CHINA HGS REAL ESTATE INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)
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 ofChina HGS Real Estate, Inc. for the three months endedDecember 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
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 theU.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 throughShaanxi Guangsha Investment andDevelopment 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 inChina . For the three months endedDecember 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 endedDecember 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 endedDecember 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 endedDecember 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 endedDecember 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 endedDecember 31,2021 with higher ASP of approximately$2,953 per square meters.
21 Table of 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 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
InDecember 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 endedDecember 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 inthe 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;
22
Table of Contents
? 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
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. 23 Table of Contents Use of estimates The preparation of financial statements in conformity withU.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 endedDecember 31, 2021 and 2020, the Company did not recognize any impairment loss for its real estate properties.
RESULTS OF OPERATIONS
Three months completed
Revenues
Here is a breakdown of revenue:
For the
three months completed
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
24
Table of Contents
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 endedDecember 31, 2021 from approximately$2.8 million in the same period of last year. The total GFA sold during three months endedDecember 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 endedDecember 31, 2021 was approximately$0.06 million , increased from three months endedDecember 31, 2020 due to more surtax charged for the completed real estate properties during the three months endedDecember 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.
25
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 endingDecember 31, 2021 were approximately$1.3 million as compared to approximately$1.7 million for the three months endedDecember 31, 2020 , representing a decrease of approximately$0.4 million . The decrease in construction cost was due to less units sold during the quarter endedDecember 31, 2021 .
Gross profit
Gross profit was approximately$1.4 million for the three months endedDecember 31, 2021 as compared to approximately$0.9 million for the three months endedDecember 31, 2020 , representing an increase of$0.5 million , which was mainly attributable to more commercial units sold in the three months endedDecember 31, 2021 with higher ASP. For the three months endedDecember 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 endedDecember 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 endedDecember 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 endedDecember 31, 2021 from$0.4 million for the three months endedDecember 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 endedDecember 31, 2021 , increased by$0.3 million from the three months endedDecember 31, 2020 due to more professional and consulting fees incurred. Our total operating expenses accounted for 29.6% and 14.0% of our real estate sales before sales taxes for the three months endedDecember 31, 2021 and 2020, respectively. For three months ended December 31, 2021 2020 (Unaudited) (Unaudited) Selling expenses$ 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 %
26
Table of Contents
Income Taxes
PRC Taxes
The Company's PRC subsidiary and VIE are governed by the Income Tax Law ofthe 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 endedDecember 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 endedDecember 31, 2021 was due to nondeductible expenses including professional fees, and penalties and interest expense related to ourU.S. delinquent tax filings.
Net revenue
We reported net income of approximately$0.4 million for the three months endedDecember 31, 2021 , as compared to net income of approximately$0.3 for the three months endedDecember 31, 2020 . The increase in net income was primarily due to higher revenue, offset by more operating expenses for the three months endedDecember 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.
27
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, inDecember 2019 , a novel strain of coronavirus (COVID-19) surfaced. COVID-19 has spread rapidly throughoutChina 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 earlyMarch 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 endedDecember 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 ofDecember 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 ofDecember 31, 2021 , our total cash and restricted cash balance was approximately$5.7 million , increased from approximately$3.5 million as ofSeptember 30, 2021 . With respect to capital funding requirements, the Company budgeted its capital spending based on ongoing assessments of needs to maintain adequate cash. OnJanuary 14, 2022 , the Company closed a private placement with net proceeds of approximately $$24.3 million of which$2.0 million was received as ofDecember 31, 2021 . As ofDecember 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 ofDecember 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 ofDecember 31, 2021 , we reported approximately$121.0 million of construction loans borrowed from financial institutions controlled by the local government and such loans can only be used on the old town renovation related project development. We expect that we will be able to renew all of the existing construction loans upon their maturity and borrow additional new loans from local financial institutions, when necessary, based on our past experience and the Company's good credit history. Also, the Company's cash flows from pre-sales and current sales should provide financial support for our current development projects and operations. For the three months endedDecember 31, 2021 , we had six large ongoing construction projects (see Note 3, real estate properties under development) which were in the preliminary development stage due to delayed inspection and acceptance of the development plans by the local government. InJune 2020 , we completed the residence relocation surrounding theLiangzhou Road related projects and launched the construction of these projects inDecember 2020 . For the other four projects, we expect we will be able to obtain the government's approval of the development plans on these projects in the coming fiscal year and start the pre-sale of the real estate properties to generate cash when certain property development milestones have been achieved. 28 Table of Contents Cash Flow
The cash flow results comparison is summarized as follows:
Three months ended
December 31,
2021 2020
(Unaudited) (Unaudited)
Net cash provided by operating activities$ 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 endedDecember 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 ourYangzhou 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 endedDecember 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 ourYangzhou 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
for three months ended
There was no net cash provided by or (used in) financing activities during the three months ended
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 ofDecember 31, 2021 andSeptember 30, 2021 , our outstanding guarantees in respect of our customers' mortgage loans amounted to approximately$66 million . As ofDecember 31, 2021 andSeptember 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.
© Edgar Online, source