ITEM 1. BUSINESS
Our Organization
Green Giant Inc. (formerly China HGS Real Estate Inc., the “Company”
or “GGE,” “we”, “our”, “us”), is a corporation organized under the laws of the State of
Florida.
China HGS Investment Inc. is a Delaware corporation
and owns 100% of the equity interest in Shaanxi HGS Management and Consulting Co., Ltd. (“Shaanxi HGS”), a wholly owned
foreign entity incorporated under the laws of the People’s Republic of China (“PRC” or “China”).
GGE does not conduct any substantive operations
of its own. Instead, through its subsidiary, Shaanxi HGS, it entered into certain exclusive contractual agreements with Shaanxi Guangsha
Investment and Development Group Co., Ltd. (“Guangsha”). Pursuant to these agreements, Shaanxi HGS is obligated to absorb
a majority of the risk of loss from Guangsha’s activities and entitles Shaanxi HGS to receive a majority of Guangsha’s expected
residual returns. In addition, Guangsha’s shareholders have pledged their equity interest in Guangsha to Shaanxi HGS, irrevocably
granted Shaanxi HGS an exclusive option to purchase, to the extent permitted under PRC Law, all or part of the equity interests in Guangsha
and agreed to entrust all the rights to exercise their voting power to the person(s) appointed by Shaanxi HGS.
Our Company engages in real estate development,
primarily in the construction and sale of residential apartments, car parks and commercial properties.
Guangsha was organized in August 1995 as
a limited liability company under the laws of the PRC. Guangsha is headquartered in the city of Hanzhong, Shaanxi Province. Guangsha is
engaged in developing large scale and high quality commercial and residential projects, including multi-layer apartment buildings, sub-high-rise
apartment buildings, high-rise apartment buildings, and office buildings.
On November 29, 2021, Green Giant Ltd. was incorporated
in Delaware.
Green Giant Energy Texas Inc. was incorporated
in Texas on October 3, 2022 which is a wholly owned subsidiary of Green Giant Ltd.
Green Giant International Limited (Hong Kong)
was incorporated in Hong Kong on December 9, 2021 as a wholly owned subsidiary of Green Giant Ltd.
Our corporate structure as of September 30, 2022
is set forth below:
Business Overview
Our Company engages in real estate development,
primarily in the construction and sale of residential apartments, car parks and commercial properties. We conduct all of our business
in mainland China. Shaanxi Guangsha Investment and Development Group Co., Ltd., or Guangsha, was founded by Mr. Xiaojun Zhu, and commenced
operations in 1995 in Hanzhong, a prefecture-level city in Shaanxi Province.
Currently, we are operating in Hanzhong, a prefecture-level
city in Shaanxi Province, and Yang County, a county in Hanzhong. Our management has been focused on expanding our business in Tier 3 and
Tier 4 cities and counties in China that we strategically select based on population and urbanization growth rates, general economic conditions
and growth rates, income and purchasing power of resident consumers, anticipated demand for private residential properties, availability
of future land supply and land prices, and governmental urban planning and development policies. Initially, these Tier 3 and Tier 4 cities
and counties will be located in the Shaanxi province, China. We utilize a standardized and scalable model that emphasizes rapid asset
turnover, efficient capital management and strict cost control. We plan to expand into strategically selected Tier 3 and Tier 4 cities
and counties with real estate development potential in Shaanxi Province, and expect to benefit from rising demand for residential housing
as a result of increasing income levels of consumers and growing populations in these cities and counties due to urbanization.
In September 2020, the Company started land leveling
and construction process for the Oriental Garden Phase II and Liangzhou Mansion real estate properties in the Liangzhou Road related projects.
The Company started the construction of the Liangzhou Road related projects, which consist of residential buildings, office buildings
and a commercial plaza, after the approval by the local government of the road. Upon completion, the Liangzhou Road related projects will
become a new city center of Hanzhong city.
The Company is transforming itself from legacy
business to a new energy corporation and has appointed a CEO in USA subsidiary to lead and operate the new business venture.
Real Estate Industry Overview
During the volatile real estate market, the Company
has been capitalizing on its inherent strengths and market opportunities in Tier 3 and Tier 4 cities and counties to deliver value for
our shareholders. We feel confident and also competent to take on every challenge and grasp every opportunity during market consolidation.
We expect to provide rapid response to the market on the basis of our projected business plans together with a flexible approach in seizing
market opportunities; strict investment standards and prudent attitude towards investment opportunities, and appropriate replenishment
of quality land resources in existing regions to realize value within the Tier 3 and Tier 4 cities and counties in Western China.
Company Positioning
The Company is headquartered in Hanzhong in the
southwestern part of the Shaanxi province, in the center of the Hanzhong Basin, on the Han River, near the Sichuan border. According to
the China City Statistical Yearbook, Hanzhong had a population of about 3.8 million. |
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Hanzhong is a key transportation hub connecting
China’s Middle Economic zone and Western Economic Zone. The travel time from Xi’an, the provincial capital of Shaanxi province,
to Hanzhong takes less than 2 hours. The airport in Hanzhong was completed and put into service in 2014. The airport handled approximately
650,000 passengers and 2,200 tons of cargo on annual basis. Xicheng, a high-speed railway between Chengdu, the provincial capital of Sichuan
province, and Xi’an with a major stop in Hanzhong was completed in 2017. It takes 1.5 hours from Hanzhong to Xi’an and 2.5
hours from Hanzhong to Chengdu. The railway passenger’s volume was around 6 million in 2020.
In accordance with Hanzhong Government’s
2020 annual report, Hanzhong’s GDP reached RMB 159.3 billion (approximately $24.0 billion) by 2020 calendar year, representing a
2.9% increase from 2019 calendar year. Residents’ annual disposable income for 2020 calendar year was RMB34,417 (equivalent to $5,331),
representing a 4.8% increase as compared to 2019 calendar year.
Many Tier 3 and Tier 4 cities and counties in
China provide a major source of migration workers (the “Migration Workers”)for the Tier 1 and Tier 2 cities in China. Income
from migration workers is becoming a significant factor in supporting the hometown economy. Migration workers are not permanent residents
in the the Tier 1 and Tier 2 cities and travel back to their home towns during the national holidays. Based on Hanzhong Government’s
2020 annual report, the number of Hanzhong’s migration workers reached approximately 893,000 as of December 31, 2020 (2019 –
865,000).
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. The details are as follows:
A. Keeping real estate financing stable and order
1). Stabilize the issuance of real estate development
loans.
Adhere to the “two unswerving”, and
treat all types of real estate enterprises such as state-owned and private enterprises equally. Encourage financial institutions to focus
on supporting the steady development of real estate enterprises with sound governance, focus on their main business and good qualifications.
Financial institutions should reasonably distinguish
the risks of project subsidiaries from the risks of group holding companies, and meet the reasonable financing needs of real estate projects
in accordance with the principle of marketization on the premise of ensuring the safety of creditor’s rights and the closed operation
of funds. Support the project host bank and the syndicated loan model, strengthen the management of the whole process of loan approval,
issuance and recovery, and effectively ensure the safety of funds.
2). Support the reasonable needs of individual
housing loans.
Reasonably determine the down payment ratio of
local personal housing loans and the lower limit of the loan interest rate policy to support rigid and improved housing demand.
Financial institutions are encouraged to reasonably
determine the specific down payment ratio and interest rate level for individual housing loans based on the lower limit of urban policies
in light of their own business conditions, customer risk status and credit conditions, etc.
3). Stabilize the credit supply of construction
enterprises.
4). Support the reasonable extension of existing
financing such as development loans and trust loans
For real estate enterprise development loans,
trust loans and other existing financing, on the premise of ensuring the safety of creditor’s rights, financial institutions and real
estate enterprises are encouraged to negotiate independently based on commercial principles, and actively support through the extension
of existing loans, adjustment of repayment arrangements, etc., to promote the completion of the project deliver.
From the date of issuance of the notice, those
due within the next six months may be allowed to extend for one more year beyond the original regulations, and the loan classification
may not be adjusted, and the loan classification submitted to the credit reporting system should be consistent with it.
5). Keep bond stable, and support high-quality
real estate enterprises to issue bond. Promote professional credit enhancement agencies to provide credit enhancement support for bond
issuance of real estate enterprises with overall financial health and short-term difficulties.
Encourage bond issuers to communicate with holders
in advance and make arrangements for borrowing bonds to redeem funds. If it is really difficult to make payment on time, reasonable arrangements
such as extension and replacement shall be made through negotiation to proactively resolve risks.
6). Maintain stable financing of asset management
products such as trusts.
B. Actively do a good job in “delivery guarantee
building” financial services
7). Support development policy banks to provide
special loans for “delivery guarantee building”.
Support China Development Bank and Agricultural
Development Bank in accordance with relevant policy arrangements and requirements. In accordance with the laws and regulations, the special
insurance payment for “delivery guarantee building” is issued to the borrowers who have been reviewed and filed in an efficient
and orderly manner, which is closed and dedicated. It is specially used to support the accelerated construction and delivery of overdue
and difficult-to-deliver residential projects that have been sold.
8). Encourage financial institutions to provide
supporting financing support.
Encourage financial institutions, especially the
main financing commercial banks of the project personal housing loans or the syndicates they lead to form, in accordance with the principles
of marketization and the rule of law, to provide new supporting financing support for special loan support projects, and promote the resolution
of unfinished personal housing loan risks.
For the sale of the remaining value of goods,
the project can be reviewed at the same time for special loans and new supporting financing, and the sales of the remaining value of goods
cannot cover both the special loan and the new supporting financing, but it has been clarified that the new supporting financing and special
financing The loan matching mechanism arranges and implements the project of the source of repayment, and encourages financial institutions
to actively provide new matching financing support under the premise of commercial voluntary.
The subject of the newly added supporting financing
should be consistent with the subject of the implementation of the special loan-supported project. The existing assets and liabilities
of the project should be audited and evaluated by a qualified institution organized by the local government, and an implementation plan
of “one building one policy” has been formulated. Commercial banks with the “special loan supporting financing”
sub-section can be newly established under the real estate development loan for statistics and management. In principle, the supporting
financing should not exceed the period of the corresponding special loan. For a maximum period of no more than 3 years, the project sales
receipts shall be transferred to a special project account opened with the main financing commercial bank or other commercial banks, and
the special project account shall be jointly managed by the commercial bank that provides additional financing. It is clearly stated that
in accordance with the principle of “last-in, first-out”, the sales receipts of the remaining value of the project should be
given priority to repay the newly-added supporting financing and special loans.
For commercial banks, in accordance with the requirements
of this notice, within half a year from the date of issuance of this notice, the supporting financing issued to special fund-supported
projects shall not be reduced in risk classification during the loan period; The main body management is not good for the newly issued
supporting financing, and the relevant institutions and personnel have done their due diligence. Liability is waived.C. Actively cooperate
with trapped real estate enterprises to deal with the risk disposal
9). Provide financial support for M&A of real
estate projects.
Encourage commercial banks to carry out M&A
loan business for real estate projects in a stable and orderly manner, and focus on supporting high-quality real estate enterprises to
merge and acquire projects of distressed real estate enterprises.
Encourage financial asset management companies
and local asset management companies (hereinafter collectively referred to as asset management companies) to use their experience and
capabilities in non-performing asset management and risk management, and jointly negotiate risk resolution models with local governments,
commercial banks, and real estate companies, and promote accelerate asset disposal.
10) Actively
explore market-oriented support methods.For some projects that have entered judicial reorganization, financial institutions can
assist in promoting project resumption and delivery by one enterprise and one policy according to the principles of independent
decision-making, risk-taking, and self-responsibility for profits and losses.
Encourage asset management companies to participate
in project disposal by acting as bankruptcy administrators, reorganization investors, etc., and support qualified financial institutions
to prudently explore the establishment of funds and other methods to resolve the risks of distressed real estate enterprises in accordance
with laws and regulations, and support project completion and delivery.
D. Legally protect the legitimate rights and interests
of housing finance consumers
11). Encourage independent negotiation and extension
of principal and interest repayment in accordance with the law.
For individuals who have lost their source of
income due to hospitalization or isolation due to the epidemic, or who have lost their income due to the closure of business due to the
epidemic, as well as personal housing loans due to changes or cancellations of housing purchase contracts, financial institutions can
follow the market-based approach. Based on the principle of rule of law, negotiate with the buyers independently, and make adjustments
such as postponement and extension.
For malicious evasion of financial debts, they
will be dealt with in accordance with laws and regulations to maintain a good market order.
12). Effectively protect the personal credit investigation
rights of deferred loans.
If the repayment arrangement of the personal housing
loan has been adjusted, the financial institution shall submit the credit record according to the new repayment arrangement; if the judgment
or ruling of the people’s court determines that the adjustment should be made, the financial institution shall adjust the credit record
and submit it according to the effective judgment or ruling of the people’s court which has been reported to be adjusted.
E. Phased adjustment of some financial management
policies
13). Extending the transition period of the real
estate loan concentration management policy.
