GREEN GIANT INC. The following discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported in the unaudited condensed consolidated financial statements ofGreen Giant Inc. for the three and six months endedMarch 31, 2023 and 2022 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 toGreen Giant Inc. , its subsidiaries and the VIE. Forward-Looking Statements.
We make forward-looking statements in Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report based on the beliefs and assumptions of our management and on information currently available to us. Forward-looking statements include information about our possible or assumed future results of operations which follow under the headings "Business Overview," "Liquidity and Capital Resources," and other statements throughout this report preceded by, followed by or that include the words "believes," "expects," "anticipates," "intends," "plans," "estimates" or similar expressions. Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in these forward-looking statements, including the risks and uncertainties described below and other factors we describe from time to time in our periodic filings with theU.S. Securities and Exchange Commission (the "SEC"). We therefore caution you not to rely unduly on any forward-looking statements. The forward-looking statements in this report speak only as of the date of this report, and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise. These forward-looking statements include, among other things, statements relating to:
? our ability to sustain our project development
? our ability to obtain additional land use rights at favorable prices;
? the market for real estate in Tier 3 and 4 cities and counties;
? our ability to obtain additional capital in future years to fund our planned
expansion; or
? economic political, regulatory, legal and foreign exchange risks associated
with our operations. Business Overview The Company currently operates in two segments, the real estate development business and green energy business. The Company engages in real estate development through the VIE, Guangsha, in mainlandChina , and is transitioning itself from its real estate development business to a new energy corporation and has appointed a CEO in itsDelaware subsidiary to lead and operate the green energy business. The Company engages in real estate development, primarily in the construction and sale of residential apartments, car parks and commercial properties in mainlandChina through Guangsha. Guangsha was founded by Mr.Xiaojun Zhu , and commenced operations in 1995 in Hanzhong, a prefecture-level city inShaanxi Province .
Currently, we conduct our real estate development business through the VIE, in Hanzhong,Shaanxi Province . Since the initiation of our real estate development business, we have been focused on expanding our business in certain Tier 3 and Tier 4 cities and counties inChina . For the six months endedMarch 31, 2023 , our sales and gross profit were$0.7 million and$0.1million , respectively, representing an approximate 90.8% and 96.5% decrease in sales and gross profit as compared to six months endedMarch 31, 2022 , respectively. The decrease in sales and gross profit was mainly the result of less gross floor area ("GFA ") sold during the first half of fiscal 2023. 20
For the six months endedMarch 31, 2023 , the average selling price ("ASP") for our real estate projects located in Yang County was approximately$633 per square meter, increased from the ASP of$518 per square meter for the six months endedMarch 31, 2022 , which was mainly attributable to the following:
1. Central and local governments relax control measures over real estate
development sector in an attempt to stimulate housing market, e.g. lift up
quote for home buyers, lower interest rate on mortgage loans, special policies
form low income earners etc.
2. The Company are selling completed house of Yang County project, not
blue-prints and so in high demand; it also attracts home buyers who are
willing to pay for a higher price; Yang County project targets high-end
market, which has better location than residential complex.
3. Yang County project targets high-end market, which has better location than
residential complex.
Recent Development
New Office Opening
OnFebruary 3, 2023 , the Company announced the opening of itsTexas' office located at1330 Post Oak Blvd , Ste 1175,Houston, Texas via its subsidiaryGreen Giant Energy Texas Inc. ("GGE Texas"). The Company has launched the green energy business sinceMarch 2023 specializing in uniting operational knowledge with critical project funding to help companies conquer clean energy transition challenges and reducing their carbon footprint.
Registration Statement Filed
OnMarch 7, 2023 , the Company filed with theU.S. Securities and Exchange Commission a registration statement on Form S-3, as amended, with aggregate offering amount not exceed$500,000,000 of the common stock, preferred stock, warrants, subscription rights, debt securities units, or any combination thereof, together or separately as described in the prospectus. The registration statement on Form S-3 was declared effective onMay 2, 2023 .
