UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period
ended
For the transition period from_______ to ________
Commission File Number:
(Exact Name of Registrant as Specified in Its Charter)
| (State or Other Jurisdiction of Incorporation) | (I.R.S. Employer Identification Number) |
Shaanxi Province,
(Address of Principal Executive Offices, Zip Code)
(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 | ||
| The |
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.
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).
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 ☐ |
| 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 9,
| Class of Securities | Shares Outstanding | |
| Common Stock, $0.001 par value |
TABLE OF CONTENTS
i
PART I: FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS
GREEN GIANT INC.
(FORMERLY CHINA HGS REAL ESTATE, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS
| December 31, | September 30, | |||||||
| 2022 | 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Contract assets | ||||||||
| Real estate property development completed | ||||||||
| Other assets | ||||||||
| Prepayment | ||||||||
| Property, plant and equipment, net | ||||||||
| Security deposits | ||||||||
| Real estate property under development | ||||||||
| Due from local governments for real estate property development completed | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Construction loans | $ | $ | ||||||
| Accounts payable | ||||||||
| Other payables | ||||||||
| Construction deposits | ||||||||
| Contract liabilities | ||||||||
| Customer deposits | ||||||||
| Accrued expenses | ||||||||
| Taxes payable | ||||||||
| Total liabilities | ||||||||
| Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Statutory surplus | ||||||||
| Retained earnings | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
GREEN GIANT INC.
(FORMERLY CHINA HGS REAL ESTATE, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
| Three months ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Real estate sales | $ | $ | ||||||
| Less: Sales tax | ( | ) | ( | ) | ||||
| Cost of real estate sales | ( | ) | ( | ) | ||||
| Gross profit | ||||||||
| Operating expenses | ||||||||
| Selling and distribution expenses | ||||||||
| General and administrative expenses | ||||||||
| Total operating expenses | ||||||||
| Operating income | ( | ) | ||||||
| Interest income, net | ||||||||
| Other (expense), net | ( | ) | ||||||
| Income before income taxes | ( | ) | ||||||
| Provision for income taxes | ||||||||
| Net income | ( | ) | ||||||
| Other Comprehensive income | ||||||||
| Foreign currency translation adjustment | ||||||||
| Comprehensive income | $ | $ | ||||||
| Basic and diluted income per common share | ||||||||
| Basic | $ | ( | ) | $ | ||||
| Diluted | $ | ( | ) | $ | ||||
| Weighted average common shares outstanding | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
GREEN GIANT INC.
(FORMERLY CHINA HGS REAL ESTATE, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||||||
| Common Stock | Paid-in | Statutory | Retained | Comprehensive | ||||||||||||||||||||||||
| Shares | Amount | Capital | Surplus | Earnings | (loss) income | Total | ||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| Net income for the period | — | |||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | |||||||||||||||||||||||||||
| Balance at December 31, 2021 (Unaudited) | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| Balance at September 30,2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Private placements | ||||||||||||||||||||||||||||
| Net income for the period | — | ( | ) | ( | ) | |||||||||||||||||||||||
| Foreign currency translation adjustments | — | |||||||||||||||||||||||||||
| Balance at December 31, 2022 (Unaudited) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
GREEN GIANT INC.
(FORMERLY CHINA HGS REAL ESTATE, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three months ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | ( | ) | $ | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Contract assets | ||||||||
| Real estate property development completed | ||||||||
| Real estate property under development | ( | ) | ( | ) | ||||
| Other current assets | ( | ) | ||||||
| Accounts payables | ( | ) | ( | ) | ||||
| Other payables | ||||||||
| Contract liabilities | ( | ) | ||||||
| Customer deposits | ( | ) | ||||||
| Accrued expenses | ( | ) | ( | ) | ||||
| Taxes payables | ( | ) | ||||||
| Net cash provided by operating activities | ( | ) | ||||||
| Cash Flows from Investing Activities: | ||||||||
| Prepayment | ( | ) | ||||||
| Net Cash Used in Investing Activities | ( | ) | ||||||
| Cash flow from financing activities: | ||||||||
| Proceeds from private placements | ||||||||
| Proceeds from prepaid subscriptions for sale of units | — | |||||||
| Net cash provided by financing activities | ||||||||
| Effect of changes of foreign exchange rate on cash and restricted cash | ( | ) | ||||||
| Net increase in cash and restricted cash | ( | ) | ||||||
| Cash and restricted cash, beginning of period | ||||||||
| Cash and restricted cash, end of period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Interest paid | $ | $ | ||||||
| Income taxes paid | $ | $ | ||||||
| Representing: | ||||||||
| Cash, end of period | $ | $ | ||||||
| Restricted, end of period | $ | $ | ||||||
| Total cash and restricted cash, end of period | $ | $ | ||||||
| Cash, beginning of period | $ | $ | ||||||
| Restricted, beginning of period | ||||||||
| Total cash and restricted cash, beginning of period | $ | $ | ||||||
| Non-cash activities: | ||||||||
| Reclassification of interest payable to construction loan | $ | $ | ||||||
| Settlement of accounts payable with real estate property* | $ | $ | ||||||
| Settlement of account payables and account receivables* | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
GREEN GIANT INC.
(FORMERLY CHINA HGS REAL ESTATE, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
Green Giant Inc. (“GGE” 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. On March 23, 2022, the Company completed the change of its name from China HGS Real Estate Inc. to Green Giant Inc., effective immediately (the “Name Change”).
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, 2022 and 2021 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, 2022 filed with the SEC on January 13, 2023.
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 purchases, 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’s 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 had real estate sales of approximately $
Resurgence of COVID-19 and followed lock-down policies in some cities of PRC might cut the Company’s demand and revenue depending on length of lock-down. Starting on March 27, 2022, Shanghai city implements the lockdown policy, which did not have significant negative impact on the Company’s operation because the Company has no operation in Shanghai. 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.
5
GREEN GIANT INC.
(FORMERLY CHINA HGS REAL ESTATE, INC.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. LIQUIDITY
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, 2022, our total cash and restricted cash balance was approximately
$
With respect to capital
funding requirements, the Company budgeted its capital spending based on ongoing assessments of its needs to maintain adequate cash. On
October 25, 2022, the Company closed a private placement with gross proceeds of $
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The interim unaudited condensed consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States (“US GAAP”).
The unaudited condensed consolidated financial information as of December 31, 2022 and for the three months ended December 31, 2022 and 2021 has been prepared without audit, pursuant to the rules and regulations of the SEC and pursuant to Regulation S-X. Certain information and footnote disclosures, which are normally included in annual financial statements prepared in accordance with US GAAP, have been omitted pursuant to those rules and regulations. The unaudited interim financial information should be read in conjunction with the audited financial statements and the notes thereto, included in the Form 10-K for the fiscal year ended September 30, 2022, which was filed with the SEC on January 13, 2023.
