GREEN GIANT INC. 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 and nine months endedJune 30, 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," "our," "us" 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 sustain our project development
? our ability to obtain additional land use rights at favorable prices;
? the market for real estate in Tier 3 and 4 cities and counties;
? our ability to obtain additional capital in future years to fund our planned
expansion; or
? economic, political, regulatory, legal and foreign exchange risks associated
with our operations. Business Overview We conduct substantially all of our business 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 first nine months endedJune 30, 2021 , our sales, gross profit and net income were$52.9 million ,$10.9 million and$6.1 million , respectively, representing an approximate 630.0%, 2477.9% and 277.7% increase in sales, gross profit and net income as compared to nine months endedJune 30,2020 , respectively. The increase in sales, gross profit and net income mainly resulted from more gross floor area ("GFA") sold during nine months endedJune 30, 2021 For the nine months endedJune 30, 2021 , the average selling price ("ASP") for our real estate projects (excluding sales of parking spaces) located in Yang County was approximately$670 per square meter, slightly decreased from the ASP of$687 per square meter. The ASP of our Hanzhong real estate projects (excluding sales of parking spaces) was approximately$621 per square meter for the nine months endedJune 30, 2021 , increased from the ASP of$569 per square meter for the nine months endedJune 30, 2020 due to increasing real estate
price in the local market.
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Market Outlook
The Chinese government is expected to continue implementing the tightening of measurements to cool down the real estate market. These measures may include but not limit to restriction on home purchase, increase the down-payment requirement against speculative buying, 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, etc. The downward 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, enhancing our cost and operational synergies and improving cash flows and strengthening our balance sheet.
The Company started the construction ofLiangzhou Road related project after the approval by the local government of the road. These projects will comprise of residential for end-users and upgraders, shopping malls as well as serviced apartments and offices to satisfy different market demands. 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 and, as such, the Company is unable to determine if it will have a material impact to its operations. For the nine months endedJune 30, 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 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.
Liangzhou road and related projects
InSeptember 2013 , the Company entered into an agreement ("Liangzhou Agreement") with the Hanzhong local government on theLiangzhou Road reformation and expansion project (Liangzhou Road Project "). Pursuant to the agreement, the Company is contracted to reform and expand the Liangzhou Road, a commercial street in downtown Hanzhong City, with a total length of 2,080 meters and width of 30 meters and to resettle the existing resident in the Liangzhou road area. The government's original road construction budget was approximately$33 million in accordance with the Liangzhou Agreement. The Company, in return, is being compensated by the local government to have an exclusive right on acquiring at least 394.5 Mu land use rights in a specified location of Hanzhong City.The Liangzhou Road Project's road construction started at the end of 2013. In 2014, the original scope and budget on the Liangzhou road reformation and expansion project was extended, because the local government included more area and resettlement residences into the project, which resulted in additional investments from the Company. In return, the Company is authorized by the local government to develop and manage the commercial and residential properties surrounding the Liangzhou Road project. As ofJune 30, 2021 , the main Liangzhou road construction is substantially completed, due to the complicated multiple level of government review process, the Company expected to the government's acceptance to be completed before the end of fiscal 2021. Due to historical delays in government approval and acceptance, the Company included such balance in real estate property under development as non-current assets. As ofJune 30, 2021 , the actual costs incurred by the Company were$177,539,504 (September 30, 2020 -$164,879,955 ) and the incremental cost related to residence resettlement was approved by the local government. The Company determined that the Company's Investment in theLiangzhou Road Project in exchange for interests in future land use rights is a barter transaction with commercial substance.
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Oriental Pearl Garden Phase II
Oriental Garden Phase II project is planned to consist of 8 high-rise residential buildings and 6 commercial buildings with total planned GFA of 370,298 square meters. The project will also include a farmer's market.
Liangzhou Mansion project is planned to consist of 7 high-rise buildings and commercial shops on the first floor with total planned GFA of 160,000 square meters.Pearl Commercial Plaza Pearl Commercial Plaza is planned to consist of one office building, one service apartment (or hotel), classical architecture style of Chinese traditional houses and shopping malls with total planned GFA of 124,191 square meters. The Company plans to start the construction of these three real estate projects in 2020 after the road construction is fully completed and passes local government's inspection and approval. These related projects may take 2-3 years to fully complete.Road Construction Other road construction projects mainly included the Yang CountyEast 2nd Ring Road construction project. The Company was engaged by the Yang County local government to construct theEast 2nd Ring Road with a total length of 2.15 km. The local government is required to repay the Company's project investment costs within 3 years with interest at the interest rate based on the commercial borrowing rate with the similar term published by the China Construction Bank (June 30, 2021 and2 September 30 , 2020 - 4.75%). The local government has approved a refund to the Company by reducing local surcharges or taxes otherwise required in the real estate development. The road construction was substantially completed as ofDecember 31, 2020 and in process of government review and approval. InSeptember 2012 , the Company was approved by the Hanzhong local government to construct four municipal roads with a total length of approximately 1,192 meters. The project was deferred and then restarted during the quarter endedMarch 31, 2014 . As ofJune 30, 2021 , the local government was still in the process of assessing the budget for these projects, which is expected to be completed by 2021.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted 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 use 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 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.