Resignation of the Chairman and CEO
Effective
Appointment of Chairman and CEO
EffectiveMarch 13, 2023 , the Board appointed Mr. Yuhuai Luo as the CEO of the Company and Chairman of the Board, to fill the vacancy created by the resignation of Mr.Neng Chen .Mr. Luo has served as the vice president ofGuizhou Tobacco Company sinceSeptember 2016 . FromJanuary 2009 toJune 2016 ,Mr. Luo served as the vice president ofHuaxin Energy Subsidiary Company . FromSeptember 1989 toMarch 2008 ,Mr. Luo served as the director ofGuizhou Tobacco Company (Guiyang Branch ).Mr. Luo obtained his bachelor's degree fromChina Guizhou Agricultural University . 21 Contract With AGR OnMarch 23, 2023 , the Company's indirect wholly owned subsidiary,Green Giant Energy Texas Inc. entered into a sales contract withAGR Enterprises Inc. pursuant to which Green Giant Energy agreed to purchase, and AGR agreed to sell to Green Giant Energy, 80 MT Zorba Scrap, with the unit price of$1,930 per
MT. Market Outlook
OnNovember 11, 2022 , thePeople's Bank of China and the China Banking andInsurance Regulatory Commission issued "Yin Fa [2022] No. 254 "Notice on Supporting the Stable andHealthy Development of the Real Estate Market" to support the stable and healthy development of the real estate market. OnNovember 14, 2022 , China Banking andInsurance Regulatory Commission , theMinistry of Housing andUrban-Rural Development and theCentral 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 mortgage 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
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 withU.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect our reported assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis and base them on historical experience and various other assumptions that are believed to be reasonable under the circumstances as the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates because of different and changing assumptions or conditions. We believe the following critical accounting policies affect our significant estimates and judgments used in the preparation of our condensed consolidated financial statements. These policies should be read in conjunction with Note 2 of the notes to the unaudited condensed consolidated financial statements.
22
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 and six months ended March 31, 2023 and
2022, the Company did not have any construction in progress recognized under the
percentage of completion method.
Disaggregation of Revenue
Disaggregated revenues are as follows:
For the three months ended
March 31,
2023 2022Revenue recognized for completed condominium real estate projects, net of sales tax
$
489,877
- -
Total revenue, net of sales tax $ 489,877 $ 4,302,992
For the six months ended
March 31,
2023 2022Revenue recognized for completed condominium real estate projects, net of sales tax
$ 652,583
- -
Total revenue, net of sales tax $ 652,583 $ 7,121,986 23 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 20%-50% of the total purchase price of the property. The period of the mortgage loan guarantee begins on the date the bank approves the buyer's mortgage and we receive the loan proceeds in our bank account and ends on the date the "Certificate of Ownership" evidencing that title to the property has been transferred to the buyer. The procedures to obtain the Certificate of Ownership take six to twelve months (the "Mortgage Loan Guarantee Period"). If, after investigation of the buyer's income and other relevant factors, the bank decides not to grant the mortgage loan, our mortgage-loan based sales contract terminates and there will be no guarantee obligation. If, during the Mortgage Loan Guarantee Period, the buyer defaults on his or her monthly mortgage payment for three consecutive months, we are required to return the loan proceeds back to the bank, although we have the right to keep the customer's deposit and resell the property to a third party. Once the Certificate of Ownership has been issued by the relevant government authority, our loan guarantee terminates. If the buyer then defaults on his or her mortgage loan, the bank has the right to take the property back and sell it and use the proceeds to pay off the loan. The Company is not liable for any shortfall that the bank may incur in this event. To date, no buyer has defaulted on his or her mortgage payments during the Mortgage Loan Guarantee Period and the Company has not returned any loan proceeds pursuant to its mortgage loan guarantees. Use of estimates The preparation of financial statements in conformity withU.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes, and disclosure of contingent liabilities at the date of the consolidated financial statements. Estimates are used for, but not limited to, the assumptions and estimates used by management in recognizing development revenue under the percentage of completion method, the selection of the useful lives of property and equipment, provision necessary for contingent liabilities, revenue recognition, taxes and budgeted costs. Management believes that the estimates utilized in preparing its consolidated financial statements are reasonable and prudent. Actual results could differ from these estimates. 24