In the opinion of the management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments, which are necessary for a fair presentation of financial results for the interim periods presented. The Company believes that the disclosures are adequate to make the information presented not misleading. The accompanying unaudited condensed consolidated financial statements have been prepared using the same accounting policies as used in the preparation of the Company’s consolidated financial statements for the year ended September 30, 2021. The results of operations for the three and nine months ended December 31, 2022 and 2021 are not necessarily indicative of the results for the full years.
Principles of consolidation
The unaudited condensed consolidated financial statements include the financial statements of the Company, 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.
6
GREEN GIANT INC.
(FORMERLY CHINA HGS REAL ESTATE, INC.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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, 2022 and 2021, the Company did not have any construction in progress recognized under the percentage of completion method. For the three months ended December 31, 2022 and 2021, all revenues were generated from completed condominium real estate projects.
7
GREEN GIANT INC.
(FORMERLY CHINA HGS REAL ESTATE, INC.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue recognition (continued)
Contract balances
Timing of revenue recognition may differ from the timing of billing and cash receipts from customers. The Company records a contract asset when revenue is recognized prior to invoicing, or a contract liability when cash is received in advance of recognizing revenue. A contract asset is a right to consideration that is conditional upon factors other than the passage of time. Contract assets include billed and billable receivables, which are the Company’s unconditional rights to consideration other than 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 expenses sales commissions (included under selling expenses) because sales commission are not expected to be recovered.
The Company provides
“mortgage loan guarantees” only with respect to buyers who make down-payments of
8
GREEN GIANT INC.
(FORMERLY CHINA HGS REAL ESTATE, INC.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Foreign currency translation
The Company’s financial information is presented in U.S. dollars. The functional currency of the Company’s operating VIE is Renminbi (“RMB”), the currency of the PRC. The consolidated financial statements of the Company have been translated into U.S. dollars in accordance with ASC Topic 830-30 “Translation of Financial Statements”. The financial information is first prepared in RMB and then is translated into U.S. dollars at period-end exchange rates as to assets and liabilities and average exchange rates as to revenue, expenses and cash flows. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income in stockholders’ equity.
| For three months ended | ||||||||||||
| December 31, | September 30, | |||||||||||
| 2022 | 2021 | 2022 | ||||||||||
| (Unaudited) | (Unaudited) | |||||||||||
| Period end RMB:USD exchange rate | ||||||||||||
| Period average RMB:USD exchange rate | ||||||||||||
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into U.S. dollars at the rates used in translation.
Real estate property development completed and under development
Real estate property consists of finished residential unit sites, commercial offices and residential unit sites under development. The Company leases the land for the residential unit sites under land use right leases with various terms from the PRC government. The cost of land use rights is included in the development cost and allocated to each project. Real estate property development completed and real estate property under development are stated at the lower of cost or fair value.
Expenditures for land development, including cost of land use rights, deed tax, pre-development costs, and engineering costs, exclusive of depreciation, are capitalized and allocated to development projects by the specific identification method. Costs are allocated to specific units within a project based on the ratio of the sales area of units to the estimated total sales area of the project (or phase of the project) multiplied by the total cost of the project (or phase of the project).
Cost of amenities transferred to buyers is allocated to specific units as a component of total construction cost. The amenity cost includes landscaping, road paving, etc. Once the projects are completed, the amenities are under control of the property management companies.
Real estate property development completed and under development are subject to valuation adjustments when the carrying amount exceeds fair value. An impairment loss is recognized only if the carrying amount of the assets is not recoverable and exceeds its fair value. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to be generated by the assets. The Company reviews all of its real estate projects for future losses and impairment by comparing the estimated future undiscounted cash flows for each project to the carrying value of such project. For the three months ended December 31, 2022 and 2021, the Company did not recognize any impairment loss for its real estate properties.
9
GREEN GIANT INC.
(FORMERLY CHINA HGS REAL ESTATE, INC.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Capitalization of Interest
Interest incurred during
and directly related to real estate development projects is capitalized to the related real estate property under development during the
active development period, which generally commences when borrowings are used to acquire real estate assets and ends when the properties
are substantially complete or the property becomes inactive. Interest is capitalized based on the interest rate applicable to specific
borrowings or the weighted average of the rates applicable to other borrowings during the period. Interest capitalized to real estate
properties under development is recorded as a component of the cost of real estate sales when related units are sold. All other interest
is expensed as incurred. For the three months ended December 31, 2022 and 2021, the total interest capitalized for real estate property
development was $
Impairment of long-lived assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.
Assets are grouped and evaluated at the lowest level for their identifiable cash flows that are largely independent of the cash flows of other groups of assets. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the future estimated cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds the estimated expected undiscounted future cash flows, the Company measures the amount of impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally determined by using the asset’s expected future discounted cash flows or market value. The Company estimates fair value of the assets based on certain assumptions such as budgets, internal projections, and other available information as considered necessary. There was no impairment of long-lived assets for the three months ended December 31, 2022 and 2021.
10
GREEN GIANT INC.
(FORMERLY CHINA HGS REAL ESTATE, INC.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income taxes
In accordance with FASB ASC Topic 740 “Income Taxes,” deferred tax assets and liabilities are for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowances is established, when necessary, to reduce net deferred tax assets to the amount expected to be realized.
ASC 740-10-25 prescribes a more-likely-than-not threshold for consolidated financial statement recognition and measurement of a tax positions taken (or expected to be taken) in a tax return. It also provides guidance on the recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, years open for tax examination, accounting for income taxes in interim periods and income tax disclosures. There are no material uncertain tax positions as of December 31, 2022 and September 30, 2021.
The Company is a corporation organized under the laws of the State of Florida. However, all of the Company’s operations are conducted solely by its subsidiaries and VIE in the PRC. No income is earned in the United States and the management does not repatriate any earnings outside the PRC. As a result, the Company did not generate any U.S. taxable income for the three months ended December 31, 2022 and 2021. As of December 31, 2022, the Chinese entities’ income tax returns filed in China for the years ended December 31, 2016 through 2022 are subject to examination by the Chinese taxing authorities.
The parent Company, Green Giant’s both U.S. federal tax returns and Florida state tax returns are delinquent since 2009. Its tax years ended September 30, 2009 through September 30, 2022 remain open for statutory examination by U.S. federal and state tax authorities.
On December 22, 2017,
the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code.
Changes include, but are not limited to, a U.S. corporate tax rate decrease from
11
GREEN GIANT INC.
(FORMERLY CHINA HGS REAL ESTATE, INC.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Land appreciation tax (“LAT”)
In accordance with the relevant taxation laws in the PRC, the Company is subject to LAT based on progressive rates on the appreciation of land value, which is calculated as the proceeds of sales of properties less deductible expenditures including borrowing costs and all property development expenditures. LAT is exempted if the appreciation values do not exceed certain thresholds specified in the relevant tax laws.