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Revenue recognition
The Company adopted FASB ASC Topic 606 Revenue from Contracts with Customers
("ASC 606") on October 1, 2018 using the modified retrospective approach. Under
ASC 606, Revenue from Contracts with Customers, revenue is recognized in
accordance with the transfer of goods and services to customers at an amount
that reflects the consideration that the Company expects to be entitled to for
those goods and services. The Company determines revenue recognition through the
following steps:
? identification of the contract, or contracts, with a customer;
? identification of the performance obligations in the contract;
? determination of the transaction price, including the constraint on variable
consideration;
? allocation of the transaction price to the performance obligations in the
contract; and
? recognition of revenue when (or as) the 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 customers. Revenues arising from real estate sales are recognized
when or as the control of the asset is transferred to the customer. The control
of the asset may transfer over time or at a point in time. For the sales of
individual condominium units in a real estate development project, the Company
has an enforceable right to payment for performance completed to date, revenue
is recognized over time by measuring the progress towards complete satisfaction
of that performance obligation ("percentage completion method"). Otherwise,
revenue is recognized at a point in time when the customer obtains control of
the asset.
Under percentage completion method, revenue and profit from the sales of long-term real estate development properties is recognized by the percentage of completion method on the sale of individual units when all the following criteria are met:
a. Construction is beyond a preliminary stage.
b. The buyer is committed to the extent of being unable to require a refund
except for non-delivery of the unit or interest.
c. Sufficient units have already been sold to assure that the entire property
will not revert to rental property.
d. Sale prices are collectible.
e. Aggregate sales proceeds and costs can be reasonably estimated.
If any of the above criteria is not met, proceeds shall be accounted for as deposits until the criteria are met.
Under the percentage of completion method, revenues from individual real estate
condominium units sold under development and related costs are recognized over
the course of the construction period, based on the completion progress of a
project. The progress towards complete satisfaction of the performance
obligation is measured based on the Company's efforts or inputs to the
satisfaction of the performance obligation, by reference to the contract costs
incurred up to the end of reporting period as a percentage of total estimated
costs for each contract. In relation to any project, revenue is determined by
calculating the ratio of incurred costs, including land use rights costs and
construction costs, to total estimated costs and applying that ratio to the
contracted sales amounts. Cost of sales is recognized by determining the ratio
of contracted sales during the period to total estimated sales value, and
applying that ratio to the incurred costs. Current period amounts are calculated
based on the difference between the life-to-date project totals and the
previously recognized amounts.
Any changes in significant judgments and/or estimates used in determining
construction and development revenue could significantly change the timing or
amount of construction and development revenue recognized. Changes in total
estimated project costs or losses, if any, are recognized in the period in which
they are determined.
Revenue from the sales of previously completed real estate condominium units is
recognized at the time of the closing of an individual unit sale. This occurs
when the customer obtains the physical possession, the legal title, or the
significant risks and rewards of ownership of the assets and the Company has the
right to payment and the collection of the consideration is probable. For
municipal road construction projects, fees are generally recognized at the time
the projects are completed.
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Contract balances
Timing of revenue recognition may differ from the timing of billing and cash
receipts from customers. The Company records a contract asset when revenue is
recognized prior to invoicing, or a contract liability when cash is received in
advance of recognizing revenue. A contract asset is a right to consideration
that is conditional upon factors other than the passage of time. Contract assets
include billed and billable receivables, which are the Company's unconditional
rights to consideration other than to the passage of time. Contract liabilities
include cash collected in excess of revenues. Customer deposits are excluded
from contract liabilities.
The Company has elected to apply the optional practical expedient for costs to
obtain a contract which allows the Company to immediately expense sales
commissions (included under selling expenses) because the amortization period of
the asset that the Company otherwise would have used is one year or less.
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.
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. Actual results could differ from these estimates.