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 and six months endedMarch 31, 2023 and 2022, the Company did not recognize any impairment loss for its real estate properties. Results of Operations
Three Months Ended
Revenue
The following is a breakdown of revenue:
For the three months ended
March 31,
2023 2022Revenue recognized for completed condominium real estate projects, net of sales tax
$
489,877
- -
Total revenue, net of sales tax $ 489,877 $ 4,302,992
25
Revenue recognized for completed condominium real estate projects
The following table summarizes our revenue generated by different projects:
For Three Months Ended March 31,
2023 2022 Variance
Revenue % Revenue % Amount %
Mingzhu Garden
(Mingzhu Nanyuan &
Mingzhu Beiyuan)
Phase I and II $ - - % $ 235,375 5.4 % $ (235,375 ) (100.0 )%
Nanyuan II Project - - - - % %
Yangzhou Palace 488,172 98.21 % 4,126,622 94.4 % (3,638,450 ) (88.2 )%
Yangzhou Pearl Garden
Phase I and II 8,874 1.79 % 7,626 0.2 % 1,248 16.4 %
Gross Real Estate
Sales 497,046 100.0 % 4,369,623 100.0 % (3,872,577 ) (88.6 )%
Less: Sales Tax (7,169 ) (66,631 ) 59,462 (89.2 )%
Revenue, net of sales
tax $ 489,877 $ 4,302,992 $ (3,813,115 ) (88.6 )%
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 decreased by 88.6% to approximately$0.5 million for the three months endedMarch 31, 2023 from approximately$4.3 million . The total GFA sold during six months endedMarch 31, 2023 was 898 square meters, decreased from the 8,113 square meters completed and sold during the same period of last fiscal year. The sales tax for the three months endedMarch 31, 2023 was approximately$7,169 , decreased by 89.2% from same period of last year, consistent with the decreased revenue. Cost of Sales
The following table sets forth a breakdown of our cost of sales:
For Three Months Ended March 31,
2023 2022 Variance
Cost % Cost % Amount %
Land use rights $ 46,465 11.5 % $ 218,985 9.5 % $ (172,520 ) (78.8 )%
Construction cost 356,905 88.5 % 2,086,118 90.5 % (1,729,213 ) (82.9 )%
Total cost $ 403,370 100.0 % $ 2,305,103 100.0 % $ (1,901,733 ) (82.5 )%
Our cost of sales consists primarily of costs associated with land use rights
and construction costs, including capitalized interest. 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 projector phase of the project. Cost of sales was approximately$0.4 million for the three months endedMarch 31, 2023 compared to$2.3 million for the same period of last year. The$1.9 million decrease in cost of sales was mainly attributable to less GFA sold during the three months endedMarch 31, 2023 . 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 endedMarch 31, 2023 and 2022 were approximately$0.05 million and$0.2 million , respectively. 26
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 endingMarch 31, 2023 were approximately$0.4 million as compared to approximately$2.1 million for the same period of last year, representing a decrease of approximately$1.7 million . The decrease in construction cost was due to less real estate projects sold during the quarter endedMarch 31, 2023 . Gross Profit Gross profit and gross margin were approximately$0.09 million and 17.7 % respectively for the three months endedMarch 31, 2023 as compared to approximately$2.0 million and 46.4% respectively in the same period of last year due to the economic downturn caused by the epidemic control inChina and aforementioned. For Three Months Ended March 31, 2023 2022 Gross Profit Gross Margin Gross Profit Gross Margin Mingzhu Garden (Mingzhu Nanyuan & Mingzhu Beiyuan) Phase I and II $ - - %$ 185,567 78.8 % Oriental Garden - - - - % Yangzhou Pearl Garden Phase I and II 1,386 15.6 % 1,192 15.6 % Yangzhou Palace 92,290 18.9 % 1,877,761 45.5 % Sales Tax (7,169 ) (66,631 ) Total gross profit$ 86,507 17.7 %$ 1,997,889 46.4 % Revenue, net of sales tax$ 489,877 $ 4,302,992 Operating Expenses Total operating expenses increased by 83.2% to approximately$1.2 million for the three months endedMarch 31, 2023 from$0.7 million for the three months endedMarch 31, 2022 , primarily due more general and administrative expense incurred for the three months endedMarch 31, 2022 . Our general and