For banking financial institutions that cannot
meet the requirements of real estate loan concentration management as scheduled due to objective reasons such as the epidemic, the transition
period will be reasonably extended based on the actual situation and objective assessment.
14). Periodically optimize the M&A financing
policy for real estate projects.
Relevant financial institutions should make good
use of the phased real estate financial management policies issued by the People’s Bank of China and the China Banking and Insurance Regulatory
Commission, which are applicable to major commercial banks and national financial asset management companies, and accelerate the marketization
of real estate risks.
F. Increase financial support for housing leasing
15). Optimize housing leasing credit services.
16). Broaden diversified financing channels in
the housing leasing market.
Support housing rental and sales enterprises to
issue credit bonds and guaranteed bonds and other direct financing products, which are specially used for the construction and operation
of rental housing, and Gupin Commercial Bank issues financial bonds to support housing rental to raise funds to increase housing rental
development and construction loans and business operations. Loans were provided, and the pilot program of real estate investment trusts
(REITs) was steadily promoted.
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 modify the conservative attitude of commercial banks to intervene in the development loan market and support
the reasonable demand for individual housing loans.
1) | The existing debt financing of real estate enterprises shall be reasonably extended. Reasonable extension
arrangements will be made for the existing financing such as real estate development loans and trust loans, with an additional extension
of one year for those due in the next six months, and the credit rating will not be downgraded or credit information will not be changed.
The “Financial Support for Real Estate Notice” is the first time to mention the support policy for trust loans, which may
help banks to enhance the risk appetite of house related businesses, especially private real estate enterprises. |
2) | Extend the transition period of the real estate concentration management policy arrangement. For the real
estate concentration management requirements of banking financial institutions established by the end of 2020 that cannot meet the standards
as scheduled due to the epidemic and other reasons, the transition period can be reasonably extended based on the actual situation through
objective assessment. The phased “relaxation” of management requirements will help banks to participate in the real estate credit
market in a reasonable manner based on the actual situation. |
3) |
Emphasis on doing a good job to provide financial services for “delivery guarantee building”. Supporting the State Development bank, the Agricultural Development Bank and other institutions to provide special loans for real estate enterprises to “delivery guarantee building” and providing supporting financing for special loans projects, will further resolve the risks of individual housing loans that are not yet delivered. |
4) | Add exemption clause to relieve worries. If the participation in the newly issued supporting financing
of the delivery guarantee building is bad, the relevant institutions and personnel shall perform their duties and be exempted from liability,
which will boost the initiative of the relevant institutions to participate in such projects. With the introduction of the policy of replacing
pre-sale supervision funds with letters of guarantee, real estate enterprises are facing significate liquidity benefits. According to
the “Notice on Pre-sale Supervision Funds”, high-quality real estate enterprises can apply to banks for a letter of guarantee
to replace the pre-sale supervision funds, which is a significant benefit to the short-term liquidity of real estate. According to the
regulatory requirements, the replacement funds of real estate enterprises are given priority to use for project construction and repayment
of debts due. On the one hand, the replacement funds can directly relieve the liquidity pressure of real estate enterprises and improve
the cash flow of enterprises; On the other hand, it is good for real estate enterprises to activate the pre-sale funds to complete the
project delivery, promote the “delivery guarantee building” in an orderly manner, strengthen the signal “stability maintenance”
in the real estate market, and promote the recovery of the sales side, so as to substantially improve the debt repayment ability of real
estate enterprises, especially private real estate enterprises, and the risks of banks involved in real estate can be mitigated. |
The upper limit of the replacement quota and the
term of the letter of guarantee are clearly stipulated, and the bank risk is guaranteed. According to the “Notice on Pre-sale Supervision
Funds”, the replacement amount of the real estate enterprise shall not exceed 30% of the amount of funds required to ensure the
completion and delivery of the project in the supervision account. At the same time, the term of the letter of guarantee shall be matched
with the project construction period to ensure that the replacement funds are used for the project construction. At the regulatory level,
there are clear provisions on the quota for the replacement of real estate enterprises and the term of the letter of guarantee, which
not only improves the utilisation efficiency of the use of pre-sale supervision funds, but also ensures the capital safety to the greatest
extent and reduces the credit risk of banks.
The target market of the Company is in Western
China. The Company continues to focus on Tier 3 and Tier 4 cities and counties in acquiring sizable quality land reserves at low cost
in a flexible and diversified manner. There has been an increasing demand for high quality residential housing, largely driven by the
“Go West” policy and accelerated urbanization. Many buyers in Tier 3 and Tier 4 cities and counties are first time home buyers.
In order to mitigate default risk, the Company generally requires from its homebuyer customers a deposit in the range of 30%-50% of the
purchase price, which is higher than the percentage required by the government for the mortgage down payment.
The Company received the National Grade-I real-estate development qualification
granted by the Ministry of Housing and Urban-Rural Development of the People’s Republic of China (“MOHURD”) on October 12,
2011. The Company is not required to renew the National Grade-I real-estate development qualification after it passed
the initial qualification application set out by the MOHURD. The Grade-I real-estate development qualification is the highest qualification
for real-estate developers in China and requires meeting several strict criteria, including:
a. Registered capital of at least RMB 50 million
(approximately $7.3 million);
b. At least five years of experience in real estate
development and operations;
c. The completion of construction of a total over
300,000 square meters. of ground floor area (GFA) within the last three years and, in the most recent year, developed real estate projects
of at least 150,000 square meters; and
d. The completed real estate projects have no
quality issues in each of the past five years; and an established, comprehensive quality control and guarantee system.
The National Grade-I real-estate development qualification
provides significant opportunities for the Company to expand its operations beyond Shaanxi province into new regional real estate markets
in China. Without the National Grade-I real-estate development qualification, a real estate developer shall not develop a real estate
property in other cities or provinces in China. The Company is not required to periodically renew the National Grade-I real-estate development
qualification after the Company passed the initial qualification application set out by the MOHURD.
Looking ahead, the Company will continue to focus
on developing high quality and large scale real estate projects in the suburban areas of Tier 3 and Tier 4 cities and counties with promising
economic growth potential. Leveraging on its unique competitive strengths, and under the direction and guidance of the government’s
macro policies, the Company expects to further replicate its successful business model into new high growth regions through strategic
selection of project locations, a short project development schedule characterized by fast asset turnover and excellent execution ability,
as well as innovative product offering closely in line with market demand. The Company aims at becoming a leading large-scale residential
property developer in Western China and a well-recognized brand name.
Pre-Sales and Sales
In the PRC, real estate developers are allowed
to begin to market properties before construction is completed. Like other developers, we pre-sell properties prior to completion of construction.
Under PRC pre-sales regulations, property developers must satisfy specific conditions before properties under construction can be pre-sold.
These mandatory conditions include:
| ● | the land premium must have been paid in full; |
| ● | the land use rights certificate, the construction site planning permit, the construction work planning
permit and the construction permit must have been obtained; |
| ● | at least 25% of the total project development cost must have been incurred; |
| ● | the progress and the expected completion and delivery date of the construction must be fixed; |
| ● | the pre-sale permit must have been obtained; and |
| ● | the completion of certain milestones in the construction processes must be specified by the local government
authorities. |
These mandatory conditions are designed to require
a certain level of capital expenditure and substantial progress in project construction before the commencement of pre-sales. Generally,
the local governments also require developers and property purchasers to have standard pre-sale contracts prepared under the auspices
of the government. Developers are required to file all pre-sale contracts with local land bureaus and real estate administrations after
entering into such contracts.
After-Sale Services and Delivery
We assist customers in arranging for and providing
information related to financing. We also assist our customers in various title registration procedures related to their properties, and
we have set up an ownership certificate team to assist purchasers to obtain their property ownership certificates. We offer various communication
channels to customers to facilitate customer feedback collection. We also cooperate with property management companies that manage our
properties and ancillary facilities, to handle customer feedback.
We endeavor to deliver the units to our customers
on a timely basis. We closely monitor the progress of construction of our property projects and conduct pre-delivery property inspections
to ensure timely delivery. The time frame for delivery is set out in the sale and purchase agreements entered into with our customers,
and we are subject to penalty payments to the purchasers for any delay in delivery caused by us. The Company has never incurred any delay
penalties. Once a property development has been completed, has passed the requisite government inspections and is ready for delivery,
we will notify our customers and hand over keys and possession of the properties.
Marketing and Distribution Channel
We maintain a marketing and sales force for our development projects,
which at September 30, 2022 consisted of 38 employees specializing in marketing and sales. We also train and use outside real estate agents
to market and increase the public awareness of our projects, and spread the acceptance and influence of our brand. However, our marketing
and sales are primarily conducted by our own sales force because we believe our own dedicated sales representatives are better motivated
to serve our customers as well as to control our property pricing and selling expenses.
Our marketing and sales team develops the appropriate
advertising and selling plan for each project. We develop public awareness through marketing and advertising as well as referrals from
customers. We utilize a customer relationship management system to track customer profiles, which helps us to forecast future customer
requirements and general demand for our projects. This allows us to have real-time information on the status of individual customer transactions
as well as available inventory by project, which enables us to better anticipate the preferences of current and future customers.
We use various advertising media to market our
developments and enhance our brand name, including newspapers, magazines, television, radio, e-marketing and outdoor billboards. We also
participate in real estate exhibitions.
We have also developed a strong relationship with
local institutional purchasers and governments. The Company has entered into various significant residential-apartment group-purchase
agreements with local government and institutional purchasers.
A typical real estate property sales transaction
usually consists of three steps. First, the customer pays a deposit to the Company. Within a week, after paying the deposit, the customer
will sign a purchase contract with us and make a down payment to us in cash. After making the down payment, the customer arranges for
a mortgage loan for the balance of the purchase price. Once the loan is approved, the mortgage loan proceeds are paid to us directly by
the bank. Finally, we deliver the property to the customer. Legal title, as evidenced by a property ownership certificate issued by local
land and construction bureaus, will be delivered to the customer.
For customers purchasing properties with mortgage
financing, under current PRC laws, their minimum down payment is 30% of the total purchase price for the purchase of the first self-use
residential unit with total GFA of 90 square meters (about 970 square feet) or more on all existing units and those yet to be completed,
and a down payment of 20% on the first residential units for self-use with total GFA of under 90 square meters. In order to mitigate the
default risk, the Company requires from its homebuyer customers deposits ranging from 30% - 50% of the purchase price, which is higher
than the percentage required by the government for the mortgage down payment.
Like most real estate companies in China, we generally
provide guarantees to mortgagee banks in respect of the mortgage loans provided to the purchasers of our properties up until completion
of the registration of the mortgage with the relevant mortgage registration authorities. As of September 30, 2022, the Company had security
deposits for these guarantees of approximately $3.0 million. Guarantees for mortgages on residential properties are typically discharged
when the individual property ownership certificates are issued. In our experience, the issuance of the individual property ownership certificates
typically takes six to twelve months, so our mortgage guarantees typically remain outstanding for up to twelve months after we deliver
the underlying property.
Our Property Development Operations
We have a systematic and standardized process
of project development, which we implement through several well-defined phases. One critically significant portion of our process is the
land acquisition process, which is segmented into three stages: (i) opportunity identification, (ii) initial planning and budgeting,
and (iii) land use rights acquisition. The following diagram sets forth the key stages of our property development process.
LAND ACQUISITION PROCESS |
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Project
planning and
design |
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Project
construction
and
Management |
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Pre-sale, sale
and marketing |
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After-sale
and delivery |
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Opportunity Identification |
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Initial Planning |
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Land Acquisition |
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-Strategic planning |
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-Feasibility study |
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-Financial assessment |
|
-Outsource architectural and engineering design |
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-Outsource
construction |
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-Pre-sale |
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-Delivery |
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-Geographic and market analysis |
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- Preliminary design
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-Internal approval
|
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-Design management |
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-Construction
supervision |
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-Marketing |
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-Feedback collection |
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-Project evaluation |
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-Bidding process |
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-Arrange financing |
|
-Quality control |
|
-Advertising |
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-Completion inspection |
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-Landscaping
and fixture installation |
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Our Projects
Overview
We develop the following three types of real estate
projects, which may be developed in one or more phases:
| ● | multi-layer apartment buildings, which are typically six stories or less; |
| ● | sub-high-rise apartment buildings, which are typically seven to 11 stories; and |
| ● | high-rise apartment buildings, which are typically 12 to 33 stories. |
At any one time, our projects (or phases of our
projects) are in one of the following three stages:
| ● | completed projects, meaning properties for which construction has been completed; |
| ● | properties under construction, meaning properties for which construction permits have been obtained but construction has not been
completed; and |
| ● | properties under planning, meaning properties for which we have entered into land grant contracts and are in the process of obtaining
the required permits to begin construction. |
Our main projects located in Hanzhong City are:
Mingzhu Beiyuan, Oriental Pearl Garden and Liangzhou Road related projects. In Yang County, our project is Yangzhou Pearl Garden
and Yangzhou Palace. Most projects are being developed in multiple phases.
