UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM ~~10−Q~~

10-Q

(Mark One)

	x
⌧	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, ~~2020~~2021


	¨ ☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from_______ to ________

Commission File Number: 001-34864

CHINA HGS REAL ESTATE, INC.

(Exact Name of Registrant as Specified in Its Charter)

~~Florida~~		~~33-0961490~~
Florida		33-0961490
(State or Other Jurisdiction of Incorporation)		(I.R.S. Employer Identification Number)

6 Xinghan Road, 19th Floor, Hanzhong City

Shaanxi Province, PRC723000

~~(Address~~(Address of Principal Executive Offices, Zip Code)

+~~(86)~~ (86) 091 - 62622612

(Registrant’s Telephone Number, including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value	HGSH	The NASDAQ Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x⌧ No ¨☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes x⌧ No ¨

☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨☐		Accelerated filer ¨☐
Non-accelerated filer ¨ ~~(Do not check if a smaller reporting company)~~⌧		Smaller reporting company x⌧
		Emerging growth company ¨☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x

⌧

The number of shares outstanding of each of the issuer’s classes of common equity, as of February 22, ~~2021~~2022 is as follows:


Class of Securities		Shares Outstanding
Common Stock, $0.001 par value		~~22,525,000~~
25,617,807

Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 1. INTERIM FINANCIAL STATEMENTS

CHINA HGS REAL ESTATE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


	December 31,		September 30,
	2021		2021
ASSETS	(Unaudited)
Cash	$	2,446,011	$	170,001
Restricted cash		3,262,677		3,295,188
Contract assets		13,295,920		13,723,793
Real estate property development completed		87,665,296		88,145,841
Other assets		5,587,779		8,358,925
Property, plant and equipment, net		558,064		558,086
Security deposits		1,976,924		1,955,202
Real estate property under development		270,668,466		265,769,721
Due from local governments for real estate property development completed		3,057,400		3,023,806

Total Assets	$	388,518,537	$	385,000,563

LIABILITIES AND STOCKHOLDERS’ EQUITY
Construction loans	$	120,965,389	$	119,636,222
Accounts payable		13,949,705		18,259,151
Other payables		9,202,246		6,430,992
Construction deposits		3,382,079		3,344,917
Contract liabilities		1,687,087		1,886,075
Customer deposits		21,801,521		19,803,917
Accrued expenses		1,222,021		1,987,567
Taxes payable		23,079,067		22,954,011
Total liabilities		195,289,115		194,302,852

Commitments and Contingencies
Stockholders’ equity
Common stock, $0.001 par value, 50,000,000 shares authorized, 25,617,807 shares issued and outstanding at December 31, 2021 and September 30, 2021		25,617		25,617
Additional paid-in capital		136,535,303		136,535,303
Statutory surplus		11,095,939		11,095,939
Retained earnings		41,056,265		40,691,955
Accumulated other comprehensive income		4,516,298		2,348,897
Total stockholders’ equity		193,229,422		190,697,711

Total Liabilities and Stockholders’ Equity	$	388,518,537	$	385,000,563

December 31, September 30,
2020 2020
ASSETS (Unaudited)

Cash $ 1,253,331 $ 457,699
Restricted cash 3,423,862 3,409,837
Contract assets 15,370,808 14,255,328
Real estate property development completed 96,628,716 94,671,258
Other assets 9,102,909 8,132,555
Property, plant and equipment, net 582,060 571,330
Security deposits 1,930,750 1,855,506
Real estate property under development 239,926,178 227,741,017
Due from local governments for real estate property development completed 2,985,991 2,869,623

Total Assets $ 371,204,605 $ 353,964,153

LIABILITIES AND STOCKHOLDERS' EQUITY
Construction loans $ 116,028,450 $ 109,937,408
Accounts payables 26,333,101 25,415,352
Other payables 4,424,032 4,028,048
Construction deposits 3,332,605 3,202,730
Contract liabilities 1,917,343 1,847,685
Customer deposits 21,939,636 19,405,528
Accrued expenses 1,971,086 1,920,370
Taxes payable 19,649,785 19,881,211
Total liabilities 195,596,038 185,638,332

Commitments and Contingencies
Stockholders' equity
Common stock, $0.001 par value, 50,000,000 shares authorized, 22,525,000 shares issued and outstanding December 31, 2020 and September 30, 2020 22,525 22,525
Additional paid-in capital 129,930,330 129,930,330
Statutory surplus 10,458,395 10,458,395
Retained earnings 35,245,648 34,954,061
Accumulated other comprehensive loss (48,331 ) (7,039,490 )
Total stockholders' equity 175,608,567 168,325,821

Total Liabilities and Stockholders' Equity $ 371,204,605 $ 353,964,153

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Table of Contents

CHINA HGS REAL ESTATE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

~~(Unaudited)~~

Three months ended December 31,

2021

2020
Real estate sales

$
2,879,215

$
2,755,262
Less: Sales tax

(60,221)

(23,538)
Cost of real estate sales

(1,455,556)

(1,853,642)
Gross profit

1,363,438

878,082
Operating expenses

Selling and distribution expenses

219,787

79,345
General and administrative expenses

631,927

305,925
Total operating expenses

851,714

385,270
Operating income

511,724

492,812
Interest income, net

1,461

2,826
Other (expense), net

—

(105,858)
Income before income taxes

513,185

389,780
Provision for income taxes

148,875

98,193
Net income

364,310

291,587
Other Comprehensive income

Foreign currency translation adjustment

2,167,401

6,991,159
Comprehensive income

$
2,531,711

$
7,282,746
Basic and diluted income per common share

Basic and diluted

$
0.01

$
0.01
Weighted average common shares outstanding

Basic and diluted

25,617,807

22,525,693
Three months ended
December 31,
2020 2019
Real estate sales $ 2,755,262 $ 2,304,244
Less: Sales tax (23,538) (39,233)
Cost of real estate sales (1,853,642) (1,705,612)
Gross profit 878,082 559,399
Operating expenses
Selling and distribution expenses 79,345 200,168
General and administrative expenses 305,925 588,839
Total operating expenses 385,270 789,007
Operating income (loss) 492,812 (229,608)
Interest income (expense), net 2,826 (17,253)
Other expense, net (105,858) -
Income (loss) before income taxes 389,780 (246,861)
Provision for income taxes 98,193 10,520
Net income (loss) 291,587 (257,381)
Other Comprehensive income (loss)
Foreign currency translation adjustment 6,991,159 4,380,862
Comprehensive income $ 7,282,746 $ 4,123,481
Basic and diluted income (loss) per common share
Basic and diluted $ 0.01 $ (0.01)
Weighted average common shares outstanding
Basic and diluted 22,525,000 22,525,000

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Table of Contents

CHINA HGS REAL ESTATE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

Common Stock Additional Statutory Retained
Accumulated
Other
Comprehensive

Shares Amount Paid-in Capital Surplus Earnings Loss Total
Balance at September 30, 2019 22,525,000 $ 22,525 $ 129,930,330 $ 10,360,251 $ 34,070,767 $ (15,683,723 ) $ 158,700,150
Net loss for the period - - - - (257,381 ) - (257,381 )
Foreign currency translation adjustments - - - - - 4,380,862 4,380,862
Balance at December 31, 2019 (Unaudited) 22,525,000 $ 22,525 $ 129,930,330 $ 10,360,251 $ 33,813,386 $ (11,302,861 ) $ 162,823,631

Balance at September 30, 2020 22,525,000 $ 22,525 $ 129,930,330 $ 10,458,395 $ 34,954,061 $ (7,039,490 ) $ 168,325,821
Net income for the period - - - - 291,587 - 291,587
Foreign currency translation adjustments - - - - - 6,991,159 6,991,159
Balance at December 31,2020 (Unaudited) 22,525,000 $ 22,525 $ 129,930,330 $ 10,458,395 $ 35,245,648 $ (48,331 ) $ 175,608,567

Accumulated

Other

Common Stock

Additional

Statutory

Retained

Comprehensive


Shares

Amount

Paid-in Capital

Surplus

Earnings

(loss) income

Total
Balance at September 30, 2020

22,525,693

$
22,525

$
129,930,330

$
10,458,395

$
34,070,767

$
(7,039,490)

$
168,325,821
Net income for the period

—

—

—

—

291,587

—

291,587
Foreign currency translation adjustments

—

—

—

—

—

6,991,159

6,991,159
Balance at December 31, 2020 (Unaudited)

22,525,693

$
22,525

$
129,930,330

$
10,458,395

$
35,245,648

$
(48,331)

$
175,608,567

Balance at September 30,2021

25,617,807

$
25,617

$
136,535,303

$
11,095,939

$
40,691,955

$
2,348,897

$
190,697,711
Net income for the period

—

—

—

—

364,310

—

364,310
Foreign currency translation adjustments

—

—

—

—

—

2,167,401

2,167,401
Balance at December 31, 2021 (Unaudited)

25,617,807

$
25,617

$
136,535,303

$
11,095,939

$
41,056,265

$
4,516,298

$
193,229,422

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Table of Contents

CHINA HGS REAL ESTATE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

Three months ended
December 31,
2020 2019
Cash flows from operating activities
Net income (loss) $ 291,587 $ (257,381 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Deferred tax benefit - (56,480 )
Depreciation 12,253 18,767
Changes in operating assets and liabilities:
Contract assets (529,410 ) 511,335
Advances to vendors - (213,038 )
Real estate property development completed 1,853,642 1,472,443
Real estate property under development (1,297,396 ) (961,873 )
Other current assets (631,040 ) (488,722 )
Security deposit - 1,596,250
Accounts payables (111,208 ) 385,617
Other payables 229,180 (1,646 )
Contract liabilities (5,191 ) (32,028 )
Customer deposits 1,721,198 1,625,398
Construction deposits - (426 )
Accrued expenses - (578,021 )
Taxes payables (890,500 ) (534,574 )
Net cash provided by operating activities 643,115 2,485,621

Cash flow from financing activities
Repayments of construction loans - (2,118,584 )
Net cash provided by (used in) financing activities - (2,118,584 )

Effect of changes of foreign exchange rate on cash and restricted cash 166,542 116,587
Net increase in cash and restricted cash 809,657 483,624
Cash and restricted cash, beginning of period 3,867,536 4,202,117
Cash and restricted cash, end of period $ 4,677,193 $ 4,685,741

Supplemental disclosures of cash flow information:
Interest paid $ 136,674 $ 1,743,380
Income taxes paid $ 63,765 $ 44,786

Representing:
Cash, end of period $ 1,253,331 $ 660,414
Restricted, end of period $ 3,423,862 $ 4,025,327
Total cash and restricted cash, end of period $ 4,677,193 $ 4,685,741

Cash, beginning of period 457,699 263,139
Restricted, beginning of period 3,409,837 3,938,978
Total cash and restricted cash, beginning of period 3,867,536 4,202,117

Non-cash financing activities:
Reclassification of interest payable to construction loan 1,608,606 -

Three months ended December 31,


2021

2020
Cash flows from operating activities:




Net income

$
364,310

$
291,587
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation

6,203

12,253
Changes in operating assets and liabilities:

Contract assets

578,638

(529,410)
Real estate property development completed

1,455,556

1,853,642
Real estate property under development

(1,940,302)

(1,297,396)
Other current assets

2,855,590

(631,040)
Accounts payables

(4,499,033)

(111,208)
Other payables

698,061

229,180
Contract liabilities

(219,296)

(5,191)
Customer deposits

1,772,351

1,721,198
Accrued expenses

(647,892)

—
Taxes payables

177,909

(890,500)
Net cash provided by operating activities

602,095

643,115

Cash flow from financing activities:

Proceeds from prepaid subscriptions for sale of units

2,000,000

—
Net cash provided by financing activities

2,000,000

—

Effect of changes of foreign exchange rate on cash and restricted cash

(358,596)

166,542
Net increase in cash and restricted cash

2,243,499

809,657
Cash and restricted cash, beginning of period

3,465,189

3,867,536
Cash and restricted cash, end of period

$
5,708,688

$
4,677,193

Supplemental disclosures of cash flow information:

Interest paid

$
—

$
136,674
Income taxes paid

$
—

$
63,765

Representing:

Cash, end of period

$
2,446,011

$
1,253,331
Restricted, end of period

$
3,262,677

$
3,423,862
Total cash and restricted cash, end of period

$
5,708,688

$
4,677,193

Cash, beginning of period

$
170,001

$
457,699
Restricted, beginning of period

3,295,188

3,409,837
Total cash and restricted cash, beginning of period

$
3,465,189

$
3,867,536

Non-cash activities:

Reclassification of interest payable to construction loan

$
—

$
1,608,606
Settlement of accounts payable with real estate property*

$
569,299

$
—
Settlement of account payables and account receivables*

$
2,758,731

$
—
*
For the three months ended December 31, 2021, the Company settled accounts payable of $569,299 with a vender by disposal of certain real estate property completed in Hanzhong City Mingzhu Garden Phase II.. In addition, the Company settled certain accounts payable by transferring other assets of $2,758,731 with venders for the three months ended December 31, 2021.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Table of Contents

CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
China HGS Real Estate, Inc. (“China HGS” or the “Company” or “we”, “us”, “our”), through its subsidiaries and variable interest entity (“VIE”), engages in real estate development, and the construction and sales of residential apartments, parking spaces and commercial properties in Tier 3 and Tier 4 cities and counties in China.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the U.S. generally accepted accounting principles (“GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission for interim financial ~~information.~~reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended December 31, ~~2020~~2021 and ~~2019~~2020 are not necessarily indicative of the results that may be expected for the full year. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, ~~2020~~2021 filed with the SEC on January 13, ~~2021.~~2022.
Liquidity
In recent years, the Chinese government has implemented measures to control overheating residential and commercial property prices including but not limited to restrictions on home purchase, increasing the down-payment requirement against speculative buying, development of low-cost rental housing properties to help low-income groups while reducing the demand in the commercial housing market, increasing real estate property taxes to discourage speculation, control of the land supply and slowdown the construction land auction process, etc. In addition, in December 2019, a novel strain of coronavirus (COVID-19) surfaced. COVID-19 has spread rapidly throughout China and worldwide, which has caused significant volatility in the PRC and international markets. There is significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the PRC and international economies. To reduce the spread of ~~the~~ COVID-19, the Chinese government has employed measures including city lockdowns, quarantines, travel restrictions, suspension of business activities and school closures. Due to difficulties resulting from the COVID-19 ~~outbreak,~~pandemic, including, but not limited to, the temporary closure of the Company’s facilities and operations beginning in early February through early March 2020, limited support from the Company’s employees, delayed access to construction raw material supplies, reduced customer visits to the Company’s sales office, and inability to promote ~~the~~ real estate property sales to customers on a timely basis, ~~our revenue during~~The Company is experiencing recovery of its real estate business in fiscal 2021 and the following periods. The Company had real estate sales of approximately $2.9 million for the three months ended December ~~2020 and 2019 were lower when comparing the rest period of the year. The Company had revenue of approximately $2.8 million, slightly~~31, 2021, increased from ~~$2.3~~$2.8 million in the same ~~three month~~ period of last year. Based on the assessment of the current economic environment, customer demand and sales trends, we believe that consumer spending has been restored in the local real estate market and real estate sales are expected to grow in the coming periods. On the other side, due to the negative impact from the COVID-19 ~~outbreak~~pandemic and its spread, ~~we believe that~~ the ~~real estate market downturn will continue to be uncertain in the coming periods. As a result, the developing~~development period of real estate properties and our operating cycle has been extended and we may not be able to liquidate our large balance of completed real estate ~~property~~properties within the short term as we originally expected. In addition, as of December 31, ~~2020,~~2021, we had large construction loans payable of approximately ~~$116.0~~$121.0 million and ~~large~~ accounts payable ~~balance~~ of approximately ~~$26.3~~$13.9 million to be paid to ~~subcontractors within one year.~~subcontractors. The extent of the impact of COVID-19 on the Company's future financial results will be dependent on future developments such as the length and severity of the crisis, the potential resurgence of the crisis, future government actions in response to the crisis and the overall impact of the COVID-19 pandemic on the local economy and real estate markets, among many other factors, all of which remain highly uncertain and unpredictable. Given this uncertainty, the Company is currently unable to quantify the expected impact of the COVID-19 pandemic on its future operations, financial condition, liquidity and results of operations if the current situation continues. The above mentioned facts raise substantial doubt about the Company's ability to continue as a going concern for at least one year from the date of this filing.