administrative expense was approximately$1.2 million for the three months endedMarch 31, 2023 , increased by$0.7million from the three months endedMarch 31, 2022 due to litigation case of construction contract dispute withZhejiang Hongcheng Construction Group Co., Ltd. in amount ofRMB5.84 million (US$0.85 million ). Our total operating expenses accounted for 254.5% and 15.8% of our real estate sales for the three months endedMarch 31, 2023 and 2022, respectively. For Three Months Ended March 31, 2023 2022 Selling expenses$ 62,431 $ 29,871 General and administrative expenses 1,184,079 650,426 Total operating expenses$ 1,246,510 $ 680,297 Percentage of revenue, net of sales tax 254.5 % 15.8 % 27 Income Taxes PRC Taxes
The Company's PRC subsidiary and VIE are governed by the Income Tax Law ofthe People's Republic of China concerning the privately run enterprises, which are generally subject to income tax on income reported in the statutory financial statements after appropriate tax adjustments. The Company's CIT rate is 25% on taxable income. Although the possibility exists for reinterpretation of the application of the tax regulations by higher tax authorities in the PRC, potentially overturning the decision made by the local tax authority, the Company has not experienced any reevaluation of the income taxes for prior years. The PRC tax rules are different from the local tax rules and the Company is required to comply with local tax rules. The difference between the two tax rules will not be a liability of the Company. There will be no further tax payments for the difference. For the three months endedMarch 31, 2023 and 2022, the Company's effective income tax rate was 0% and 31.3%. The increase in the effective income tax rate for the three months endedMarch 31, 2023 was due to nondeductible expenses including professional fees, and penalties and interest expense related to ourU.S. delinquent tax filings. Net income We reported net income of approximately$1.3 million for the three months endedMarch 31, 2023 , as compared to net income of approximately$0.7 for the three months endedMarch 31, 2022 . The decrease of approximately$0.6 million in our net income was primarily due to less revenue for the three months endedMarch 31, 2022 as discussed above under Revenues and Gross Profit. Six Months EndedMarch 31, 2023 compared to Six Months EndedMarch 31, 2022
Revenue
The following is a breakdown of revenue:
For the six months ended
March 31,
2023 2022Revenue recognized for completed condominium real estate projects, net of sales taxes
$ 652,583
- -
Total revenue, net of sales taxes $ 652,583 $ 7,121,986
Revenue recognized for completed condominium real estate projects
The following table summarizes our revenue generated by different projects:
For Six Months Ended March 31,
2023 2022 Variance
Revenue % Revenue % Amount %
Mingzhu Garden
(Mingzhu Nanyuan &
Mingzhu Beiyuan)
Phase I and Phase II $ - - % $ 1,051,238 14.5 % $ (1,051,238 ) (100.0 )%
Nanyuan II Project - - - - % - - %
Yangzhou Pearl Garden
Phase I and Phase II 8,874 1.3 % 7,626 0.1 % 1,248 16.4 %
Oriental Garden - - % 773,113 10.7 (773,113 ) (100.0 )%
Yangzhou Palace 652,884 98.7 % 5,416,861 74.7 % (4,763,977 ) (87.9 )%
Gross Real Estate
Sales 661,758 100.0 % 7,248,838 100.0 % (6,587,080 ) (90.9 )%
Less: Sales Tax (9,175 ) (126,852 ) 117,677 (92.8 )%
Revenue, net of sales
tax $ 652,583 $ 7,121,986 $ (6,469,403 ) (90.8 )%
28
Our revenue is derived from the sale of residential buildings, commercial
store-fronts and parking spaces in projects that we have developed. Compared to
the same period of last year, revenues decreased by 90.8% to approximately $0.7
million for the six months ended March 31, 2023 from approximately $7.1 million
in the same period of last year. The total GFA sold during six months ended
March 31, 2023 was 1,045 square meters, decreased from the 11,783 square meters
completed and sold during the same period of last year. The sales tax for the
six months ended March 31, 2023 was approximately $9,175 decreased by 92.8% from
same period of last year, consistent with the decreased revenue.
Cost of Sales
The following table sets forth a breakdown of our cost of sales:
For Six Months Ended March 31,
2023 2022 Variance
Cost % Cost % Amount %
Land use rights $ 52,238 9.8 % $ 357,263 9.5 % $ (305,025 ) (85.4 )%
Construction cost 481,424 90.2 % 3,403,396 90.5 % (2,921,972 ) (85.9 )%
Total cost $ 533,662 100.0 % $ 3,760,659 100.0 % $ (3,226,997 ) (85.8 )%
Our cost of sales consists primarily of costs associated with land use rights
and construction costs, including capitalized interest. 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 projector phase of the project.