Real estate property development completed and under development
Real estate property consists of finished residential unit sites, commercial offices and residential unit sites under development. The Company leases the land for the residential unit sites under land use right leases with various terms from the PRC government. The cost of land use rights is included in the development cost and allocated to each project. Real estate property development completed and real estate property under development are stated at the lower of cost or fair value. Expenditures for land development, including cost of land use rights, deed tax, pre-development costs, and engineering costs, exclusive of depreciation, are capitalized and allocated to development projects by the specific identification method. Costs are allocated to specific units within a project based on the ratio of the sales area of units to the estimated total sales area of the project (or phase of the project) multiplied by the total cost of the project (or phase of the project).
Cost of amenities transferred to buyers is allocated to specific units as a component of total construction cost. The amenity cost includes landscaping, road paving, etc. Once the projects are completed, the amenities are under control of the property management companies.
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Real estate property development completed and real estate property under
development are reclassified on the balance sheet into current and non-current
portions based on the estimated date of construction completion and sales. The
real estate property development completed classification is based on the
estimated date that each property is expected to be sold within the Company's
normal operating cycle of the business and the Company's sales plan. Real estate
property development completed is classified as a current asset if the property
is expected to be sold within the normal operating cycle of the business.
Otherwise, it is classified as a non-current asset. The majority of real estate
projects the Company has completed in the past were multi-layer or sub-high-rise
real estate projects. The Company considers its normal operating cycle is
12 months.
Real estate property development completed and under development are subject to
valuation adjustments when the carrying amount exceeds fair value. An impairment
loss is recognized only if the carrying amount of the assets is not recoverable
and exceeds its fair value. The carrying amount is not recoverable if it exceeds
the sum of the undiscounted cash flows expected to be generated by the assets.
The Company 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 and nine months
ended June 30, 2021 and 2020, the Company did not recognize an impairment loss
for any of its real estate properties.
RESULTS OF OPERATIONS
Three Months Ended
Revenues
The following is a breakdown of revenue:
For Three Months Ended
June 30,
2021 2020
Revenue recognized for completed condominium real estate
projects $ 31,824,097 $ 3,046,430
Revenue recognized for condominium real estate projects
under development - -
Total $ 31,824,097 $ 3,046,430 Revenue recognized for completed condominium real estate projects
The following table summarizes our revenue generated by different projects:
For Three Months Ended June 30,
2021 2020 Variance
Revenue % Revenue % Amount %
Mingzhu Garden (Mingzhu Nanyuan &
Mingzhu Beiyuan) Phase I and II $ - - $ 132,563 4.4 %$ (132,563) (100) % Oriental Pearl Garden - - 64,560 2.1 % (64,560) (100) % Nanyuan II Project 29,107,272 91.5 % - - 29,107,272 100 % Yangzhou Palace 2,716,825 8.5 % 2,781,660 91.3 % (64,835) (2.3) % Yangzhou Pearl Garden Phase I and II - - 67,647
2.2 % (67,647) (100) %
Total Real Estate Sales before Sales Tax 31,824,097 100 % 3,046,430 100 % 28,777,667 944.6 % Sales Tax (197,537) (29,222) (168,315) 576.0 % Revenue net of sales tax$ 31,626,560 $ 3,017,208 $ 28,609,352 948.2 %
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 944.6% to approximately$31.8 million for the three months endedJune 30, 2021 from approximately$3.0 million . For the three months endedJune 30, 2021 , we sold all residential units in Nanyuan II project to the local government for residence reallocation purposes with total revenue of approximately$29.1 million , which represented 91.5% of our revenue in this quarter. The total GFA sold for the rest of real estate projects during the three months endedJune 30, 2021 and 2020 was 4,056 square meters and 3,624 square meters, respectively. The sales tax for the three months endedJune 30, 2021 was approximately$0.2 million , increased by 576.0% from the same period of 2020, consistent with
the
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increase in revenue. The percentage of increase in sales taxes was less than the
growth rate in revenue was due to the fact that certain tax charge was based on
the customers' payments, the location of the properties and other factors.Cost of Sales
The following table sets forth a breakdown of our cost of sales:
For Three Months Ended June 30,
2021 2020 Variance
Cost % Cost % Amount %
Land use rights $ 2,327,295 9.2 % $ 165,305 9.6 % $ 2,161,990 1307.9 %
Construction cost 22,969,393 90.8 % 1,562,912 90.4 % 21,406,481 1369.7 %
Total cost $ 25,296,688 100 % $ 1,728,217 100 % $ 23,568,471 1363.7 %
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 $25.3 million for the three months ended June
30, 2021 compared to $1.7 million for the same period of last year. The $23.6
million increase in cost of sales was mainly attributable to more GFA sold
during the three months ended June 30, 2021 which led to increased cost of
sales.
