRE") and LIN 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 for Securities and Exchange Commission reporting purposes. The
historical financial statements prior to October 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.
SRRE and its subsidiaries, namely, CY-SRRE, LRY, Shanghai Xin Ji Yang Real
Estate Consultation Company Limited ("SHXJY"), Shanghai Shang Yang Investment
Management and Consulting 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, namely Wuhan Yuan
Yu Long Real Estate Development Company Limited ("WHYYL"), Shanghai Xin Xing
Yang Real Estate Brokerage Company Limited ("SHXXY") and Xin Guang Investment
Management and Consulting 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
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
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
In August 2018, the SEC 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 on January 1, 2019. Upon adoption, the Company include its
Statements of Stockholders' Deficit with each interim reporting.
In June 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 on January 1, 2019. Early adoption is
permitted. The Company adopted this ASU on January 1, 2019 with no material
impact on the Company's financial statements.
In February 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 after December 15, 2018. The Company adopted this
ASU on January 1, 2019 with no material impact on the Company's financial
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 in the
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:
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 on January 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
Real Estate Property Under Development
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
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 December 31, 2018 and 2019.
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 ended December 31, 2019
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 December
2019 and 2018.
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 with U.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 December 31, 2019, the balance of deferred government subsidy was
$4,751,214 (2018: $4,829,440). The subsidy is given to reimburse the land
acquisition costs and certain construction costs incurred for the Company's
property development project and are repayable if the Company fails to complete
the subsidized property development project by the agreed date. The Company
recorded the subsidy received as a deferred government subsidy
RESULTS OF OPERATIONS
We provide the following discussion and analyses of our changes in financial
condition and results of operations for the year ended December 31, 2019 with
comparisons to the historical year ended December 31, 2018.
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
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.
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
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
to do so.
Property management represented 2% of our revenue in year of 2019 and revenue
from property management decreased by 17% compared with 2018.
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.
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
The cost of revenue from property management for 2019 was $1,256,678, an
increase from $474,820 for 2018.
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.
The following table shows operating expenses detailed by line of business:
Years Ended December 31,
2019 % to total 2018 % to total % change
Agency 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
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.
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.
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.
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.
In 2019, we had an operating loss of $6,948,403, representing an increased loss
from an operating loss of $3,204,213 in 2018.
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.
The interest expense in 2019 was NIL, compared with the interest expenses of
$2,142,282 in 2018.
Equity Income (Loss) of Affiliate
Equity in net gain in 2019 was $0. We have no longer measured the valuation in
equity method due to the dilution of our ownership in SHDEW.
On December 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 December 31, 2019 were $1,472,995. The
amounts due were as follows:
Amount Due To Lin Chi-Jung
The amount due to Lin Chi-Jung as of December 31, 2019 was $1,469,315, which is
Amount Due from Pan Yu-Jen
The balance due from Pan Yu-Jen as of December 31, 2019 was $28,669, which is
unsecured, interest-free and have no fixed term of repayment.
Amount Due To Lin Hsin Hung
The balance due to Lin Hsin Hung as of December 31, 2019 was $32,349, which is
unsecured, interest-free and has no fixed term of repayment.
Amount Due From An Unconsolidated Affiliates
Advances to the unconsolidated affiliate, SHTX, as of December 31, 2019 amounted
to $249,419, which is an intercompany transfer for day to day operations.
Amount Due to Affiliates
As of December 31, 2019, the amount due to JXSY, $504,802, was an intercompany
transfer for day to day operation.
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 $15,900,753.
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
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 $13,813,992,
representing a decrease from $20,474,314 in 2018. This decrease was primarily
attributable to dividend payments of $6,869,193.
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.
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 and
in Item 8.
Promissory Notes: As of December 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 of December 31, 2019 and 2018,
Advances from Officers and Directors: The Company has also financed its
operations in part with advances from officers and directors. At December 31,
2019, the Company had loans with unpaid principals and interest expenses as of
December 31, 2019 and December 31, 2018 totaling $1,472,995 and $1,767,609,
respectively. The balances are unsecured and interest free.
Amount due to affiliates: As of December 31, 2019, the amount due to JXSY, in
the amount of $504,802, was intercompany transfers for day to day operation.
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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