Cost of sales was approximately$0.5 million for the six months endedMarch 31, 2023 compared to$3.8 million for the same period of last year. The$3.2 million decrease in cost of sales was mainly attributable to less GFA sold during the six months endedMarch 31, 2023 . 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 six months endedMarch 31, 2023 and 2022 were approximately$0.05 million and$0.4 million , respectively. 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 six months endingMarch 31, 2023 were approximately$0.5 million as compared to approximately$3.4 million for the same period of last year, representing a decrease of approximately$2.9 million . The decrease in construction cost was due to less real estate property units sold during the first half of fiscal 2023. Gross Profit Gross profit and gross margin were approximately$0.12 million and 18.2 % respectively for the six months endedMarch 31, 2023 as compared to approximately$3.3 million and 47.2% respectively in the same period of last year due to the economic downturn caused by the epidemic control inChina and aforementioned. 29
The following table sets forth the gross margin of each of our projects:
For Six Months Ended March 31,
2023 2022
Gross Percentage Gross Percentage
Profit of Revenue Profit of Revenue
Mingzhu Garden (Mingzhu Nanyuan &
Mingzhu Beiyuan) $ - - % $ 432,047 41.1 %
Oriental Garden - - % 615,807 79.7 %
Nanyuan II project - - % - - %
Yangzhou Pearl Garden Phase I and Phase
II 1,386 15.6 % 1,192 15.6 %
Yangzhou Palace 126,710 19.4 % 2,439,133 45.0 %
Sales Tax (9,175 ) - (126,852 ) -
Total gross profit $ 118,921 18.2 % $ 3,361,327 47.2 %Revenue, net of sales tax$ 652,583 - $
7,121,986 - Operating Expenses Total operating expenses were approximately$1.9 million and$1.5 million for the six months endedMarch 31, 2023 and 2022, respectively. The 36.5% increase in general administration expense for the six months endedMarch 31, 2023 due to litigation case of construction contract dispute withZhejiang Hongcheng Construction Group Co., Ltd. in amount ofRMB5.84 million (US$0.85 million ). Our total operating expenses accounted for 284.1% and 21.5% of our real estate sales for the six months endedMarch 31, 2023 and 2022, respectively. For Six Months Ended March 31, 2022 2021 Selling expenses$ 102,861 $ 249,658
General and administrative expenses 1,750,896 1,282,353 Total operating expenses
$ 1,853,757 $ 1,532,011
Percentage of Revenue, net of sales tax (284.1 )% 21.5 %
Income Taxes PRC Taxes Our Company is governed by the Enterprise Income Tax Law ofthe People's Republic of China concerning private-run enterprises, which are generally subject to tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments. For the six months endedMarch 31, 2023 and 2022, the Company is subject to income tax rate of 25% on taxable income. Although the possibility exists for reinterpretation of the application of the tax regulations by higher tax authorities in the PRC, potentially overturning the decision made by the local tax authority, the Company has not experienced any reevaluation of the income taxes for prior years. The PRC tax rules are different from the local tax rules and the Company is required to comply with local tax rules. The difference between the two tax rules will not be a liability of the Company. There will be no further tax payments for the difference. Net Income We reported net income of approximately negative$1.9 million for the six months endedMarch 31, 2023 , as compared to net income of approximately$1.1million for the six months endedMarch 31, 2022 . The decrease of$3.0 million in our net income was primarily due to less revenue reported for the first half of fiscal 2023 as discussed above under Revenues and Gross Profit. 30
Liquidity and Capital Resources
Our principal need for liquidity and capital resources is to maintain working capital sufficient to support our operations and to make capital expenditures to finance the growth of our business. Historically we mainly financed our operations primarily through cash flows from operations and borrowings from
our principal shareholder. Liquidity
In recent years, the Chinese government has implemented measures to control overheating residential and commercial property prices including but not limited to restrictions on home purchase, increasing the down-payment requirement against speculative buying, development of low-cost rental housing properties to help low-income groups while reducing the demand in the commercial housing market, increasing real estate property taxes to discourage speculation, control of the land supply and slowdown the construction land auction process, etc. In addition, inDecember 2019 , a novel strain of coronavirus (COVID-19) surfaced. COVID-19 has spread rapidly throughoutChina and worldwide, which has caused significant volatility in the PRC and international markets. There is significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the PRC and international economies. To reduce the spread of COVID-19, the Chinese government has employed measures including city lockdowns, quarantines, travel restrictions, suspension of business activities and school closures. Due to difficulties resulting from the COVID-19 pandemic, including, but not limited to, the temporary closure of the Company's facilities and operations beginning in early February through earlyMarch 2020 , limited support from the Company's employees, delayed access to construction raw material supplies, reduced customer visits to the Company's sales office, and inability to promote real estate property sales to customers on a timely basis, The Company had real estate sales of approximately$0.7 