Table of Contents

CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION (continued)

In assessing its liquidity, management monitors and analyzes the Company’s cash on-hand, its ability to generate sufficient revenue sources in the future, and its operating and capital expenditure commitments. As of December 31, ~~2020,~~2021, our total cash and restricted cash balance was approximately $5.7 million, increased tofrom approximately ~~$4.7 million as compared to approximately $3.9~~$3.5 million as of September 30, ~~2020.~~2021. With respect to capital funding requirements, the Company budgeted ~~our~~its capital spending based on ongoing assessments of needs to maintain adequate cash. On January 14, 2022, the Company closed a private placement with net proceeds of approximately $24.3 million. As of December 31, ~~2020,~~2021, we had approximately ~~$96.6~~$87.7 million of completed residential apartments and commercial units available for sale to potential buyers. Although we reported approximately ~~$26.3~~$13.9 million accounts payable as of December 31, ~~2020,~~2021, due to the ~~long term~~long-term relationship with our construction suppliers and subcontractors, we were able to effectively manage cash spending on construction and negotiate with them to adjust the payment schedule based on our cash on hand. In addition, most of our existing real estate development projects relate to the old town renovation which are supported by the local government. As of December 31, ~~2020,~~2021, we reported approximately ~~$116.0~~$121.0 million of construction loans borrowed from financial institutions controlled by the local government and such loans can only be used on the old town renovation related project development. We expect that we will be able to renew all of the existing construction loans upon their maturity and borrow additional new loans from local financial institutions, when necessary, based on our past experience and the Company’s good credit history. Also, the Company’s cash flows from pre-sales and current sales should provide financial support for our current ~~developments~~development projects and operations. As of December 31, 2020, we had approximately $21.9 million customer deposits representing cash advances from buyers for pre-sales of our residential units and we believe such cash advances can be used to fund our ongoing construction projects whenever necessary. For the three months ended December 31, ~~2020,~~2021, we had ~~five~~6 large ongoing construction projects (see Note 3, real estate ~~property~~properties under development) which were under the preliminary development stage due to delayed inspection and acceptance of the development plans by the local government. In June 2020, we completed the residence relocation surrounding the Liangzhou Road related projects and launched the construction of ~~Liangzhou Road related~~these projects in December 2020. For the other four projects, we expect we will be able to obtain the government’s approval of the development plans on these projects in the coming fiscal year and start the pre-sale of the real estate ~~property~~properties to generate cash when certain property development milestones have been achieved. ~~In addition, our principal shareholder, Mr. Xiaojun Zhu has been providing and has committed to continue to provide his personal funds to support the Company’s operation whenever necessary.~~

~~CHINA HGS REAL ESTATE, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

The unaudited condensed consolidated financial statements include the financial statements of China HGS Real Estate Inc. (the “Company” or “China HGS”), China HGS Investment Inc. (“HGS Investment”), Shaanxi HGS Management and Consulting Co., Ltd. (“Shaanxi HGS”) and its variable interest entity (“VIE”), Shaanxi Guangsha Investment and Development Group Co., Ltd. (“Guangsha”). All inter-company transactions and balances between the Company and its subsidiaries and VIE have been eliminated upon consolidation.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes, and disclosure of contingent liabilities at the date of the consolidated financial statements. Estimates are used for, but not limited to, the assumptions and estimates used by management in recognizing development revenue under the percentage of completion method, the selection of the useful lives of property and equipment, provision necessary for contingent liabilities, revenue recognition, taxes and budgeted ~~costs. Management~~costs.Management believes that the estimates utilized in preparing its consolidated financial statements are reasonable and prudent. Actual results could differ from these estimates.

Fair value of financial instruments

The Company follows the provisions of the Financial Accounting ~~Standard~~Standards Board (“”FASB”) Accounting Standards Codification (“ASC”) Topic 820, ~~Fair~~“Fair Value Measurements and Disclosures.” It clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

Table of Contents

CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.
Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions or what assumptions the market participants would use in pricing the asset or liability based on the best available information.
The carrying amounts reported in the accompanying consolidated balance sheets for cash, restricted cash and all other current assets, security deposits for land use rights, loans and all current liabilities approximate their fair value based on the short-term maturity of these instruments. The fair value of the ~~long term~~ customer, construction and security deposits approximate their carrying amounts because the deposits are received in cash. It was impractical to estimate the fair value of the amount due from the local government and the ~~long term~~ other ~~loans payable.~~
payables.
Revenue recognition
The Company ~~adopted~~follows FASB ASC Topic 606 ~~Revenue~~“Revenue from Contracts with ~~Customers~~Customers” (“ASC 606”) ~~on October 1, 2018 using the modified retrospective approach.~~. Under ASC 606, ~~Revenue from Contracts with Customers,~~ revenue is recognized in accordance with the transfer of goods and services to customers at an amount that reflects the consideration that the Company expects to be entitled to for those goods and services. The Company determines revenue recognition through the following steps:
· ~~identification of the contract, or contracts, with a customer;~~
· ~~identification of the performance obligations in the contract;~~
· ~~determination of the transaction price, including the constraint on variable consideration;~~
· ~~allocation of the transaction price to the performance obligations in the contract; and~~
· ~~recognition of revenue when (or as) the Group satisfy a performance obligation.~~
● identification of the contract, or contracts, with a customer;
● identification of the performance obligations in the contract;
● determination of the transaction price, including the constraint on variable consideration;
● allocation of the transaction price to the performance obligations in the contract; and
● recognition of revenue when (or as) the Company satisfies a performance obligation.

Most of the Company’s revenue is derived from real estate sales of condominiums and commercial properties 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 its 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 (“percentage completion method”). Otherwise, revenue is recognized at a point in time when the customer obtains control of the ~~asset.~~
~~Under percentage completion method, revenue~~asset.For the three months ended December 31, 2021 and ~~profit from~~2020, the ~~sales of long term real estate development properties is~~Company did not have any construction in progress recognized byunder the percentage of completion ~~method on the sale of individual units when all the following criteria are met:~~method.
a. ~~Construction is beyond a preliminary stage.~~
b. ~~The buyer is committed to the extent of being unable to require a refund except for non-delivery of the unit or interest.~~
c. ~~Sufficient units have already been sold to assure that the entire property will not revert to rental property.~~
d. ~~Sales prices are collectible.~~
e. ~~Aggregate sales proceeds and costs can be reasonably estimated.~~
~~If any of the above criteria is not met, proceeds shall be accounted for as deposits until the criteria are met.~~
Under the percentage of completion method, revenues from individual real estate condominium units sold under development and related costs are recognized over the course of the construction period, based on the completion progress of a project. The progress towards complete satisfaction of the performance obligation is measured based on the Company’s efforts or inputs to the satisfaction of the performance obligation, by reference to the contract costs incurred up to the end of reporting period as a percentage of total estimated costs for each contract. In relation to any project, revenue is determined by calculating the ratio of incurred costs, including land use rights costs and construction costs, to total estimated costs and applying that ratio to the contracted sales amounts. Cost of sales is recognized by determining the ratio of contracted sales during the period to total estimated sales value, and applying that ratio to the incurred costs. Current period amounts are calculated based on the difference between the life-to-date project totals and the previously recognized amounts.
Any changes in significant judgments and/or estimates used in determining construction and development revenue could significantly change the timing or amount of construction and development revenue recognized. Changes in total estimated project costs or losses, if any, are recognized in the period in which they are determined.
Revenue from the sales of previously completed real estate condominium units is recognized at the time of the closing of an individual unit sale. This occurs when the customer obtains the physical possession, the legal title, or the significant risks and rewards of ownership of the assets and the Company has present right to payment and the collection of the consideration is probable. For municipal road construction projects, fees are generally recognized at the time of the projects are completed.
Disaggregation of Revenues
Disaggregated revenues ~~was~~are as follows:

For the three months ended
December 31,
2020 2019
(Unaudited) (Unaudited)
Revenue recognized for completed condominium real estate projects $ 2,755,262 $ 2,304,244
Revenue recognized for condominium real estate projects under development - -
Total $ 2,755,262 $ 2,304,244

For the three months ended December 31,

2021

2020

(Unaudited)

(Unaudited)
Revenue recognized for completed condominium real estate projects, net of sales taxes

$
2,818,994

$
2,731,724
Revenue recognized for condominium real estate projects under development, net of sales taxes

0

0
Total revenue, net of sales taxes

$
2,818,994

$
2,731,724
7
9

Table of Contents

CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition (continued)
~~Revenue recognition (continued)~~
Contract balances
Timing of revenue recognition may differ from the timing of billing and cash receipts from customers. The Company records a contract asset when revenue is recognized prior to invoicing, or a contract liability when cash is received in advance of recognizing revenue. A contract asset is a right to consideration that is conditional upon factors other than the passage of time. Contract assets include billed and billable receivables, which are the Company’s unconditional rights to consideration other than to the passage of time. Contract liabilities include cash collected in advance and in excess of ~~revenues.~~revenue recognized. Customer deposits are excluded from contract liabilities.
The Company ~~has elected to apply the optional practical expedient for costs to obtain a contract which allows the Company to~~ immediately ~~expense~~expenses sales commissions (included under selling expenses) because ~~the amortization period of the asset that the Company otherwise would have used~~sales commission is ~~one year or less.~~
not expected to be recovered.
The Company provides “mortgage loan guarantees” only with respect to buyers who make down-payments of 20%-50% of the total purchase price of the property. The period of the mortgage loan guarantee begins on the date the bank approves the buyer’s mortgage and we receive the loan proceeds in our bank account and ends on the date the “Certificate of Ownership” evidencing that title to the property has been transferred to the buyer. The procedures to obtain the Certificate of Ownership take six to twelve months (the “Mortgage Loan Guarantee Period”). If, after investigation of the buyer’s income and other relevant factors, the bank decides not to grant the mortgage loan, our mortgage-loan based sales contract terminates and there will be no guarantee obligation. If, during the Mortgage Loan Guarantee Period, the buyer defaults on his or her monthly mortgage payment for ~~three~~3 consecutive months, we are required to return the loan proceeds back to the bank, although we have the right to keep the ~~customer's~~customer’s deposit and resell the property to a third party. Once the Certificate of ~~Property~~Ownership has been issued by the relevant government authority, our loan guarantee terminates. If the buyer then defaults on his or her mortgage loan, the bank has the right to take the property back and sell it and use the proceeds to pay off the loan. The Company is not liable for any shortfall that the bank may incur in this event. To date, no buyer has defaulted on his or her mortgage payments during the Mortgage Loan Guarantee Period and the Company has not returned any loan proceeds pursuant to its mortgage loan guarantees.
Foreign currency translation
The Company’s financial information is presented in U.S. dollars. The functional currency of the Company’s operating ~~subsidiaries~~VIE is Renminbi (“RMB”), the currency of the PRC. The consolidated financial statements of the Company have been translated into U.S. dollars in accordance with ASC Topic 830-30 “Translation of Financial Statements”. The financial information is first prepared in RMB and then is translated into U.S. dollars at ~~the balance sheet dates~~period-end exchange rates as to assets and liabilities and average exchange rates as to revenue, expenses and ~~expenses.~~cash flows. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income in stockholders’ equity.

For three months ended
December 31, September 30,
2020 2019 2020
(Unaudited) (Unaudited)

For three months ended

December 31,

September 30,


2021

2020

2021

(Unaudited)

(Unaudited)

Period end RMB:USD exchange rate 6.5250 6.9618 6.7896

6.3726

6.5250

6.4434
Period average RMB:USD exchange rate 6.6235 7.0448 7.0056

6.3914

6.6235

6.5072

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into U.S. dollars at the rates used in translation.

Table of Contents

CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Real estate property development completed and under development
Real estate property consists of finished residential unit sites, commercial offices and residential unit sites under development. The Company leases the land for the residential unit sites under land use right leases with various terms from the PRC government. The cost of land use rights is included in the development cost and allocated to each project. Real estate property development completed and real estate property under development are stated at the lower of cost or fair value.
Expenditures for land development, including cost of land use rights, deed tax, pre-development costs, and engineering costs, exclusive of depreciation, are capitalized and allocated to development projects by the specific identification method. Costs are allocated to specific units within a project based on the ratio of the sales area of units to the estimated total sales area of the project (or phase of the project) multiplied by the total cost of the project (or phase of the project).
Cost of amenities transferred to buyers is allocated to specific units as a component of total construction cost. The amenity cost includes landscaping, road paving, etc. Once the projects are completed, the amenities are under control of the property management companies.
Real estate property development completed and under development are subject to valuation adjustments when the carrying amount exceeds fair value. An impairment loss is recognized only if the carrying amount of the assets is not recoverable and exceeds its 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. The Company ~~reviewed~~reviews all of its real estate projects for future losses and impairment by comparing the estimated future undiscounted cash flows for each project to the carrying value of such project. For the three months ended December 31, ~~2020~~2021 and ~~2019,~~2020, the Company did not recognized anany impairment loss for its real estate ~~property completed.~~
properties.
Capitalization of Interest
Interest incurred during and directly related to real estate development projects is capitalized to the related real estate property under development during the active development period, which generally commences when borrowings are used to acquire real estate assets and ends when the properties are substantially complete or the property becomes inactive. Interest is capitalized based on the interest rate applicable to specific borrowings or the weighted average of the rates applicable to other borrowings during the period. Interest capitalized to real estate property under development is recorded as a component of cost of real estate sales when related units are sold. All other interest is expensed as incurred. For the three months ended December 31, ~~2020~~2021 and ~~2019,~~2020, the total interest capitalized in the real estate property development was $1,733,224 and $1,769,564, ~~and $1,748,417,~~ respectively.
Impairment of long-lived assets
The Company reviews 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.
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 ~~its~~ 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 was no0 impairment of long-lived assets for the three months ended December 31, ~~2020~~2021 and ~~2019.~~2020.

Table of Contents

CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Income taxes

~~Deferred~~In accordance with FASB ASC Topic 740 “Income Taxes,” deferred tax assets and liabilities are 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. A valuation allowances is established, when necessary, to reduce net deferred tax assets to the amount expected to be realized.

ASC 740-10-25 prescribes a more-likely-than-not threshold for consolidated financial statement recognition and measurement of a tax ~~position~~positions taken (or expected to be taken) in a tax return. It also provides guidance on the recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, years open for tax examination, accounting for income taxes in interim periods and income tax disclosures. There are no material uncertain tax positions as of December 31, ~~2020~~2021 and September 30, ~~2020.~~2021.