Real Estate Projects located in Hanzhong City
Mingzhu Garden - Mingzhu Beiyuan
This project is located in the southwest part of Hanzhong City. The
Phase I project includes two high-rise residential buildings with commercial shops located on the first floor with unsold GFA of Nil square
meters as of September 30, 2020. The Phase II Mingzhu Beiyuan project includes 17 high-rise residential buildings with GFA of 358,058
square meters. The Company started construction in the third quarter of fiscal 2012 and completed the construction in the last quarter
of fiscal 2015. As of September 30, 2022, the unsold GFA was 78,677 square meters; un-allocated costs was $20,672,000.
|
|
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Oriental Pearl Garden
This project is located in the downtown of Hanzhong City. The
Company started construction in the third quarter of fiscal 2012. It consists of 12 high-rise residential buildings with commercial shops
on the first and second floors with GFA of approximately 275,014 square meters. The project was fully completed in fiscal 2016. As of
September 30, 2022, the unsold GFA was 53,506 square meters; un-allocated costs was $17,425,514.
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|
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Real Estate Projects located in Yang County
Yangzhou Pearl Garden
Yangzhou Pearl Garden mainly consists of multi-layer residential buildings
and sub-high-rise residential buildings with commercial shops on the first floors. As of September 30, 2021, the remaining unsold GFA
of Phase I of Yangzhou Pearl Garden, which includes multi-layer residential buildings, commercial units, sub-high-rise and high-rise residential
buildings was a total GFA of Nil square meters. Yangzhou Pearl Garden Phase II consists of five high-rise residential buildings and one
multi-layer residential building, with a total GFA of 67,991 square meters. The construction was completed in fiscal 2015. As of September
30, 2022, the unsold GFA of Yangzhou Pearl Garden Phase II was 10,545 square meters; un-allocated costs was $2,039,912.
Yangzhou Palace
The Company is currently constructing 9 high-rise residential buildings
and 16 sub-high-rise residential and multi-layer residential buildings with total GFA of 297,059 square meters in Yangzhou Palace located
in Yang County. The construction started in the fourth quarter of fiscal 2013 and was completed during the year ended September 30, 2021.
The Company received the pre-sale license on September 1, 2016 and started to promote and sell the property in November 2016.
As of September 30, 2022, the remaining unsold GFA of Yangzhou Palace, which includes multi-layer residential buildings, commercial units,
sub-high-rise and high-rise residential buildings was a total GFA of 87,989 square meters; un-allocated costs was $34,635,104.
The following table sets forth our real estate
projects in the year ended September 30, 2022:
| |
| |
| |
| | |
Unsold GFA as | |
| |
| |
| |
GFA sold / disposed | | |
of September 30, | |
Project Name | |
Location | |
Type of Buildings | |
during the year | | |
2022 | |
Mingzhu Garden | |
| |
| |
| | | |
| | |
(Mingzhu Beiyuan) Phase II | |
Hanzhong City | |
High-rise residential | |
| 1,138 | | |
| 78,677 | |
| |
| |
| |
| | | |
| | |
Oriental Pearl Garden | |
Hanzhong City | |
High-rise residential | |
| 363 | | |
| 53,506 | |
| |
| |
| |
| | | |
| | |
Yangzhou Pearl Garden Phase II | |
Yang County | |
High-rise residential | |
| | | |
| 10,545 | |
Yangzhou Palace | |
Yang County | |
High-rise residential | |
| 14,681 | | |
| 87,989 | |
Total | |
| |
| |
| 16,182 | | |
| 230,717 | |
(1) | The amounts for “total GFA” in this table are the
amounts of total saleable gross floor area and are derived on the following basis: |
| ● | for properties that are sold, the stated GFA is based on sales contracts relating to such property; |
| ● | for unsold properties that are completed, the stated GFA is calculated based on the detailed construction blueprint and the calculation
method approved by the PRC government for saleable GFA, after necessary adjustments; and |
| ● | for properties that are under planning, the stated GFA is based on the land grant contract and our internal projections. |
Suppliers
Land Bank
In China, the supply of land is controlled by
the government. Since the early 2000s, the real estate industry in China has been transitioning from an arranged system controlled
by the PRC government to a more market-oriented system. At present, although the Chinese government still owns all urban land in China,
land use rights with terms of up to 70 years can be granted to, owned or leased by, private individuals and companies.
Land - under planning and development
In May 2011, the Company entered into a development agreement
with the local government. Pursuant to the agreement, the Company will prepay the development cost of approximately $16.8 million (RMB
119,700,000) and the Company has the right to acquire the land use rights through public bidding. The prepaid development cost will be
deducted from the final purchase price of the land use rights. As of September 30, 2022, a deposit of approximately $2.2 million was paid
by the Company (2021- $2.0 million). The local government is still in a slow process of re-zoning the property. The Company expects to
make payment of the remaining development cost based on the government’s current work progress.
All land transactions are required to be reported
to and authorized by the local Bureau of Land and Natural Resources. With respect to real estate project design and construction services,
the Company typically selects the lowest-cost provider based on quality selected through an open bidding process. Such service providers
are numerous in China and the Company foresees no difficulties in securing alternative sources of services as needed.
Other Suppliers
The Company uses various suppliers in the construction
of its projects. For the year ended September 30, 2022 and 2021, no suppliers accounted for more than 10% of the total project expenditures
Competition
The real estate industry in China is highly competitive. In the Tier
3 and Tier 4 cities and counties that we focus on, the markets are relatively more fragmented than in the Tier 1 or Tier 2 cities. We
compete primarily with regional property developers and an increasing number of large national property developers who have also started
to enter these markets. Competitive factors include the geographical location of the projects, the types of products offered, brand recognition,
price, designing and quality. In the regional markets in which we operate, our major competitors include regional real estate developers
Wanbang Real Estate Development Co. Ltd. (“Wanbang”), Jingtai Real Estate Development Co. Ltd. (“Jingtai”) and
Shaanxi Fenghui Real Estate Development Co. Ltd. (“Fenghui”) as well as other national real estate developers such as Evergrande
Real Estate Group (“Evergrande”) who have also started their projects in these local markets.
Nationally, there are numerous national real estate
developers that have real estate projects across China. There are many housing and land development companies listed on the Shanghai and
Shenzhen Stock Exchanges. However, such companies usually undertake large scale projects and are unlikely to compete with the Company
for business as the Company targets small to medium sized projects in Tier 3 and Tier 4 cities and counties.
In the regional market, the Company’s only
direct competitor with meaningful market share in the market is Wanbang. This company generally undertakes medium and small scale projects
and focuses on development of commercial real estate properties, such as hotels and shopping centers.
Competitive Strength:
We believe the following strengths allow us to
compete effectively:
Well Positioned to Capture Opportunities in
Tier 3 and Tier 4 Cities and Counties.
With the increase in consumer disposable income
and urbanization rates, a growing middle-income consumer market has emerged driving demand for affordable and high quality housing in
many cities across northwest China. We focus on building large communities of modern, mid-sized residential properties for this market
segment and have accumulated substantial knowledge and experience about the residential preferences and demands of mid-income customers.
We believe we can leverage our experience to capture the growth opportunities in the markets.
Standardized and Scalable Business Model.
Our business model focuses on a standardized property
development process designed for rapid asset turnover. We break up the overall process into well-defined stages and closely monitor costs
and development schedules through each stage. These stages include (i) identifying land, (ii) pre-planning and budgeting, (iii) land
acquisition, (iv) detailed project design, (v) construction management, (vi) pre-sales, sales and (vii) after-sale
services. We commence pre-planning and budgeting prior to the land acquisition, which enables us to acquire land at costs that meet our
pre-set investment targeted returns and to quickly begin the development process upon acquisition. Our enterprise resource planning enables
us to collect and analyze information on a real-time basis throughout the entire property development process. We utilize our customer
relationship management system to track customer profiles and sales to forecast future individual preferences and market demand.
Experienced Management Team Supported by Trained
and Motivated Workforce.
Our management and workforce are well-trained
and motivated. Employees receive on-going training in their areas of specialization at our head office in Hanzhong.
Guangsha is also an “AAA Enterprise in Shaanxi
Construction Industry” as recognized by the Credit Association of Agricultural Bank of China, Shaanxi Branch.
Strategies
Our goal is to become the leading residential
property developer focused on China’s Tier 3 and Tier 4 cities and counties by implementing the following strategies:
Continue Expanding in Selected Tier 3 and Tier
4 Cities. We believe that Tier 3 and Tier 4 cities and counties present development opportunities that are well suited for our scalable
business model of rapid asset turnover. Furthermore, Tier 3 and Tier 4 cities and counties currently tend to be in an early stage of market
maturity and have fewer large national developers. We believe that the fragmented market and relative abundance of land supply in Tier
3 and Tier 4 cities, as compared to Tier 1 and Tier 2 cities, offer more opportunities for us to generate attractive margins. And we also
believe that our experience affords us the opportunity to emerge as a leading developer in these markets. In the near future, we plan
to enter into other Tier 3 and Tier 4 cities that have:
| ● | Increasing urbanization rates and population growth; |
| ● | High economic growth and increasing individual income; and |
| ● | Sustainable land supply for future developments. |
We plan to continue to closely monitor our capital
and cash positions and carefully manage our cost for land use rights, construction costs and operating expenses. We believe that we will
be able to use our working capital more efficiently by adhering to prudent cost management, which will help to maintain our profit margins.
When selecting a property project for development, we will continue to follow our established internal evaluation process, including utilizing
the analysis and input of our experienced management team and choosing third-party contractors through a tender process open only to bids
which meet our budgeted costs.
Quality Control
We emphasize quality control to ensure that our
buildings and residential units meet our standards and provide high quality service. We select only experienced design and construction
companies. We, through our contracts with construction contractors, provide customers with warranties covering the building structure
and certain fittings and facilities of our property developments in accordance with the relevant regulations. To ensure construction quality,
our construction contracts contain quality warranties and penalty provisions for poor work quality. In the event of delay or poor work
quality, the contractor may be required to pay pre-agreed damages under our construction contracts. Our construction contracts do not
allow our contractors to subcontract or transfer their contractual arrangements with us to third parties. We typically withhold 2% of
the agreed construction fees for two to five years after completion of the construction as security to guarantee quality, which provides
us with assurance for our contractors’ work quality.
Our contractors are also subject to our quality
control procedures, including examination of materials and supplies, on-site inspection and production of progress reports. We require
our contractors to comply with relevant PRC laws and regulations, as well as our own standards and specifications. We set up a profile
for each and every unit constructed and monitor the quality of such unit throughout its construction period until its delivery. We also
employ independent surveyors to supervise the construction progress. In addition, the construction of real estate projects is regularly
inspected and supervised by the PRC governmental authorities.
Environmental Matters
As a developer of property in the PRC, we are
subject to various environmental laws and regulations set by the PRC national, provincial and municipal governments. These include regulations
on air pollution, noise emissions, as well as water and waste discharge. As of September 30, 2022, we have never paid any penalties
associated with the breach of any such laws and regulations. Compliance with existing environmental laws and regulations has not had a
material adverse effect on our financial condition and results of operations, and we do not believe it will have such an impact in the
future.
Our projects are normally required to undergo
an environmental impact assessment by government-appointed third parties, and a report of such assessment needs to be submitted to the
relevant environmental authorities in order to obtain their approval before commencing construction.
Upon completion of each project, the relevant
environmental authorities inspect the site to ensure the applicable environmental standards have been complied with, and the resulting
report is presented together with other specified documents to the relevant construction administration authorities for their approval
and records. Approval from the environmental authorities on such report is required before we can deliver our completed work to our customers.
As of September 30, 2022, we have not experienced any difficulties in obtaining those approvals for commencement of construction and delivery
of completed projects.
Employees
We currently have 90 full-time employees .
Department | |
| |
Management | |
| 15 | |
Accounting Staff | |
| 11 | |
Sales and marketing staff | |
| 38 | |
Administrative | |
| 26 | |
Total | |
| 90 | |
Contractual Arrangements between Shaanxi HGS and Guangsha
Due to PRC legal restrictions on foreign ownership,
neither we nor our subsidiaries own any direct equity interest in Guangsha. Instead, we control and receive the economic benefits of Guangsha’s
business operation through a series of contractual arrangements. Shaanxi HGS, Guangsha and the Guangsha shareholders entered into a series
of contractual arrangements, also known as VIE Agreements. The VIE agreements are designed to provide Shaanxi HGS with the power, rights
and obligations equivalent in all material respects to those it would possess as the sole equity holder of Guangsha, including absolute
control rights and the rights to the assets, property and revenue of Guangsha. If Guangsha or the Guangsha’s shareholders fail to
perform their respective obligations under the contractual arrangements, we could be limited in our ability to enforce the contractual
arrangements that give us effective control over Guangsha and its subsidiary. Furthermore, if we are unable to maintain effective control,
we would not be able to continue to consolidate the financial results of our variable interest entity in our financial statements.