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 June 30, 2021 were
approximately $2.3 million , as compared to approximately $0.2 million for the
three months ended June 30, 2020 , representing an increase of approximately $2.2
million from the same quarter last year. The increase was consistent with the
fact that total GFA sold in this quarter significantly increased from the same
period of last year.
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 June
30, 2021 were approximately $23.0 million as compared to approximately $1.6
million for the same period of last year, representing an increase of
approximately $21.4 million . The increase in construction cost was due to more
real estate projects sold during the quarter ended June 30, 2021 .
In addition, for the three months ended
Gross Profit
Gross profit was approximately$6.3 million for the three months endedJune 30, 2021 as compared to gross loss approximately$1.4 million for the three months endedJune 30, 2020 , representing an increase of$7.7 million , which was mainly attributable to approximately$5.8 million gross profit from the sales of Nanyuan II project to the local government during the current quarter of fiscal 2021 and no impairment loss recognized for the real estate property completed during the quarter endedJune 30, 2021 . For the three months endedJune 30, 2020 , we recognized approximately$2.7 million impairment losses for certain slow moving real estate property development completed. The gross margin was consistently around 19.9% comparing to negative gross margin of 46.4% in the same 27 Table of Contents
period of last year. The higher margin in
For Three Months Ended June 30,
2021 2020
Gross Gross
Gross Profit Margin Gross Profit Margin
Mingzhu Garden (Mingzhu Nanyuan & Mingzhu
Beiyuan) Phase I and II $ - - $ 38,183 28.8 %
Oriental Garden - - 16,085 24.9 %
Nanyuan II project 5,751,198 19.8 % - -Yangzhou Pearl Garden Phase I and II - -
11,684 17.3 %
Yangzhou Palace 776,211 28.6 % 1,252,261 45.0 %
Sales Tax (197,537) - (29,222) -
Impairment losses on real estate property
development completed (2,703,031)
Total Gross Profit$ 6,329,872 19.9 %$ (1,424,040) (46.4) % Total Real Estate Sales before Sales Tax$ 31,824,097
$ 3,046,430 Operating Expenses Total operating expenses increased by 42.0% to approximately$1.5 million for the three months endedJune 30, 2021 from$1.1 million for the three months endedJune 30, 2020 , primarily due more general and administrative expense incurred for the three months endedJune 30, 2021 . Our general and administrative expense was approximately$1.4 million for the three months endedJune 30, 2021 , increased by$0.4 million from the three months endedJune 30,2020 due to more office expenses and professional and consulting fee expenses incurred. Our total operating expenses accounted for 4.7% and 34.5% of our real estate sales before sales taxes for the three months endedJune 30, 2021 and 2020, respectively. For Three Months Ended June 30, 2021 2020 Selling expenses$ 81,002 $ 77,404 General and administrative expenses 1,411,151
973,318
Total operating expenses$ 1,492,153 $
1,050,722
Percentage of Real Estate Sales before Sales Tax 4.7 % 34.5 % Income Taxes U.S. Taxes China HGS is aFlorida corporation. However, all of our operations are conducted solely by our subsidiaries in the PRC. No income is earned inthe United States and we do not repatriate any earnings outside the PRC. As a result, we did not generate anyU.S. taxable income for the three months endedJune 30, 2021 and 2020. 28 Table of Contents RecentU.S. federal tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the "U.S. Tax Reform"), was signed into law onDecember 22, 2017 . TheU.S. Tax Reform significantly modified theU.S. Internal Revenue Code by, among other things, reducing the statutoryU.S. federal corporate income tax rate from 35% to 21% for taxable years beginning afterDecember 31, 2017 ; limiting and/or eliminating many business deductions; migrating theU.S. to a territorial tax system with a one-time transition tax on a mandatory deemed repatriation of previously deferred foreign earnings of certain foreign subsidiaries; subject to certain limitations, generally eliminatingU.S. corporate income tax on dividends from foreign subsidiaries; and providing for new taxes on certain foreign earnings. Taxpayers may elect to pay the one-time transition tax over eight years or in a single lump sum. TheU.S. Tax Reform also includes provisions for a new tax on GILTI effective for tax years of foreign corporations beginning afterDecember 31, 2017 . The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of controlled foreign corporations ("CFCs"), subject to the possible use of foreign tax credits and a deduction equal to 50 percent to offset the income tax liability, subject to some limitations. For the year endedSeptember 30, 2018 , the Company recognized a one-time transition toll tax of approximately$2.3 million that represented management's estimate of the amount ofU.S. corporate income tax based on the deemed repatriation tothe United States of the Company's share of previously deferred earnings of certain non-U.S. subsidiaries and VIE of the Company mandated by theU.S. Tax Reform. The Company's estimate of the onetime transition toll Tax is subject to the finalization of management's analysis related to certain matters, such as developing interpretations of the provisions of the Tax Act and amounts related to the earnings and profits of certain foreign VIEs and the filing of our tax returns.U.S. Treasury regulations, administrative interpretations or court decisions interpreting the Tax Act may require further adjustments and changes in our estimates. As ofJune 30, 2021 andSeptember 30, 2020 , the Company provided an additional$0.8 million provision due to delinquentU.S. tax return fillings.
