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".
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 real estate agency sales, real estate marketing services,
real estate investments, property leasing services, property management
services, and real estate development in the PRC. Additionally, we expand our
business to the field of financial activities such as entity investment, fund
management, financial services and so on.
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Since we started our agency sales operations in 2001, we have established a reputation as a sales and marketing agency for new projects. With our accumulated expertise and experience, we intend to take a more aggressive role by participating in property investments. We plan to select property developers with outstanding qualifications as our strategic partners, and continue to build strength in design, planning, positioning and marketing services. InOctober 2011 , we established LYSY and own 24% of the company. OnMay 27, 2020 , LYRL received 10% of the shares of LYSY fromNanjing Longchang Real Estate Development Group . LYRL owns 34% of LYSY as ofMay 2020 . During the first quarter of 2012, we acquired approximately 103,385 square meters for the purpose of developing villa-style residential housing. The LYSY project has divided into phase 1 and phase 2. The phase 1 has completed construction of 121 units inMay 2015 and the phase 2 will complete construction of 84 units at the end of the year of 2020. The sales of phase 1 started inNovember 2013 ; we have sold 118 units out of all 121 units byNovember 30, 2020 . We have pre-sold 82 units out of all 84 units during phase 2 byNovember 30, 2020 . InSeptember 2020 , LYSY purchased a land of area 54,314 square meters forRMB228,120,000 (approximatelyUSD32,197,146 ), which is attached to the south border of our developed land. OnMarch 13, 2014 , the Company 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 is 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 apartments. 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, we 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 the units. These unsold units are recognized as investment in properties in Note 9. We also recognized all the units that were sold before the regulation in our financial statement of the second quarter in 2019. SHDEW was established inJune 2013 with its business as a skincare and cosmetic company. SHDEW's online Wechat stores had a membership of over ten million members as ofJuly 12, 2020 . 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 an online shopping app, "???," where consumers can purchase its cosmetics and skincare products as well as products imported intoChina .
InOctober 2018 , we established HATX for real estate development in Huai'an through HAZB of which we have 78.46% ownership. HAZB purchased the property in Qingjiang Pu district, Huai'an city, with an area of 78,030 square meters and the Company, through HATX, invested 78.46% shares in HAZB. The Huai'an project, namedTianxi Times , started its first phase development in early 2019 with a GFA of 82,218 sqm totaling 679 units. As ofNovember 30, 2020 , the Company pre-sold 672 out of 679 units. InDecember 2019 , SHDEW issued stock to certain employees pursuant to an employee stock bonus. This stock 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 regarding 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.
RECENTLY ADOPTED ACCOUNTING STANDARDS
InJune 2016 , theFinancial Accounting Standards Board (FASB) issued a new accounting standard that amends the guidance for measuring and recording credit losses on financial assets measured at amortized cost by replacing the incurred-loss model with an expected-loss model. Accordingly, these financial assets are now presented at the net amount expected to be collected. This new standard also requires that credit losses related to available-for-sale debt securities be recorded as an allowance through net income rather than reducing the carrying amount under the former other-than-temporary-impairment model. We adopted this standard as ofJanuary 1, 2020 , using a modified-retrospective approach. Adoption of the standard did not have a material impact on our consolidated financial statements. InAugust 2018 , the FASB issued a new accounting standard update which eliminates, adds and modifies certain disclosure requirements for fair value measurements. The update eliminates the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, and introduces a requirement to disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The Company adopted this new accounting standard onJanuary 1, 2020 , using the prospective method, and the adoption did not have a material impact on our consolidated financial statements. InNovember 2018 , the FASB issued Accounting Standards Update No. 2018-18 "Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606" ("ASU 2018-18"). ASU 2018-18 clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under Topic 606, "Revenue from Contracts with Customers" when the counterparty is a customer. In addition, the update precludes an entity from presenting consideration from a transaction in a collaborative arrangement as customer revenue if the counterparty is not a customer for that transaction. OnJanuary 1, 2020 , we adopted this standard and applied it retrospectively toJanuary 1, 2018 when we initially adopted Topic 606. The adoption did not have an impact on our consolidated financial statements. 20
NEW ACCOUNTING PRONOUNCEMENTS
Accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption. The Company does not discuss new accounting pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.
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. 21
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
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 from the local governments in the PRC.