Although we took every precaution available to
effectively enforce the contractual and corporate relationship above, these contractual arrangements may still be less effective than
direct ownership and that the Company may incur substantial costs to enforce the terms of the arrangements. For example, our VIE and its
shareholders could breach their contractual arrangements with us by, among other things, failing to conduct their operations in an acceptable
manner or taking other actions that are detrimental to our interests. If we had direct ownership of our VIE, we would be able to exercise
our rights as a shareholder to effect changes in the board of directors of our VIE, which in turn could implement changes, subject to
any applicable fiduciary obligations, at the management and operational level. However, under the current contractual arrangements, we
rely on the performance by our VIE and its shareholders of their obligations under the contracts to exercise control over our VIE. The
shareholders of our consolidated VIE may not act in the best interests of our Company or may not perform their obligations under these
contracts. In addition, failure of our VIE shareholders to perform certain obligations could compel the Company to rely on legal remedies
available under PRC laws, including seeking specific performance or injunctive relief, and claiming damages, which may not be effective.
All of these contractual arrangements are governed
by PRC law and provide for the resolution of disputes through arbitration in the PRC. The legal environment in the PRC is not as developed
as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability
to enforce these contractual arrangements. In the event we are unable to enforce these contractual arrangements, we may not be able to
exert effective control over our operating entities and we may be precluded from operating our business, which would have a material adverse
effect on our financial condition and results of operations. In addition, there is uncertainty as to whether the courts of the Cayman
Islands or the PRC would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability
provisions of the securities laws of the United States or any state.
Selected Condensed Consolidated Financial Schedule of the Company
and its Subsidiaries and the VIE
The following tables present selected condensed
consolidating financial data of the Company and its subsidiaries and the VIE for the fiscal years ended September 30, 2022 and 2021, and
balance sheet data as of September 30, 2022 and 2021, which have been derived from our consolidated financial statements for those years.
SELECTED CONDENSED CONSOLIDATING STATEMENTS
OF INCOME AND COMPREHENSIVE INCOME (LOSS)
| |
For the Year Ended September 30, 2022 | |
| |
The | | |
| | |
| | |
| | |
Consolidated | |
| |
Company | | |
Subsidiaries | | |
VIE | | |
Eliminations | | |
Total | |
| |
| | |
| | |
| | |
| | |
| |
Revenues | |
$ | — | | |
$ | — | | |
$ | 9,577,405 | | |
$ | — | | |
$ | 9,577,405 | |
Income from equity method investment | |
$ | (87,959,503 | ) | |
$ | — | | |
$ | — | | |
$ | 87,959,503 | | |
$ | — | |
Net income (loss) | |
$ | (108,124,682 | ) | |
$ | (65 | ) | |
$ | (87,959,438 | ) | |
$ | 87,959,503 | | |
$ | (108,124,682 | ) |
Comprehensive income (loss) | |
$ | (119,559,356 | ) | |
$ | (65 | ) | |
$ | (99,394,112 | ) | |
$ | 99,394,177 | | |
$ | (119,559,356 | ) |
| |
For the Year Ended September 30, 2021 | |
| |
The | | |
| | |
| | |
| | |
Consolidated | |
| |
Company | | |
Subsidiaries | | |
VIE | | |
Eliminations | | |
Total | |
| |
| | |
| | |
| | |
| | |
| |
Revenues | |
$ | — | | |
$ | — | | |
$ | 58,915,239 | | |
$ | — | | |
$ | 58,915,239 | |
Income from equity method investment | |
$ | 6,643,438 | | |
$ | — | | |
$ | — | | |
$ | (6,643,438 | ) | |
$ | — | |
Net income (loss) | |
$ | 6,375,438 | | |
$ | (12,000 | ) | |
$ | 6,387,438 | | |
$ | (6,375,438 | ) | |
$ | 6,375,438 | |
Comprehensive income (loss) | |
$ | 15,763,825 | | |
$ | (12,000 | ) | |
$ | 15,775,825 | | |
$ | (15,763,825 | ) | |
$ | 15,763,825 | |
SELECTED CONDENSED CONSOLIDATING BALANCE SHEETS
| |
As of September 30, 2022 | |
| |
The | | |
| | |
| | |
| | |
Consolidated | |
| |
Company | | |
Subsidiaries | | |
VIE | | |
Eliminations | | |
Total | |
Cash | |
$ | 1,074,440 | | |
$ | 2,000 | | |
$ | 283,777 | | |
$ | — | | |
$ | 1,360,217 | |
Investments in subsidiaries and VIE | |
$ | 94,868,534 | | |
$ | — | | |
$ | — | | |
$ | (94,868,534 | ) | |
$ | — | |
Total assets | |
$ | 123,043,589 | | |
$ | (70 | ) | |
$ | 280,939,924 | | |
$ | (96,596,049 | ) | |
$ | 307,387,394 | |
Total liabilities | |
$ | 3,597,919 | | |
$ | 669,765 | | |
$ | 183,674,040 | | |
$ | — | | |
$ | 187,941,724 | |
Total shareholders’ equity | |
$ | 119,445,670 | | |
$ | (669,835 | ) | |
$ | 97,265,884 | | |
$ | (96,596,049 | ) | |
$ | 119,445,670 | |
Total liabilities and shareholders’ deficit | |
$ | 123,043,589 | | |
$ | (70 | ) | |
$ | 280,939,924 | | |
$ | (96,596,049 | ) | |
$ | 307,387,394 | |
| |
As of September 30, 2021 | |
| |
The | | |
| | |
| | |
| | |
Consolidated | |
| |
Company | | |
Subsidiaries | | |
VIE | | |
Eliminations | | |
Total | |
Cash | |
$ | — | | |
$ | — | | |
$ | 170,001 | | |
$ | — | | |
$ | 170,001 | |
Investments in subsidiaries and VIE | |
$ | 194,262,711 | | |
$ | — | | |
$ | — | | |
$ | (194,262,711 | ) | |
$ | — | |
Total assets | |
$ | 194,262,711 | | |
$ | 371,230 | | |
$ | 384,629,333 | | |
$ | (194,262,711 | ) | |
$ | 385,000,563 | |
Total liabilities | |
$ | 3,565,000 | | |
$ | 1,266,921 | | |
$ | 189,470,931 | | |
$ | — | | |
$ | 194,302,852 | |
Total shareholders’ equity | |
$ | 190,697,711 | | |
$ | (895,691 | ) | |
$ | 195,158,402 | | |
$ | (194,262,711 | ) | |
$ | 190,697,711 | |
Total liabilities and shareholders’ deficit | |
$ | 194,262,711 | | |
$ | 371,230 | | |
$ | 384,629,333 | | |
$ | (194,262,711 | ) | |
$ | 385,000,563 | |
SELECTED CONDENSED CONSOLIDATING STATEMENTS
OF CASH FLOWS
|
|
For the Year Ended September 30, 2022 |
|
|
|
The |
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
Company |
|
|
Subsidiaries |
|
|
VIE |
|
|
Eliminations |
|
|
Total |
|
Net
cash (used in) operating activities |
|
$ |
(925,560 |
) |
|
$ |
2,000 |
|
|
$ |
166,053 |
|
|
$ |
— |
|
|
$ |
(757,507 |
) |
Net
cash provided by investing activities |
|
$ |
(26,936,915 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(26,936,915 |
) |
Net
cash used in financing activities |
|
$ |
28,936,915 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
28,936,915 |
|
| |
For the Year Ended September 30, 2021 | |
| |
The | | |
| | |
| | |
| | |
Consolidated | |
| |
Company | | |
Subsidiaries | | |
VIE | | |
Eliminations | | |
Total | |
Net cash (used in) operating activities | |
$ | — | | |
$ | — | | |
$ | (604,167 | ) | |
$ | — | | |
$ | (604,167 | ) |
Net cash provided by investing activities | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
Net cash used in financing activities | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
Transfers of Cash to and from Our VIE
Green Giant Inc. is a holding company with no operations of its own. We conduct our operations in China primarily
through our subsidiary and VIE in China. As a result, although other means are available for us to obtain financing at the holding company
level, Green Giant Inc.’s ability to pay dividends to its shareholders and to service any debt it may incur may depend upon dividends
paid by our PRC subsidiaries and license and service fees paid by our PRC consolidated affiliated entities. If any of our subsidiaries
incurs debt on its own in the future, the instruments governing such debt may restrict its ability to pay dividends to Green Giant Inc.
In addition, our PRC subsidiary and VIE are required to make appropriations to certain statutory reserve funds, which are not distributable
as cash dividends except in the event of a liquidation of the companies.
Current PRC regulations permit our indirect PRC
subsidiaries to pay dividends to HGS Investment only out of their accumulated profits, if any, determined in accordance with Chinese
accounting standards and regulations. In addition, each of our subsidiaries in China is required to set aside at least 10% of its after-tax
profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each of such entity in
China is also required to further set aside a portion of its after-tax profits to fund the employee welfare fund, although the amount
to be set aside, if any, is determined at the discretion of its board of directors. Although the statutory reserves can be used, among
other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies,
the reserve funds are not distributable as cash dividends except in the event of liquidation.
The PRC government also imposes controls on the
conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. Therefore, we may experience difficulties in
completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from our profits,
if any. Furthermore, if our subsidiaries in the PRC incur debt on their own in the future, the instruments governing the debt may restrict
their ability to pay dividends or make other payments. If we or our subsidiaries are unable to receive all of the revenues from our operations
through the current VIE Agreements, we may be unable to pay dividends on our common stock.
Cash dividends, if any, on our common stock will
be paid in U.S. dollars. If we are considered a PRC tax resident enterprise for tax purposes, any dividends we pay to our overseas shareholders
may be regarded as China-sourced income and as a result may be subject to PRC withholding tax at a rate of up to 10.0%.
In order for us to pay dividends to our shareholders,
we will be dependent on payments made from Guangsha to Shaanxi HGS, pursuant to VIE Agreements between them, and the distribution
of such payments to HGS Investment as dividends from Shaanxi HGS. Certain payments from Guangsha to Shaanxi HGS are subject to PRC taxes,
including business taxes and VAT. During the year ended September 30, 2022 and 2021, Guangsha made no payments to Shaanxi HGS. For the
years ended September 30, 2022 and 2021, there was no cash transferred between the Company and Guangsha (our VIE).
PRC Limitation on Overseas Listing and Share
Issuances
Neither we, our subsidiaries nor our VIE are currently
required to obtain approval from Chinese authorities, including the China Securities Regulatory Commission, or CSRC, or the Cybersecurity
Administration Committee, or CAC, to list
on U.S. exchanges or issue securities to foreign investors, however, if our VIE, subsidiaries or the holding company were required to
obtain approval in the future and were denied permission from Chinese authorities to list on U.S. exchanges, we will not be able to continue
listing on a U.S. exchange, which would materially affect the interest of investors. It is uncertain when and whether the Company will
be required to obtain permission from the PRC government to list on U.S. exchanges in the future, and even when such permission is obtained,
whether it will be denied or rescinded. Although the Company is currently not required to obtain permission from any of the PRC federal
or local governments to obtain such permission and has not received any denial to list on the U.S. exchange, our operations could be adversely
affected, directly or indirectly, by existing or future laws and regulations relating to its business or industry.
ITEM 1A. RISK FACTORS
Risks Relating to Our Business and Industry
Our business is sensitive to China’s
economy and China real estate policies. A downturn in China’s economy and restrictive real estate polices could materially and adversely
affect our revenues and results of operations.
Any slowdown in China’s economic development
might lead to tighter credit markets, increased market volatility, sudden drops in business and consumer confidence and dramatic changes
in business and consumer behaviors. The current package of economic support policies is designed to stabilize the economy against slowing
exports. Ongoing government regulatory measures, including the “Ten National Notices” announced in 2010, the “Eight
National Notices” and property tax approved in January 2011, might have an adverse effect on our results of operations and the PRC
property market. In 2022, the overall risk remained in Tier 3 and 4 cities despite initial signs of improvement in sales. In response
to their perceived uncertainty in economic conditions, consumers might delay, reduce or cancel purchases of homes, and our homebuyers
may also defer, reduce or cancel purchases of our units and our results of operations may be materially and adversely affected.
If we are unable to successfully manage our
expansion into other Tier 3 and Tier 4 cities, we will not be able to execute our business plan.
Historically, our business and operations have
been concentrated in Hanzhong City and other surrounding counties. If we are unable to successfully develop and sell projects outside
Hanzhong City, our future growth may be limited and we may not generate adequate returns to cover our investments in these Tier 3 and
Tier 4 cities. In addition, as we expand our operations to Tier 3 and Tier 4 cities with higher land prices, our costs may increase, which
may lead to a decrease in our profit margin.
We require substantial capital resources
to fund our land use rights acquisitions and property developments, which may not be available.
Property development is capital intensive. Our
ability to secure sufficient financing for land use rights acquisition and property development depends on a number of factors that are
beyond our control, including market conditions in the capital markets, the PRC economy and the PRC government regulations that affect
the availability and cost of financing for real estate companies.