The whole project must
be completed before the LAT obligation can be assessed. Accordingly, the Company records the liability and the total related expense at
the completion of a project unless the tax authorities impose an assessment at an earlier date. The methods to implement this tax law
vary among different geographic areas. Hanzhong, where the projects Mingzhu Garden, Nan Dajie and Central Plaza are located, implements
this tax rule by requiring real estate companies prepay the LAT based upon customer deposits received. The tax rate in Hanzhong is
Comprehensive income (loss)
In accordance with ASC 220-10-55, comprehensive income (loss) is defined as all changes in equity except those resulting from investments by owners and distributions to owners. The Company’s only components of other comprehensive income (loss) for the three months ended December 31, 2022 and 2021 were net income and foreign currency translation adjustments.
Basic and diluted earnings (loss) per share
The Company computes earnings (loss) per share (“EPS”) in accordance with the ASC 260, “Earnings per share”, which requires companies to present basic and diluted EPS. Basic EPS is measured as net income (loss) divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.
On December 10, 2021,
the Company entered into a certain securities purchase agreement with certain purchasers whom are “non-U.S. Persons” as defined
in Regulation S of the Securities Act, pursuant to which the Company agreed to sell an aggregate of
On October 5, 2022, the
Company entered into certain securities purchase agreement with certain “non-U.S. Persons” as defined in Regulation S of the
Securities Act of 1933, as amended, pursuant to which the Company agreed to sell
As of December 31, 2022,
there were outstanding warrants to purchase approximately
12
GREEN GIANT INC.
(FORMERLY CHINA HGS REAL ESTATE, INC.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentration risk
The Company’s operations
are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced
by the political, economic and legal environment in the PRC, and by the general state of the PRC’s economy. The Company’s
operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America.
The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittances abroad, and rates and methods of taxation, among other things. Financial instruments which
potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. The Company’s
cash and restricted cash were on deposit at financial institutions in the PRC, which the management believes are of high credit quality.
In May, 2015, China’s new Deposit Insurance Regulation came into effect, pursuant to which banking financial institutions, such
as commercial banks, established in China are required to purchase deposit insurance for deposits in RMB and in foreign currencies placed
with them. Such Deposit Insurance Regulation would not be effective in providing complete protection for the Company’s accounts,
as its aggregate deposits are much higher than the compensation limit of RMB
For the three months
ended December 31, 2022 and 2021, the Company did not have any individual customer that accounted for more than
Recently issued accounting standards
The Company considers the applicability and impact of all ASUs. Management periodically reviews new accounting standards that are issued.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. ASU 2016-13 was subsequently amended by ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments — Credit Losses, ASU 2019-04 Codification Improvements to Topic 326, Financial Instruments — Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, and ASU 2019-05, Targeted Transition Relief. For public entities, ASU 2016-13 and its amendments is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For all other entities, this guidance and its amendments will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. As a smaller reporting company, the Company plans to adopt this guidance effective October 1, 2023.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes. The Board is issuing this Update as part of its initiative to reduce complexity in accounting standards (the Simplification Initiative). The objective of the Simplification Initiative is to identify, evaluate, and improve areas of U.S. GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The specific areas of potential simplification in this Update were submitted by stakeholders as part of the Simplification Initiative. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company adopted this guidance on July 1, 2021 and the adoption of this ASU did not have a material impact on its consolidated financial statements.
13
GREEN GIANT INC.
(FORMERLY CHINA HGS REAL ESTATE, INC.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06). The amendments in ASU 2020-06 simplify the accounting for convertible instruments by removing major separation models and removing certain settlement condition qualifiers for the derivatives scope exception for contracts in an entity’s own equity, and simplify the related diluted net income per share calculation for both Subtopics. ASU 2020-06 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023, for smaller reporting companies, as defined by the SEC. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which the amendments in this Update require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606.The amendments in this Update address how to determine whether a contract liability is recognized by the acquirer in a business combination. The ASU is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Early adoption is permitted, including early adoption in an interim period, for periods for which financial statements have not yet been issued.
Management has considered all other recent accounting pronouncements issued. The Company’s management believes that these recent pronouncements will not have a material effect on the Company’s financial statements.
14
GREEN GIANT INC.
(FORMERLY CHINA HGS REAL ESTATE, INC.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. REAL ESTATE PROPERTY DEVELOPMENT COMPLETED AND UNDER DEVELOPMENT
The following summarizes the components of real estate property development completed and under development as of December 31, 2022 and September 30, 2022:
| Balance as of | ||||||||
| December 31, 2022 | September 30, 2022 | |||||||
| (Unaudited) | ||||||||
| Development completed: | ||||||||
| Hanzhong City Mingzhu Garden Phase II | $ | $ | ||||||
| Hanzhong City Oriental Pearl Garden | ||||||||
| Yang County Yangzhou Pearl Garden Phase II | ||||||||
| Yang County Yangzhou Palace | ||||||||
| Real estate property development completed | $ | $ | ||||||
| Under development: | ||||||||
| Hanzhong City Liangzhou Road and related projects (a) | $ | $ | ||||||
| Hanzhong City Hanfeng Beiyuan East (b) | ||||||||
| Hanzhong City Beidajie (b) | ||||||||
| Yang County East 2nd Ring Road (c) | ||||||||
| Real estate property under development | $ | $ | ||||||
| Impairment | ( | ) | ( | ) | ||||
| Real estate property under development | ||||||||
| (a) | In September 2013, the Company entered into an agreement (“Liangzhou Agreement”) with the Hanzhong local government on the Liangzhou Road reformation and expansion project (Liangzhou Road Project”). Pursuant to the agreement, the Company is contracted to reform and expand the Liangzhou Road, a commercial street in downtown Hanzhong City, with a total length of 2,080 meters and a width of 30 meters and to resettle the existing residences in the Liangzhou road area. The government’s original road construction budget was approximately $ |
The Company’s
development cost incurred for the Liangzhou Road Project is treated as the Company’s deposit on purchasing the related land use
rights, as agreed by the local government. As of December 31, 2022, the actual costs
incurred by the Company were approximately $
| (b) | In September 2012, the Company was approved by the Hanzhong local government to construct four municipal roads with a total length of approximately 1,192 meters. The project was deferred and then restarted during the quarter ended June 30, 2014. As of December 31, 2022, the local government has not completed the budget for these projects therefore the delivery for these projects for the government’s acceptance and related settlement were extended to 2023. |
| (c) | The Company was engaged by the Yang County local government to construct the East 2nd Ring Road with a total length of 2.15 km. The local government is required to repay the Company’s project investment costs within 3 years with interest at the interest rate based on the commercial borrowing rate with the similar term published by the China Construction Bank (December 31, 2022 and 2021 – |
15
GREEN GIANT INC.