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, 2020 and 2019. RESULTS OF OPERATIONS We provide the following discussion and analyses of our changes in financial condition and results of operations for the period endedSeptember 30, 2020 with comparisons to the period endedSeptember 30, 2019 . Revenue
The following table shows the net revenue detail by line of business:
Three Months Ended September 30, Nine Months Ended September 30,
% to % to % % to % to %
2020 total 2019 total change 2020 total 2019 total change
Agency
sales 44,708 56 123,152 17 (64 ) 282,650 35 231,802 1 22
Property
management 35,503 44 199,432 28 (82 ) 519,544 65 390,113 1 33
House
sales - 0 402,243 55 (100 ) - 0 31,802,159 98 (100 )
Net
revenues 80,211 100 724,827 100 (89 ) 802,194 100 5,162,387 100 (98 )
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The net revenue for the third quarter of 2020 was$80,211 , which decreased 89% from$724,827 from the third quarter of 2019. The net revenue for the first three quarters of 2020 was$802,194 , which represented a decrease of 98% from$5,162,387 from the first three quarters of 2019. For the third quarter of 2020, agency sales and property management represented 56% and 44% of our net revenues, respectively. For the first three quarters of 2020, agency sales and property management represented 35% and 65% of our net revenues, respectively. The decrease in net revenue for the first three quarters of 2020 was mainly due to the lack of any house sales r. Agency sales For the third quarter and first three quarters of 2020, 56% and 35%, respectively, of our net revenues were attributable to agency sales. As compared with the same period in 2019, net revenue of agency sales decreased 64% and increase 22%, respectively, for the third quarter and the first three quarters of 2020. Property Management Property management represented 44% of our revenue for the first three quarter of 2020 and revenue from property management increased by 33% compared with
the same period in 2019. House sales For the first three quarters of 2020, the Company has not recognized any house sales. House sales represented 0% of our revenue for the first three quarters of 2020. Cost of Revenue
The following table shows the cost of revenue detail by line of business:
Three Months Ended September 30, Nine Months Ended September 30,
% to % to % % to % to %
2020 total 2019 total change 2020 total 2019 total change
Agency
sales 137,119 26 107,118 14 28 395,422 23 185,502 1 113
Property
management 395,502 74 730,626 98 (46 ) 1,298,168 77 913,852 3 42
House
sales - 0 (88,508 ) (12 ) (100 ) - 0 25,131,903 96 (100 )
Cost of
revenues 532,622 100 749,236 100 (29 ) 1,693,591 100 26,231,257 100 (93 )
The cost of revenue for the third quarter of 2020 was $532,622 , which decreased
29% from $749,236 during the third quarter of 2019. The cost of revenues for the
first three quarters of 2020 was $1,693,591 , which decreased 93% from
$26,231,257 during the first three quarters of 2019. For the third quarter of
2020, agency sales, property management, and house sales represented 26%, 74%
and 0% of our cost of revenue, respectively. For the first three quarters of
2020, agency sales, property management, and house sales represented 23% and 77%
and 0% of our cost of revenue, respectively. The decrease in the cost of revenue
in the third quarter and in the first three quarters of 2020 was mainly due to
none of cost of sales revenue was recognized.
Agency sales
The cost of revenue for agency sales for the first three quarters of 2020 was
$395,422 , an increase of 113% from $185,502 in the same period in 2019. This
increase was mainly due to the increase in our commissions from the increase in
agency sales for the first three quarters of 2020.
Property management
The cost of revenue for property management for the first three quarters of 2020 was$1,298,168 , an increase of 42% from$913,852 in the same period in 2019. This was mainly due to more business for the property management as a whole. Operating Expenses
The following table shows operating expenses detail by line of business:
Three Months Ended September 30, Nine Months Ended September 30,
% to % to % % to % to %
2020 total 2019 total change 2020 total 2019 total change
Agency
sales 22,138 4 23,944 4 (8 ) 69,279 2 85,450 6 (19 )
Property
management 129,417 23 155,171 28 (17 ) 1,260,001 43 454,278 33 177
House
sales 408,022 73 360,576 68 13 1,578,322 54 832,946 61 89
Operating
expenses 559,577 100 548,691 100 4 2,907,602 100 1,372,674 100 112
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The operating expenses for the third quarter of 2020 were $559,577 , which
increased 4% from $548,691 for the same period in 2019. The total operating
expenses for the first three quarters of 2020 were $2,907,602 , which increased
112% from $1,372,674 for the same period in 2019. For the third quarter of 2020,
agency sales, property management, and house sales represented 4%, 23%, and 73%
of the total operating expenses, respectively. For the first three quarters of
2020, agency sales, property management, and house sales represented 2%, 43%,
and 54% of the total operating expense, respectively. The increase in the
overall operating expense resulted from the increase in house sales and property
management for the third quarter and the first three quarters of 2020.
Agency sales
The operating expenses for agency sales for the first three quarters of 2020
were
Property management
The operating expenses for property management for the first three quarters of 2020 were$1,260,001 , an increase of 117% from$454,278 in the same period in 2019. The increase is mainly due to the consulting expenses relating to the
business. House sales
The operating expenses for house sales for the first three quarters of 2020 were$1,578,322 which increased 89% from$832,946 in the same period in 2019. The increase is mainly due to the operations of HATX project.
General and Administrative Expenses
General and administrative expenses in the first three quarters of 2020 were
Other income, net Other income for the first three quarters of 2020 was$23,402,495 , an increase of 1427% from a gain of$1,573,414 for the same period in 2019. The increase in income was mainly due to the dividend received from SHDEW and 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 for
Amount due toLin Chi-Jung
The balances due to
Amount due toLin Hsin Hung
The amount of
Amount due to affiliate
The amount due to JXSY, in the amount of
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LIQUIDITY AND CAPITAL RESOURCES
For the first three quarters of 2020, 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.
We ended the period with a cash position of
The Company's operating activities provided cash in the amount of$59,978,643 , which was primarily attributable to the receipts in advance of pre-sale of
real estate development.
The Company's investing activities used cash resources of
The Company's financing activities used cash resources of
The potential cash needs for 2020 are for investment in transactional financial assets, construction for our development projects in the Huai'an project (HATX) and the Linyi 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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