We may be unable to acquire desired development
sites at commercially reasonable costs.
Our revenue depends on the completion and sale
of our projects, which in turn depends on our ability to acquire development sites. Our land use rights costs are a major component of
our cost of real estate sales and increases in such costs could diminish our gross margin. In China, the PRC government controls the supply
of land and regulates land sales and transfers in the secondary market. As a result, the policies of the PRC government, including those
related to land supply and urban planning, affect our ability to acquire, and our costs of acquiring, land use rights for our projects.
In recent years, the PRC government has introduced various measures attempting to moderate investment in the property market in China.
Although we believe that these measures are generally
targeted at the luxury property market and speculative purchases of land and properties, the PRC government could introduce other measures
in the future that may adversely affect our ability to obtain land for development. We currently acquire our development sites primarily
by bidding for government land. Under current regulations, land use rights acquired from government authorities for commercial and residential
development purposes must be purchased through a public tender, auction or listing-for-sale. Competition in these bidding processes has
resulted in higher land use rights costs for us. We may also need to acquire land use rights through acquisition, which could increase
our costs. Moreover, the supply of potential development sites in any given city will diminish over time and we may find it increasingly
difficult to identify and acquire attractive development sites at commercially reasonable costs in the future.
We provide guarantees for the mortgage loans
of our customers which expose us to risks of default by our customers.
We pre-sell properties before actual completion
and, in accordance with industry practice, our customers’ mortgage banks require us to guarantee our customers’ mortgage loans.
Typically, we provide guarantees to PRC banks with respect to loans procured by the purchasers of our properties for the total mortgage
loan amount until the completion of the registration of the mortgage with the relevant mortgage registration authorities, which generally
occurs within six to twelve months after the purchasers take possession of the relevant properties. In line with what we believe to be
industry practice, we rely on the credit evaluation conducted by mortgagee banks and do not conduct our own independent credit checks
on our customers. The mortgagee banks typically require us to maintain, as restricted cash, 5% to 10% of the mortgage proceeds paid to
us as security for our obligations under such guarantees (the security deposit).
If a purchaser defaults on its payment obligations
during the term of our guarantee, the mortgagee bank may deduct the delinquent mortgage payment from 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. For the years ended September 30, 2022 and 2021, the Company has not
experienced any delinquent mortgage loans and has not experienced any losses related to this guarantee. As of September 30, 2022 and 2021,
our outstanding guarantees in respect of our customers’ mortgage loans amounted to approximately $24.87 million and $66 million,
respectively. As of September 30, 2022 and 2021, the amount of security deposits provided for these guarantees was approximately $2.2
million and $3.3 million, respectively, and the Company believes that such reserves are sufficient. 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.
A large portion of our loan portfolio is tied
to the real estate market and we may be negatively impacted by downturns in that market.
As of September 30, 2022, we had large construction
loans payable of approximately $108.37 million . These loans generally have a higher degree of risk than long-term financing of existing
properties because repayment depends on the completion of the project and usually on the sale of the property. In addition, these loans
are often “interest-only loans,” which normally require only the payment of interest accrued prior to maturity. Interest-only
loans carry greater risk than principal and interest loans because no principal is paid prior to maturity. This risk is particularly apparent
during periods of rising interest rates and declining real estate values. If there is a significant decline in the real estate market
due to a material increase in interest rates or for other reasons, many of these loans could default and result in foreclosure. Moreover,
most of these loans are for projects located in our primary market area. If we are forced to foreclose on a project prior to completion,
we may not be able to recover the entire unpaid portion of the loan or we may be required to fund additional money to complete the project
or hold the property for an indeterminate period of time. Any of these outcomes may result in losses and reduce our earnings.
We rely on third-party contractors.
Substantially all of our project construction
and related work are outsourced to third-party contractors. We are exposed to risks that the performance of our contractors may not meet
our standards or specifications. Negligence or poor work quality by any contractors may result in defects in our buildings or residential
units, which could in turn cause us to suffer financial losses, harm our reputation or expose us to third-party claims. We work with multiple
contractors on different projects and we cannot guarantee that we can effectively monitor their work at all times.
Although our construction and other contracts
contain provisions designed to protect us, we may be unable to successfully enforce these rights and, even if we are able to successfully
enforce these rights, the third-party contractor may not have sufficient financial resources to compensate us. Moreover, the contractors
may undertake projects from other property developers, engage in risky undertakings or encounter financial or other difficulties, such
as supply shortages, labor disputes or work accidents, which may cause delays in the completion of our property projects or increases
in our costs.
We may be unable to complete our property developments
on time or at all. The progress and costs for a development project can be adversely affected by many factors, including, without limitation:
| ● | delays in obtaining necessary licenses, permits or approvals from government agencies or authorities; |
| ● | shortages of materials, equipment, contractors and skilled labor; |
| ● | disputes with our third-party contractors; |
| ● | failure by our third-party contractors to comply with our designs, specifications or standards; |
| ● | difficult geological situations or other geotechnical issues; and |
| ● | onsite labor disputes or work accidents; and natural catastrophes or adverse weather conditions. |
Any construction delays, or failure to complete a project according
to our planned specifications or budget, may delay our property sales, which could harm our revenues, cash flows and our reputation.
Changes of laws and regulations with respect
to pre-sales may adversely affect our cash flow position and business performance.
We depend on cash flows from pre-sale of properties
as an important source of funding for our property projects and servicing our indebtedness. Under current PRC laws and regulations, property
developers must fulfill certain conditions before they can commence pre-sale of the relevant properties and may only use pre-sale proceeds
to finance the construction of specific developments (the “Pre-Sale Conditions and Usage”). Changes in laws and regulations
or in their interpretation or the imposition of more stringent Pre-Sale Conditions and Usage could have a material adverse effect on our
cash flow position and business performance.
Our results of operations may fluctuate from
period to period.
Our results of operations tend to fluctuate from
period to period. The number of properties that we can develop or complete during any particular period is limited due to the substantial
capital required for land acquisition and construction, as well as the lengthy development periods required before positive cash flows
may be generated. In addition, several properties that we have developed or that are under development are large scale and are developed
in multiple phases over the course of one to several years. The selling prices of the residential units in larger scale property developments
tend to change over time, which may impact our sales proceeds and, accordingly, our revenues for any given period.
We rely on our key management members.
We depend on the services provided by key management
members. Competition for management talent is intense in the property development sector. In particular, we are highly dependent on Mr. Neng
Chen, our Chairman and Chief Executive Officer. We do not maintain key employee insurance. In the event that we lose the services of any
key management member, we may be unable to identify and recruit suitable successors in a timely manner or at all, which will adversely
affect our business and operations. Moreover, we need to employ and retain more management personnel to support our expansion into other
Tier 3 and Tier 4 cities and counties. If we cannot attract and retain suitable human resources, especially at the management level, our
business and future growth will be adversely affected.
Increases in the price of raw materials may
increase our cost of sales and reduce our earnings.
Our third-party contractors are responsible for
procuring almost all of the raw materials used in our project developments. Our construction contracts typically provide for fixed or
capped payments, but the payments are subject to changes in government-suggested steel prices. The increase in steel prices could result
in an increase in our construction costs. In addition, the increases in the price of raw materials, such as cement, concrete blocks and
bricks, in the long run could be passed on to us by our contractors, which will increase our construction costs. Any such cost increase
could reduce our earnings to the extent we are unable to pass these increased costs to our customers.
Any unauthorized use of our brand or trademark
may adversely affect our business.
We own trademarks for “汉中广厦”,
in the form of Chinese characters and our Company logo. We rely on the PRC intellectual property and anti-unfair competition laws and
contractual restrictions to protect brand name and trademarks. We believe our brand, trademarks and other intellectual property rights
are important to our success. Any unauthorized use of our brand, trademarks and other intellectual property rights could harm our competitive
advantages and business. Historically, China has not protected intellectual property rights to the same extent as the United States, and
infringement of intellectual property rights continues to pose a serious risk of doing business in China. Monitoring and preventing unauthorized
use is difficult. The measures we take to protect our intellectual property rights may not be adequate. Furthermore, the application of
laws governing intellectual property rights in China and abroad is uncertain and evolving, and could involve substantial risks to us.
If we are unable to adequately protect our brand, trademarks and other intellectual property rights, our reputation may be harmed and
our business may be adversely affected.
We may fail to obtain or may experience material
delays in obtaining necessary government approvals for any major property development, which will adversely affect our business.
The real estate industry is strictly regulated
by the PRC government. Property developers in China must abide by various laws and regulations, including implementation rules promulgated
by local governments to enforce these laws and regulations. Before commencing, and during the course of, development of a property project,
we need to apply for various licenses, permits, certificates and approvals, including land use rights certificates, construction site
planning permits, construction work planning permits, construction permits, pre-sale permits and completion acceptance certificates. We
need to satisfy various requirements to obtain these certificates and permits. To date, we have not encountered serious delays or difficulties
in the process of applying for these certificates and permits, but we cannot guarantee that we will not encounter serious delays or difficulties
in the future. In the event that we fail to obtain the necessary governmental approvals for any of our major property projects, or a serious
delay occurs in the government’s examination and approval progress, we may not be able to maintain our development schedule and
our business and cash flows may be adversely affected.
We may forfeit land to the PRC government
if we fail to comply with procedural requirements applicable to land grants from the government or the terms of the land use rights grant
contracts.
According to the relevant PRC regulations, if
we fail to develop a property project according to the terms of the land use rights grant contract, including those relating to the payment
of land premiums, specified use of the land and the time for commencement and completion of the property development, the PRC government
may issue a warning, may impose a penalty or may order us to forfeit the land. Specifically, under current PRC law, if we fail to commence
development within one year after the commencement date stipulated in the land use rights grant contract, the relevant PRC land bureau
may issue a warning notice to us and impose an idle land fee on the land of up to 20% of the land premium. If we fail to commence development
within two years, the land will be subject to forfeiture to the PRC government, unless the delay in development is caused by government
actions or force majeure. Even if the commencement of the land development is compliant with the land use rights grant contract, if the
developed GFA on the land is less than one-third of the total GFA of the project or the total capital invested is less than one-fourth
of the total investment of the project and the suspension of the development of the land continues for more than one year without government
approval, the land will also be treated as idle land and be subject to penalty or forfeiture. We cannot assure you that circumstances
leading to significant delays in our development schedule or forfeiture of land will not arise in the future. If we forfeit land, we will
not only lose the opportunity to develop the property projects on such land, but may also lose all past investments in such land, including
land premiums paid and development costs incurred.
Any non-compliant GFA of our uncompleted
and future property developments will be subject to governmental approval and additional payments.
The local government authorities inspect property
developments after their completion and issue the completion acceptance certificates if the developments are in compliance with the relevant
laws and regulations. If the total constructed GFA of a property development exceeds the GFA originally authorized in the relevant land
grant contracts or construction permit, or if the completed property contains built-up areas that do not conform with the plan authorized
by the construction permit, the property developer may be required to pay additional amounts or take corrective actions with respect to
such non-compliant GFA before a completion acceptance certificate can be issued to the property development.
Our failure to assist our customers in applying
for property ownership certificates in a timely manner may lead to compensatory liabilities to our customers.
We are required to meet various requirements within
90 days after delivery of property, or such other period contracted with our customers, in order for our customers to apply for their
property ownership certificates, including passing various governmental clearances, formalities and procedures. Under our sales contract,
we are liable for any delay in the submission of the required documents as a result of our failure to meet such requirements, and are
required to compensate our customers for delays. In the case of serious delays on one or more property projects, we may be required to
pay significant compensation to our customers and our reputation may be adversely affected.
We are subject to potential environmental
liabilities.
We are subject to a variety of laws and regulations
concerning the protection of health and the environment. The particular environmental laws and regulations that apply to any given development
site vary significantly according to the site’s location and environmental conditions, the present and former uses of the site and
the nature of the adjoining properties. Environmental laws and conditions may result in delays, may cause us to incur substantial compliance
and other costs and can prohibit or severely restrict project development activity in environmentally-sensitive regions or areas. Although
the environmental investigations conducted by local environmental authorities have not revealed any environmental liabilities that we
believe would have a material adverse effect on our business, financial condition or results of operations to date, it is possible that
these investigations did not reveal all environmental liabilities and that there are material environmental liabilities of which we are
unaware. We cannot assure you that future environmental investigations will not reveal material environmental liabilities. Also, we cannot
assure you that the PRC government will not change the existing laws and regulations or impose additional or stricter laws or regulations,
the compliance with which may cause us to incur significant capital expenditures.
We need to improve our internal financial
reporting controls. If we are unable to establish appropriate internal financial reporting controls and procedures, it could cause
us to fail to meet our reporting obligations, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our
reported financial information and have a negative effect on the market price for shares of our common stock.
Effective internal controls are necessary for
us to provide reliable financial reports and effectively prevent fraud. We maintain a system of internal control over financial reporting,
which is defined as a process designed by, or under the supervision of, our principal executive officer and principal financial officer,
or persons performing similar functions, and effected by our board of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.