million for the six months endedMarch 31, 2023 , decreased from$7.2 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 ofMarch 31, 2023 , we had large construction loans payable of approximately$112.2 million and accounts payable of approximately$11.0 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 ofMarch 31, 2023 , our total cash and restricted cash balance was approximately$3.3 million , increased from approximately$4.4 million as ofSeptember 30, 2022 . With respect to capital funding requirements, the Company budgeted its capital spending based on ongoing assessments of needs to maintain adequate cash. As ofMarch 31, 2023 , we had approximately$76.9million of completed residential apartments and commercial units available for sale to potential buyers. Although we reported approximately$11.0 million accounts payable as ofMarch 31, 2023 , due to the long-term relationship with our construction suppliers and subcontractors, we were able to effectively manage cash spending on construction and negotiate with them to adjust the payment schedule based on our cash on hand. In addition, most of our existing real estate development projects relate to the old town renovation which are supported by the local government. As ofMarch 31, 2023 , we reported approximately$112.2 million of construction loans borrowed from financial institutions controlled by the local government and such loans can only be used on the old town renovation related project development. We expect that we will be able to renew all of the existing construction loans upon their maturity and borrow additional new loans from local financial institutions, when necessary, based on our past experience and the Company's good credit history. Also, the Company's cash flows from pre-sales and current sales should provide financial support for our current development projects and operations. For the three months endedMarch 31, 2023 , we had six large ongoing construction projects (see Note 3, real estate properties under development) which were under the preliminary development stage due to delayed inspection and acceptance of the development plans by the local government. For the other four projects, we expect we will be able to obtain the government's approval of the development plans on these projects in the coming fiscal year and start the pre-sale of the real estate properties to generate cash when certain property development milestones have been achieved. 31 Cash Flow
Comparison of cash flows results is summarized as follows:
Six months ended
March 31,
2023 2022Net cash provided by (used in) operating activities$ (1,157,079 ) $ 7,334 Net cash used in investing activities (5,354,400 ) (18,461,700 ) Net cash provided by financing activities 5,307,470
28,936,915
Effect of change of foreign exchange rate on cash and restricted cash 112,219 (356,551 ) Net increase (decrease) in cash and restricted cash (1,091,790 ) 10,125,998 Cash and restricted cash, beginning of period 4,368,177
3,465,189
Cash and restricted cash, end of period$ 3,276,387
$ 13,591,187 Operating Activities
Net cash provided by operating activities during the six months endedMarch 31, 2023 was$1,157,079 , consisting of net loss of approximately$ 1.9 million and net changes in our operating assets and liabilities, which mainly included an increase of spending in real estate property under development of$2.6 million , offset by an increase in other payables of$2.72 million . Net cash provided by operating activities during the six months endedMarch 31, 2022 was$7,334 , consisting of net income of approximately$1.1 million and net changes in our operating assets and liabilities, which mainly included an increase of spending in real estate property under development of$8.1 million , a decrease in accounts payable of$5.9 million due to more payments to our supplier during the first half of fiscal 2022, offset by decrease of real estate property completed of$3.8 million due to sales of real estate and a decrease in other assets of$4.3 million due to the reduction of receivables from housing buyers, an increase of$2.9 million in customer deposits received from real estate sales and an increase of$2.3 million in other payable due to additional cost accrued for the first half of fiscal 2022. Investing Activities
Net cash flows used in investing activities was approximately$5.4 million for six months endedMarch 31, 2023 , which was mainly the prepayment made to purchase energy equipment and professional services. There was$18,461,700 cash flows used in investing activities for six months endedMarch 31, 2022 . Financing Activities Net cash flows provided by financing activities was approximately$5.3 million for six months endedMarch 31, 2023 , which was the proceeds received from two private placements completed by the Company during the first half of fiscal 2023. There was$28,936,915 cash flows provided by financing activities for
six months endedMarch 31, 2022 . 32
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as of the date of this quarterly report on the Form 10-Q.
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 ofMarch 31, 2023 andSeptember 30, 2022 , our outstanding guarantees in respect of our customers' mortgage loans amounted to approximately$25.7 million . As ofMarch 31, 2023 andSeptember 30, 2022 , the amount of restricted cash reserved for these guarantees was approximately$3.0 million and the Company believes that such reserves
are sufficient. Inflation Inflation has not had a material impact on our real estate business inChina and we do not expect inflation to have a material impact on our business in the near future.
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