(FORMERLY CHINA HGS REAL ESTATE, INC.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. PREPAYMENT
As of December 31, 2022, prepayments were as follows:
| December 31, | September 30, | |||||||
| 2022 | 2022 | |||||||
| (Unaudited) | ||||||||
| Energy equipemts | $ | $ | ||||||
| Professional service | ||||||||
| Total | $ | $ | ||||||
| (A) | In 1st quarter of fiscal 2023, the Company made the prepayment in $ |
| (B) | In 4th quarter of fiscal 2022, the Company made the prepayment in $ |
NOTE 6. CONSTRUCTION LOANS
| December 31, | September 30, | |||||||
| 2022 | 2022 | |||||||
| (Unaudited) | ||||||||
| Loan A | $ | $ | ||||||
| Loan B | ||||||||
| Total | $ | $ | ||||||
| (A) | On June 26, 2015 and March 10, 2016, the Company signed phase I and Phase II agreements with Hanzhong Urban Construction Investment Development Co., Ltd, a state-owned Company, to borrow up to approximately $ |
| (B) | In December 2016, the Company signed a loan agreement with Hantai District Urban Construction Investment Development Co., Ltd, a state-owned Company, to borrow up to approximately $ |
Additionally,
in September 2017, the Urban Development Center Co., Ltd. approved a construction loan for the Company in the amount of approximately
$
16
GREEN GIANT INC.
(FORMERLY CHINA HGS REAL ESTATE, INC.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. CUSTOMER DEPOSITS
Customer deposits consist of amounts received from customers for the pre-sale of residential units in the PRC. The detail of customer deposits is as follows:
| December 31, | September 30, | |||||||
| 2022 | 2022 | |||||||
| (Unaudited) | ||||||||
| Customer deposits by real estate projects: | ||||||||
| Mingzhu Garden (Mingzhu Nanyuan and Mingzhu Beiyuan) | $ | $ | ||||||
| Oriental Pearl Garden | ||||||||
| Liangzhou road and related projects | ||||||||
| Yangzhou Pearl Garden | ||||||||
| Yang County East 2nd Ring Road | ||||||||
| Yangzhou Palace | ||||||||
| Total | $ | $ | ||||||
Customer deposits are
typically
NOTE 8. TAXES
(A) Business sales tax and VAT
The Company is subject
to a
B) Corporate income taxes (“CIT”)
The Company’s PRC
subsidiary and VIE are governed by the Income Tax Law of the People’s Republic of China for 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
17
GREEN GIANT INC.
(FORMERLY CHINA HGS REAL ESTATE, INC.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. TAXES (continued)
B) Corporate income taxes (“CIT”) (continued)
The following table reconciles the statutory rates to the Company’s effective tax rate for the three months ended December 31, 2022 and 2021
| For the three months ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Chinese statutory tax rate | % | $ | % | |||||
| Other adjustments* | ( | )% | % | |||||
| Effective tax rate | % | $ | % | |||||
| * |
Income tax expense for the three months ended December 31, 2022 and 2021 is summarized as follows:
| For the three months ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Current tax provision | $ | $ | ||||||
| Deferred tax provision | ||||||||
| Income tax provision | $ | $ | ||||||
Recent U.S. federal tax
legislation, commonly referred to as the Tax Cuts and Jobs Act (the “U.S. Tax Reform”), was signed into law on December 22,
2017. The U.S. Tax Reform significantly modified the U.S. Internal Revenue Code by, among other things, reducing the statutory U.S. federal
corporate income tax rate from
For the year ended September 30,
2018, the Company recognized a one-time transition toll tax of approximately $
18
GREEN GIANT INC.
(FORMERLY CHINA HGS REAL ESTATE, INC.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. TAXES (continued)
(C) Land Appreciation Tax (“LAT”)
Since January 1,
1994, LAT has been applicable at progressive tax rates ranging from
As at December 31, 2022 and September 30, 2022, the outstanding LAT payable balance was with respect to completed real estate properties sold up to December 31,2022 and September 30, 2022, respectively.
(D) Taxes payable consisted of the following:
| December 31, | September 30, | |||||||
| 2022 | 2022 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| CIT | $ | $ | ||||||
| Business tax | ||||||||
| Other taxes and fees | ||||||||
| Tax payable | $ | $ | ||||||
19
GREEN GIANT INC.
(FORMERLY CHINA HGS REAL ESTATE, INC.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. COMMITMENTS AND CONTINGENCIES
From time to time, the Company is a party to various legal actions arising in the ordinary course of business. The Company accrues costs related to these matters when they become probable and the amount can be reasonably estimated. The Company’s management does not believe the liability from the disposition of such claims and litigation individually or in the aggregate would have a material adverse impact on the Company’s consolidated financial position, results of operations and cash flows.
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
The Company has been named as a defendant in a number of lawsuits arising in its ordinary course of business. As of the date of this quarterly report, the Company continues to use all commercially reasonable efforts to defend itself in these proceedings and is undergoing on-going discussion with regulatory authorities.
| 1) | Case between the labor contract dispute between Wangcang County Lexin Labor Service Co., Ltd. and Zhejiang Hongcheng Construction Group Co., Ltd., Zhejiang Hongcheng Construction Group Co., Ltd. Xi 'an Branch and Shaanxi Guangsha Investment Development Group Co., Ltd. Hongcheng Company was judged to compensate Lexin Company, and Shaanxi Guangsha Company was jointly and severally liable, with an execution amount of $ |
| 2) | Related to the above Case 1 disputes between Zhejiang Hongcheng Construction Group Co., Ltd. and Shaanxi Guangsha Investment Development Group Co., Ltd. on the construction project contract. The execution target of this case is $ |
| 3) | Case between Hantai District Commuity Center Hanzhong Urban Counsel and Shaanxi Guangsha Investment Development Group Co., Ltd., which was ordered by Hanzhong Hantai District Court to the settle the amount of $ |
| 4) | Dispute between a disclosed property buyer and Shaanxi Guangsha Investment Development Group Co., Ltd., which was ordered by local court to pay the plaintiff of $ |
The Company has accrued $
NOTE 10. SUBSEQUENT EVENTS
On January 12, 2023, the Company and FT Global
Capital Inc. (“FT Global”) entered into a settlement agreement (the “FT Global Settlement Agreement”), pursuant
to which FT Global has waived all claims and liabilities against the Company in connection with the Company’s private placement
in October 2022 and terminated the Exclusive Placement Agent Agreement entered by and between the Company and FT Global in May 2022. Under
the terms of the FT Global Settlement Agreement, the Company is obligated to pay to FT Global cash compensation of $
20
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported in the unaudited condensed consolidated financial statements of Green Giant Inc. (formerly “China HGS Real Estate, Inc.”) for the three months ended December 31, 2022 and 2021 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 “GGE” refer to Green Giant Inc. and its subsidiaries.