We cannot assure you that we will not, in the
future, identify areas requiring improvement in our internal control over financial reporting. We cannot assure you that the measures
we will take to remediate any areas in need of improvement will be successful or that we will implement and maintain adequate controls
over our financial processes and reporting in the future as we continue our growth.
As
a public company, we are required to comply with the reporting obligations of the Exchange Act and Section 404 of the Sarbanes-Oxley
Act of 2013. If we fail to comply with the reporting obligations of the Exchange Act and Section 404 of the Sarbanes-Oxley Act or
if we fail to maintain adequate internal controls over financial reporting, our business, results of operations and financial condition
could be materially adversely affected.
As a public company, we are required to comply
with the periodic reporting obligations of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including
preparing annual reports and quarterly reports. Our failure to prepare and disclose this information in a timely manner could subject
us to penalties under U.S. federal securities laws, expose us to lawsuits and restrict our ability to access financing. In addition, we
are required under applicable law and regulations to design and implement internal controls over financial reporting, and evaluate our
existing internal controls with respect to the standards adopted by the U.S. Public Company Accounting Oversight Board.
The Company assessed its internal control over
financial reporting and still has significant and material deficiencies as of September 30, 2022. To remediate the material weaknesses
described above and to prevent similar deficiencies in the future, we are currently evaluating additional controls and procedures, which
may include: (i) provide more U.S. GAAP knowledge and SEC reporting requirement training for the accounting department and establish formal
policies and procedures for an internal audit function; and (ii) implementation of an ongoing initiative and training in the Company to
ensure the importance of internal controls and compliance with established policies and procedures are fully understood throughout the
organization and plan to provide continuous U.S. GAAP knowledge training to relevant employees involved to ensure the performance of and
compliance with those procedures and policies. Any actions we have taken or may take to remediate these material weaknesses are subject
to continued management review supported by testing, as well as oversight by the Audit Committee of our Board of Directors. We cannot
assure you that these material weaknesses will not occur in the future and that we will be able to remediate such weaknesses in a timely
manner, which could impair our ability to accurately and timely report our financial position, results of operations or cash flows. The
management is committed to improving the internal controls over financial reporting and will undertake the consistent improvements or
enhancements on an ongoing basis. However, we cannot assure you that our current remediation plan can resolve all the significant deficiencies
and material weaknesses in the internal control over financial reporting. As a result, we may be required to implement further remedial
measures and to design enhanced processes and controls to address issues identified through future reviews. This could result in significant
delays and costs to us and require us to divert substantial resources, including management time, from other activities.
If we do not fully remediate the material weaknesses
identified by management or fail to maintain the adequacy of our internal controls in the future, we may not be able to ensure that we
can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with the Sarbanes-Oxley
Act. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent
fraud. As a result, any failure to satisfy the requirements of Section 404 on a timely basis could result in the loss of investor
confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price
of our common stock.
We do not have business insurance coverage.
Any future business liability, disruption or litigation we experience might divert management focus from our business and could significantly
impact our financial results.
Availability of business insurance products and
coverage in China is limited, and most such products are expensive in relation to the coverage offered. We have determined that the risks
of disruption, cost of such insurance and the difficulties associated with acquiring such insurances on commercially reasonable terms
make it impractical for us to maintain such insurance. As a result, we do not have any business liability, disruption or litigation insurance
coverage for our operations in China. Accordingly, a business disruption, litigation or natural disaster may result in substantial costs
and divert management’s attention from our business, which would have an adverse effect on our results of operations and financial
condition.
The PRC government may adopt further restrictive
measures to slow the increase in prices of real property and real property development.
Along with the economic growth in China, investments
in the property sectors have increased significantly in the past few years. In response to concerns over the scale of the increase in
property investments, the PRC government has introduced policies to curtail property development. We believe those regulations, among
others, significantly affect the property industry in China.
These restrictive regulations and measures could
increase our operating costs in adapting to these regulations and measures, limit our access to capital resources or even restrict our
business operations. We cannot be certain that the PRC government will not issue additional and more stringent regulations or measures,
which could further slowdown property development in China and adversely affect our business and prospects.
We are heavily dependent on the performance
of the residential property market in China, which is at a relatively early development stage.
The residential property industry in the PRC is
still in a relatively early stage of development. Although demand for residential property in the PRC has been growing rapidly in recent
years, such growth is often coupled with volatility in market conditions and fluctuation in property prices. It is extremely difficult
to predict how much and when demand will develop, as many social, political, economic, legal and other factors, most of which are beyond
our control, may affect the development of the market. The level of uncertainty is increased by the limited availability of accurate financial
and market information as well as the overall low level of transparency in the PRC, especially in Tier 3 and 4 cities which have lagged
in progress in these aspects when compared to Tier 1 cities.
The lack of a liquid secondary market for residential
property may discourage investors from acquiring new properties. The limited amount of property mortgage financing available to PRC individuals
may further inhibit demand for residential developments.
We face intense competition from other real
estate developers.
The property industry in the PRC is highly competitive.
In the Tier 3 and Tier 4 cities we focus on, local and regional property developers are our major competitors, and an increasing number
of large state-owned and private national property developers have started entering these markets. Many of our competitors, especially
the state-owned and private national property developers, are well capitalized and have greater financial, marketing and other resources
than we have. Some also have larger land banks, greater economies of scale, broader name recognition, a longer track record and more established
relationships in certain markets. In addition, the PRC government’s recent measures designed to reduce land supply further increased
competition for land among property developers.
Competition among property developers may result
in increased costs for the acquisition of land for development, increased costs for raw materials, shortages of skilled contractors, oversupply
of properties, decrease in property prices in certain parts of the PRC, a slowdown in the rate at which new property developments will
be approved and/or reviewed by the relevant government authorities and an increase in administrative costs for hiring or retaining qualified
personnel, any of which may adversely affect our business and financial condition. Furthermore, property developers that are better capitalized
than we are may be more competitive in acquiring land through the auction process. If we cannot respond to changes in market conditions
as promptly and effectively as our competitors, or effectively compete for land acquisition through the auction systems and acquire other
factors of production, our business and financial condition will be adversely affected.
In addition, risk of property over-supply is increasing
in parts of China, where property investment, trading and speculation have become overly active. We are exposed to the risk that in the
event of actual or perceived over-supply, property prices may fall drastically, and our revenue and profitability will be adversely affected.
Failure to make adequate contributions to various
employee benefits plans as required by PRC regulations may subject us to penalties.
Companies operating in China are required to participate
in various government sponsored employee benefit plans, including certain social insurance, housing funds and other welfare-oriented payment
obligations, and contribute to the plans in amounts equal to certain percentages of salaries, including bonuses and allowances, of employees
up to a maximum amount specified by the local government from time to time at locations where they operate their businesses. The requirement
of employee benefit plans has not been implemented consistently by the local governments in China given the different levels of economic
development in different locations. As of September 30, 2022 and 2021, we have made adequate employee benefit payments in strict compliance
with the relevant PRC regulations for and on behalf of our employees. If we fail to make contributions to various employee benefits plans
in strict compliance with applicable PRC labor-related laws and regulations may subject us to late payment penalties, and we could also
be required to make up the contributions for these plans as well as to pay late fees and fines. If we are subject to late fees or fines
in relation to the underpaid employee benefits, our financial condition and results of operations may be adversely affected.
Risks Relating to the Residential Property
Industry and primary operation in China
Because all our operations are in China, our
business is subject to the complex and rapidly evolving laws and regulations there. The Chinese government may exercise significant oversight
and discretion over the conduct of our business and may intervene in or influence our operations at any time, which could result in a
material change in our operations and/or the value of our common stocks.
As a business operating in China, we are subject
to the laws and regulations of the PRC, which can be complex and evolve rapidly. The PRC government has the power to exercise significant
oversight and discretion over the conduct of our business, and the regulations to which we are subject may change rapidly and with little
notice to us or our shareholders. As a result, the application, interpretation, and enforcement of new and existing laws and regulations
in the PRC are often uncertain. In addition, these laws and regulations may be interpreted and applied inconsistently by different agencies
or authorities, and inconsistently with our current policies and practices. New laws, regulations, and other government directives in
the PRC may also be costly to comply with, and such compliance or any associated inquiries or investigations or any other government actions
may:
| ● | delay or impede our development; |
| ● | result in negative publicity or increase the Company’s operating costs; |
| ● | require significant management time and attention; and |
| ● | subject us to remedies, administrative penalties and even criminal liabilities that may harm our business,
including fines assessed for our current or historical operations, or demands or orders that we modify or even cease our business practices. |
The promulgation of new laws or regulations, or
the new interpretation of existing laws and regulations, in each case that restrict or otherwise unfavorably impact the ability or way
we conduct our business and could require us to change certain aspects of our business to ensure compliance, which could decrease demand
for our products, reduce revenues, increase costs, require us to obtain more licenses, permits, approvals or certificates, or subject
us to additional liabilities. To the extent any new or more stringent measures are required to be implemented, our business, financial
condition and results of operations could be adversely affected as well as materially decrease the value of our common stock, potentially
rendering it worthless.
The uncertainties in the China legal system
could materially and adversely affect us.
On July 6, 2021, the General Office of the
Communist Party of China Central Committee and the General Office of the State Council jointly issued a document to enhance its enforcement
against illegal activities in the securities markets and promote the high-quality development of the capital markets, which, among other
things, requires the relevant governmental authorities to strengthen cross-border oversight of law-enforcement and judicial cooperation,
to enhance supervision over China-based companies listed overseas, and to establish and improve the system of extraterritorial application
of the Chinese securities laws. Since this document is relatively new, uncertainties exist in relation to how soon legislative or administrative
regulation-making bodies will respond and what existing or new laws or regulations or detailed implementations and interpretations will
be modified or promulgated, if any, and the potential impact such modified or new laws and regulations will have on companies like us.
It is especially difficult for us to accurately
predict the potential impact to the Company of new legal requirements in China because the China legal system is a civil law system based
on written statutes. Unlike the common law system, prior court decisions under the civil law system may be cited for reference but have
limited precedential value. In 1979, the Chinese government began to promulgate a comprehensive system of laws and regulations governing
economic matters in general. The overall effect of legislation over the past four decades has significantly enhanced the protections afforded
to various forms of foreign investments in China. However, China has not developed a fully integrated legal system, and recently enacted
laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, the China legal system is
based on written statutes and prior court decisions have limited value as precedents. Since these laws and regulations are relatively
new and the China legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules may not be uniform
and enforcement of these laws, regulations and rules involves uncertainties. These uncertainties may affect our judgment on the relevance
of legal requirements and our ability to enforce our contractual rights or tort claims. In addition, the regulatory uncertainties may
be exploited through unmerited or frivolous legal actions or threats in attempts to extract payments or benefits from us. Furthermore,
the China legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or
at all and may have a retroactive effect. As a result, we may not be aware of our violation of any of these policies and rules until sometime
after the violation. In addition, any administrative and court proceedings in China may be protracted, resulting in substantial costs
and diversion of resources and management attention.
We may be deemed a PRC resident enterprise
for PRC tax purposes under the Enterprise Income Tax Law, which could result in the imposition of a 25% enterprise income tax payable
on our taxable global income.
On March 16, 2007, the National People’s
Congress of the PRC passed the Enterprise Income Tax Law of the PRC (’‘New Income Tax Law’’), which took effect
on January 1, 2008. On December 6, 2007, the Implementation Rules of Enterprise Income Tax Law of the PRC (’‘Implementation
Rules’’) were also enacted and took effect on January 1, 2008. In accordance with the new laws and regulations, a unified
enterprise income tax rate of 25% and unified tax deduction standards will be applied equally to both domestic enterprises and foreign-invested
enterprises.
Under the New Income Tax Law and the Implementation
Rules, enterprises established under the laws of foreign jurisdictions other than the PRC may nevertheless be considered as PRC-resident
enterprises for tax purposes if these enterprises have their ’‘de facto management body’’ within the PRC. Under
the Implementation Rules, ’‘de facto management body’’ is defined as a body that has material and overall management
and control over the manufacturing and business operations, personnel and human resources, finances and treasury, and acquisition and
disposition of properties and other assets of an enterprise. At present, it is unclear what factors will be used by the PRC tax authorities
to determine whether we are a ’‘de facto management body’’ in China. All of our management personnel are located
in the PRC, and all of our revenues arise from our operations in China. If the PRC tax authorities determine that we are a PRC resident
enterprise, we will be subject to PRC tax on our worldwide income at the 25% uniform tax rate, which may have a material adverse effect
on our financial condition and results of operations. Notwithstanding the foregoing provision, the New Income Tax Law also provides that,
if a PRC resident enterprise already invests in another PRC resident enterprise, the dividends received by the investing resident enterprise
from the invested resident enterprise are exempt from income tax, subject to certain qualifications. Therefore, if we are classified as
a PRC resident enterprise, the dividends received from our PRC subsidiaries may be exempt from income tax. However, due to the limited
history of the New Income Tax Law, it is unclear as to (i) the detailed qualification requirements for such exemption and (ii) whether
dividend payments by our PRC subsidiaries to us will meet such qualification requirements, even if we are considered a PRC resident enterprise
for tax purposes.