PRC Taxes
Our Company is governed by the Enterprise Income Tax Law ofthe People's Republic of China concerning private-run enterprises, which are generally subject to tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments. For the nine months endedJune 30, 2021 and 2020, the Company is subject to income tax rate of 25% on taxable income. Although the possibility exists for reinterpretation of the application of the tax regulations by higher tax authorities in the PRC, potentially overturning the decision made by the local tax authority, the Company has not experienced any reevaluation of the income taxes for prior years. The PRC tax rules are different from the local tax rules and the Company is required to comply with local tax rules. The difference between the two tax rules will not be a liability of the Company. There will be no further tax payments for the difference.
Net income
We reported net income of approximately$3.6 million for the three months endedJune 30, 2021 , as compared to net loss of approximately$2.6 for the three months endedJune 30, 2020 . The increase of approximately$6.2 million in our net income was primarily due to more revenue for the three months endedJune 30, 2021 as discussed above under Revenues and Gross Profit.
Other Comprehensive Income (loss)
We operate primarily in the PRC and the functional currency of our operating
subsidiary 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 loss of $2.8
million and $0.4 million for the three months ended June 30, 2021 and 2020,
respectively, due to the significant fluctuation of RMB during the period. The
balance sheet amounts with the exception of equity at June 30, 2021 were
translated at 6.4566 RMB to 1.00 USD as compared to 6.7896 RMB to 1.00 USD at
September 30, 2020 . The equity accounts were stated at their historical rate.
The average translation rates applied to the income statements accounts for the
periods ended June 30, 2021 and 2020 were 6.5202 RMB and 7.0364 RMB ,
respectively.
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Nine months Ended
Revenues
The following is a breakdown of revenue:
For nine months ended
June 30,
2021 2020Revenue recognized under full accrual method$ 52,857,471 $ 7,240,503 Revenue recognized under percentage of completion method -
-
Total $ 52,857,471 $ 7,240,503 Revenue recognized for completed condominium real estate projects
The following table summarizes our revenue generated by different projects:
For Nine Months Ended June 30,
2021 2020 Variance
Revenue % Revenue % Amount %
Mingzhu Garden (Mingzhu Nanyuan &
Mingzhu Beiyuan) Phase I and Phase
II $ 189,455 0.4 % $ 663,516 9.2 % $ (474,061) (71.4) %
Nanyuan II Project 43,538,611 82.4 % - - 43,538,611 100 %
Yangzhou Pearl Garden Phase I and
Phase II 42,321 0.1 % 76,355 1.1 % (34,034) (44.6) %
Oriental Garden - - 186,464 2.6 % (186,464) (100) %
Yangzhou Palace 9,087,084 17.1 % 6,314,168 87.2 2,772,916 43.9 %
Total Real Estate Sales before Sales Tax 52,857,471 100 % 7,240,503 100 % 45,616,698 630.0 % Sales Tax (336,241) (95,503) (240,738) 252.1 % Revenue net of sales tax$ 52,521,230 $ 7,145,000
$ 45,376,230 635.1 %
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$45.6 million to approximately$52.9 million for the nine months endedJune 30, 2021 from approximately$7.2 million in the same period of last year. For the nine months endedJune 30, 2021 , we sold all residential units in Nanyuan II project to the local government for residence reallocation purposes with total revenue of approximately$43.5 million , which represented 82.4% of our revenue. The total GFA sold for the rest of real estate projects during the nine months endedJune 30, 2021 and 2020 was 13,949 square meters and 10,797 square meters, respectively. The sales tax for the nine months endedJune 30, 2021 was approximately$0.3 million , increased by 252.1% from the same period of 2020, consistent with more revenue in the first half of fiscal 2021. The percentage of increase in sales taxes was less than the growth rate in revenue was due to the fact that certain tax charge was based on the customers' payments, the location of the properties and other factors.