Preliminary Note Regarding Forward-Looking Statements.
We make forward-looking statements in Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report based on the beliefs and assumptions of our management and on information currently available to us. Forward-looking statements include information about our possible or assumed future results of operations which follow under the headings “Business Overview,” “Liquidity and Capital Resources,” and other statements throughout this report preceded by, followed by or that include the words “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates” or similar expressions.
Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in these forward-looking statements, including the risks and uncertainties described below and other factors we describe from time to time in our periodic filings with the U.S. Securities and Exchange Commission (the “SEC”). We therefore caution you not to rely unduly on any forward-looking statements. The forward-looking statements in this report speak only as of the date of this report, and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise. These forward-looking statements include, among other things, statements relating to:
| ● | our ability to sustain our project development |
| ● | our ability to obtain additional land use rights at favorable prices; |
| ● | the market for real estate in Tier 3 and 4 cities and counties; |
| ● | our ability to obtain additional capital in future years to fund our planned expansion; or |
| ● | economic political, regulatory, legal and foreign exchange risks associated with our operations. |
Business Overview
We conduct substantially all of our business through Shaanxi Guangsha Investment and Development Group Co., Ltd, in Hanzhong, Shaanxi Province. Since the initiation of our business, we have been focused on expanding our business in certain Tier 3 and Tier 4 cities and counties in China.
For the three months ended December 31, 2022, our sales and gross profit were $0.2 million and $0.03 million, respectively, representing an approximate 94.2% and 97.6% decrease in sales and gross profit as compared to three months ended December 31, 2021, respectively. The decrease in sales and gross profit was mainly the result of less gross floor area (“GFA”) sold during the three months ended December 31, 2022.
For the three months ended December 31, 2022, the average selling price (“ASP”) for our real estate projects located in Yang County was approximately $482 per square meter, decreased $31 per square comparing to the same period of last year due to lower ASP.
21
Market Outlook
On November 11, 2022, the People’s Bank of China and the China Banking and Insurance Regulatory Commission issued “Yin Fa [2022] No. 254 “Notice on Supporting the Stable and Healthy Development of the Real Estate Market” to support the stable and healthy development of the real estate market. On November 14, 2022, China Banking and Insurance Regulatory Commission, the Ministry of Housing and Urban-Rural Development and the Central Bank issued the “Notice on the Relevant Work of Commercial Banks Issuing letters of Guarantee to Replace the Pre-sale Supervision Funds” (the “Pre-sale Supervision Funds Notice”). Commercial banks’ house related credit business is expected to expand. The “Financial Support for Real Estate Notice” issued sixteen measures to generate power at both supply and demand ends, it further clarifies the support policies for housing credit. Many policies have been implemented at the document system level for the first time, or will push banks to increase their support for the real estate market. It is expected to positively affect the conservative attitude of commercial banks to intervene in the development of loan market and support the increasing demand from home buyers for mortagage loans.
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 of the Liangzhou Road related projects after the approval by the local government of the road. These projects comprise residential for end-users and upgraders, shopping malls as well as serviced apartments and offices to satisfy different market demands.
In December 2019, a novel strain of coronavirus (COVID-19) surfaced. COVID-19 has spread rapidly to many parts of the PRC and other parts of the world in the first quarter of 2020, which has caused significant volatility in the PRC and international markets. There is significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the PRC and international economies. For the quarter ended December 31, 2022, the COVID-19 pandemic did not have did have a material net impact on the Company’s financial position and operating results, especially Yang County which is operation was shut down. On and off from August 2022 onwards the extent of the impact on the Company’s future financial results will be dependent on future developments such as the length and severity of the crisis, the potential resurgence of the pandemic, future government actions in response to the pandemic and the overall impact of the COVID-19 pandemic on the local economy and real estate markets, among many other factors, all of which remain highly uncertain and unpredictable. Given this uncertainty, the Company is currently unable to quantify the future impact of the COVID-19 pandemic on its future operations, financial condition, liquidity and results of operations if the current situation continues.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect our reported assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis and base them on historical experience and various other assumptions that are believed to be reasonable under the circumstances as the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates because of different and changing assumptions or conditions.
We believe the following critical accounting policies affect our significant estimates and judgments used in the preparation of our condensed consolidated financial statements. These policies should be read in conjunction with Note 3 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, 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. |
22
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, 2022 and 2021, the Company did not have any construction in progress meet the revenue recognition under percentage completion method.
Disaggregation of Revenues
Disaggregated revenues was as follows:
| For the three months ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Revenue recognized for completed condominium real estate projects, net of sales taxes | $ | 162,706 | $ | 2,818,994 | ||||
| Revenue recognized for condominium real estate projects under development, net of sales taxes | — | — | ||||||
| Total revenue, net of sales taxes | $ | 162,706 | $ | 2,818,994 | ||||
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 expenses sales commissions (included under selling expenses) because 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
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes, and disclosure of contingent liabilities at the date of the consolidated financial statements. Estimates are used for, but not limited to, the assumptions and estimates used by management in recognizing development revenue under the percentage of completion method, the selection of the useful lives of property and equipment, provision necessary for contingent liabilities, revenue recognition, taxes and budgeted costs. Management believes that the estimates utilized in preparing its consolidated financial statements are reasonable and prudent. Actual results could differ from these estimates.
Real estate property development completed and under development
Real estate property consists of finished residential unit sites, commercial offices and residential unit sites under development. The Company leases the land for the residential unit sites under land use right leases with various terms from the PRC government. The cost of land use rights is included in the development cost and allocated to each project. Real estate property development completed and real estate property under development are stated at the lower of cost or fair value.
Expenditures for land development, including cost of land use rights, deed tax, pre-development costs, and engineering costs, exclusive of depreciation, are capitalized and allocated to development projects by the specific identification method. Costs are allocated to specific units within a project based on the ratio of the sales area of units to the estimated total sales area of the project (or phase of the project) multiplied by the total cost of the project (or phase of the project).
Cost of amenities transferred to buyers is allocated to specific units as a component of total construction cost. The amenity cost includes landscaping, road paving, etc. Once the projects are completed, the amenities are under control of the property management companies.
Real estate property development completed and under development are subject to valuation adjustments when the carrying amount exceeds fair value. An impairment loss is recognized only if the carrying amount of the asset is not recoverable and exceeds its fair value. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to be generated by the asset. The Company reviews all of its real estate projects for future losses and impairment by comparing the estimated future undiscounted cash flows for each project to the carrying value of such project. For the three months ended December 31, 2022 and 2021, the Company did not recognize any impairment loss for its real estate properties.