The Company is a corporation organized under the laws of the State of Florida. However, all of the Company’s operations are conducted solely by its subsidiaries and VIE in the PRC. No income is earned in the United States and the management does not repatriate any earnings outside the PRC. As a result, the Company did not generate any U.S. taxable income for the three months ended December 31, ~~2020~~2021 and ~~2019.~~2020. As of December 31, ~~2020,~~2021, the Chinese entities’ income tax returns filed in China for the years ended December 31, 2020, 2019, 2018, 2017 and 2016 are subject to examination by the Chinese taxing authorities.

~~As of December 31, 2020, the tax years ended September 30, 2016 through September 30, 2020 for the Company’s PRC entities remain open for statutory examination by PRC tax authorities.~~ The parent Company, China HGS Real Estate Inc.’s both U.S. federal tax returns and Florida state tax returns are delinquent since 2009. Its tax years ended September 30, 2009 through September 30, ~~2020~~2021 remain open for statutory examination by U.S. federal and state tax authorities.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a U.S. corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. Due to the complexity involved in applying the provisions of the Tax Act, we made reasonable estimates of the effects and recorded accrued amounts in our consolidated financial statements as of December 31, ~~2020~~2021 and September 30, ~~2020,~~2021, including an approximately $2.3 million provision on the deemed repatriation of undistributed foreign earnings and an additional ~~$0.8~~$1.3 million provision for delinquent U.S. and State tax fillings. The Company ~~is in the process of engaging~~plans to engage a tax professional to file its delinquent tax ~~returns.~~returns in 2022. Failure to furnish any income tax and information returns with respect to any foreign business entity required, within the time prescribed by the IRS, subjects the Company to civil penalties.

Land appreciation tax (“LAT”)

In accordance with the relevant taxation laws in the PRC, the Company is subject to LAT based on progressive rates ~~ranging from 30% to 60%~~ on the appreciation of land value, which is calculated as the proceeds of sales of properties less deductible expenditures including borrowing costs and all property development expenditures. LAT is exempted if the appreciation values do not exceed certain thresholds specified in the relevant tax laws.

The whole project must be completed before the LAT obligation can be assessed. Accordingly, the Company should record the liability and the total related expense at the completion of a project unless the tax authorities impose an assessment at an earlier date. The methods to implement this tax law vary among different geographic areas. Hanzhong, where the ~~project~~projects Mingzhu Garden, Nan Dajie and Central Plaza are located, implements this tax rule by requiring real estate companies prepay the LAT based upon customer deposits received. The tax rate in Hanzhong is 1%. Yang County, where the ~~project~~ Yangzhou Pearl Garden and Yangzhou Palace projects are located, ~~requires~~has a tax rate of 0.5%.

Table of Contents

CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Comprehensive income (loss)

In accordance with ASC 220-10-55, comprehensive income (loss) is defined as all changes in equity except those resulting from investments by owners and distributions to owners. The Company’s only components of other comprehensive income (loss) for the three months ended December 31, ~~2020~~2021 and ~~2019~~2020 were net income and foreign currency translation adjustments.

~~CHINA HGS REAL ESTATE, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

~~NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)~~

Basic and diluted earnings (loss) per share

The Company computes earnings (loss) per share (“EPS”) in accordance with the ASC 260, “Earnings per share”, which requires companies to present basic and diluted EPS. Basic EPS is measured as net income (loss) divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. There were no0 anti-dilutive shares for the three months ended December 31, ~~2020~~2021 and ~~2019.~~

2020.

Concentration risk

The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC's economy. The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America. The Company's results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and ~~remittance~~remittances abroad, and rates and methods of taxation, among other things. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. The ~~Company’s~~Company's cash and restricted cash were on deposit at financial institutions in the PRC, which the management believes are of high credit quality. In May, 2015, ~~China’s~~China's new Deposit Insurance Regulation came into effect, pursuant to which banking financial institutions, such as commercial banks, established in China are required to purchase deposit insurance for deposits in RMB and in foreign currency placed with them. Such Deposit Insurance Regulation would not be effective in providing complete protection for the ~~Company’s~~Company's accounts, as its aggregate deposits are much higher than the compensation ~~limit.~~limit of RMB500,000 (approximately $78,000). However, the Company believes that the risk of failure of any of these Chinese banks is remote. Bank failure is uncommon in China and the Company believes that ~~those~~the Chinese banks that hold the ~~Company’s~~Company's cash and restricted cash are financially sound based on public available information. ~~For the years ended September 30, 2020 and 2019, the~~The Company has not experienced any ~~delinquent mortgage loans and has not experienced any~~ losses ~~related to this guarantee. The Company believes that such reserves are sufficient.~~in its bank accounts.

~~The Company is dependent on third-party sub-contractors, manufacturers, and distributors for all construction services and supply of construction materials.~~ For the three months ended December 31, 2021 and 2020, ~~and 2019, none supplier~~the Company did not have any individual customer that accounted for more than 10% of the ~~total project expenditures.~~

~~Recent Accounting Pronouncements~~

~~In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires the~~ Company to measure and recognize expected credit losses for financial assets held and not accounted for at fair value through net income. In November 2018, April 2019 and May 2019, the FASB issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses,” “ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses,” “Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” and “ASU No. 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief,” which provided additional implementation guidance on the previously issued ASU. The ASU is effective for fiscal years beginning after December 15, 2020. The ASU requires a modified retrospective adoption method. The Company is still evaluating the impact of adoption on its financial statements and disclosures.

In October 2018, the FASB issued ASU No. 2018-17 (“ASU 2018-17”), Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. The updated guidance requires entities to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety when determining whether a decision-making fee is a variable interest. The amendments in this update are effective for non-public business entities for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021, with early adoption permitted. These amendments should be applied retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, to simplify the accounting for income taxes. The new guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. This ASU will become effectivereal estate sales revenue for the ~~Company's annual and interim periods beginning in January 1, 2021, and early adoption is permitted. The Company does not believe the adoption~~related periods.

Table of ~~this ASU would have a material effect on the Company’s unaudited condensed consolidated financial statements and related disclosures.~~

Management has considered all recent accounting pronouncements issued. The Company’s management believes that these recent pronouncements will not have a material effect on the Company’s financial statements.

Contents

CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 3. REAL ESTATE PROPERTY DEVELOPMENT COMPLETED AND UNDER DEVELOPMENT
The following summarizes the components of real estate property development completed and under development as of December 31, ~~2020~~2021 and September 30, ~~2019:~~2021:

Balance as of
December 31, 2020 September 30, 2020
(Unaudited)
Development completed:
Hanzhong City Mingzhu Garden Phase II 23,631,380 22,801,439
Hanzhong City Oriental Pearl Garden 20,745,589 19,937,105
Yang County Yangzhou Pearl Garden Phase II 2,663,789 2,559,977
Yang County Yangzhou Palace 49,587,958 49,372,737
Real estate property development completed 96,628,716 94,671,258
Under development:
Hanzhong City Liangzhou Road and related projects (a) 173,712,144 164,879,955
Hanzhong City Hanfeng Beiyuan East (b) 1,657,408 824,496
Hanzhong City Beidajie (b) 59,463,709 57,142,127
Yang County East 2^nd Ring Road (c) 5,092,917 4,894,439
Real estate property under development 239,926,178 227,741,017

Balance as of

December 31, 2021

September 30, 2021

(Unaudited)

Development completed:

Hanzhong City Mingzhu Garden Phase II

$
23,153,993

$
23,464,365
Hanzhong City Oriental Pearl Garden

19,494,416

19,435,711
Yang County Yangzhou Pearl Garden Phase II

2,275,390

2,250,388
Yang County Yangzhou Palace

42,741,497

42,995,377
Real estate property development completed

$
87,665,296

$
88,145,841
Under development:

Hanzhong City Liangzhou Road and related projects (a)

$
184,291,015

$
180,389,654
Hanzhong City Hanfeng Beiyuan East (b)

878,448

868,796
Hanzhong City Beidajie (b)

78,991,790

78,075,559
Yang County East 2^nd Ring Road (c)

6,507,213

6,435,712
Real estate property under development

$
270,668,466

$
265,769,721
(a)
In September 2013, the Company entered into an agreement (“Liangzhou Agreement”) with the Hanzhong local government on the Liangzhou Road reformation and expansion project (Liangzhou Road Project”). Pursuant to the agreement, the Company is contracted to reform and expand the Liangzhou Road, a commercial street in downtown Hanzhong City, with a total length of 2,080 meters and a width of 30 meters and to resettle the existing residences in the Liangzhou road area. The government’s original road construction budget was approximately $33 million in accordance with the Liangzhou Agreement. The Company, in return, is being compensated by the local government to have an exclusive right on acquiring at least 394.5 Mu land use rights in a specified location of Hanzhong City. The Liangzhou Road Project’s road construction started at the end of 2013. In 2014, the original scope and budget on the Liangzhou road reformation and expansion project was extended, because the local government included more area and resettlement residences into the project, which resulted in additional investments from the Company. In return, the Company is authorized by the local government to develop and manage the commercial and residential properties surrounding the Liangzhou Road project. ~~As of December 31, 2020, the main Liangzhou road construction is substantially completed.~~ The Company ~~also completed the relocation of residents by the end of June 2020 and~~ launched the construction of the Liangzhou Road related projects in December 2020.
~~The Company’s development cost incurred on Liangzhou Road Project is treated as the Company’s deposit on purchasing the related land use rights, as agreed by the local government.~~ As of December 31, ~~2020,~~2021, the ~~actual costs incurred by the Company were $173,712,144 (September 30, 2019 - $164,879,955) and the incremental cost related to residence resettlement~~main Liangzhou road construction is substantially completed.
The Company’s development cost incurred for the Liangzhou Road Project is treated as the Company’s deposit on purchasing the related land use rights, as agreed by the local government. As of December 31, 2021, the actual costs incurred by the Company were approximately $184.3 million (September 30, 2021 - $180.4 million) and the incremental cost related to residence resettlements approved by the local government. The Company determined that the Company’s Investment in the Liangzhou Road Project in exchange for interests in future land use rights is a barter transaction with commercial substance.

~~CHINA HGS REAL ESTATE, INC.~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~
~~NOTE 3. REAL ESTATE PROPERTY DEVELOPMENT COMPLETED AND UNDER DEVELOPMENT~~
(b) In September 2012, the Company was approved by the Hanzhong local government to construct four municipal roads with a total length of approximately 1,192 meters. The project was deferred and then restarted during the quarter ended June 30, 2014. As of December 31, ~~2020,~~2021, the local government has not completed the budget for these projects therefore the delivery for these projects for the government’s acceptance and related settlement were extended to ~~2021.~~2022.
(c) The Company was engaged by the Yang County local government to construct the East 2nd Ring Road with a total length of 2.15 km. The local government is required to repay the Company’s project investment costs within 3 years with interest at the interest rate based on the commercial borrowing rate with the similar term published by the China Construction Bank (December ~~31,2020~~31, 2021 and ~~2019 - 4.75%)~~2020 – 4.75)%. The local government has approved a refund to the Company by reducing local surcharges or taxes otherwise required in the real estate development. The road construction was substantially completed as of December 31, ~~2020~~2021 and is in process of ~~government~~the government’s review and approval.

Table of Contents

CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4. CONSTRUCTION LOANS

December 31,
2020 September 30,
2020
(Unaudited)

December 31,

September 30,

2021

2021

(Unaudited)

Loan A $ 97,832,408 $ 92,450,491

$
102,334,191

$
101,209,744
Loan B 18,196,042 17,486,917

18,631,198

18,426,478
Total $ 116,028,450 $ 109,937,408

$
120,965,389

$
119,636,222

~~CHINA HGS REAL ESTATE, INC.~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~
~~NOTE 4. CONSTRUCTION LOANS (continued)~~

(A) On June 26, 2015 and March 10, 2016, the Company signed phase I and Phase II agreements with Hanzhong Urban Construction Investment Development Co., Ltd, a ~~state owned~~state-owned Company, to borrow up to approximately ~~$118.8~~$121.6 million ~~(RMB 775,000,000)~~(RMB775,000,000) for a long term loan with interest at 4.75% ~~interest per year~~ to develop the ~~develop~~ Liangzhou Road Project. As of ~~September 30, 2020,~~December 31, 2021, the Company borrowed ~~$97,832,408~~$102,334,191 under this credit line ~~with final due date in October 2021.~~ (September 30, 2021 - $101,209,744). Due to the local government’s delay in ~~reallocation~~the relocation of ~~residence~~residences in the Liangzhou Road Project and related area, the Hanzhong Urban Construction Investment Development Co., Ltd has not released all the funds available ~~in this loan~~ to the Company and ~~the Company’s withdraws~~additional withdrawals will be based on the project’s development progress and the Company expects the loan will be extended upon maturity. The loan is guaranteed by Hanzhong City Hantai District Municipal Government and pledged by the Company’s Yang County Yangzhou Palace project with a carrying value of ~~$49,587,958~~$42,741,497 as of December 31, ~~2020~~2021 (September 30, ~~2020- $49,372,737)~~2021- $42,995,377). For the three months ended December 31, ~~2020 and 2019,~~2021, the interest ~~incurred~~ was ~~$1,632,889 and $1,596,250, respectively,~~$1,593,281 (December 31, 2020 - $1,632,889), which was capitalized into the development cost of the Liangzhou ~~road project.~~Road Project.

(B) In December 2016, the Company signed a loan agreement with Hantai District Urban Construction Investment Development Co., Ltd, a ~~state owned~~state-owned Company, to borrow up to approximately ~~$18.2~~$18.7 million ~~(RMB 119,000,000)~~(RMB119,000,000) for the development of the Hanzhong City Liangzhou Road ~~project.~~Project. The ~~loan carries~~ interest ~~at a fixed annual interest of~~is 1.2% and is due on June 20, 2031. The Company is required to repay the loan byin equal annual principal repayments of approximately $3.3 million commencing from December 2027 through June 2031 ~~and the~~with interest is payable on an annual basis. The Company pledged the assets of the Liangzhou Road related projects with a carrying value of ~~$173,712,144~~$184,291,015 as collateral for the loan. Total interest of ~~$55,321 and $51,239~~$56,644 for the three months ended December 31, ~~2020 and 2019, respectively, were~~2021 was capitalized into the development cost of the Hanzhong City Liangzhou Road ~~project.~~Project (December 31, 2020- $55,321).
Additionally, in September 2017, the Urban Development Center Co., Ltd. approved a construction loan for the Company in the amount of approximately $27.5 million (RMB175,000,000) with an annual interest rate of 1.2% per year in connection with the Liangzhou Road and related Project. The Company is required to repay the loan in equal annual principal repayment of approximately $5 million commencing from December 2027 through May 2031 with the interest payable on an annual basis. The amount of this loan is available to be drawn down as soon as the land use rights of the Liangzhou Road Project are approved and the construction starts, which is expected to be completed before the end of 2022. Interest charges for the three months ended December 31, 2021 and 2020 were $83,299 and $81,354, respectively, which was included in the construction capitalized costs.
Additionally, in September 2017, the Urban Development Center Co., Ltd. approved a construction loan for the Company in the amount of approximately $26.8 million (RMB 175,000,000) with an annual interest rate of 1.2% per year in connection with the Liangzhou Road and related Project. The Company is required to repay the loan by equal annual principal repayment of approximately $5 million from December 2027 through May 2031 and the interest is payable on an annual basis. The amount of this loan is available to be drawn down as soon as the land use rights of the Liangzhou Road project is approved and the construction starts, which is expected to begin in 2021. As of December 31, 2020 and September 30, 2020, the outstanding balance of the loan was Nil. Interest charges for the three months ended December 31, 2020 and 2019 was $81,354 and $75,351, respectively, which was included in the construction capitalized costs.