We face uncertainty from the Circular on
Strengthening the Administration of Enterprise Income Tax on Non-resident Enterprises’ Share Transfer (“Circular 698”)
released in December 2009 by China’s State Administration of Taxation (SAT), effective as of January 1, 2008.
Where a foreign investor indirectly transfers
equity interests in a Chinese resident enterprise by selling the shares in an offshore holding company, and the latter is located in a
country (jurisdiction) where the effective tax burden is less than 12.5% or where the offshore income of their residents is not taxable,
the foreign investor is required to provide the tax authority in charge of that Chinese resident enterprise with the relevant information
within 30 days of the transfers.
Where a foreign investor indirectly transfers
equity interests in a Chinese resident enterprise through the abuse of form of organization and there are no reasonable commercial purposes
such that the corporate income tax liability is avoided, the tax authority has the power to re-assess the nature of the equity transfer
in accordance with the “substance-over-form” principle and deny the existence of the offshore holding company that is used
for tax planning purposes. “Income derived from equity transfers” as mentioned in this circular refers to income derived by
non-resident enterprises from direct or indirect transfers of equity interest in China resident enterprises, excluding share in Chinese
resident enterprises that are bought and sold openly on the stock exchange.
While the term “indirectly transfer”
is not defined, we understand that the relevant PRC tax authorities have jurisdiction regarding requests for information over a wide range
of foreign entities having no direct contact with China. The relevant authority has not yet promulgated any formal provisions or formally
declared or stated how to calculate the effective tax in the country (jurisdiction) and the process of the disclosure to the tax authority
in charge of that Chinese resident enterprise. Meanwhile, there are no formal declarations with regard to how to decide “abuse of
form of organization” and “reasonable commercial purpose,” which can be utilized by us to determine if our company complies
with the Circular 698.
Failure to comply with PRC regulations relating
to the establishment of offshore special purpose companies by PRC residents may materially adversely affect us.
On July 15, 2014, SAFE issued the Notice
on Relevant Issues in the Foreign Exchange Control over Investment, Financing and Return Investment Through Special Purpose Companies
by Residents Inside China, generally referred to as Circular 37, which required PRC residents to register with the competent local SAFE
branch before establishing or acquiring control over an offshore special purpose company, or SPV, for the purpose of engaging in an equity
financing outside of China on the strength of domestic PRC assets originally held by those residents. Internal implementing guidelines
issued by SAFE, which became public in June 2007 (known as Notice 106), expanded the reach of Circular 37 by (1) purporting
to cover the establishment or acquisition of control by PRC residents of offshore entities which merely acquire “control”
over domestic companies or assets, even in the absence of legal ownership; (2) adding requirements relating to the source of the
PRC resident’s funds used to establish or acquire the offshore entity; (3) covering the use of existing offshore entities for
offshore financings; (4) purporting to cover situations in which an offshore SPV establishes a new subsidiary in China or acquires
an unrelated company or unrelated assets in China; and (5) making the domestic affiliate of the SPV responsible for the accuracy
of certain documents which must be filed in connection with any such registration, notably, the business plan which describes the overseas
financing and the use of proceeds. Amendments to registrations made under Circular 37 are required in connection with any increase or
decrease of capital, transfer of shares, mergers and acquisitions, equity investment or creation of any security interest in any assets
located in China to guarantee offshore obligations and Notice 106 makes the offshore SPV jointly responsible for these filings. In the
case of an SPV which was established, and which acquired a related domestic company or assets, before the implementation date of Circular
37, a retroactive SAFE registration was required to have been completed before March 31, 2006. This date was subsequently extended
indefinitely by Notice 106, which also required that the registrant establish that all foreign exchange transactions undertaken by the
SPV and its affiliates were in compliance with applicable laws and regulations. Failure to comply with the requirements of Circular 37,
as applied by SAFE in accordance with Notice 106, may result in fines and other penalties under PRC laws for evasion of applicable foreign
exchange restrictions. Any such failure could also result in the SPV’s affiliates being impeded or prevented from distributing their
profits and the proceeds from any reduction in capital, share transfer or liquidation to the SPV, or from engaging in other transfers
of funds into or out of China.
We have asked our stockholders, who are PRC residents
as defined in Circular 37, to register with the relevant branch of SAFE, as currently required, in connection with their equity interests
in us and our acquisitions of equity interests in our PRC subsidiary. However, we cannot provide any assurances that they can obtain the
above SAFE registrations required by Circular 37 and Notice 106. Moreover, because of uncertainty over how Circular 37 will be interpreted
and implemented, and how or whether SAFE will apply it to us, we cannot predict how it will affect our business operations or future strategies.
For example, our present and prospective PRC subsidiaries’ ability to conduct foreign exchange activities, such as the remittance
of dividends and foreign currency-denominated borrowings, may be subject to compliance with Circular 37 and Notice 106 by our PRC resident
beneficial holders.
In addition, such PRC residents may not always
be able to complete the necessary registration procedures required by Circular 37 and Notice 106. We also have little control over either
our present or prospective direct or indirect stockholders or the outcome of such registration procedures. A failure by our PRC resident
beneficial holders or future PRC resident stockholders to comply with Circular 37 and Notice 106, if SAFE requires it, could subject these
PRC resident beneficial holders to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries’
ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.
In February 2015, SAFE promulgated a Notice on
Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13. Under SAFE Notice 13,
applications for foreign exchange registration of inbound foreign direct investments and outbound direct investments, including those
required under SAFE Circular 37, must be filed with qualified banks instead of SAFE. Qualified banks should examine the applications and
accept registrations under the supervision of SAFE. We have used our best efforts to notify PRC residents or entities who directly or
indirectly hold shares in our Cayman Islands holding company and who are known to us as being PRC residents to complete the foreign exchange
registrations. However, we may not be informed of the identities of all the PRC residents or entities holding direct or indirect interest
in our Company, nor can we compel our beneficial owners to comply with SAFE registration requirements. We cannot assure you that all other
shareholders or beneficial owners of ours who are PRC residents or entities have complied with, and will in the future make, obtain or
update any applicable registrations or approvals required by, SAFE regulations. Failure by such shareholders or beneficial owners to comply
with SAFE regulations, or failure by us to amend the foreign exchange registrations of our PRC subsidiaries, could subject us to fines
or legal sanctions, restrict our overseas or cross-border investment activities, and limit our PRC subsidiaries’ ability to make
distributions or pay dividends to us or affect our ownership structure, which could adversely affect our business and prospects.
Furthermore, as these foreign exchange and outbound
investment related regulations are relatively new and their interpretation and implementation has been constantly evolving, it is unclear
how these regulations, and any future regulations concerning offshore or cross-border investments and transactions, will be interpreted,
amended and implemented by the relevant government authorities. For example, we may be subject to a more stringent review and approval
process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings,
which may adversely affect our financial condition and results of operations. We cannot assure you that we have complied or will be able
to comply with all applicable foreign exchange and outbound investment related regulations. In addition, if we decide to acquire a PRC
domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary
approvals or complete the necessary filings and registrations required by the foreign exchange regulations. This may restrict our ability
to implement our acquisition strategy and could adversely affect our business and prospects.
Changes in the policies, regulations, rules,
and the enforcement of laws of the PRC government may be quick with little advance notice and could have a significant impact upon our
ability to operate profitably in the PRC.
All of our operations are located in China. Accordingly,
our business, prospects, financial condition and results of operations may be influenced to a significant degree by political, economic,
legal developments and social conditions in China generally and by continued economic growth in China as a whole. Policies, regulations,
rules, and the enforcement of laws of the PRC government can have significant effects on economic conditions in the PRC and the ability
of businesses to operate profitably. Our ability to operate profitably in the PRC may be adversely affected by changes in policies by
the PRC government, including changes in laws, regulations or their interpretation, particularly those dealing with security, intellectual
property, money laundering, taxation and other laws that affect our post-combination entity’s ability to operate its business.
Changes in foreign exchange regulations may
adversely affect our results of operations.
We currently receive all of our revenues in RMB.
The PRC government regulates the conversion between RMB and foreign currencies. Over the years, the government has significantly reduced
its control over routine foreign exchange transactions under current accounts, including trade and service-related foreign exchange transactions,
payment of dividends and service of foreign debt. However, foreign exchange transactions by our PRC subsidiaries under capital accounts
continue to be subject to significant foreign exchange controls and require the approval of, or registration with, PRC governmental authorities.
There can be no assurance that these PRC laws and regulations on foreign investment will not cast uncertainties on our financing and operating
plans in China. Under current foreign exchange regulations in China, subject to the relevant registration at SAFE, we will be able to
pay dividends in foreign currencies, without prior approval from SAFE, by complying with certain procedural requirements. However, there
can be no assurance that the current PRC foreign exchange policies regarding debt service and payment of dividends in foreign currencies
will continue in the future. Changes in PRC foreign exchange policies might have a negative impact on our ability to service our foreign
currency-denominated indebtedness, if any, and to distribute dividends to our shareholders in foreign currencies.
Future inflation in China may inhibit our activity to conduct
business in China.
In recent years, the Chinese economy has experienced
periods of rapid expansion and high rates of inflation, which have led to the adoption by the Chinese government, from time to time, of
various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. While inflation
has been more moderate since 1995, high inflation may in the future cause Chinese government to impose controls on credit and/or prices,
or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products.
Because Chinese law governs almost all of our
material agreements, we may not be able to enforce our legal rights within China or elsewhere, which could result in a significant loss
of business, business opportunities, or capital.
We cannot assure you that we will be able to enforce
any of our material agreements or that remedies will be available outside of China. The system of laws and the enforcement of existing
laws in China may not be as certain in implementation and interpretation as in the United States. The inability to enforce or obtain a
remedy under any of our current or future agreements could result in a significant loss of business, business opportunities or capital.
It will be extremely difficult to acquire jurisdiction and enforce liabilities against our officers, directors and assets based in China.
Substantially all of our assets are located in
the PRC and all of our officers and most of our present directors reside outside of the United States. As a result, it may not be
possible for United States investors to enforce their legal rights, to effect service of process upon our directors or officers or to
enforce judgments of United States courts predicated upon civil liabilities and criminal penalties of our directors and officers under
Federal securities laws. Moreover, we have been advised that China does not have treaties providing for the reciprocal recognition and
enforcement of judgments of courts with the United States. Further, it is unclear if extradition treaties now in effect between the United
States and China would permit effective enforcement of criminal penalties of the Federal securities laws.
Failure to comply with the United States
Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.
We are subject to the United States Foreign Corrupt
Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials
for the purpose of obtaining or retaining business. Foreign companies, including some that may compete with us, are not subject to these
prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in the PRC. We can
make no assurance, however, that our employees or other agents will not engage in such conduct for which we might be held responsible.
If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences
that may have a material adverse effect on our business, financial condition and results of operations.
We may have difficulty establishing adequate management,
legal and financial controls in the PRC.
The PRC historically has been deficient in Western
style management and financial reporting concepts and practices, as well as in modern banking, computer and other control systems. We
may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. As a result of these factors,
we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial
statements, books of account and corporate records and instituting business practices that meet Western standards. We may have difficulty
establishing adequate management, legal and financial controls in the PRC.
Although the audit report included in this
annual report is prepared by U.S. auditors who are currently inspected by the PCAOB, there is no guarantee that future audit reports will
be prepared by auditors inspected by the PCAOB and, as such, in the future investors may be deprived of the benefits of such inspection.
Furthermore, trading in our securities may be prohibited under the HFCA Act if the SEC subsequently determines our audit work is performed
by auditors that the PCAOB is unable to inspect or investigate completely, and as a result, U.S. national securities exchanges, such as
the Nasdaq, may determine to delist our securities. Furthermore, on December 29, 2022, the Consolidated Appropriations Act, was signed
into law by President Biden. The Consolidated Appropriations Act contained, among other things, an identical provision to AHFCAA, which
reduce the number of consecutive non-inspection years required for triggering the prohibitions under the HFCA Act from three years to
two.
As an auditor of companies that are registered
with the SEC and publicly traded in the United States and a firm registered with the PCAOB, our auditor is required under the laws of
the United States to undergo regular inspections by the PCAOB to assess their compliance with the laws of the United States and professional
standards.
Although currently we operates substantially in
mainland China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese government
authorities, our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this annual
report, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess our auditor’s
compliance with the applicable professional standards. Inspections of other auditors conducted by the PCAOB outside mainland China have
at times identified deficiencies in those auditors’ audit procedures and quality control procedures, which may be addressed as part
of the inspection process to improve future audit quality. The lack of the PCAOB inspections of audit work undertaken in mainland China
prevents the PCAOB from regularly evaluating auditors’ audits and their quality control procedures. As a result, if there is any
component of our auditor’s work papers become located in mainland China in the future, such work papers will not be subject to inspection
by the PCAOB. As a result, investors would be deprived of such PCAOB inspections, which could result in limitations or restrictions to
our access of the U.S. capital markets.
