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Home›Conditional Sales Contract›CHINA HGS REAL ESTATE INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)

CHINA HGS REAL ESTATE INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)

By Mabel McCaw
February 22, 2022
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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, 2021 and 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”, “us”, “our” 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 support the development of our projects

? our ability to obtain additional land use rights at favorable prices;

? the real estate market in Tier 3 and Tier 4 cities and counties;

? our ability to raise additional capital in future years to fund our

expansion; Where

? the associated economic, political, regulatory, legal and foreign exchange risks

   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, 2021, the average selling price ("ASP")
for our real estate projects located in Yang County was approximately $513 per
square meter, decreased from the ASP of $611 per square meter for the three
months ended December 31, 2020, which was mainly due to the fact that we lowered
our selling prices on certain commercial units to promote their sales. 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.
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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 intends to remain focused on our existing construction projects in Hanzhong City and Yang County, deepening our institutional sales network, improving our cost and operating synergies, improving our cash flow and strengthening our balance sheet.

The Company has started the construction of the Liangzhou Road related projects after the local government approval of the road. These projects include residences for end users and valuers, shopping malls as well as serviced apartments and offices to meet 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,
2021, the 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 is currently unable to
quantify the future impact of the COVID-19 pandemic on its future operations,
financial condition, liquidity and results of operations if the current
situation continues.

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 follows FASB ASC Topic 606 "Revenue from Contracts with Customers"
("ASC 606"). 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(s) with a customer;

? identification of performance obligations in the contract;


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


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? allocation of the transaction price to the performance obligations in the

Contract; and

? recognition of revenue when (or as and when) the Company meets a performance target

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. 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.

Income disaggregation

The disaggregated revenues were as follows:

                                                               For the 

three months completed the 31st of December,

                                                                    2021                     2020
                                                                 (Unaudited)              (Unaudited)

Recognized revenue for completed condominium projects, net of sales taxes

                                 $         

2,818,994 $2,731,724 Recognized revenue 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 the passage of time. Contract liabilities
include cash collected in advance and in excess of revenue recognized. Customer
deposits are excluded from contract liabilities.

The Company immediately expense sales commissions (included in selling expenses) because the sales commission is 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 deposit and
resell the property to a third party. Once the Certificate of 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 promotion 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).

The cost of amenities transferred to buyers is allocated to specific units as a component of the total construction cost. The cost of amenities includes landscaping, road paving, etc. Once the projects are completed, the developments are under the 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 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 asset.
The Company 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, 2021 and 2020, the Company did not recognize any impairment loss
for its real estate properties.

RESULTS OF OPERATIONS

Three months completed December 31, 2021 compared to the three months ended December 31, 2020

Revenues

Here is a breakdown of revenue:

                                                               For the 

three months completed the 31st of December,

                                                                    2021                     2020
                                                                 (Unaudited)              (Unaudited)

Recognized revenue for completed condominium projects, net of sales taxes

                                 $         

2,818,994 $2,731,724 Recognized revenue 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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Recognized revenue for completed condominium projects

The following table summarizes our revenues generated by different projects:

                                           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 $0.1 million to approximately $2.9 million for the three months
ended December 31, 2021 from approximately $2.8 million in the same period of
last year. The total GFA sold during three months ended December 31, 2021 was
3,670 square meters, decreased from the 4,525 square meters completed and sold
during the same period of last year. However, since we sold more commercial
units in 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, 2021 was approximately $0.06 million, increased from
three months ended December 31, 2020 due to more surtax charged for the
completed real estate properties during the three months ended December 31,
2021.

Cost of sales

The following table provides a breakdown of our cost of sales:

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

Land use rights      $    138,278      9.5 %  $    166,828      9.0 %  $  (28,550)    (17.1) %
Construction cost       1,317,278     90.5 %     1,686,814     91.0 %    (369,536)    (21.9) %
Total cost           $  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 $1.5 million for the three months ended December
31, 2021 compared to $1.9 million for the same period of last year. The decrease
in cost of sales was mainly attributable to less GFA sold during the three
months ended December 31, 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 31,2021 and 2020
were approximately$0.1 and $0.2 million, respectively.