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CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 5. CUSTOMER DEPOSITS
Customer deposits consist of amounts received from customers for the pre-sale of residential units in the PRC. The detail of customer deposits is as follows:

December 31,
2020 September 30,
2020
(Unaudited)

December 31,

September 30,

2021

2021

(Unaudited)

Customer deposits by real estate projects:

Mingzhu Garden (Mingzhu Nanyuan and Mingzhu Beiyuan) $ 7,902,613 $ 7,606,944

$
9,344,461

$
8,210,839
Oriental Pearl Garden 4,688,467 4,358,467

3,367,316

2,780,917
Liangzhou road and related projects 878,161 888,123

326,397

617,686
Yangzhou Pearl Garden 1,311,584 1,243,137

836,619

827,426
Yang County East 2nd Ring Road

2,353,828

2,327,964
Yangzhou Palace 7,158,811 5,308,857

5,572,900

5,039,085
Total $ 21,939,636 $ 19,405,528

$
21,801,521

$
19,803,917

Customer deposits are typically 10% - 20% of the unit selling price for those customers who purchase properties in cash and 30%-50% of the unit selling price for those customers who purchase properties with mortgages. Buyers with mortgage loans pay customer deposits. The banks provide the balance of the funding to the Company upon consummation of the sales. The banks hold the properties as collateral for customers’ mortgage loans. If the customers default, the bank will repossess the collateral properties. Except during the Mortgage Loan Guarantee Period of approximately six to twelve months, the banks have no recourse to the Company for customers’ defaults. As of December 31, 2020 and September 30, 2020, approximately $3.4 million and $3.4 million was guaranteed by the Company, respectively.

NOTE 7.6. TAXES
(A) Business sales tax and VAT
The Company is subject to a 5% ~~business sales tax on revenue. It is the Company’s continuing practice to recognize the 5% business sales tax~~VAT for its existing real estate projects based on ~~revenue as a cost of sales as~~ the ~~revenue is recognized.~~local tax authority’s practice. As of December 31 ~~2020,~~, 2021, the Company had business ~~sales~~VAT tax payable of ~~$4,425,570 (2019~~$5,471,564 (September 30, 2021 - ~~$5,159,296)~~$5,660,149), which is expected to be paid when the projects are completed and assessed by the local tax authority. In May of 2016, the Business Tax has been incorporated into a Value Added Tax in China, which means there will be no more Business Tax and accordingly some business operations previously taxed in the name of Business Tax will be taxed in the manner of VAT thereafter. The Company is subject to a 5% VAT for its all existing real estate project based on the local tax authority’s practice.
B) Corporate income taxes (“CIT”)
The Company’s PRC ~~subsidiaries~~subsidiary and VIE are governed by the Income Tax Law of the People’s Republic of China ~~concerning the~~for privately run enterprises, which are generally subject to income tax ~~at a statutory rate of 25%~~ on income reported in the statutory financial statements after appropriate tax adjustments. The Company’s CIT rate is 25% on taxable income. Although the possibility exists for reinterpretation of the application of the tax regulations by higher tax authorities in the PRC, potentially overturning the decision made by the local tax authority, the Company has not experienced any reevaluation of the income taxes for prior years. The PRC tax rules are different from the local tax rules and the Company is required to comply with local tax rules. The difference between the two tax rules will not be a liability of the Company. There will be no further tax payments for the difference. As of December 31, ~~2020~~2021 and September 30, ~~2020,~~2021, the Company’s total income tax payable amounted to ~~$12,609,996~~$14,446,208 and ~~$11,639,537,~~$14,326,646, respectively, which included the income tax payable balances in the PRC of ~~$8,474,996~~$10,881,208 and ~~$8,342,537,~~$10,761,646, respectively and the Company expects to pay this income tax payable balance when the related real estate projects are completely sold.

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CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 7.6. TAXES (continued)
The following table reconciles the statutory rates to the Company’s effective tax rate for the three months ended December 31, ~~2020~~2021 and ~~2019~~2020

For the three months ended
December 31,
2020 2019
(Unaudited) (Unaudited)

For the three months ended

December 31,


2021

2020

(Unaudited)

(Unaudited)

Chinese statutory tax rate 25 % $ 25 %

25.0
%
$
25.0
%
Valuation allowance change and other adjustments 0.2 % (29.3 )%

Other adjustments*

4.0
%

0.2
%

Effective tax rate 25.2 % $ (4.3 )%

29.0
%
$
25.2
%
*other adjustment mainly represented non-deductible expenses for the three months ended December 31, 2021 and 2020.

Income tax expense for the three months ended December 31, ~~2020~~2021 and ~~2019~~2020 is summarized as follows:

For the three months ended
December 31,
2020 2019
(Unaudited) (Unaudited)

For the three months ended

December 31,


2021

2020

(Unaudited)

(Unaudited)
Current tax provision $ 98,193 $ 67,000

$
148,875

$
98,193
Deferred tax provision - (56,480 )

0

0

Income tax provision $ 98,193 $ 10,520

$
148,875

$
98,193

Recent U.S. federal tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the “U.S. Tax Reform”), was signed into law on December 22, 2017. The U.S. Tax Reform significantly modified the U.S. Internal Revenue Code by, among other things, reducing the statutory U.S. federal corporate income tax rate from 35% to 21% for taxable years beginning after December 31, 2017; limiting and/or eliminating many business deductions; migrating the U.S. to a territorial tax system with a one-time transition tax on a mandatory deemed repatriation of previously deferred foreign earnings of certain foreign subsidiaries; subject to certain limitations, generally eliminating U.S. corporate income tax on dividends from foreign subsidiaries; and providing for new taxes on certain foreign earnings. Taxpayers may elect to pay the one-time transition tax over eight years or in a single lump sum. The U.S. Tax Reform also includes provisions for a new tax on ~~GILTI~~Global Intangible Low-Taxed Income (“GILTI”) effective for tax years of foreign corporations beginning after December 31, 2017. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of controlled foreign corporations (“CFCs”), subject to the possible use of foreign tax credits and a deduction equal to 50 percent to offset the income tax liability, subject to some limitations.
As of December 31, 2021 and September 30, 2021, the Company assessed that the related GILTI tax payable was Nil, which is subject to the reassessment upon the Company’s filling of GILTI information.
For the year ended September 30, 2018, the Company recognized a one-time transition toll tax of approximately $2.3 million that represented management’s estimate of the amount of U.S. corporate income tax based on the deemed repatriation to the United States of the Company’s share of previously deferred earnings of certain non-U.S. subsidiaries and VIE of the Company mandated by the U.S. Tax Reform. The Company’s estimate of the onetime transition toll Tax is subject to the finalization of management’s analysis related to certain matters, such as developing interpretations of the provisions of the Tax Act and amounts related to the earnings and profits of certain foreign VIEs and the filing of our tax returns. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the Tax Act may require further adjustments and changes in our estimates. As of December 31 ~~2020~~, 2021 and September 30, ~~2020,~~2021, the Company provided an additional ~~$0.8~~$1.3 million provision due to delinquent U.S. tax return fillings.

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CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 6. TAXES (continued)
(C) Land Appreciation Tax (“LAT”)
Since January 1, 1994, LAT has been applicable at progressive tax rates ranging from 30% to 60% on the appreciation of land values, with an exemption provided for the sales of ordinary residential properties if the appreciation values do not exceed certain thresholds specified in the relevant tax laws. However, the Company’s local tax authority in Hanzhong City has not imposed the regulation on real estate companies in its area of administration. Instead, the local tax authority has levied the LAT at the rate of 0.5% in Yang County and 1.0% in Hanzhong against total cash receipts from sales of real estate properties, rather than according to the progressive rates.
As at December 31 ~~2020~~, 2021 and September 30, ~~2020,~~2021, the outstanding LAT payable balance was ~~Nil~~NaN with respect to completed real estate properties sold up to December 31 ~~2020~~,2021 and September 30, ~~2020.~~2021, respectively.
(D) Taxes payable consisted of the following:

December 31,

September 30,

2020

2020

(Unaudited)

(Unaudited)

CIT

$
14,595,522

$
14,326,646
Business tax

5,471,564

5,660,149
Other taxes and fees

3,011,981

2,967,216
Tax payable

$
23,079,067

$
22,954,011

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CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~NOTE 7. TAXES (continued)~~

~~(D) Taxes payable consisted of the following:~~

December 31,
2020 September 30,
2020
(Unaudited) (Unaudited)
CIT $ 12,609,996 $ 12,213,470
Business tax 4,425,570 5,159,296
Other taxes and fees 2,614,219 2,508,445
Tax payable $ 19,649,785 $ 19,881,211
~~NOTE 8. STOCKHOLDERS’ EQUITY~~
On August 19, 2020, the Company filed an Amendment to the Company’s Articles of Incorporation (the “Certificate of Amendment”) with the Florida Secretary of State to effect a one-for-two reverse split of the Company’s authorized and issued and outstanding shares of common stock (the “Reverse Stock Split”). The Reverse Stock Split became effective in accordance with the terms of the Certificate of Amendment on August 20, 2020 (the “Effective Time”). At the Effective Time, every two shares of the Company’s common stock authorized and issued and outstanding were automatically combined into one share of common stock, without any change in the par value per share. The Company will not issue any fractional shares in connection with the Reverse Stock Split. Instead, fractional shares will be rounded up to the nearest full share. The Company has a total of 45,050,000 shares of common stock issued and outstanding prior to the Reverse Stock Split. As a result of the Reverse Stock Split, the number of common stock outstanding as of December 31, 2020 and September 30, 2020, which reflects the effect of the reverse split, was 22,525,000.

NOTE 9.7. COMMITMENTS AND CONTINGENCIES
From time to time, the Company is a party to various legal actions arising in the ordinary course of business. The Company accrues costs ~~associated with~~related to these matters when they become probable and as a result the amount of loss can be reasonably estimated. ~~Legal~~In determining whether a loss from a claim is probable, and if it is possible to estimate the loss, the Company reviews and evaluates its litigation and regulatory matters on at least a quarterly basis in light of potentially relevant factual and legal developments. If the Company determines a favorable outcome is probable, or that the amount of loss cannot be reasonably estimated, the Company does not accrue costs ~~incurred~~for a potential litigation loss.
As of December 31, 2021, the Company’s VIE, Guangsha, was subject to several civil disputes with a supplier (the “General Contractor”), a general contractor of the Company’s certain real estate projects. The total claim by the supplier is approximately $9.4 million, for which the Company estimated that it is more than likely to pay approximately $3.4 million which was included in the accounts payable and other payables in the accompanying consolidated balance sheets. The General Contractor and the Company are in the process of negotiating a settlement. The Company believes it can reach a settlement with a favorable outcome.
In addition, certain subcontractor filed lawsuits against the Genernal Contractor with a total claim approximately of $3.4 million. The Company was added as a joint defendant in the lawsuits. The Company was not involved in the transactions between the General Contractor and the related subcontractor. The Company disputes the allegations in the lawsuit and intends to vigorously defend itself in the action. The Company is unable to estimate a range of loss, if any, were there to be an adverse final decision.
For the three months ended December 31, 2021, the Company paid approximately $648,000 of legal settlement costs previously accrued. On a quarterly basis, the Company assesses its liabilities and contingencies in connection with ~~loss contingencies~~outstanding disputes and legal proceedings utilizing the latest information available. These legal accruals may be increased or decreased to reflect any relevant developments on a quarterly basis. Based on information currently available to the Company, the Company believes that its established accruals are ~~expensed~~adequate as ~~incurred. The Company's management does not believe the liability from the disposition~~ of ~~such claims and litigation individually or in the aggregate would have a material adverse impact on the Company's consolidated financial position, results of operations and cash flows.~~
December 31, 2021.
As an industry practice, the Company provides guarantees to PRC banks with respect to loans procured by the purchasers of the Company’s real estate properties for the total mortgage loan amount until the ~~completion of obtaining~~buyer obtains the “Certificate of Ownership” of the properties from the government, which generally takes six to twelve months. Because the banks provide loan proceeds without getting the “Certificate of Ownership” as loan collateral during the ~~six to twelve months’~~six-to-twelve-month period, the mortgage banks require the Company to maintain, as restricted cash of at least 5% of the mortgage proceeds as security for the Company’s obligations under such guarantees. If a purchaser defaults on its payment obligations, the mortgage bank may deduct the delinquent mortgage payment from the security deposit and require the Company to pay the excess amount if the delinquent mortgage payments exceed the security deposit. If the delinquent mortgage payments exceed the security deposit, the banks may require us to pay the excess amount. If multiple ~~purchasers~~purchasers’ default on their payment obligations at around the same time, we will be required to make significant payments to the banks to satisfy our guarantee obligations. If we are unable to resell the properties underlying defaulted mortgages on a timely basis or at prices higher than the amounts of our guarantees and related expenses, we will suffer financial losses. The Company has ~~made necessary~~the required reserves in its restricted cash account to cover any potential mortgage defaults as required by the mortgage lenders. ~~For~~Since inception through the ~~three months ended December 31, 2020 and 2019,~~release of this report, the Company has not experienced any delinquent mortgage loans and has not experienced any losses related to ~~this guarantee.~~these guarantees. As of December 31, ~~2020~~2021 and September 30, ~~2020,~~2021, our outstanding guarantees in respect of our ~~customers'~~customers’ mortgage loans amounted to approximately ~~$68~~$66 million. As of December 31, ~~2020~~2021 and September 30, ~~2020,~~2021, the amount of ~~security deposits provided~~restricted cash reserved for these guarantees was approximately ~~$3.4~~$3.3 million and the Company believes that such reserves are sufficient.