Appointment of Chief Operating Officer
Effective October 17, 2022, the Board appointed Ms. Sheng (Dorothy) Liu as the Chief Operating Officer of the Company with annual compensation of $25,000.
Ms. Sheng (Dorothy) Liu has served as the Chief Executive Officer of Zhongjintai Venture Capital (Shenzhen) Co., Ltd. since January 2019. From April 2017 to December 2020, Ms. Liu served as the General Manager of Shenzhen Zhaoyin Dinghong Investment Management Co., Ltd. Ms. Liu served as the General Manager of Vela-Industry (HK) Ltd. from February 2013 to March 2017. Ms. Liu graduated from Massey University of New Zealand with a bachelor’s degree in Financial Economics.
RESULTS OF OPERATIONS
Three Months Ended December 31, 2022 compared to Three Months Ended December 31, 2021
Revenues
The following is a breakdown of revenue:
| For the three months ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Revenue recognized for completed condominium real estate projects, net of sales taxes | $ | 162,706 | $ | 2,818,994 | ||||
| Revenue recognized for condominium real estate projects under development, net of sales taxes | — | — | ||||||
| Total revenue, net of sales taxes | $ | 162,706 | $ | 2,818,994 | ||||
24
Revenue recognized for completed condominium real estate projects
The following table summarizes our revenue generated by different projects:
| For Three Months Ended December 31, | ||||||||||||||||||||||||
| 2022 | 2021 | Variance | ||||||||||||||||||||||
| Revenue | % | Revenue | % | Amount | % | |||||||||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||||||||||
| Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan) Phase I and II | $ | — | — | % | $ | 815,863 | 28.3 | % | $ | (815,863 | ) | (100.0 | )% | |||||||||||
| Oriental Pearl Garden | — | — | % | 770,452 | 26.8 | (770,452 | ) | (100.0 | )% | |||||||||||||||
| Yangzhou Palace | 164,712 | 100.0 | % | 1,292,900 | 44.9 | % | (1,128,188 | ) | (87.3 | )% | ||||||||||||||
| Gross Real Estate Sales | 164,712 | 100.0 | % | 2,879,215 | 100 | % | (2,714,503 | ) | (94.3 | )% | ||||||||||||||
| Less: Sales Tax | (2,006 | ) | (60,221 | ) | 58,215 | (96.7 | )% | |||||||||||||||||
| Revenue, net of sales tax | $ | 162,706 | $ | 2,818,994 | $ | (2,656,288 | ) | (94.2 | )% | |||||||||||||||
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 decreased by 94.3% from approximately $2.9 million to approximately $0.2 million for the three months ended December 31, 2022. The total GFA sold during three months ended December 31, 2022 was 342 square meters, decreased from the 3,670 square meters completed and sold during the same period of last year. The sales tax for the three months ended December 31, 2022 was approximately $2,000 decreased by 96.7% from same period of last year , consistent with the decreased revenue.
The year-over-year decrease in revenue was mainly caused by the following reasons: 1) The macro-control of the real estate market by the Chinese government, mainly suppressed in the past 12 months; 2)China's economic downturn due to recurring epidemic; 3) Lower disposable income resulted in the decreased demand for housing; 4) The Company is a real estate developer in the third and fourth tier cities in China, the decline in house prices is especially obvious than that in the first tier and second tier cities.
Cost of Sales
The following table sets forth a breakdown of our cost of sales:
| For Three Months Ended December 31, | ||||||||||||||||||||||||
| 2022 | 2021 | Variance | ||||||||||||||||||||||
| Cost | % | Cost | % | Amount | % | |||||||||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||||||||||
| Land use rights | $ | 5,773 | 4.4 | % | $ | 138,278 | 9.5 | % | $ | (132,503 | ) | (95.8 | )% | |||||||||||
| Construction cost | 124,519 | 95.6 | % | 1,317,278 | 90.5 | % | (1,192,761 | ) | (90.6 | )% | ||||||||||||||
| Total cost | $ | 130,292 | 100.0 | % | $ | 1,455,556 | 100.0 | % | $ | (1,325,264 | ) | (91.1 | )% | |||||||||||
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 $0.1 million for the three months ended December 31, 2022 compared to $1.5 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, 2022.
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, 2022 and 2021 were approximately $0.006 million and $0.1 million, respectively.
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Construction cost: We outsource the construction of all of our projects to third party contractors, whom we select through a competitive tender process. Our construction contracts provide a fixed payment which covers substantially all labor, materials and equipment costs, subject to adjustments for some types of excess, such as design changes during construction or changes in government-suggested steel prices. Our construction costs consist primarily of the payments to our third-party contractors, which are paid over the construction period based on specified milestones. In addition, we purchase and supply a limited range of fittings and equipment, including elevators, window frames and door frames. Our construction costs for the three months ending December 31, 2022 were approximately $0.1 million as compared to approximately $1.3 million for the three months ended December 31, 2021, representing a decrease of approximately $1.2 million. The decrease in construction cost was due to less units sold during the quarter ended December 31, 2022.
Gross Profit
Gross profit and gross margin were approximately $0.03 million and 19.7 % respectively for the three months ended December 31, 2022 as compared to approximately $1.4 million and 47.4% respectively in the same period of last year due to the economic downturn caused by the epidemic control in China and aforementioned.
| For three months ended December 31, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| Gross Profit | Gross Margin | Gross Profit | Gross Margin | |||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
| Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan) Phase I and II | $ | — | — | % | $ | 246,481 | 30.2 | % | ||||||||
| Oriental Garden | — | — | % | 613,688 | 79.7 | % | ||||||||||
| Yangzhou Pearl Garden Phase I and II | — | — | — | — | % | |||||||||||
| Yangzhou Palace | 34,420 | 20.9 | % | 563,490 | 43.6 | % | ||||||||||
| Sales Tax | (2,006 | ) | (60,221 | ) | ||||||||||||
| Total Gross Profit | $ | 32,414 | 19.7 | % | $ | 1,363,438 | 47.4 | % | ||||||||
| Total Real Estate Sales before Sales Tax | $ | 164,712 | $ | 2,879,215 | ||||||||||||
Operating Expenses
Total operating expenses decreased by 28.7% to approximately $0.6 million for the three months ended December 31, 2022 from $0.9 million for the three months ended December 31, 2021, primarily as a result of a decrease of $0.2 million in selling expenses and a decrease of $0.07 million in general administrative expenses. Our general and administrative expense was approximately $0.57 million for the three months ended December 31, 2022, decreased by $0.63 million from the three months ended December 31, 2021 due to no professional and consulting fees incurred in the 1st quarter of fiscal 2023. Our total operating expenses accounted for 368.7% and 29.6% of our real estate sales before sales taxes for the three months ended December 31, 2022 and 2021, respectively.