Cost of Sales
The following table sets forth a breakdown of our cost of sales:
For nine months ended June 30,
2021 2020 Variance
Cost % Cost % Amount %
Land use rights $ 3,954,336 9.5 % $ 462,934 9.4 % $ 3,491,402 754.2 %
Construction cost 37,670,258 90.5 % 4,437,276 90.6 % 33,232,982 749.0 %
Total cost $ 41,624,594 100 % $ 4,900,210 100 % $ 36,724,384 749.4 %
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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
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 nine months endedJune 30, 2021 were approximately$4.0 million , as compared to approximately$0.5 million for the nine months endedJune 30, 2020 , representing an increase of approximately$3.5 million from the same period of last year. The increase was consistent with the fact that total GFA sold in the first nine months 2020 was significantly increased from the same period of last year. 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 nine months endingJune 30, 2021 were approximately$37.7million as compared to approximately$4.4 million for the same period of last year, representing an increase of approximately$33.2 million . The increase in construction cost was due to more real estate property units sold during the first half of fiscal 2020.
In addition, for the nine months ended
Gross Profit
Gross profit was approximately$10.9 million for the nine months endedJune 30, 2021 as compared to gross loss of approximately$0.5 million for the nine months endedJune 30, 2020 , representing an increase of$11.4 million , which was mainly attributable to approximately$8.6 million gross profit from the sales of Nanyuan II project to the local government and no impairment charge recognized for the real estate property completed during the first nine months of fiscal 2021. The gross margin was 20.6% in the first nine months of fiscal 2021 as compared to negative gross margin of 6.3% in the same period of last year. For the nine months endedJune 30, 2020 , we recognized approximately$2.7 million impairment losses for certain slow moving real estate property development completed. For the nine months endedJune 30, 2021 , the ASP for our real estate projects (excluding sales of parking spaces) located in Yang County was approximately$670 per square meter, slightly decreased from the ASP of$687 per square meter. The ASP of our Hanzhong real estate projects (excluding sales of parking spaces) was approximately$621 per square meter for the nine months endedJune 30, 2021 , increased from the ASP of$569 per square meter for the nine months endedJune 30, 2020 due to increasing real estate price in the
local
market.
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The following table sets forth the gross margin of each of our projects:
For Nine Months Ended June 30,
2021 2020
Percentage Gross Percentage
Gross Profit of Revenue Profit of Revenue
Mingzhu Garden (Mingzhu Nanyuan &
Mingzhu Beiyuan) $ 47,336 25.0 % $ 185,245 27.9 %
Oriental Garden - - 52,504 28.2 %
Nanyuan II project 8,602,566 19.8 % - -
Yangzhou Pearl Garden 5,275 13.5 % 12,863 16.8 %
Yangzhou Palace 2,577,250 28.4 % 2,089,681 33.1 %
Sales Tax (336,241) (95,503)
Impairment losses on real estate
property development completed - - (2,703,031)
Total Gross Profit 10,896,636 20.6 % (458,241) (6.3) % Total Real Estate Sales before Sales Tax$ 52,857,471 $ 7,240,503 Operating Expenses Total operating expenses were approximately$2.4 million and$2.9 million for the nine months endedJune 30, 2021 and 2020, respectively. The decrease in selling expenses of$0.3 million for nine months endedJune 30, 2021 was primarily attributed to less promotion activities. The$0.1 million decrease in general administration expenses for the nine months endedJune 30, 2021 was primarily attributed to less office expenses and professional and consulting fee expenses incurred. Our total operating expenses accounted for 4.6% and 39.5% of our real estate sales before sales taxes for the nine months endedJune 30 ,
2021
and 2020, respectively.
