SUNRISE REAL ESTATE GROUP, INC. RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-Q In addition to historical information, this Form 10-Q 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-Q. 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.
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 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. SRRE and its subsidiaries, namely, CY-SRRE, LRY,Shanghai Xin Ji Yang Real Estate Consultation Company Limited ("SHXJY"),Shanghai Shang Yang Real Estate Consultation Company, Ltd. ("SHSY"),Suzhou Gao Feng Hui Property Management Company, Ltd , ("SZGFH"),Suzhou Shang Yang Real Estate Consultation Company ("SZSY"),Suzhou Xin Ji Yang Real Estate Consultation Company, Ltd. ("SZXJY"),Linyi Shang Yang Real Estate Development Company Ltd ("LYSH"),Shangqiu Shang Yang Real Estate Consultation Company, Ltd. , ("SQSY"),Wuhan Gao Feng Hui Consultation Company Ltd. (WHGFH),Sanya Shang Yang Real Estate Consultation Company, Ltd. ("SYSH"),Shanghai Rui Jian Design Company, Ltd. , ("SHRJ"),Wuhan Yuan Yu Long Real Estate Development Company, Ltd. ("WHYYL"), andShanghai Da Er Wei Trading Company Limited ("SHDEW") are sometimes hereinafter collectively referred to as "the Company", "we", "our" or "us". 21
The principal activities of the Company are real estate agency sales, real estate marketing services, real estate investments, property leasing services, property management services, and real estate development in the PRC.
RECENT DEVELOPMENTS Our major business is agency sales, whereby our Chinese subsidiaries contracted with property developers to market and sell their newly developed property units. For these services we earn a commission fee calculated as a percentage of the sales prices. We have focused our sales on the wholeChina market, especially in second-tier cities. To expand our agency business, we have established subsidiaries or branches inShanghai ,Suzhou , and Kunshan, and branches inWuhan andShangqiu . In mid-2011, we established a project company inWuhan in which we have a 49% ownership. We commenced the construction of Phase 1 of the project in the third quarter of 2012 and the pre-sale of Phase 1 in the first quarter of 2013. We have begun Phase 2 construction of the project in the second quarter of 2013 and the pre-sale of Phase 2 was started in mid-August. TheWuhan project is planned to include seven residential buildings with three buildings being part of Phase 1 and four buildings in Phase 2. As ofMarch 31, 2018 , the project has sold 755 apartment units with an area of 81,221 square meters. As ofDecember 31, 2018 , we sold all of the residential units. InAugust 2017 , theWuhan project has reached a dispute settlement with the construction contractor,Hubei Fifth Constructions Co. ("HFCC"), which settled the expenses of construction and the project company could going through the handover progress. For the period ended ofJune 30, 2019 , the company had recognized the net revenue and cost of revenue of WHYYL project based on the number of units sold.
InOctober 2011 , we established LYSY and own 24% of the company. During the first quarter of 2012, we acquired approximately 103,385 square meters for the purpose of developing villa-style residential housing. We began construction in mid-2012 and as ofDecember 31, 2016 have constructed 121 units, which encompasses all units in phase 1. The phase 1 has completed construction inMay 2015 . The sales started inNovember 2013 , and we have made sales of 104 units at the end ofDecember 2017 . Proceeds from sales will be used to finance the constructions of the subsequent phases of the project. The phase 2 has begun construction of 17,000 sqm inOctober 2017 . For the period ended ofJune 30, 2019 , the company had recognized the net revenue and cost of revenue of Linyi project at a certain proportion. OnMarch 13, 2014 , the Company has signed a joint development agreement withZhongji Pufa Real Estate Co. According to this agreement, the Company has obtained a right to develop the Guangxinglu ("GXL") project, which located on 182 lane Guangxinglu, Putuo district,Shanghai , PRC. This project covers a site area of approximately 2,502 square meters for the development of one building of apartment. In 2016 the government issued a regulation prohibiting the by-unit sale of commercial-use buildings. The apartment unit sale for the GXL project was put on hold until the government reviewed our project's status. Since then, rented out the unsold apartment units while not recognizing the units previously sold before the regulation. InMarch 2019 , we received government confirmation that our project cannot be sold on a unit-by-unit basis going forward. The Company decided to continue operating the project by renting out the units. SHDEW was established inJune 2013 with its business as a skincare and cosmetic company. SHDEW's online Wechat stores had a membership of over a million members as ofDecember 31, 2017 . SHDEW develops its own skincare products as well as improving its online ecommerce platform. SHDEW sells products under its own brands as well as the products from third parties. The products include skincare, cosmetics, personal care products such as soaps, shampoos, skin care devices and children's apparel. SHDEW has its own online shopping app, "???," where consumers can purchase its cosmetics and skincare products as well as products imported intoChina . The online shopping platform is currently in operation. InOctober 2018 we established HATX for the purpose of for real estate development in Huaian through HAZB of which we have 78.46% ownership. HAZB purchased the property in Huaian, Qingjiang Pu district with an area of 78,030 square meters and the Company, through HATX, invested 78.46% shares in HAZB. The Huaian project, namedTianxi Times , started its 1st phase development in early 2019 with a GFA of 41,795 sqm totaling 347 units. As ofApril 30, 2020 , the Company pre-sold 255 out of 347 units. InDecember 2019 , SHDEW had an employee stock bonus where many of its employees received their vested shares. This issuance resulted in the dilution of our ownership of SHDEW from 20.38% to 19.91%. The financial statements for 2018 will follow the equity method for the accounting treatment in regard to our investment in SHDEW and from the beginning of 2019 and going forward, we will be using the measurement alternative method instead. This change in accounting method may have an impact in our financial statements. 22
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 beginning with its financial reporting for the quarter endingJanuary 1, 2019 . Upon adoption, the Company include its Statements of Stockholders' Deficit with each interim reporting. 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. 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.