NOTE ~~10. PENDING NASDAQ COMPLIANCE ISSUE~~8. SUBSEQUENT EVENTS
On June 21, 2019, the “Company received a letter from the Listing Qualifications staff of The Nasdaq Stock Market (“Nasdaq”) notifying the Company that it is no longer in compliance with the minimum bid price requirement for continued listing on the Nasdaq Capital Market. Nasdaq Listing Rule 5550(a)(2) requires listed companies to maintain a minimum bid price of $1.00 per share. The letter noted that the bid price of the Company’s common stock was below $1.00 for the 30-day period ending June 20, 2019. The notification letter had no immediate effect on the Company’s listing on the Nasdaq Capital Market. Nasdaq has provided the Company with 180 days, or until January 14, 2020, to regain compliance with the minimum bid price requirement by having a closing bid price of at least $1.00 per share for a minimum of 10 consecutive business days. On December 19, 2019, Nasdaq determined that the Company is eligible for an additional 180 calendar day period, or until June 15, 2020, to regain compliance. Given the extraordinary market conditions caused by COVID-19, Nasdaq has determined to toll the compliance periods for bid price and market value of publicly held shares requirements through June 30, 2020. In that regard, on April 16, 2020, Nasdaq filed an immediately effective rule change with the Securities and Exchange Commission. Accordingly, the Company had until August 31, 2020, to regain compliance. As of November 3, 2020, The Company has ~~been advised~~evaluated subsequent events through the date these financial statements were filed and determined that ~~March 1, 2021 represents~~other than the ~~full extent of the Panel’s discretion to grant continued listing while it is non-compliant. Should the company fail to demonstrate compliance with Nasdaq Listing Rule 5550(a)(2) by~~following, there are no subsequent events that ~~date, the Panel will issue a final delist determination and~~require disclosure.
On January 14, 2022, the Company ~~will be suspended~~closed a private placement with certain investors. In connection with the private placement, the Company issued an aggregate of 10,247,122 units (the “Units”), each Unit consisting of 1 share of common stock, par value $0.001 per share (“Common Stock”) and a warrant to purchase 3 shares of Common Stock (the “Warrant”) with an initial exercise price of $2.375 at a price of $2.375 per Unit, for gross proceeds of approximately $24.3 million. As of December 31, 2021, the Company

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CHINA HGS REAL ESTATE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

received $2 million in advance from ~~trading on The Nasdaq Stock Market.~~certain investors and these prepaid subscriptions were included other payables as of December 31, 2021.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The following discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported in the unaudited condensed consolidated financial statements of China HGS Real Estate, Inc. for the three months ended December 31, ~~2020~~2021 and ~~2019~~2020 and should be read in conjunction with such financial statements and related notes included in this report.
As used in this report, the terms “Company,” “we,” “our,” “us” and “HGS” refer to China HGS Real Estate, Inc. and its subsidiaries.
Preliminary Note Regarding Forward-Looking Statements.
We make forward-looking statements in Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report based on the beliefs and assumptions of our management and on information currently available to us. Forward-looking statements include information about our possible or assumed future results of operations which follow under the headings “Business Overview,” “Liquidity and Capital Resources,” and other statements throughout this report preceded by, followed by or that include the words “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates” or similar expressions.
Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in these forward-looking statements, including the risks and uncertainties described below and other factors we describe from time to time in our periodic filings with the U.S. Securities and Exchange Commission (the “SEC”). We therefore caution you not to rely unduly on any forward-looking statements. The forward-looking statements in this report speak only as of the date of this report, and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise. These forward-looking statements include, among other things, statements relating to:
·● our ability to sustain our project development
·● our ability to obtain additional land use rights at favorable prices;
·● the market for real estate in Tier 3 and 4 cities and counties;
·● our ability to obtain additional capital in future years to fund our planned expansion; or
·● economic political, regulatory, legal and foreign exchange risks associated with our operations.
Business Overview
We conduct substantially all of our business through Shaanxi Guangsha Investment and Development Group Co., Ltd, in Hanzhong, Shaanxi Province. Since the initiation of our business, we have been focused on expanding our business in certain Tier 3 and Tier 4 cities and counties in China.
For the three months ended December 31, 2021, our sales and gross profit were $2.9 million and $1.4 million, respectively, representing an approximate 4.5% and 55.3% increase in sales and gross profit as compared to three months ended December 31, 2020, respectively. The increase in sales and gross profit was mainly the result of more commercial units sold with higher prices during the current quarter.
For the three months ended December 31, 2020, our sales, gross profit and net income were $2.8 million, $0.9 million and $0.3 million, respectively, representing an approximate 19.6%, 57.0% and 213.3% increase in sales, gross profit and net income as compared to three months ended December 31, 2019, respectively. The increase in sales, gross profit and net income was mainly the result of more gross floor area (“GFA”) sold during current quarter.
~~For the three months ended December 31, 2020,~~2021, the average selling price (“ASP”) for our real estate projects ~~(excluding sales of parking spaces)~~ located in Yang County was approximately ~~$611~~$513 per square meter, ~~an increase of 6%~~decreased from the ASP of ~~$574~~$611 per square meter for the three months ended December 31, ~~2019,~~2020, which was mainly due to ~~more~~the fact that we lowered our selling prices on certain commercial units ~~with higher selling prices were sold in the three months ended December 31, 2020.~~to promote their sales. The ASP of our Hanzhong real estate projects ~~(excluding sales of parking spaces)~~ was approximately ~~$564~~$1,382 per square meter, ~~a decrease~~significantly increased from the ASP of ~~$762~~$564 per square meter for the three months ended December 31, ~~2019.~~2020. The ~~decrease~~increase in ASP in Hanzhong real estate projects was mainly due to the fact that the ~~limited~~all the units sold in the ~~first quarter~~Oriental Garden real estate property were commercial units for the three months ended December 31,2021 with higher ASP of ~~fiscal 2021 was for government’s reallocation~~approximately $2,953 per square meters.

Table of ~~residences with lower ASP.~~Contents

Market Outlook

The Chinese government is expected to continue implementing measures to cool down the real estate market. These measures may include restrictions on home purchase, increase the down-payment requirement against speculative buying, encourage the development of low-cost rental housing property to help low-income groups while reducing the demand in the commercial housing market, increase the real estate property tax to discourage speculation, and control of the land supply and slowdown the construction land auction process. The pressure on home sales and prices will be especially obvious in third and fourth-tier cities, while the property market in the first and second-tier cities is expected to be resilient.

The Company expects to start the construction of the real estate projects surrounding the Liangzhou Road area after the approval by the local government of the road. These projects will comprise of residential for end-users and upgraders, shopping malls as well as serviced apartments and offices to satisfy different market demands. Our customers continue to experience growth of their disposable income. With a lower housing price to family disposable income ratio and an increasing urbanization level, there is a growing demand for high quality residential housing. From this perspective, the Company is positive about the outlook for the local real estate market in the long term. In the meantime, the Company is diversifying its revenue and developing more commercial and municipal projects.

~~We intend~~intends to remain focused on our existing construction projects in Hanzhong City and Yang County, deepening our institutional sales network, enhancing our cost and operational synergies and improving cash flows and strengthening our balance sheet. ~~In this respect, we began the construction of the following large high rise residential projects in Hanzhong City and Yang County:~~

~~Liangzhou road and related projects~~

In September 2013, the Company entered into an agreement (“Liangzhou Agreement”) with the Hanzhong local government on the Liangzhou Road reformation and expansion project (Liangzhou Road Project”). Pursuant to the agreement, the Company is contracted to reform and expand the Liangzhou Road, a commercial street in downtown Hanzhong City, with a total length of 2,080 meters and width of 30 meters and to resettle the existing residences in the Liangzhou road area. The government’s original road construction budget was approximately $33 million in accordance with the Liangzhou Agreement. The Company in return, is being compensated by the local government to have an exclusive right on acquiring at least 394.5 Mu land use rights in a specified location of Hanzhong City. The Liangzhou Road Project’s road construction started at the end of 2013. In 2014, the original scope and budget on the Liangzhou road reformation and expansion project was extended, because the local government included more area and resettlement residences into the project, which resulted in additional investments from the Company. In return, the Company is authorized by the local government to develop and manage the commercial and residential properties surrounding the Liangzhou Road project. As of December 31, 2020, the main Liangzhou road construction is substantially completed. The Company also completed the relocation of residences by the end of June 2020 and launched the construction of the Liangzhou Road related projects ~~in December 2020.~~

~~The Company’s development cost incurred on Liangzhou Road Project is treated as~~after the ~~Company’s deposit on purchasing the related land use rights, as agreed~~approval by the local ~~government. As~~government of the road. These projects comprise residential for end-users and upgraders, shopping malls as well as serviced apartments and offices to satisfy different market demands.

In December 2019, a novel strain of coronavirus (COVID-19) surfaced. COVID-19 has spread rapidly to many parts of the PRC and other parts of the world in the first quarter of 2020, which has caused significant volatility in the PRC and international markets. There is significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the PRC and international economies. For the three months ended December 31, ~~2020,~~2021, the ~~actual costs incurred by~~COVID-19 pandemic did not have a material net impact on the Company’s financial position and operating results. The extent of the impact on the Company’s future financial results will be dependent on future developments such as the length and severity of the crisis, the potential resurgence of the pandemic, future government actions in response to the pandemic and the overall impact of the COVID-19 pandemic on the local economy and real estate markets, among many other factors, all of which remain highly uncertain and unpredictable. Given this uncertainty, the Company ~~were $173,712,144 (September 30, 2019 - $164,879,955) and~~is currently unable to quantify the ~~incremental cost related to residence resettlement approved by the local government. The Company determined that the Company’s Investment in Liangzhou Road Project in exchange for interests in~~ future ~~land use rights is a barter transaction with commercial substance..~~

~~The Liangzhou Road related projects mainly consists Oriental Garden Phase II, Liangzhou Mansion and Pearl Commercial Plaza surrounding the Liangzhou road area:~~

~~Oriental Pearl Garden Phase II~~

Oriental Garden Phase II project is planned to consist of 8 high-rise residential buildings and 6 commercial buildings with total planned GFA of 370,298 square meters. The project will also include a farmer’s market.

~~Liangzhou Mansion~~

~~Liangzhou Mansion project is planned to consist of 7 high-rise building and commercial shops on the first floor with total planned GFA of 160,000 square meters.~~

~~Pearl Commercial Plaza~~

Pearl Commercial Plaza is planned to consist one office building, one service apartment (or hotel), classical architecture style of Chinese traditional houses and shopping malls with total planned GFA of 124,191 square meters.

The Company plans to start the construction of these three real estate projects in 2019 after the road construction is fully completed and passes local government’s inspection and approval. These related projects may take 2-3 years to fully complete.

~~The Company launched the construction~~impact of the ~~Liangzhou Road related projects in December 2020. These related projects may take 2-3 years to fully complete.~~

COVID-19 pandemic on its future operations, financial condition, liquidity and results of operations if the current situation continues.

~~Road Construction~~

Other road construction projects mainly included a Yang County East 2nd Ring Road construction project. The Company was engaged by the Yang County local government to construct the East 2nd Ring Road with a total length of 2.15 km. The local government is required to repay the Company’s project investment costs within 3 years with interest at the interest rate based on the commercial borrowing rate with the similar term published by the China Construction Bank (December 31, 2020 and 2 September 30, 2020 - 4.75%). The local government has approved a refund to the Company by reducing local surcharges or taxes otherwise required in the real estate development. The road construction was substantially completed as of December 31, 2020 and in process of government review and approval.

In September 2012, the Company was approved by the Hanzhong local government to construct four municipal roads with a total length of approximately 1,192 meters. The project was deferred and then restarted during the quarter ended March 31, 2014. As of December 31, 2020, the local government was still in the process of assessing the budget for these projects, which is expected to be completed by 2021.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect our reported assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis and base them on historical experience and various other assumptions that are believed to be reasonable under the circumstances as the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates because of different and changing assumptions or conditions.

We believe the following critical accounting policies affect our significant estimates and judgments used in the preparation of our condensed consolidated financial statements. These policies should be read in conjunction with Note 2 of the notes to the unaudited condensed consolidated financial statements.

Revenue recognition

The Company ~~adopted~~follows FASB ASC Topic 606 ~~Revenue~~“Revenue from Contracts with ~~Customers~~Customers” (“ASC 606”) ~~on October 1, 2018 using the modified retrospective approach.~~. Under ASC 606, Revenue from Contracts with Customers, revenue is recognized in accordance with the transfer of goods and services to customers at an amount that reflects the consideration that the Company expects to be entitled to for those goods and services. The Company determines revenue recognition through the following steps:

●	identification of the contract, or contracts, with a customer;

●	identification of the performance obligations in the contract;

●	determination of the transaction price, including the constraint on variable consideration;

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· ~~identification of the contract, or contracts, with a customer;~~

· ~~identification of the performance obligations in the contract;~~

· ~~determination of the transaction price, including the constraint on variable consideration;~~

· ~~allocation of the transaction price to the performance obligations in the contract; and~~

· ~~recognition of revenue when (or as) the Group satisfy a performance obligation.~~

●	allocation of the transaction price to the performance obligations in the contract; and

●	recognition of revenue when (or as) the Company satisfies a performance obligation.

Most of the Company’s revenue is derived from real estate sales of condominiums and commercial properties 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 its 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 (“percentage completion method”). Otherwise, revenue is recognized at a point in time when the customer obtains control of the asset.

~~Under~~ For the three months ended December 31, 2021 and 2020, the Company did not have any construction in progress meet the revenue recognition under percentage completion method, revenue and profit from the sales of long term real estate development properties is recognized by the percentage of completion method on the sale of individual units when all the following criteria are met:method.

	a.	~~Construction is beyond a preliminary stage.~~
	b.	~~The buyer is committed to the extent of being unable to require a refund except for non-delivery of the unit or interest.~~
	c.	~~Sufficient units have already been sold to assure that the entire property will not revert to rental property.~~
	d.	~~Sales prices are collectible.~~
	e.	~~Aggregate sales proceeds and costs can be reasonably estimated.~~

~~If any of the above criteria is not met, proceeds shall be accounted for as deposits until the criteria are met.~~

Under the percentage of completion method, revenues from individual real estate condominium units sold under development and related costs are recognized over the course of the construction period, based on the completion progress of a project. The progress towards complete satisfaction of the performance obligation is measured based on the Company’s efforts or inputs to the satisfaction of the performance obligation, by reference to the contract costs incurred up to the end of reporting period as a percentage of total estimated costs for each contract. In relation to any project, revenue is determined by calculating the ratio of incurred costs, including land use rights costs and construction costs, to total estimated costs and applying that ratio to the contracted sales amounts. Cost of sales is recognized by determining the ratio of contracted sales during the period to total estimated sales value, and applying that ratio to the incurred costs. Current period amounts are calculated based on the difference between the life-to-date project totals and the previously recognized amounts.

Any changes in significant judgments and/or estimates used in determining construction and development revenue could significantly change the timing or amount of construction and development revenue recognized. Changes in total estimated project costs or losses, if any, are recognized in the period in which they are determined.

Revenue from the sales of previously completed real estate condominium units is recognized at the time of the closing of an individual unit sale. This occurs when the customer obtains the physical possession, the legal title, or the significant risks and rewards of ownership of the assets and the Company has present right to payment and the collection of the consideration is probable. For municipal road construction projects, fees are generally recognized at the time of the projects are completed.

Disaggregation of Revenues

Disaggregated revenues was as follows:

For the three months ended
December 31,
2020 2019
(Unaudited) (Unaudited)
Revenue recognized for completed condominium real estate projects $ 2,755,262 $ 2,304,244
Revenue recognized for condominium real estate projects under development - -
Total $ 2,755,262 $ 2,304,244


	For the three months ended December 31,
	2021		2020
	(Unaudited)		(Unaudited)

Revenue recognized for completed condominium real estate projects, net of sales taxes	$	2,818,994	$	2,731,724
Revenue recognized for condominium real estate projects under development, net of sales taxes		—		—
Total revenue, net of sales taxes	$	2,818,994	$	2,731,724

Contract balances

Timing of revenue recognition may differ from the timing of billing and cash receipts from customers. The Company records a contract asset when revenue is recognized prior to invoicing, or a contract liability when cash is received in advance of recognizing revenue. A contract asset is a right to consideration that is conditional upon factors other than the passage of time. Contract assets include billed and billable receivables, which are the Company’s unconditional rights to consideration other than to the passage of time. Contract liabilities include cash collected in advance and in excess of ~~revenues.~~revenue recognized. Customer deposits are excluded from contract liabilities.

The Company ~~has elected to apply the optional practical expedient for costs to obtain a contract which allows the Company to~~ immediately ~~expense~~expenses sales commissions (included under selling expenses) because ~~the amortization period of the asset that the Company otherwise would have used~~sales commission is ~~one year or less.~~

not expected to be recovered.