For nine months ended
June 30,
2021 2020
Selling expenses $ 177,168 $ 477,962
General and administrative expenses 2,260,410 2,381,572
Total operating expenses$ 2,437,578 $
2,859,534
Percentage of Real Estate Sales before Sales Tax 4.6 % 39.5 % Income Taxes U.S. Taxes China HGS is aFlorida corporation. However, all of our operations are conducted solely by our subsidiaries in the PRC. No income is earned inthe United States and we do not repatriate any earnings outside the PRC. As a result, we did not generate anyU.S. taxable income for the nine months endedJune 30, 2021 and 2020. RecentU.S. federal tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the "U.S. Tax Reform"), was signed into law onDecember 22, 2017 . TheU.S. Tax Reform significantly modified theU.S. Internal Revenue Code by, among other things, reducing the statutoryU.S. federal corporate income tax rate from 35% to 21% for taxable years beginning afterDecember 31, 2017 ; limiting and/or eliminating many business deductions; migrating theU.S. to a territorial tax system with a one-time transition tax on a mandatory deemed repatriation of previously deferred foreign earnings of certain foreign subsidiaries; subject to certain limitations, generally eliminatingU.S. corporate income tax on dividends from foreign subsidiaries; and providing for new taxes on certain foreign earnings. Taxpayers may elect to pay the one-time transition tax over eight years or in a single lump sum. TheU.S. Tax Reform also includes provisions for a new tax on GILTI effective for tax years of foreign corporations beginning afterDecember 31, 2017 . The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of controlled foreign corporations ("CFCs"), subject to the possible use of foreign tax credits and a deduction equal to 50 percent to offset the income tax liability, subject to some limitations. For the year endedSeptember 30, 2018 , the Company recognized a one-time transition toll tax of approximately$2.3 million that represented management's estimate of the amount ofU.S. corporate income tax based on the deemed repatriation tothe United States of the Company's share of previously deferred earnings of certain non-U.S. subsidiaries and VIE of the Company mandated by theU.S. Tax Reform. The Company's estimate of the onetime transition toll Tax is subject to the finalization of management's analysis related to certain matters, such as developing interpretations of the provisions of the Tax Act and amounts related to the
earnings and
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profits of certain foreign VIEs and the filing of our tax returns. U.S. Treasury
regulations, administrative interpretations or court decisions interpreting the
Tax Act may require further adjustments and changes in our estimates. As of June
30, 2021 and September 30, 2020 , the Company provided an additional $0.8 million
provision due to delinquent U.S. tax return fillings.
PRC Taxes
Our Company is governed by the Enterprise Income Tax Law ofthe People's Republic of China concerning private-run enterprises, which are generally subject to tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments. For the nine months endedJune 30, 2021 and 2020, the Company is subject to income tax rate of 25% on taxable income. Although the possibility exists for reinterpretation of the application of the tax regulations by higher tax authorities in the PRC, potentially overturning the decision made by the local tax authority, the Company has not experienced any reevaluation of the income taxes for prior years. The PRC tax rules are different from the local tax rules and the Company is required to comply with local tax rules. The difference between the two tax rules will not be a liability of the Company. There will be no further tax payments for the difference.
Net Income
We reported net income of approximately$2.5 million for the nine months endedJune 30, 2021 , as compared to net loss of approximately$6.1 million for the nine months endedJune 30, 2020 . The increase of$9.6 million in our net income was primarily due to more revenue reported for the first half of fiscal 2021 as discussed above under Revenues and Gross Profit
Other Comprehensive Income (Loss)
We operate primarily in the PRC and the functional currency of our operating
subsidiary 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 loss of $9.0
million and $1.9 million for the nine months ended June 30, 2021 and 2020,
respectively, due to the significant fluctuation of RMB during the period. The
balance sheet amounts with the exception of equity at June 30, 2021 were
translated at 6.4566 RMB to 1.00 USD as compared to 6.7896 RMB to 1.00 USD at
September 30, 2020 . The equity accounts were stated at their historical rate.
The average translation rates applied to the income statements accounts for the
periods ended June 30, 2021 and 2020 were 6.5202 RMB and 7.0364 RMB ,
respectively.
Liquidity and Capital Resources
Our principal need for liquidity and capital resources is to maintain working capital sufficient to support our operations and to make capital expenditures to finance the growth of our business. Historically we mainly financed our operations primarily through cash flows from operations and borrowings from
our
principal shareholder.