| For three months ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Selling expenses | $ | 40,430 | $ | 219,787 | ||||
| General and administrative expenses | 566,817 | 631,927 | ||||||
| Total operating expenses | $ | 607,247 | $ | 851,714 | ||||
| Percentage of Real Estate Sales before Sales Tax | 368.7 | % | 29.6 | % | ||||
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Income Taxes
PRC Taxes
The Company’s PRC subsidiary and VIE are governed by the Income Tax Law of the People’s Republic of China concerning the privately run enterprises, which are generally subject to income tax on income reported in the statutory financial statements after appropriate tax adjustments. The Company’s CIT rate is 25% on taxable income. Although the possibility exists for reinterpretation of the application of the tax regulations by higher tax authorities in the PRC, potentially overturning the decision made by the local tax authority, the Company has not experienced any reevaluation of the income taxes for prior years. The PRC tax rules are different from the local tax rules and the Company is required to comply with local tax rules. The difference between the two tax rules will not be a liability of the Company. There will be no further tax payments for the difference. For the three months ended December 31, 2022 and 2021, the Company’s effective income tax rate was nil and 29%.
Net Income
We reported net loss of approximately $0.6 million for the three months ended December 31, 2022, as compared to net income of approximately $0.4 for the three months ended December 31, 2021. The decrease in net income was primarily due to less revenue and more operating expenses as discussed above.
Other Comprehensive Income
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 $3.0 million and $2.2 million for the three months ended December 31, 2022 and 2021, respectively. The balance sheet amounts with the exception of equity at December 31, 2022 were translated at 6.8972 RMB to 1.00 USD as compared to 7.1135 RMB to 1.00 USD at September 30, 2022. 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, 2022 and 2021 were 7.1120 RMB and 6.3914 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.
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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, in December 2019, a novel strain of coronavirus (COVID-19) surfaced. COVID-19 has spread rapidly throughout China and worldwide, which has caused significant volatility in the PRC and international markets. There is significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the PRC and international economies. To reduce the spread of COVID-19, the Chinese government has employed measures including city lockdowns, quarantines, travel restrictions, suspension of business activities and school closures. Due to difficulties resulting from the COVID-19 pandemic, including, but not limited to, the temporary closure of the Company’s facilities and operations beginning in early February through early March 2020, limited support from the Company’s employees, delayed access to construction raw material supplies, reduced customer visits to the Company’s sales office, and inability to promote real estate property sales to customers on a timely basis, The Company experienced recovery of its real estate business in fiscal 2022 and the following period. The Company had real estate sales of approximately $0.2 million for the three months ended December 31, 2022, decreased from $2.9 million in the same period of last year. Based on the assessment of the current economic environment, customer demand and sales trends, we believe that consumer spending has been restored in the local real estate market and real estate sales are expected to grow in the coming periods. On the other side, due to the negative impact from the COVID-19 pandemic and its variants, the development period of real estate properties and our operating cycle has been extended and we may not be able to liquidate our large balance of completed real estate properties within the short term as we originally expected. In addition, as of December 31, 2022, we had large construction loans payable of approximately $111.8 million and accounts payable of approximately $10.9 million to be paid to subcontractors. The extent of the impact of COVID-19 on the Company’s future financial results will be dependent on future developments such as the length and severity of the crisis, the potential resurgence of the crisis, future government actions in response to the crisis and the overall impact of the COVID-19 pandemic on the local economy and real estate markets, among many other factors, all of which remain highly uncertain and unpredictable. Given this uncertainty, the Company is currently unable to quantify the expected impact of the COVID-19 pandemic on its future operations, financial condition, liquidity and results of operations if the current situation continues. The above-mentioned facts raise substantial doubt about the Company’s ability to continue as a going concern for at least one year from the date of this filing.
In assessing its liquidity, management monitors and analyzes the Company’s cash on-hand, its ability to generate sufficient revenue sources in the future, and its operating and capital expenditure commitments. As of December 31, 2022, our total cash and restricted cash balance was approximately $3.8 million, decreased from approximately $4.4 million as of September 30, 2022. With respect to capital funding requirements, the Company budgeted its capital spending based on ongoing assessments of needs to maintain adequate cash. On October 25, 2022, the Company closed a private placement with gross proceeds of $5.2 million. As of December 31, 2022, we had approximately $77.0 million of completed residential apartments and commercial units available for sale to potential buyers. Although we reported approximately $10.9 million of accounts payable as of December 31, 2022, due to the long-term relationship with our construction suppliers and subcontractors, we were able to effectively manage cash spending on construction and negotiate with them to adjust the payment schedule based on our cash on hand. In addition, most of our existing real estate development projects relate to the old town renovation which is supported by the local government. As of December 31, 2022, we reported approximately $111.8 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, 2022, we had six large ongoing construction projects (see Note 4, real estate properties under development) which were in the preliminary development stage due to delayed inspection and acceptance of the development plans by the local government. In June 2020, we completed the residence relocation surrounding the Liangzhou Road related projects and launched the construction of these projects in December 2020. For the other four projects, we expect we will be able to obtain the government’s approval of the development plans on these projects in the coming fiscal year and start the pre-sale of the real estate properties to generate cash when certain property development milestones have been achieved.
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Cash Flow
Comparison of cash flows results is summarized as follows:
| Three months ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Net cash provided by operating activities | $ | (672,961 | ) | $ | 602,095 | |||
| Net Cash Used in Investing Activities | (5,200,000 | ) | — | |||||
| Net cash provided by financing activities | 5,201,470 | 2,000,000 | ||||||
| Effect of change of foreign exchange rate on cash and restricted cash | 92,539 | (358,596 | ) | |||||
| Net increase in cash and restricted cash | (578,952 | ) | 2,243,499 | |||||
| Cash and restricted cash, beginning of period | 4,368,177 | 3,465,189 | ||||||
| Cash and restricted cash, end of period | $ | 3,789,225 | $ | 5,708,688 | ||||
Operating Activities
Net cash used by operating activities during the three months ended December 31, 2022 was approximately $0.7 million, consisting of net loss of approximately $0.6 million and net changes in our operating assets and liabilities, which mainly included a decrease of other assets of approximately $0.08 million due to the reduction of receivables from housing buyers, a decrease in real estate property completed of approximately $0.08 million due to sales of our Yangzhou Palace and other projects and an decrease in customer deposits received of $0.3 million, offset by payments of other payables of approximately of $1.4 million and additional spending in real estate under development of $1.3 million.