The Company provides “mortgage loan guarantees” only with respect to buyers who make down-payments of 20%-50% of the total purchase price of the property. The period of the mortgage loan guarantee begins on the date the bank approves the buyer’s mortgage and we receive the loan proceeds in our bank account and ends on the date the “Certificate of Ownership” evidencing that title to the property has been transferred to the buyer. The procedures to obtain the Certificate of Ownership take six to twelve months (the “Mortgage Loan Guarantee Period”). If, after investigation of the buyer’s income and other relevant factors, the bank decides not to grant the mortgage loan, our mortgage-loan based sales contract terminates and there will be no guarantee obligation. If, during the Mortgage Loan Guarantee Period, the buyer defaults on his or her monthly mortgage payment for three consecutive months, we are required to return the loan proceeds back to the bank, although we have the right to keep the ~~customer's~~customer’s deposit and resell the property to a third party. Once the Certificate of ~~Property~~Ownership has been issued by the relevant government authority, our loan guarantee terminates. If the buyer then defaults on his or her mortgage loan, the bank has the right to take the property back and sell it and use the proceeds to pay off the loan. The Company is not liable for any shortfall that the bank may incur in this event. To date, no buyer has defaulted on his or her mortgage payments during the Mortgage Loan Guarantee Period and the Company has not returned any loan proceeds pursuant to its mortgage loan guarantees.

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Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes, and disclosure of contingent liabilities at the date of the consolidated financial statements. Estimates are used for, but not limited to, the assumptions and estimates used by management in recognizing development revenue under the percentage of completion method, the selection of the useful lives of property and equipment, provision necessary for contingent liabilities, revenue recognition, taxes and budgeted costs. Management believes that the estimates utilized in preparing its consolidated financial statements are reasonable and prudent. Actual results could differ from these estimates.

Real estate property development completed and under development

Real estate property consists of finished residential unit sites, commercial offices and residential unit sites under development. The Company leases the land for the residential unit sites under land use right leases with various terms from the PRC government. The cost of land use rights is included in the development cost and allocated to each project. Real estate property development completed and real estate property under development are stated at the lower of cost or fair value.

Expenditures for land development, including cost of land use rights, deed tax, pre-development costs, and engineering costs, exclusive of depreciation, are capitalized and allocated to development projects by the specific identification method. Costs are allocated to specific units within a project based on the ratio of the sales area of units to the estimated total sales area of the project (or phase of the project) multiplied by the total cost of the project (or phase of the project).

Cost of amenities transferred to buyers is allocated to specific units as a component of total construction cost. The amenity cost includes landscaping, road paving, etc. Once the projects are completed, the amenities are under control of the property management companies.

Real estate property development completed and under development are subject to valuation adjustments when the carrying amount exceeds fair value. An impairment loss is recognized only if the carrying amount of the ~~assets~~asset is not recoverable and exceeds its 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.~~asset. The Company ~~reviewed~~reviews all of its real estate projects for future losses and impairment by comparing the estimated future undiscounted cash flows for each project to the carrying value of such project. For the three months ended December 31, ~~2020~~2021 and ~~2019,~~2020, the Company did not recognize anany impairment loss for its real estate ~~property completed.~~properties.

RESULTS OF OPERATIONS

Three Months Ended December 31, ~~2020~~2021 compared to Three Months Ended December 31, ~~2019~~2020

Revenues

The following is a breakdown of revenue:

For Three Months Ended
December 31,
2020 2019
(Unaudited) (Unaudited)
Revenue recognized  for completed condominium real estate projects $ 2,755,262 $ 2,304,244
Revenue recognized for condominium real estate projects under development - -
Total $ 2,755,262 $ 2,304,244

For the three months ended December 31,

2021

2020

(Unaudited)

(Unaudited)

Revenue recognized for completed condominium real estate projects, net of sales taxes

$
2,818,994

$
2,731,724
Revenue recognized for condominium real estate projects under development, net of sales taxes

—

—
Total revenue, net of sales taxes

$
2,818,994

$
2,731,724

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Revenue recognized for completed condominium real estate projects

The following table summarizes our revenue generated by different projects:

For Three Months Ended
December 31,
2020 2019 Variance
Revenue % Revenue % Amount %
(Unaudited) (Unaudited)
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan) Phase I and II $ 119,625 4.3 % $ 180,905 7.9 % $ (61,280 ) (33.9 )%
Oriental Pearl Garden - - 33,680 1.5 % (33,680 ) (100 )%
Yangzhou Palace 2,635,637 95.7 % 2,080,991 90.3 % 554,646 26.7 %
Yangzhou Pearl Garden Phase I and II - - 8,668 0.3 % (8,668 ) (100 )%

Total Real Estate Sales before Sales Tax $ 2,755,262 100 % 2,304,244 100 % 451,018 19.6 %
Sales Tax (23,538 ) (39,233 ) 15,695 (40.0 )%
Revenue net of sales tax $ 2,731,724 $ 2,265,011 $ 466,713 20.6 %


For Three Months Ended December 31,






2021

2020

Variance


Revenue

%

Revenue

%

Amount

%

(Unaudited)

(Unaudited)

Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan) Phase I and II

$
815,863

28.3
%
$
119,625

4.3
%
$
696,238

(582.0)
%
Oriental Pearl Garden

770,452

26.8
%

—

—

770,452

100
%
Yangzhou Palace

1,292,900

44.9
%

2,635,637

95.7
%

(1,342,737)

(50.9)
%

Gross Real Estate Sales

2,879,215

100
%

2,755,262

100
%

123,953

4.5
%
Less: Sales Tax

(60,221)

(23,538)

36,683

155.8
%
Revenue, net of sales tax

$
2,818,994

$
2,731,724

$
87,270

3.2
%

Our revenues are derived from the sale of residential buildings, commercial store-fronts and parking spaces in projects that we have developed. Comparing to the same period of last year, revenues before sales tax increased by approximately ~~$0.5~~$0.1 million to approximately ~~$2.8~~$2.9 million for the three months ended December 31, ~~2020~~2021 from approximately ~~$2.3~~$2.8 million in the same period of last year. The total GFA sold during three months ended December 31, ~~2020~~2021 was ~~4.525~~3,670 square meters, ~~including 4,313 square meter sold in Yangzhou Palace project, representing a significant increase~~decreased from the ~~3,625~~4,525 square meters completed and sold during the same period of last year. ~~Our Mingzhu Garden Phase II, Yangzhou Pearl Garden Phase II and Oriental Garden Phase I have all been completed~~However, since we sold more commercial units in ~~prior years, only limited models are available for customer selection, which resulted in no revenue.~~this quarter with higher ASP, our total revenue before sales tax increased 4.5% from the same period of last year. The sales tax for the three months ended December 31, ~~2020~~2021 was approximately ~~$0.02~~$0.06 million, ~~decreased~~increased from three months ended December 31, ~~2019~~2020 due ~~less tax~~to more surtax charged for the completed real estate properties during the three months ended December 31, ~~2020.~~2021.
Cost of Sales
The following table sets forth a breakdown of our cost of sales:

For Three Months Ended December  31,
2020 2019 Variance
Cost % Cost % Amount %
(Unaudited) (Unaudited)


For Three Months Ended December 31,

2021

2020

Variance

Cost

%

Cost

%

Amount

%

(Unaudited)

(Unaudited)

Land use rights $ 166,828 9.0 % $ 163,661 9.6 % $ 3,167 1.9 %

$
138,278

9.5
%
$
166,828

9.0
%
$
(28,550)

(17.1)
%
Construction cost 1,686,814 91 % 1,541,951 90.4 % 144,863 9.4 %

1,317,278

90.5
%

1,686,814

91.0
%

(369,536)

(21.9)
%
Total cost $ 1,853,642 100 % $ 1,705,612 100 %% $ 148,030 8.7 %

$
1,455,556

100.0
%
$
1,853,642

100.0
%
$
(398,086)

(21.5)
%

Our cost of sales consists primarily of costs associated with land use rights and construction costs. Cost of sales are capitalized and allocated to development projects using a specific identification method. Costs are allocated to specific units within a project based on the ratio of the sales area of units to the estimated total sales area of the project or phase of the project times the total cost of the project or phase of the project.

Cost of sales was approximately ~~$1.9~~$1.5 million for the three months ended December 31, ~~2020~~2021 compared to ~~$1.7~~$1.9 million for the same period of last year. The ~~increase~~decrease in cost of sales was mainly attributable to ~~more~~less GFA sold during the three months ended December 31, ~~2020 which led to increased revenue and cost of sales.~~
2021.
Land use rights cost: The cost of land use rights includes the land premium we pay to acquire land use rights for our property development sites, plus taxes. Our land use rights cost varies for different projects according to the size and location of the site and the minimum land premium set for the site, all of which are influenced by government policies, as well as prevailing market conditions. Costs for land use rights for the three months ended December ~~31,2020~~31,2021 and ~~2019~~2020 were ~~approximately 0.2 million.~~approximately$0.1 and $0.2 million, respectively.

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Construction cost: We outsource the construction of all of our projects to third party contractors, whom we select through a competitive tender process. Our construction contracts provide a fixed payment which covers substantially all labor, materials and equipment costs, subject to adjustments for some types of excess, such as design changes during construction or changes in government-suggested steel prices. Our construction costs consist primarily of the payments to our third-party contractors, which are paid over the construction period based on specified milestones. In addition, we purchase and supply a limited range of fittings and equipment, including elevators, window frames and door frames. Our construction costs for the three months ending December 31, ~~2020~~2021 were approximately ~~$1.7~~$1.3 million as compared to approximately ~~$1.5~~$1.7 million for the three months ended December 31, ~~2019,~~2020, representing ~~an increase~~a decrease of approximately ~~$0.1~~$0.4 million. The ~~increase~~decrease in construction cost was due to ~~more in~~less units sold during the quarter ended December 31, ~~2020.~~2021.

Gross Profit

Gross profit was approximately $1.4 million for the three months ended December 31, 2021 as compared to approximately $0.9 million for the three months ended December 31, 2020, representing an increase of $0.5 million, which was mainly attributable to more commercial units sold in the three months ended December 31, 2021 with higher ASP. For the three months ended December 31, 2021, the ASP of our Hanzhong real estate projects was approximately $1,382 per square meter, significantly increased from the ASP of $564 per square meter for the three months ended December 31, 2020. The increase in ASP in Hanzhong real estate projects was mainly due to the fact that the all the units sold in the Oriental Garden real estate property were commercial units for the three months ended December 31,2021 with higher ASP of approximately $2,953 per square meters. As a result, our gross margin increased to 47.4% in the first quarter of fiscal 2021 from31.9% in the first quarter of fiscal 2020.

For three months ended December 31,

2021

2020

Gross Profit

Gross Margin

Gross Profit

Gross Margin

(Unaudited)

(Unaudited)

Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan) Phase I and II

$
246,481

30.2
%
$
26,337

22.0
%
Oriental Garden

613,688

79.7
%

—

—
%
Yangzhou Pearl Garden Phase I and II

—

—

—

—
%
Yangzhou Palace

563,490

43.6
%

875,283

33.2
%
Sales Tax

(60,221)

(23,538)

Total Gross Profit

$
1,363,438

47.4
%
$
878,082

31.9
%
Total Real Estate Sales before Sales Tax

$
2,879,215

$
2,755,262



Operating Expenses
Total operating expenses increased by 121.1% to approximately $0.9 million for the three months ended December 31, 2021 from $0.4 million for the three months ended December 31, 2020, primarily as ~~compared~~a result of an increase of $0.1 million in selling expense related to more promotional activities during the first quarter of fiscal 2021 and an increase of $0.3 million in general administrative expenses. Our general and administrative expense was approximately $0.6 million for the three months ended December 31, ~~2019, representing an increase of $0.3 million, which was mainly attributable to more GFA sold during the first quarter of fiscal 2021. The gross margin~~2021, increased to 31.9% in the first quarter of fiscal 2021 from 24.3% in the first quarter of fiscal 2020. It was mainly due to increasing real estate prices in the Yang County during the first quarter of fiscal 2021. For the three months ended December 31, 2021, the ASP for our real estate projects (excluding sales of parking spaces) located in Yang County was approximately $620 per square meter, an increase of 8% from the ASP of $574 per square meter for the three months ended December 31, 2019.
For three months ended
December 31,
2020 2019
Gross Profit Gross Margin Gross Profit Gross Margin
(Unaudited) (Unaudited)
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan) Phase I and II $ 26,337 22.0 % $ 50,371 27.8 %
Oriental Garden - - 10,062 29.9 %
Yangzhou Pearl Garden Phase I and II - - 1,176 13.6 %
Yangzhou Palace 875,283 33.2 % 537,023 25.8 %
Sales Tax (23,538 ) (39,233 )
Total Gross Profit $ 878,082 31.9 % $ 559,399 24.3 %
Total Real Estate Sales before Sales Tax $ 2,755,262 $ 2,304,244

~~Operating Expenses~~
Total operating expenses decreased by 51.2% to approximately $0.4 million for the three months ended December 31, 2020 from $0.8 million for the three months ended December 31, 2019, primarily as a result of a decrease of $0.1 million in selling expense due to less promotion activities during the first quarter of fiscal 2021 and a decrease of $0.3 million in general administrative expense. Our general and administrative expense was approximately $0.3 million for the three months ended December 31, 2020, decreased by $0.3 million from the three months ended December 31, ~~2019~~2020 due to ~~less office expenses and~~more professional and consulting ~~fee expenses~~fees incurred. Our total operating expenses accounted for ~~14.0%~~29.6% and ~~34.2%~~14.0% of our real estate sales before sales taxes for the three months ended December 31, 2021 and 2020, ~~and 2019,~~ respectively.

For three months ended
December 31,
2020 2019
(Unaudited) (Unaudited)


For three months ended

December 31,

2021

2020

(Unaudited)

(Unaudited)

Selling expenses $ 79,345 $ 200,168

$
219,787

$
79,345

General and administrative expenses 305,925 588,839

631,927

305,925

Total operating expenses $ 385,270 $ 789,007

$
851,714

$
385,270

Percentage of Real Estate Sales before Sales Tax 14.0 % 34.2 %

29.6
%

14.0
%

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Income Taxes

PRC Taxes

~~U.S. Taxes~~

~~China HGS is a Florida corporation. However, all of our operations are conducted solely by our subsidiaries~~The Company’s PRC subsidiary and VIE in the PRC. No income is earned in the United States and we do not repatriate any earnings outside the PRC. As a result, we did not generate any U.S. taxable income for the three months ended December 31, 2020 and 2019.