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In recent years, the Chinese government has implemented measures to control overheating residential and commercial property prices including but not limited to restrictions on home 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 the COVID-19, the Chinese government has employed measures including city lockdowns, quarantines, travel restrictions, suspension of business activities and school closures. Due to difficulties resulting from the COVID-19 outbreak, 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 the real estate property sales to customers on a timely basis, our revenue during the nine months endedJune 30,2020 were significantly lower. The Company is experiencing a recovery of its real estate development business in the first nine months of fiscal 2021 due to increasing demand from the local real estate market. The Company had revenue of approximately$52.9 million for the nine months endedJune 30, 2021 , increased from$45.6 million in the same period of last year. Based on the assessment of current economic environment, customer demand and sales trends, we believe that consumer spending has been restored in the local real estate market and the real estate sales are expected to grow in the coming periods. On the other side, due to negative impact from COVID-19 outbreak and spread, the developing period of real estate properties and our operating cycle has been extended and we may not be able to liquidate our large balance of completed real estate property within the short term as we originally expected. In addition, as ofJune 30, 2021 , we had large construction loans payable of approximately$119.4 million and a large accounts payable of approximately$20.1 million to be paid to subcontractors within one year. 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 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 ofJune 30, 2021 , our total cash and restricted cash balance was approximately$3.7 million similar to approximately$3.9 million as ofSeptember 30, 2020 . With respect to capital funding requirements, the Company budgeted its capital spending based on ongoing assessments of needs to maintain adequate cash. As ofJune 30, 2021 , we had approximately$92.8 million of completed residential apartments and commercial units available for sale to potential buyers. Although we reported approximately$20.1 million accounts payable as ofJune 30, 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 ofJune 30, 2021 , we reported approximately$119.4 million of construction loans borrowed from financial institutions controlled by the local government and such loans can only be used on the old town renovation related project development. We expect that we will be able to renew all of the existing construction loans upon their maturity and borrow additional new loans from local financial institutions, when necessary, based on our past experience and the Company's good credit history. Also, the Company's cash flows from pre-sales and current sales should provide financial support for our current developments and operations. As ofJune 30, 2021 , we had approximately$22.8 million of customer deposits representing cash advances from buyers for pre-sales of our residential units and road construction and we believe future cash advances from our customers can be used to fund our ongoing construction projects whenever necessary. For the nine months endedJune 30, 2021 , we had six large ongoing construction projects (see Note 3, real estate properties under development) which were under the preliminary development stage due to delayed inspection and acceptance of the development plans by the local government. InJune 2020 , we completed the residence relocation surrounding the Liangzhou Road related projects and launched the construction of these projects inDecember 2020 . For the other four projects, we expect we will be able to obtain the government's approval of the development plans on these projects in the coming fiscal year and start the pre-sale of the real estate property to generate cash when certain property development milestones have been achieved. In addition, our principal shareholder, Mr.Xiaojun Zhu has been providing and has committed to continue to provide his personal funds to support the Company's operation whenever necessary. 34 Table of Contents Cash Flow
Comparison of cash flows results is summarized as follows:
Nine months ended
June 30,
2021 2020Net cash (used in) provided by operating activities$ (252,384) $ 1,811,912 Net cash used in financing activities -
(2,405,349)
Effect of change of foreign exchange rate on cash and restricted cash 91,431
184,993
Net (decrease) increase in cash and restricted cash (160,953)
(408,444)
Cash and restricted cash, beginning of period 3,867,536
4,202,117
Cash and restricted cash, end of period$ 3,706,583
$ 3,793,673 Operating Activities
Net cash used in operating activities during the nine months endedJune 30, 2021 was approximately$0.3 million , consisting of net income of approximately$6.1 million and net changes in our operating assets and liabilities, which mainly included a decrease in real estate property completed by approximately$6.7 million due to sales of ourYangzhou Palace project, a decrease in contract assets of approximately$2.3 million due to collection of customers' payments and an increase in customer deposit received of$2.4 million and an increase in tax payable of$2.2 million , offset by additional spending for real estate under development of$19.9 million . Net cash provided by operating activities during the nine months endedJune 30, 2020 was approximately$1.8 million , consisting of net loss of approximately$3.5 million , adjusted by impairment losses of$2.7 million on certain slow moving real estate property development completed projects and net changes in our operating assets and liabilities, which mainly included a decrease in real estate property completed together with the changes in the cost and earnings in excess of billings by approximately$12.6 million due to sales of ourYangzhou Palace project, a collection of security deposits of$4.8 million and an increase in customer deposits received of$1.8 million , offset by additional spending for real estate under development of$4.4 million and payments of accrued expense and tax payable in aggregated of approximately$2.6 million .
Financing Activities
Net cash flows used in financing activities was approximately$2.4 million for nine months endedJune 30, 2020 , which was due to the repayment of construction loans of approximately$2.4 million during the nine months endedJune 30,2020 . 35 Table of Contents
Off-Balance Sheet Arrangements
As an industry practice, the Company provides guarantees to PRC banks with respect to loans procured by the purchasers of the Company's real estate properties for the total mortgage loan amount until the completion of obtaining the "Certificate of Ownership" of the properties from the government, which generally takes six to twelve months. Because the banks provide loan proceeds without getting the "Certificate of Ownership" as loan collateral during the six to twelve months' 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 made necessary reserves in its restricted cash account to cover any potential mortgage defaults as required by the mortgage lenders. The Company has not experienced any delinquent mortgage loans and has not experienced any losses related to this guarantee. As ofJune 30, 2021 andSeptember 30, 2020 , our outstanding guarantees in respect of our customers' mortgage loans amounted to approximately$68 million . As ofJune 30, 2021 andSeptember 30, 2020 , the amount of security deposits provided for these guarantees was approximately$3.4million and the Company believes that such reserves are sufficient.
Inflation
Inflation has not had a material impact on our business and we do not expect inflation to have a material impact on our business in the near future.
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