NEW ACCOUNTING PRONOUNCEMENTS
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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 revenue recognition, and the useful lives and impairment of property and equipment, and investment properties, the valuation of real estate property under development, the recognition of government subsidies, 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-Q 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 condensed 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 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
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.
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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.
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. The government subsidy received by the Company is given to reimburse the land acquisition costs and certain construction costs incurred for its property development project in Linyi. The subsidy is 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 in consolidated balance sheets. Income Taxes The Company accounts for income taxes under ASC 740, Income Taxes. Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations. Deferred tax assets or liabilities were off-set by a 100% valuation allowance; therefore there has been no recognized benefit as ofDecember 31, 2019 and 2018. 25 RESULTS OF OPERATIONS We provide the following discussion and analyses of our changes in financial condition and results of operations for the 3 months and 6 months period endedJune 30, 2019 with comparisons to the same periods endedJune 30, 2018 . Revenue
The following table shows the net revenue detail by line of business:
Three Months Ended June 30, Six Months Ended June 30,
% to % to % % to % to %
2019 total 2018 total change 2019 total 2018 total change
Agency
sales 70,688 28 267,939 14 (73 ) 165,389 1 511,899 15 (67 )
Property
management 183,450 72 193,960 10 (5 ) 282,563 1 378,471 11 (25 )
House
sales - 0 1,457,375 76 (100 ) 31,582,237 98 2,607,700 74 1,111
Net
revenues 254137 100 1,919,274 100 (87 ) 32,033,189 100 3,498,070 100 815
The net revenue in the second quarter of 2019 was$254,137 , which decreased 87% from$1,919,274 in the second quarter of 2018. The net revenue in the first two quarters of 2019 was$32,033,189 , which represented an increase of 815% from$3,498,070 in the first two quarter of 2018. In the second quarter of 2019, agency sales, property management, and house sales represented 28%, 72%, and 0% of our net revenues, respectively. For the first two quarters of 2019, agency sales, property management, and house sales represented 1%, 1%, and 98% of our net revenues, respectively. The increase in net revenue in the first two quarter of 2019 was mainly due to the recognition of sales revenue of the GXL project. Agency sales For the second quarter and first two quarters of 2019, 28% and 1%, respectively, of our net revenues were attributable to agency sales. As compared with the same period in 2018, net revenue of agency sales decreased 73% and 67%, respectively, for the second quarter and the first two quarters of 2019. Property Management Property management represented 1% of our revenue for the first two quarters of 2019 and revenue from property management decreased by 25% compared with the same period in 2018. House sales For the first two quarters of 2019, the Company has recognized the house sales of GXL project at a certain portion of time. House sales represented 98% of our revenue for the first two quarter of 2019. Cost of Revenue
The following table shows the cost of revenue detail by line of business:
Three Months Ended June 30, Six Months Ended June 30,
% to % to % % to % to %
2019 total 2018 total change 2019 total 2018 total change
Agency
sales 59,149 15 134,108 13 (56 ) 116,764 1 241,706 12 (51 )
Property
management 336,521 85 130,589 13 157 445,004 2 248,997 12 78
House
sales - - 739,456 74 (100 ) 25,188,699 97 1,596,897 76 1,477
Cost of
revenues 395,670 100 1,004,153 100 (60 ) 25,750,467 100 2,087,600 100 1,135
The cost of revenues for the second quarter of 2019 was $395,670 , which
decreased 60% from $1,004,153 during the second quarter of 2018. The cost of
revenues of the first two quarters of 2019 was $25,750,467 , which increased
1,134% from $2,087,600 during the first two quarters of 2018. For the second
quarter of 2019, agency sales, property management, and house sales represented
15%, 85%, and 0% of our cost of revenues, respectively. For the first two
quarters of 2019, agency sales, property management, and house sales represented
1%, 2%, and 97% of our cost of revenues, respectively. The decrease in the cost
of revenue in the second quarter and increase in the first two quarters of 2019
was mainly due to the recognition of cost of sales revenue of GXL project.