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Contents

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, 2021 were approximately $1.3 million as compared to approximately
$1.7 million for the three months ended December 31, 2020, representing a
decrease of approximately $0.4 million. The decrease in construction cost was
due to less units sold during the quarter ended December 31, 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

as a result, our gross margin decreased from 31.9% in the first quarter of fiscal 2020 to 47.4% in the first quarter of fiscal 2021.

                                                              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 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, 2021, increased by $0.3 million from the
three months ended December 31, 2020 due to more professional and consulting
fees incurred. Our total operating expenses accounted for 29.6% and 14.0% of our
real estate sales before sales taxes for the three months ended December 31,
2021 and 2020, respectively.

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

Selling expenses                                    $    219,787     $      79,345
General and administrative expenses                      631,927          

305 925

Total operating expenses                            $    851,714     $    

385 270

Percentage of Real Estate Sales before Sales Tax            29.6 %         
  14.0 %


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Income Taxes

PRC Taxes
The Company's PRC subsidiary and VIE are governed by the Income Tax Law of the
People's Republic of China concerning the privately run enterprises, which are
generally subject to income tax 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. 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 revenue

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

The other extended result

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 $2.2 million and
$7.0 million for the three months ended December 31, 2021 and 2020,
respectively. The balance sheet amounts with the exception of equity at December
31, 2021 were translated at 6.3726 RMB to 1.00 USD as compared to 6.4434 RMB to
1.00 USD at September 30, 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
6.6235 RMB, respectively.

Cash 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.

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Contents

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 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 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 real estate property sales to customers
on a timely basis, The Company experienced recovery of its real estate business
in fiscal 2021 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
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 pandemic and its
variants, the 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 properties within the short term as we originally
expected. In addition, as of December 31, 2021, we had large construction loans
payable of approximately $121.0 million and accounts payable of approximately
$13.9 million to be paid to 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.

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, 2021, our
total cash and restricted cash balance was approximately $5.7 million, increased
from approximately $3.5 million as of September 30, 2021. With respect to
capital funding requirements, the Company budgeted 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, 2021, we had approximately $87.7 million of completed residential
apartments and commercial units available for sale to potential buyers. Although
we reported approximately $13.9 million of accounts payable as of December 31,
2021, due to the 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 is supported by the local government. As of
December 31, 2021, we reported approximately $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 development
projects and operations. For the three months ended December 31, 2021, we had
six large ongoing construction projects (see Note 3, real estate properties
under development) which were 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 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 properties to
generate cash when certain property development milestones have been achieved.

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Cash Flow

The cash flow results comparison is summarized as follows:

                                                                    Three months ended
                                                                       December 31,
                                                                   2021            2020
                                                               (Unaudited)     (Unaudited)
Net cash provided by operating activities                      $    602,095    $    643,115
Net cash provided by financing activities                         2,000,000               -
Effect of change of foreign exchange rate on cash and
restricted cash                                                   (358,596)

166,542

Net increase in cash and restricted cash                          2,243,499

806 657

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


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.

Fundraising activities

Net cash flow from financing activities was approximately $2.0 million
for three months ended December 31, 2021which was the anticipated proceeds of investors for the sale by private placement of units, which was completed on
January 14, 2022.

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

                                       29

Contents

Off-balance sheet arrangements

We have no 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 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-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' 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 the required reserves in its restricted
cash account to cover any potential mortgage defaults as required by the
mortgage lenders. 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 these guarantees. As of December 31, 2021 and
September 30, 2021, our outstanding guarantees in respect of our customers'
mortgage loans amounted to approximately $66 million. As of December 31, 2021
and September 30, 2021, the amount of restricted cash reserved for these
guarantees was approximately $3.3 million and the Company believes that such
reserves are sufficient.

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