Net cash provided by operating activities during the three months ended December 31, 2021 was approximately $0.6 million, consisting of net income of approximately $0.4 million and net changes in our operating assets and liabilities, which mainly included a decrease of other assets of approximately $2.9 million due to the reduction of receivables from housing buyers, a decrease in real estate property completed of approximately $1.5 million due to sales of our Yangzhou Palace and other projects and an increase in customer deposits received of $1.8 million, offset by payments of other payables of approximately of $4.5 million and additional spending in real estate under development of $1.9 million.
Investing Activities
Net cash flows provided by investing activities was approximately $5.2 million and nil for three months ended December 31, 2022 and 2021.
Financing Activities
Net cash flows provided by financing activities was approximately $5.2 million for three months ended December 31, 2022 from the private placement completed on October 25, 2022.
Net cash flows provided by financing activities was approximately $2.0 million for three months ended December 31, 2021, which was advance proceeds from investors for the private placement sale of Units, which was completed on January 14, 2022.
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Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
As an industry practice, the Company provides guarantees to PRC banks with respect to loans procured by the purchasers of the Company’s real estate properties for the total mortgage loan amount until the buyer obtains the “Certificate of Ownership” of the properties from the government, which generally takes six to twelve months. Because the banks provide loan proceeds without getting the “Certificate of Ownership” as loan collateral during the six-to-twelve-month period, the mortgage banks require the Company to maintain, as restricted cash of at least 5% of the mortgage proceeds as security for the Company’s obligations under such guarantees. If a purchaser defaults on its payment obligations, the mortgage bank may deduct the delinquent mortgage payment from the security deposit and require the Company to pay the excess amount if the delinquent mortgage payments exceed the security deposit. If the delinquent mortgage payments exceed the security deposit, the banks may require us to pay the excess amount. If multiple purchasers’ default on their payment obligations at around the same time, we will be required to make significant payments to the banks to satisfy our guarantee obligations. If we are unable to resell the properties underlying defaulted mortgages on a timely basis or at prices higher than the amounts of our guarantees and related expenses, we will suffer financial losses. The Company has the required reserves in its restricted cash account to cover any potential mortgage defaults as required by the mortgage lenders. Since inception through the release of this report, the Company has not experienced any delinquent mortgage loans and has not experienced any losses related to these guarantees. As of December 31, 2022 and September 30, 2022, our outstanding guarantees in respect of our customers’ mortgage loans amounted to approximately $25.7 million and 24.9 million, respectively. As of December 31, 2022 and September 30, 2022, the amount of restricted cash reserved for these guarantees was approximately $2.9 million and $3.0 million, respectively, and the Company believes that such reserves are sufficient.
Inflation
Inflationary factors, such as increases in the cost of our products and overhead costs, could impair our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of sales revenue if the selling prices of our products do not increase with these increased costs.
We Conduct Substantially All Our Business in Foreign Country
Substantially all of our operations are conducted in China and are subject to various political, economic, and other risks and uncertainties inherent in conducting business in China. Among other risks, our Company and our subsidiaries’ operations are subject to the risks of restrictions on transfer of funds; export duties, quotas, and embargoes; domestic and international customs and tariffs; changing taxation policies; foreign exchange restrictions; and political conditions and governmental regulations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide the information required by this item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”). The evaluation of our disclosure controls and procedures included a review of our processes and the effect on the information generated for use in this Quarterly Report on Form 10-Q. In the course of this evaluation, we sought to identify any material weaknesses in our disclosure controls and procedures and to confirm that any necessary corrective action, including process improvements, was taken. The purpose of this evaluation is to determine if, as of the Evaluation Date, our disclosure controls and procedures were operating effectively such that the information, required to be disclosed in our SEC reports (i) was recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
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Management conducted its evaluation of disclosure controls and procedures under the supervision of our chief executive officer and our chief financial officer. Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of December 31, 2022. Management is committed to improving the internal controls over financial reporting and will undertake the consistent improvements or enhancements on an ongoing basis. To remediate the material weakness and significant deficiencies and to prevent similar deficiencies in the future, we are currently evaluating additional controls and procedures, which may include:
| ● | Provide more U.S. GAAP knowledge and SEC reporting requirements training for the accounting department and establish formal policies and procedures. |
The remedial measures being undertaken may not be fully effectuated or may be insufficient to address the significant deficiencies we identified, and there can be no assurance that significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified or occur in the future. If additional significant deficiencies (or if material weaknesses) in our internal controls are discovered or occur in the future, among other similar or related effects: (i) the Company may fail to meet future reporting obligations on a timely basis, (ii) the Company’s consolidated financial statements may contain material misstatements, and (iii) the Company’s business and operating results may be harmed.
Changes in Internal Control over Financial Reporting
Except for the matters described above to improve our internal controls over financial reporting, there were no changes in our internal control over financial reporting for the three months ended December 31, 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, however, the Company is in the process of designing and planning to change as described above.
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PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are four on-going legal proceedings to which the Company is a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of voting securities of the Company, or security holder is a party adverse to the Company or has a material interest adverse to the Company. Some of the Company’s property is the subject of on-going legal proceedings.
| 1) | Case between the labor contract dispute between Wangcang County Lexin Labor Service Co., Ltd. and Zhejiang Hongcheng Construction Group Co., Ltd., Zhejiang Hongcheng Construction Group Co., Ltd. Xi 'an Branch and Shaanxi Guangsha Investment Development Group Co., Ltd. Hongcheng Company was judged to compensate Lexin Company, and Shaanxi Guangsha Company was jointly and severally liable, with an execution amount of $3,479,673. |
| 2) | Related to the above Case 1 disputes between Zhejiang Hongcheng Construction Group Co., Ltd. and Shaanxi Guangsha Investment Development Group Co., Ltd. on the construction project contract. The execution target of this case is $9,376,994 million including $3,479,673 in Case 1. |
| 3) | Case between Hantai District Commuity Center Hanzhong Urban Counsel and Shaanxi Guangsha Investment Development Group Co., Ltd., which was ordered by Hanzhong Hantai District Court to the settle the amount of $135,621 and it is still outstanding as at December 31, 2022. |
| 4) | Dispute between a disclosed property buyer and Shaanxi Guangsha Investment Development Group Co., Ltd., which was ordered by local court to pay the plaintiff of $131,993 which is still outstanding as at December 31, 2022. |
ITEM 1A. RISK FACTORS
As a smaller reporting company, we are not required to provide the information required by this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Other than any sales previously reported in the Company’s Current Reports on Form 8-K, the Company did not sell any unregistered securities during the period covered by this report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
(a) Exhibits
| * | Filed herewith | |
| ** | Furnished herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| Green Giant Inc. | ||
| Date: February 13, 2023 | By: | /s/ Neng Chen |
| Neng Chen | ||
| Chief Executive Officer | ||
| Date: February 13, 2023 | By: | /s/ Rongrong Dai |
| Rongrong Dai | ||
| Chief Financial Officer | ||
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