Recent U.S. federal tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the “U.S. Tax Reform”), was signed into law on December 22, 2017. The U.S. Tax Reform significantly modified the U.S. Internal Revenue Code by, among other things, reducing the statutory U.S. federal corporate income tax rate from 35% to 21% for taxable years beginning after December 31, 2017; limiting and/or eliminating many business deductions; migrating the U.S. to a territorial tax system with a one-time transition tax on a mandatory deemed repatriation of previously deferred foreign earnings of certain foreign subsidiaries; subject to certain limitations, generally eliminating U.S. corporate income tax on dividends from foreign subsidiaries; and providing for new taxes on certain foreign earnings. Taxpayers may elect to pay the one-time transition tax over eight years or in a single lump sum. The U.S. Tax Reform also includes provisions for a new tax on GILTI effective for tax years of foreign corporations beginning after December 31, 2017. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of controlled foreign corporations (“CFCs”), subject to the possible use of foreign tax credits and a deduction equal to 50 percent to offset the income tax liability, subject to some limitations. For the year ended September 30, 2018, the Company recognized a one-time transition toll tax of approximately $2.3 million that represented management’s estimate of the amount of U.S. corporate income tax based on the deemed repatriation to the United States of the Company’s share of previously deferred earnings of certain non-U.S. subsidiaries and VIE of the Company mandated by the U.S. Tax Reform. The Company’s estimate of the onetime transition toll Tax is subject to the finalization of management’s analysis related to certain matters, such as developing interpretations of the provisions of the Tax Act and amounts related to the earnings and profits of certain foreign VIEs and the filing of our tax returns. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the Tax Act may require further adjustments and changes in our estimates. As of December 31, 2020 and September 30, 2020, the Company provided an additional $0.8 million provision due to delinquent U.S. tax return fillings.

~~PRC Taxes~~

~~Our Company is~~are governed by the ~~Enterprise~~ Income Tax Law of the People’s Republic of China concerning ~~private-run~~the privately run enterprises, which are generally subject to income tax ~~at a statutory rate of 25%~~ on income reported in the statutory financial statements after appropriate tax adjustments. ~~For the three months ended December 31, 2020 and 2019, the Company~~The Company’s CIT rate is ~~subject to income tax rate of~~ 25% on taxable income. Although the possibility exists for reinterpretation of the application of the tax regulations by higher tax authorities in the PRC, potentially overturning the decision made by the local tax authority, the Company has not experienced any reevaluation of the income taxes for prior years. The PRC tax rules are different from the local tax rules and the Company is required to comply with local tax rules. The difference between the two tax rules will not be a liability of the Company. There will be no further tax payments for the difference. For the three months ended December 31, 2021 and 2020, the Company’s effective income tax rate was 29.0 and 25.2%. The increase in the effective income tax rate for the three months ended December 31, 2021 was due to nondeductible expenses including professional fees, and penalties and interest expense related to our U.S. delinquent tax filings.

Net Income ~~(loss)~~

We reported net income of approximately ~~$0.3~~$0.4 million for the three months ended December 31, ~~2020,~~2021, as compared to net ~~loss~~income of approximately $0.3 for the three months ended December 31, ~~2019.~~2020. The increase ~~of approximately $0.6 million~~ in ~~our~~ net ~~earnings~~income was primarily due to ~~more~~higher revenue, ~~and less~~offset by more operating expenses for the three months ended December 31, ~~2020~~2021 as discussed above.

Other Comprehensive Income ~~(loss)~~

We operate primarily in the PRC and the functional currency of our operating subsidiary and VIE is the Chinese Renminbi (“RMB”). RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that RMB amounts could have been, or could be, converted into USD at the rates used in translation.

Translation adjustments resulting from this process amounted to ~~$7.0~~$2.2 million and ~~$4.4~~$7.0 million for the three months ended December 31, ~~2020~~2021 and ~~2019,~~2020, respectively. The balance sheet amounts with the exception of equity at December 31, ~~2020~~2021 were translated at ~~6.5250~~6.3726 RMB to 1.00 USD as compared to ~~6.7896~~6.4434 RMB to 1.00 USD at September 30, ~~2020.~~2021. The equity accounts were stated at their historical rate. The average translation rates applied to the income statements accounts for the periods ended December 31, 2021 and 2020 were 6.3914 RMB and ~~2019 were~~ 6.6235 RMB, ~~and 7.0448 RMB,~~ respectively.

Liquidity and Capital Resources

Our principal need for liquidity and capital resources is to maintain working capital sufficient to support our operations and to make capital expenditures to finance the growth of our business. ~~Historically we mainly financed our operations primarily through cash flows from operations and borrowings from our principal shareholder.~~

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In recent years, the Chinese government has implemented measures to control overheating residential and commercial property prices including but not limited to restrictions on home ~~purchases,~~purchase, increasing the down-payment requirement against speculative buying, development of low-cost rental housing properties to help low-income groups while reducing the demand in the commercial housing market, increasing ~~the~~ real estate property taxes to discourage speculation, control of the land supply and slowdown the construction land auction process, etc. In addition, in December 2019, a novel strain of coronavirus (COVID-19) surfaced. COVID-19 has spread rapidly throughout China and worldwide, which has caused significant volatility in the PRC and international markets. There is significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the PRC and international economies. To reduce the spread of ~~the~~ COVID-19, the Chinese government has employed measures including city lockdowns, quarantines, travel restrictions, suspension of business activities and school closures. Due to difficulties resulting from the COVID-19 ~~outbreak,~~pandemic, including, but not limited to, the temporary closure of the Company’s facilities and operations beginning in early February through early March 2020, limited support from the Company’s employees, delayed access to construction raw material supplies, reduced customer visits to the Company’s sales office, and inability to promote ~~the~~ real estate property sales to customers on a timely basis, ~~our revenue increased by approximately $0.5 million~~The Company experienced recovery of its real estate business in ~~the first quarter of~~ fiscal 2021 ~~as compared to~~and the following period. The Company had real estate sales of approximately $2.9 million for the three months ended December 31, 2021, increased from $2.8 million in the same period of last year. Based on the assessment of the current economic environment, customer demand and sales ~~trend,~~trends, we believe that consumer spending has been restored in the local real estate market and real estate sales are expected to grow in the coming periods. On the other side, due to the negative impact from the COVID-19 ~~outbreak~~pandemic and ~~spread, we believe that~~its variants, the ~~real estate market downturn will continue to be uncertain in the coming periods. As a result, the developing~~development period of real estate properties and our operating cycle has been extended and we may not be able to liquidate our large balance of completed real estate ~~property~~properties within the short term as we originally expected. In addition, as of December 31, ~~2020,~~2021, we had large construction loans payable of approximately ~~$116.0~~$121.0 million and ~~large~~ accounts payable ~~balance~~ of approximately ~~$26.3~~$13.9 million to be paid to ~~subcontractors within~~subcontractors. The extent of the impact of COVID-19 on the Company’s future financial results will be dependent on future developments such as the length and severity of the crisis, the potential resurgence of the crisis, future government actions in response to the crisis and the overall impact of the COVID-19 pandemic on the local economy and real estate markets, among many other factors, all of which remain highly uncertain and unpredictable. Given this uncertainty, the Company is currently unable to quantify the expected impact of the COVID-19 pandemic on its future operations, financial condition, liquidity and results of operations if the current situation continues. The above mentioned facts raise substantial doubt about the Company’s ability to continue as a going concern for at least one ~~year.~~

year from the date of this filing.

In assessing its liquidity, management monitors and analyzes the Company’s cash on-hand, its ability to generate sufficient revenue sources in the future, and its operating and capital expenditure commitments. As of December 31, ~~2020,~~2021, our total cash and restricted cash balance was approximately $5.7 million, increased tofrom approximately ~~$4.7 million as compared to approximately $3.9~~$3.5 million as of September 30, ~~2020.~~2021. With respect to capital funding requirements, the Company budgeted ~~our~~its capital spending based on ongoing assessments of needs to maintain adequate cash. On January 14, 2022, the Company closed a private placement with net proceeds of approximately $ $24.3 million of which $2.0 million was received as of December 31, 2021. As of December 31, ~~2020,~~2021, we had approximately ~~$96.6~~$87.7 million of completed residential apartments and commercial units available for sale to potential ~~buyers when needed.~~buyers. Although we reported approximately ~~$26.3~~$13.9 million of accounts payable as of December 31, ~~2020,~~2021, due to the ~~long term~~long-term relationship with our construction suppliers and subcontractors, we were able to effectively manage cash spending on construction and negotiate with them to adjust the payment schedule based on our cash on hand. In addition, most of our existing real estate development projects relate to the old town renovation which ~~are~~is supported by the local government. As of December 31, ~~2020,~~2021, we reported approximately ~~$116.0~~$121.0 million of construction loans borrowed from financial institutions controlled by the local government and such loans can only be used on the old town renovation related project development. We expect that we will be able to renew all of the existing construction loans upon their maturity and borrow additional new loans from local financial institutions, when necessary, based on our past experience and the Company’s good credit history. Also, the Company’s cash flows from pre-sales and current sales should provide financial support for our current ~~developments~~development projects and operations. ~~As of~~For the three months ended December 31, ~~2020,~~2021, we had approximately $21.9 million customer deposits representing cash advances from buyers for pre-sales of our residential units and we believe such cash advances can be used to fund our ongoing construction projects whenever necessary. As of December 31, 2020, we had fivesix large ongoing construction projects (see Note 3, real estate properties under development) which were ~~under~~in the preliminary development stage due to delayed inspection and acceptance of the development plans by the local government. In June 2020, we completed the residence relocation surrounding the Liangzhou Road related projects and launched the construction of ~~the Liangzhou Road related~~these projects in December 2020. For the other four projects, we expect we will be able to obtain the government’s approval of the development plans on these projects in the coming fiscal year and start the pre-sale of the real estate ~~property~~properties to generate cash when certain property development milestones have been achieved. ~~In addition, our principal shareholder, Mr. Xiaojun Zhu has been providing and has committed to continue to provide his personal funds to support the Company’s operation whenever necessary.~~

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Cash Flow

Comparison of cash flows results is summarized as follows:

	Three months ended December 31,
	2020		2019
	(Unaudited)		(Unaudited)

						Three months ended
						December 31,
						2021		2020
						(Unaudited)		(Unaudited)

Net cash provided by operating activities	$	643,115	$	2,485,621		$	602,095	$	643,115
Net cash used in financing activities		-		(2,118,584	)
Net cash provided by financing activities							2,000,000		—
Effect of change of foreign exchange rate on cash and restricted cash		166,542		116,587			(358,596)		166,542
Net increase in cash and restricted cash		806,657		483,624			2,243,499		806,657
Cash and restricted cash, beginning of period		3,867,536		4,202,117			3,465,189		3,867,536
Cash and restricted cash, end of period	$	4,677,193	$	4,685,741		$	5,708,688	$	4,677,193

Operating Activities

Net cash provided by operating activities during the three months ended December 31, 2021 was approximately $0.6 million, consisting of net income of approximately $0.4 million and net changes in our operating assets and liabilities, which mainly included a decrease of other assets of approximately $2.9 million due to the reduction of receivables from housing buyers, a decrease in real estate property completed of approximately $1.5 million due to sales of our Yangzhou Palace and other projects and an increase in customer deposits received of $1.8 million, offset by payments of other payables of approximately of $4.5 million and additional spending in real estate under development of $1.9 million.

Net cash provided by operating activities during the three months ended December 31, 2020 was approximately $0.6 million, consisting of net income of approximately $0.3 million and net changes in our operating assets and liabilities, which mainly included a decrease in real estate property completed by approximately $1.9 million due to sales of our Yangzhou Palace project and an increase in customer deposit received of $1.7 million, offset by additional spending in real estate under development of $1.3 million and payments of taxes payable of approximately $0.9 million.

Financing Activities

Net cash flows provided by ~~operating~~financing activities ~~during the~~was approximately $2.0 million for three months ended December 31, ~~2019~~2021, which was ~~approximately $2.5 million, consisting~~advance proceeds from investors for the private placement sale of ~~net loss of approximately $0.3 million and net changes in our operating assets and liabilities,~~Units, which ~~mainly included a decrease in real estate property~~was completed by approximately $1.5 million due to sales of our Yangzhou Palace project, a collection of security deposit of $1.6 million and an increase in customer deposit received of $1.6 million, offset by additional spending in real estate under development of $1.0 million and payments of accrued expense and tax payable in aggregated of approximately $1.1 million.

~~Financing Activities~~

on January 14, 2022.

There was no net cash provided by or (used in) financing activities during the three months ended December 31, 2020.

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Net cash flows used in financing activities was approximately $2.1 million for three months ended December 31, 2019, which mainly included a repayment of a construction loan of approximately $2.1 million during the three months ended December 31,2019.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

As an industry practice, the Company provides guarantees to PRC banks with respect to loans procured by the purchasers of the Company’s real estate properties for the total mortgage loan amount until the ~~completion of obtaining~~buyer obtains the “Certificate of Ownership” of the properties from the government, which generally takes six to twelve months. Because the banks provide loan proceeds without getting the “Certificate of Ownership” as loan collateral during the ~~six to twelve months’~~six-to-twelve-month period, the mortgage banks require the Company to maintain, as restricted cash of at least 5% of the mortgage proceeds as security for the Company’s obligations under such guarantees. If a purchaser defaults on its payment obligations, the mortgage bank may deduct the delinquent mortgage payment from the security deposit and require the Company to pay the excess amount if the delinquent mortgage payments exceed the security deposit. If the delinquent mortgage payments exceed the security deposit, the banks may require us to pay the excess amount. If multiple ~~purchasers~~purchasers’ default on their payment obligations at around the same time, we will be required to make significant payments to the banks to satisfy our guarantee obligations. If we are unable to resell the properties underlying defaulted mortgages on a timely basis or at prices higher than the amounts of our guarantees and related expenses, we will suffer financial losses. The Company has ~~made necessary~~the required reserves in its restricted cash account to cover any potential mortgage defaults as required by the mortgage lenders. ~~The~~Since inception through the release of this report, the Company has not experienced any delinquent mortgage loans and has not experienced any losses related to ~~this guarantee.~~these guarantees. As of December 31, ~~2020~~2021 and September 30, ~~2020,~~2021, our outstanding guarantees in respect of our ~~customers'~~customers’ mortgage loans amounted to approximately ~~$68 million,~~$66 million. As of December 31, ~~2020~~2021 and September 30, ~~2020,~~2021, the amount of ~~security deposits provided~~restricted cash reserved for these guarantees was approximately ~~$3.4~~$3.3 million and the Company believes that such reserves are sufficient.

~~Inflation~~

~~Inflation has not had a material impact on our business and we do not expect inflation to have a material impact on our business in the near future.~~

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
~~Foreign Exchange Risk~~
All of our net sales, and a majority of our costs and expenses are denominated in RMB. Although the conversion of RMB is highly regulated in China, the value of RMB against the value of the U.S. dollar or any other currency nonetheless may fluctuate and be affected by, among other things, changes in China’s political and economic conditions. Under current policy, the value of RMB is permitted to fluctuate within a narrow band against a basket of certain foreign currencies. China is currently under significant international pressures to liberalize this government currency policy, and if such liberalization were to occur, the value of RMB could appreciate or depreciate against the U.S. dollar.
Because substantially all of our earnings and majority of our cash assets are denominated in RMB, other than certain cash deposits we keep in a bank in Hong Kong and the U.S., appreciation or depreciation in the value of RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividends we may issue in future that will be exchanged into U.S. dollars and earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.
Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedging transactions may be limited and we may not be able to successfully hedge our exposure at all. In addition, our currency exchange losses may be magnified by the PRC exchange control regulations that restrict our ability to convert RMB into foreign currency.
~~Interest Rate Risk~~
We have not been, nor do we anticipate being exposed to material risks due to changes in interest rates. Our risk exposure to changes in interest rates relates primarily to the interest income generated by cash deposited in interest-bearing savings accounts and interest expense on variable rate bank loan. We have not used, and do not expect to use in the future any derivative financial instruments to hedge our interest risk exposure. However, fluctuations in interest rates can lead to significant changes in our interest income and interest expense.
~~Credit Risk~~
We are exposed to credit risk from our cash in banks, accounts receivable and amounts due from local governments for real estate property development completed. The credit risk on cash in bank and fixed deposits is limited because the counterparties are recognized financial institutions. Accounts receivable are subjected to credit evaluations. An allowance would be made, if necessary, for estimated unrecoverable amounts by reference to past default experience, if any, and by reference to the current economic environment.
Inflation
Inflationary factors, such as increases in the cost of our products and overhead costs, could impair our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of sales revenue if the selling prices of our products do not increase with these increased costs.
We Conduct Substantially All Our Business in Foreign Country
Substantially all of our operations are conducted in China and are subject to various political, economic, and other risks and uncertainties inherent in conducting business in China. Among other risks, our Company and our subsidiaries’ operations are subject to the risks of restrictions on transfer of funds; export duties, quotas, and embargoes; domestic and international customs and tariffs; changing taxation policies; foreign exchange restrictions; and political conditions and governmental regulations.