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Agency sales
The cost of revenue for agency sales for the first two quarters of 2019 was
Property management The cost of revenue for property management for the first two quarters of 2019 was$445,004 , an increase of 78% from$248,997 for the same period in 2018. This was mainly due to more business for the property management. House sales
For the first two quarters of 2019, the Company have recognized the cost of house sales of the GXL project. House sales represented 97% of our cost of revenue for the first two quarters of 2019.
Operating Expenses
The following table shows the operating expenses detail by line of business:
Three Months Ended June 30, Six Months Ended June 30,
% to % to % % to % to %
2019 total 2018 total change 2019 total 2018 total change
Agency
sales 29,544 6 62,430 21 (52 ) 61,884 7 160,930 15 (61 )
Property
management 185,886 38 114,382 38 62 301,562 36 529,492 48 (43 )
House
sales 275,555 56 121,716 41 126 469,216 57 401,524 37 17
Service
sales - 0 83 0 (100 ) - 0 182 0 (100 )
Operating
expenses 490,986 100 298,610 100 64 832,663 100 1,092,127 100 (24 )
The operating expenses for the second quarter of 2019 were$490,986 , which increased 64% from$298,610 for the same period in 2018. The total operating expenses for the first two quarters of 2019 were$832,663 , which decreased 24% from$1,092,127 for the same period in 2018. In the second quarter of 2019, agency sales, property management, and house sales represented 6%, 38%, and 56% of the total operating expenses, respectively. For the first two quarters of 2019, agency sales, property management, and house sales represented 7%, 36%, 57% of the total operating expenses, respectively. The increase in the overall operating expense resulted from the increase in house sales and property management for the second quarter and the first two quarters of 2019. Agency sales
The operating expenses for agency sales for the first two quarter of 2019 were
Property management The operating expenses for property management for the first two quarters of 2019 were$301,562 , a decrease of 43% from$529,492 in the same period in 2018. The increase is mainly due to consulting expenses relating to the business.
House sales
The operating expenses for house sales for the first two quarters of 2019 were
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General and Administrative Expenses
General and administrative expenses for the first two quarters of 2019 were$7,483,796 , which increased by 569% from$1,117,904 for same periods in 2018. This increase was mainly due to the write-off of$2,612,491 due from WHYYL and the expense of delayed house handover of the GXL project.
Equity in net gain (loss) of affiliates
Equity in net gain for the first two quarter of 2019 was
InDecember 2019 , SHDEW had an employee stock bonus where many of its employees received their vested shares. This resulted in the dilution of our ownership of SHDEW from 20.38% to 19.91%, thereby changing our accounting method for the SHDEW investment from the equity method to the measurement alternative method starting in 2019. Other income, net
Other income for the first two quarters of 2019 was$1,281,346 , an increase of 347% from gain of$286,398 for the same period in 2018. The income increased mainly due to the gain of transactional financial assets.
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 total amount due to directors as of
Amount due toLin Chi-Jung
The balances due to
Amount due toLin Hsin Hung
The amount of
Amount due from Pan, Yu-Jen
The amount of
Amount due to affiliate
The amount due to JXSY, in the amount of
LIQUIDITY AND CAPITAL RESOURCES
For the first two quarters of 2019, our principal sources of cash were revenues
from our house sales collection and property management business, as well as the
dividend receipt from the 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.
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We ended the period with a cash position of
The Company's operating activities used cash in the amount of
The Company's investing activities provided cash resources of
The Company's financing activities used cash resources of
The potential cash needs for 2019 include the investment in transactional financial assets, the rental guarantee payments and promissory deposits for various property projects as well as our development of the GXL projects, Linyi project and Huai'an project.
Capital Resources Considering our cash position, available credit facilities and cash generated from operating activities, we believe that we have sufficient funds to operate our existing business for the next twelve months. If our business otherwise grows more rapidly than we currently 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. There can be no guarantee that we will be able to obtain such funds through the issuance of debt or equity or obtain funds that are with terms satisfactory to management and our board of directors.
OFF BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements.
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