UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended December 31, 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
(State or Other Jurisdiction of Incorporation)		(I.R.S. Employer Identification Number)

6 Xinghan Road, 19th Floor, Hanzhong City

Shaanxi Province, PRC 723000

(Address of Principal Executive Offices, Zip Code)

+(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 ⌧ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ⌧ 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 ⌧	Smaller reporting company ⌧
	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 ⌧

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


Class of Securities		Shares Outstanding
Common Stock, $0.001 par value		25,617,807

Table of Contents

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION	3

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

PART II	OTHER INFORMATION	32

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

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

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)


	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

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


										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,
	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 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, 2021 and 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, 2021 filed with the SEC on January 13, 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 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 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 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 spread, 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.

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, 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. 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 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 are 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 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 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.

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 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 Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, “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 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 other payables.

Revenue recognition

The Company follows FASB ASC Topic 606 “Revenue from Contracts with Customers” (“ASC 606”). Under ASC 606, 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 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.For the three months ended December 31, 2021 and 2020, the Company did not have any construction in progress recognized under the percentage of completion method.

Disaggregation of Revenues

Disaggregated revenues are as follows:

For the three months ended December 31,

SEC Form 10-Q filed by China HGS Real Estate Inc.