29
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”). The evaluation of our disclosure controls and procedures included a review of our processes and the effect on the information generated for use in this Quarterly Report on Form 10-Q. In the course of this evaluation, we sought to identify any material weaknesses in our disclosure controls and procedures and to confirm that any necessary corrective action, including process improvements, was taken. The purpose of this evaluation is to determine if, as of the Evaluation Date, our disclosure controls and procedures were operating effectively such that the information, required to be disclosed in our SEC reports (i) was recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

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Management conducted its evaluation of disclosure controls and procedures under the supervision of our chief executive officer and our chief financial officer. Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of December 31, ~~2020.~~2021. Management is committed to improving the internal controls over financial reporting and will undertake the consistent improvements or enhancements on an ongoing basis. To remediate the material weakness and significant deficiencies and to prevent similar deficiencies in the future, we are currently evaluating additional controls and procedures, which may include:

·●	Provide more U.S. GAAP knowledge and SEC reporting requirements training for the accounting department and establish formal ~~Policies~~policies and ~~procedures in internal audit function.~~ procedures.

The remedial measures being undertaken may not be fully effectuated or may be insufficient to address the significant deficiencies we identified, and there can be no assurance that significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified or occur in the future. If additional significant deficiencies (or if material weaknesses) in our internal controls are discovered or occur in the future, among other similar or related effects: (i) the Company may fail to meet future reporting obligations on a timely basis, (ii) the Company’s consolidated financial statements may contain material misstatements, and (iii) the Company’s business and operating results may be harmed.

Changes in Internal Control over Financial Reporting

Except for the matters described above to improve our internal controls over financial reporting, there were no changes in our internal control over financial reporting for the three months ended December 31, ~~2020~~2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, however, the Company is in the process of designing and planning to change as described above.

30

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PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We may be subject to, from time to time, various legal proceedings relating to claims arising out of our operations in the ordinary course of our business. We are not currently a party to any legal proceedings, the adverse outcome of which, individually or in the aggregate, would have a material adverse effect on the business, financial condition, or results of operations of the Company.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
~~None.~~
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
~~None.~~
ITEM 4. MINE SAFETY DISCLOSURES
None.
~~None.~~
ITEM 5. OTHER INFORMATION
None.
~~None.~~

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ITEM 6. EXHIBITS
~~(a) Exhibits~~
(a) Exhibits

Exhibit Number
Description of Exhibit
31.1*
Rule 13a-14(a) Certification of Chief Executive Officer
31.2*
Rule 13a-14(a) Certification of Chief Financial Officer
32.1*
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
101.INS*
XBRL Instance

101.SCH*
XBRL Taxonomy Extension Schema

101.CAL*
XBRL Taxonomy Extension Calculation

101.DEF*
XBRL Taxonomy Extension Definition

101.LAB*
XBRL Taxonomy Extension Labels

101.PRE*
XBRL Taxonomy Extension Presentation
*
Furnished electronically herewith

* Furnished electronically herewith

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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

China HGS Real Estate, Inc.

February 22, ~~2021~~2022
By:
/s/ ~~Xiaojun Zhu~~Neng Chen

~~Xiaojun Zhu~~
Neng Chen

Chief Executive Officer

3234

		Page
PART I	FINANCIAL INFORMATION	1 3

Item 1.	Unaudited Interim Financial Statements	1 3
	Condensed Consolidated Balance Sheets at December 31, ~~2020~~2021 (unaudited) and September 30, ~~2019~~2021	1 3
	Condensed Unaudited Consolidated Statements of Income and Comprehensive Income for The Three Months Ended December 31, ~~2020~~2021 and ~~2019~~2020	2 4
	Condensed Unaudited Consolidated Statements of Changes in Stockholders’ Equity for The Three Months Ended December 31, ~~2020~~2021 and ~~2019~~2020	3 5
	Condensed Unaudited Consolidated Statements of Cash Flows for The Three Months Ended December 31, ~~2020~~2021 and ~~2019~~2020	4 6
	Notes to Condensed Unaudited Consolidated Financial Statements	~~5-17~~ 7-19
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18 21
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	29 30
Item 4.	Controls and Procedures	30

PART II	OTHER INFORMATION	31 32

Item 1.	Legal Proceedings	31 32
Item 1A.	Risk Factors
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31 32
Item 3.	Defaults upon Senior Securities	31 32
Item 4.	Mine Safety Disclosures	31 32
Item 5.	Other Information	31 32
Item 6	Exhibits	31 33
	Signatures	32 34

	December 31,			September 30,
	2020			2020
ASSETS		(Unaudited)

Cash	$	1,253,331		$	457,699
Restricted cash		3,423,862			3,409,837
Contract assets		15,370,808			14,255,328
Real estate property development completed		96,628,716			94,671,258
Other assets		9,102,909			8,132,555
Property, plant and equipment, net		582,060			571,330
Security deposits		1,930,750			1,855,506
Real estate property under development		239,926,178			227,741,017
Due from local governments for real estate property development completed		2,985,991			2,869,623

Total Assets	$	371,204,605		$	353,964,153

LIABILITIES AND STOCKHOLDERS' EQUITY
Construction loans	$	116,028,450		$	109,937,408
Accounts payables		26,333,101			25,415,352
Other payables		4,424,032			4,028,048
Construction deposits		3,332,605			3,202,730
Contract liabilities		1,917,343			1,847,685
Customer deposits		21,939,636			19,405,528
Accrued expenses		1,971,086			1,920,370
Taxes payable		19,649,785			19,881,211
Total liabilities		195,596,038			185,638,332

Commitments and Contingencies
Stockholders' equity
Common stock, $0.001 par value, 50,000,000 shares authorized, 22,525,000 shares issued and outstanding December 31, 2020 and September 30, 2020		22,525			22,525
Additional paid-in capital		129,930,330			129,930,330
Statutory surplus		10,458,395			10,458,395
Retained earnings		35,245,648			34,954,061
Accumulated other comprehensive loss		(48,331	)		(7,039,490	)
Total stockholders' equity		175,608,567			168,325,821

Total Liabilities and Stockholders' Equity	$	371,204,605		$	353,964,153


	Three months ended December 31,
	2021		2020
Real estate sales	$	2,879,215	$	2,755,262
Less: Sales tax		(60,221)		(23,538)
Cost of real estate sales		(1,455,556)		(1,853,642)
Gross profit		1,363,438		878,082
Operating expenses
Selling and distribution expenses		219,787		79,345
General and administrative expenses		631,927		305,925
Total operating expenses		851,714		385,270
Operating income		511,724		492,812
Interest income, net		1,461		2,826
Other (expense), net		—		(105,858)
Income before income taxes		513,185		389,780
Provision for income taxes		148,875		98,193
Net income		364,310		291,587
Other Comprehensive income
Foreign currency translation adjustment		2,167,401		6,991,159
Comprehensive income	$	2,531,711	$	7,282,746
Basic and diluted income per common share
Basic and diluted	$	0.01	$	0.01
Weighted average common shares outstanding
Basic and diluted		25,617,807		22,525,693

	Common Stock				Additional		Statutory		Retained			Accumulated Other Comprehensive
	Shares		Amount		Paid-in Capital		Surplus		Earnings			Loss			Total
Balance at September 30, 2019		22,525,000	$	22,525	$	129,930,330	$	10,360,251	$	34,070,767		$	(15,683,723	)	$	158,700,150
Net loss for the period		-		-		-		-		(257,381	)		-			(257,381	)
Foreign currency translation adjustments		-		-		-		-		-			4,380,862			4,380,862
Balance at December 31, 2019 (Unaudited)		22,525,000	$	22,525	$	129,930,330	$	10,360,251	$	33,813,386		$	(11,302,861	)	$	162,823,631

Balance at September 30, 2020		22,525,000	$	22,525	$	129,930,330	$	10,458,395	$	34,954,061		$	(7,039,490	)	$	168,325,821
Net income for the period		-		-		-		-		291,587			-			291,587
Foreign currency translation adjustments		-		-		-		-		-			6,991,159			6,991,159
Balance at December 31,2020 (Unaudited)		22,525,000	$	22,525	$	129,930,330	$	10,458,395	$	35,245,648		$	(48,331	)	$	175,608,567


										Accumulated
										Other
	Common Stock			Additional		Statutory		Retained		Comprehensive
	Shares	Amount		Paid-in Capital		Surplus		Earnings		(loss) income		Total
Balance at September 30, 2020	22,525,693	$	22,525	$	129,930,330	$	10,458,395	$	34,070,767	$	(7,039,490)	$	168,325,821
Net income for the period	—		—		—		—		291,587		—		291,587
Foreign currency translation adjustments	—		—		—		—		—		6,991,159		6,991,159
Balance at December 31, 2020 (Unaudited)	22,525,693	$	22,525	$	129,930,330	$	10,458,395	$	35,245,648	$	(48,331)	$	175,608,567

Balance at September 30,2021	25,617,807	$	25,617	$	136,535,303	$	11,095,939	$	40,691,955	$	2,348,897	$	190,697,711
Net income for the period	—		—		—		—		364,310		—		364,310
Foreign currency translation adjustments	—		—		—		—		—		2,167,401		2,167,401
Balance at December 31, 2021 (Unaudited)	25,617,807	$	25,617	$	136,535,303	$	11,095,939	$	41,056,265	$	4,516,298	$	193,229,422

	For the three months ended December 31,
	2020		2019
	(Unaudited)		(Unaudited)
Revenue recognized for completed condominium real estate projects	$	2,755,262	$	2,304,244
Revenue recognized for condominium real estate projects under development		-		-
Total	$	2,755,262	$	2,304,244

	For three months ended December 31,				September 30,
	2020		2019		2020
	(Unaudited)		(Unaudited)

							For three months ended
							December 31,		September 30,
							2021	2020	2021
							(Unaudited)	(Unaudited)
Period end RMB:USD exchange rate		6.5250		6.9618		6.7896	6.3726	6.5250	6.4434
Period average RMB:USD exchange rate		6.6235		7.0448		7.0056	6.3914	6.6235	6.5072

	Balance as of
	December 31, 2020		September 30, 2020
	(Unaudited)
Development completed:
Hanzhong City Mingzhu Garden Phase II		23,631,380		22,801,439
Hanzhong City Oriental Pearl Garden		20,745,589		19,937,105
Yang County Yangzhou Pearl Garden Phase II		2,663,789		2,559,977
Yang County Yangzhou Palace		49,587,958		49,372,737
Real estate property development completed		96,628,716		94,671,258
Under development:
Hanzhong City Liangzhou Road and related projects (a)		173,712,144		164,879,955
Hanzhong City Hanfeng Beiyuan East (b)		1,657,408		824,496
Hanzhong City Beidajie (b)		59,463,709		57,142,127
Yang County East 2^nd Ring Road (c)		5,092,917		4,894,439
Real estate property under development		239,926,178		227,741,017


	Balance as of
	December 31, 2021		September 30, 2021
	(Unaudited)
Development completed:
Hanzhong City Mingzhu Garden Phase II	$	23,153,993	$	23,464,365
Hanzhong City Oriental Pearl Garden		19,494,416		19,435,711
Yang County Yangzhou Pearl Garden Phase II		2,275,390		2,250,388
Yang County Yangzhou Palace		42,741,497		42,995,377
Real estate property development completed	$	87,665,296	$	88,145,841
Under development:
Hanzhong City Liangzhou Road and related projects (a)	$	184,291,015	$	180,389,654
Hanzhong City Hanfeng Beiyuan East (b)		878,448		868,796
Hanzhong City Beidajie (b)		78,991,790		78,075,559
Yang County East 2^nd Ring Road (c)		6,507,213		6,435,712
Real estate property under development	$	270,668,466	$	265,769,721

	December 31, 2020		September 30, 2020
	(Unaudited)

					December 31,		September 30,
					2021		2021
					(Unaudited)
Loan A	$	97,832,408	$	92,450,491	$	102,334,191	$	101,209,744
Loan B		18,196,042		17,486,917		18,631,198		18,426,478
Total	$	116,028,450	$	109,937,408	$	120,965,389	$	119,636,222


	For Three Months Ended December 31,
	2021					2020				Variance
	Revenue		%			Revenue		%		Amount		%
	(Unaudited)					(Unaudited)

Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan) Phase I and II	$	815,863		28.3	%	$	119,625	4.3	%	$	696,238	(582.0)	%
Oriental Pearl Garden		770,452		26.8	%		—	—			770,452	100	%
Yangzhou Palace		1,292,900		44.9	%		2,635,637	95.7	%		(1,342,737)	(50.9)	%

Gross Real Estate Sales		2,879,215		100	%		2,755,262	100	%		123,953	4.5	%
Less: Sales Tax		(60,221)					(23,538)				36,683	155.8	%
Revenue, net of sales tax	$	2,818,994				$	2,731,724			$	87,270	3.2	%

	For Three Months Ended December 31,
	2020					2019					Variance
	Cost		%			Cost		%			Amount		%
	(Unaudited)					(Unaudited)

																For Three Months Ended December 31,
																2021				2020				Variance
																Cost		%		Cost		%		Amount		%
																(Unaudited)				(Unaudited)

Land use rights	$	166,828		9.0	%	$	163,661		9.6	%	$	3,167		1.9	%	$	138,278	9.5	%	$	166,828	9.0	%	$	(28,550)	(17.1)	%
Construction cost		1,686,814		91	%		1,541,951		90.4	%		144,863		9.4	%		1,317,278	90.5	%		1,686,814	91.0	%		(369,536)	(21.9)	%
Total cost	$	1,853,642		100	%	$	1,705,612		100	%%	$	148,030		8.7	%	$	1,455,556	100.0	%	$	1,853,642	100.0	%	$	(398,086)	(21.5)	%


Exhibit Number		Description of Exhibit

31.1*		Rule 13a-14(a) Certification of Chief Executive Officer

31.2*		Rule 13a-14(a) Certification of Chief Financial Officer

32.1*		Section 1350 Certification of Chief Executive Officer and Chief Financial Officer

101.INS*		XBRL Instance

101.SCH*		XBRL Taxonomy Extension Schema

101.CAL*		XBRL Taxonomy Extension Calculation

101.DEF*		XBRL Taxonomy Extension Definition

101.LAB*		XBRL Taxonomy Extension Labels

101.PRE*		XBRL Taxonomy Extension Presentation


	China HGS Real Estate, Inc.

February 22, ~~2021~~2022	By:	/s/ ~~Xiaojun Zhu~~Neng Chen
		~~Xiaojun Zhu~~ Neng Chen
		Chief Executive Officer