As part of a continued regulatory focus in the
United States on access to audit and other information currently protected by national law, in particular mainland China’s, in June
2019, a bipartisan group of lawmakers introduced bills in both houses of the U.S. Congress which, if passed, would require the SEC to
maintain a list of issuers for which the PCAOB is not able to inspect or investigate the audit work performed by a foreign public accounting
firm completely. The proposed Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges (“EQUITABLE”)
Act prescribes increased disclosure requirements for these issuers and, beginning in 2025, the delisting from U.S. national securities
exchanges such as the Nasdaq of issuers included on the SEC’s list for three consecutive years. It is unclear if this proposed legislation
will be enacted. Furthermore, there have been recent deliberations within the U.S. government regarding potentially limiting or restricting
China-based companies from accessing U.S. capital markets. On May 20, 2020, the U.S. Senate passed the HFCA Act, which includes requirements
for the SEC to identify issuers whose audit work is performed by auditors that the PCAOB is unable to inspect or investigate completely
because of a restriction imposed by a non-U.S. authority in the auditor’s local jurisdiction. The U.S. House of Representatives
passed the HFCA Act on December 2, 2020, and the HFCA Act was signed into law on December 18, 2020. Additionally, in July 2020, the U.S.
President’s Working Group on Financial Markets issued recommendations for actions that can be taken by the executive branch, the
SEC, the PCAOB or other federal agencies and department with respect to Chinese companies listed on U.S. stock exchanges and their audit
firms, in an effort to protect investors in the United States. In response, on November 23, 2020, the SEC issued guidance highlighting
certain risks (and their implications to U.S. investors) associated with investments in China-based issuers and summarizing enhanced disclosures
the SEC recommends China-based issuers make regarding such risks. On March 24, 2021, the SEC adopted interim final rules relating to the
implementation of certain disclosure and documentation requirements of the HFCA Act. We will be required to comply with these rules if
the SEC identifies us as having a “non-inspection” year (as defined in the interim final rules) under a process to be subsequently
established by the SEC. The SEC is assessing how to implement other requirements of the HFCA Act, including the listing and trading prohibition
requirements described above. Under the HFCA Act, our securities may be prohibited from trading on the Nasdaq or other U.S. stock exchanges
if our auditor is not inspected by the PCAOB for three consecutive years, and this ultimately could result in our common stock being delisted.
Furthermore, on June 22, 2021, the U.S. Senate passed the AHFCAA, which, if enacted, would amend the HFCA Act and require the SEC to prohibit
an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to the PCAOB inspections for two consecutive
years instead of three and would reduce the time before our securities may be prohibited from trading or delisted. On September 22, 2021,
the PCAOB adopted a final rule implementing the AHFCAA, which provides a framework for the PCAOB to use when determining, as contemplated
under the AHFCAA, whether the Board is unable to inspect or investigate completely registered public accounting firms located in a foreign
jurisdiction because of a position taken by one or more authorities in that jurisdiction. On November 5, 2021, the SEC approved the PCAOB’s
Rule 6100, Board Determinations Under the HFCA Act. On December 2, 2021, the SEC issued amendments to finalize rules implementing the
submission and disclosure requirements in the HFCA Act The rules apply to registrants that the SEC identifies as having filed an annual
report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB
is unable to inspect or investigate completely because of a position taken by an authority in foreign jurisdictions. The PCAOB issued
a Determination Report on December 16, 2021 which found that the PCAOB is unable to inspect or investigate completely registered public
accounting firms headquartered in: (1) mainland China of the PRC, and (2) Hong Kong. In addition, the PCAOB’s report identified
the specific registered public accounting firms which are subject to these determinations. On December 29, 2022, the Consolidated Appropriations
Act, was signed into law by President Biden. The Consolidated Appropriations Act contained, among other things, an identical provision
to AHFCAA, which reduce the number of consecutive non-inspection years required for triggering the prohibitions under the HFCA Act from
three years to two. Our auditor, OneStop Assurance PAC, is headquartered in Singapore, not mainland China or Hong Kong and was not identified
in this report as a firm subject to the PCAOB’s determination. Therefore, our auditor is not currently subject to the determinations
announced by the PCAOB on December 16, 2021, and it is currently subject to the PCAOB inspections.
While our auditor is based in the U.S. and is
registered with the PCAOB and has been inspected by the PCAOB on a regular basis, in the event it is later determined that the PCAOB is
unable to inspect or investigate completely our auditor because of a position taken by an authority in a foreign jurisdiction, then such
lack of inspection could cause trading in the our securities to be prohibited under the HFCA Act, and ultimately result in a determination
by a securities exchange to delist our securities. In addition, the recent developments would add uncertainties to the listing of our
securities and we cannot assure you whether Nasdaq or regulatory authorities would apply additional and more stringent criteria to us
after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of personnel and
training, or sufficiency of resources, geographic reach or experience as it relates to the audit of our financial statements. It remains
unclear what the SEC’s implementation process related to the above rules will entail or what further actions the SEC, the PCAOB
or Nasdaq will take to address these issues and what impact those actions will have on U.S. companies that have significant operations
in the PRC and have securities listed on a U.S. stock exchange (including a national securities exchange or over-the-counter stock market).
In addition, the above amendments and any additional actions, proceedings, or new rules resulting from these efforts to increase U.S.
regulatory access to audit information could create some uncertainty for investors, the market price of our common stock could be adversely
affected, and we could be delisted if we and our auditor are unable to meet the PCAOB inspection requirement or being required to engage
a new audit firm, which would require significant expense and management time.
On August 26, 2022, the PCAOB signed Statement
of Protocol (the “SOP”) Agreement with the CSRC and China’s Ministry of Finance. The SOP Agreement, together with two
protocol agreements (collectively, “SOP Agreements”), governs inspections and investigations of audit firms based in mainland
China and Hong Kong, taking the first step toward opening access for the PCAOB to inspect and investigate registered public accounting
firms headquartered in mainland China and Hong Kong. Pursuant to the fact sheet with respect to the Protocol disclosed by the SEC, the
PCAOB shall have independent discretion to select any issuer audits for inspection or investigation and has the unfettered ability to
transfer information to the SEC. On December 15, 2022, the PCAOB Board determined that the PCAOB was able to secure complete access to
inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong and voted to vacate its previous
determinations to the contrary. However, should PRC authorities obstruct or otherwise fail to facilitate the PCAOB’s access in the
future, the PCAOB Board will consider the need to issue a new determination. Delisting of our common stock would force holders of our
common stock to sell their shares of common stock. The market price of our common stock could be adversely affected as a result of anticipated
negative impacts of these executive or legislative actions upon, as well as negative investor sentiment towards, companies with significant
operations in China that are listed in the United States, regardless of whether these executive or legislative actions are implemented
and regardless of our actual operating performance.
Recent greater oversight by the CAC over data
security, particularly for companies seeking to list on a foreign exchange, could adversely impact the operating entities’ business
and our offerings.
On December 28, 2021, the CAC, together with 12
other governmental departments of the PRC, jointly promulgated the Cybersecurity Review Measures, which became effective on February 15,
2022. The Cybersecurity Review Measures provides that, in addition to critical information infrastructure operators (“CIIOs”)
that intend to purchase Internet products and services, data processing operators engaging in data processing activities that affect or
may affect national security must be subject to cybersecurity review by the Cybersecurity Review Office of the PRC. According to the Cybersecurity
Review Measures, a cybersecurity review assesses potential national security risks that may be brought about by any procurement, data
processing, or overseas listing. The Cybersecurity Review Measures further requires that CIIOs and data processing operators that possess
personal data of at least one million users must apply for a review by the Cybersecurity Review Office of the PRC before conducting listings
in foreign countries.
On November 14, 2021, the CAC published the Security
Administration Draft, which provides that data processing operators engaging in data processing activities that affect or may affect national
security must be subject to network data security review by the relevant Cyberspace Administration of the PRC. According to the Security
Administration Draft, data processing operators who possess personal data of at least one million users or collect data that affects or
may affect national security must be subject to network data security review by the relevant Cyberspace Administration of the PRC. The
deadline for public comments on the Security Administration Draft was December 13, 2021.
As of the date of this annual report, we
have not received any notice from any authorities identifying any of the operating entities as a CIIO or requiring any of the
operating entities to go through cybersecurity review or network data security review by the CAC. As the Cybersecurity Review
Measures became effective and if the Security Administration Draft is enacted as proposed, we believe that our operating entity,
Guangsha’s operations and our listing will not be affected and that the operating entities are not subject to cybersecurity
review or network data security review by the CAC, given that: (i) Guangsha engages in real estate development, primarily in the
construction and sale of residential apartments, car parks and commercial properties, therefore it is unlikely to be classified as a
CIIO by the PRC regulatory agencies; (ii) Guangsha possesses personal data of fewer than one million individual clients in its
business operations as of the date of this annual report and do not anticipate that Guangsha will be collecting over one million
users’ personal information in the near future, which we understand might otherwise subject Guangsha to the Cybersecurity
Review Measures; and (iii) since Guangsha are in real estate development, data processed in their business is unlikely to have a
bearing on national security and therefore is unlikely to be classified as core or important data by the authorities. There remains
uncertainty, however, as to how the Cybersecurity Review Measures and the Security Administration Draft will be interpreted or
implemented and whether the PRC regulatory agencies, including the CAC, may adopt new laws, regulations, rules, or detailed
implementation and interpretation related to the Cybersecurity Review Measures and the Security Administration Draft. If any such
new laws, regulations, rules, or implementation and interpretation come into effect, the operating entities will take all reasonable
measures and actions to comply and to minimize the adverse effect of such laws on them. We cannot guarantee, however, that our
operating entity in mainland China will not be subject to cybersecurity review and network data security review in the future.
During such reviews, our operating entity in mainland China may be required to suspend its operations or experience other
disruptions to its operations. Cybersecurity review and network data security review could also result in negative publicity with
respect to our Company and diversion of Guangsha’s managerial and financial resources, which could materially and adversely
affect its business, financial conditions, and results of operations and our offerings.
The Opinions recently issued by the General
Office of the Central Committee of the Communist Party of China and the General Office of the State Council may subject the operating
entities to additional compliance requirement in the future.
Recently, the General Office of the Central Committee of the Communist
Party of China and the General Office of the State Council jointly issued the Opinions, which were made available to the public on July
6, 2021. The Opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas
listings by China-based companies. These opinions proposed to take effective measures, such as promoting the construction of relevant
regulatory systems, to deal with the risks and incidents facing China-based overseas-listed companies and the demand for cybersecurity
and data privacy protection. The aforementioned policies and any related implementation rules to be enacted may subject the operating
entities to additional compliance requirement in the future. As the Opinions were recently issued, official guidance and interpretation
of the Opinions remain unclear in several respects at this time. Therefore, we cannot assure you that the operating entities will remain
fully compliant with all new regulatory requirements of the Opinions or any future implementation rules on a timely basis, or at all.
Risks Relating to Our Corporate Structure
If the PRC government deems that the contractual arrangements
in relation to Guangsha, our consolidated variable interest entity, do not comply with PRC regulatory restrictions on foreign investment
in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject
to severe penalties or be forced to relinquish our interests in those operations.
We are a holding company incorporated under
the laws of the State of Florida. As a holding company with no material operations of our own, we conduct all of our operations through
our subsidiaries established in PRC and our VIE. We control and receive the economic benefits of our VIE’s business operations through
certain contractual arrangements.
The VIE contributed 60% and 100% of the Company’s
consolidated results of operations for the years ended September 30, 2022 and 2021, respectively. As of September 30, 2022, the VIE accounted
for approximately 93% of the consolidated total assets and 97% of total liabilities of the Company, respectively.
We rely on and expect to continue to rely on our
wholly owned PRC subsidiary’s contractual arrangements with Guangsha and its shareholders to operate our business. These contractual
arrangements may not be as effective in providing us with control over Guangsha as ownership of controlling equity interests would be
in providing us with control over or enabling us to derive economic benefits from the operations of Guangsha. Under the current contractual
arrangements, as a legal matter, if Guangsha or any of its shareholders executing the VIE Agreements fails to perform its, his or her
respective obligations under these contractual arrangements, we may have to incur substantial costs and resources to enforce such arrangements,
and rely on legal remedies available under PRC laws, including seeking specific performance or injunctive relief, and claiming damages,
which we cannot assure you will be effective. For example, if shareholders of a variable interest entity were to refuse to transfer their
equity interests in such variable interest entity to us or our designated persons when we exercise the purchase option pursuant to these
contractual arrangements, we may have to take a legal action to compel them to fulfill their contractual obligations.
If (i) the applicable PRC authorities invalidate
these contractual arrangements for violation of PRC laws, rules and regulations, (ii) any variable interest entity or its shareholders
terminate the contractual arrangements (iii) any variable interest entity or its shareholders fail to perform its/his/her obligations
under these contractual arrangements, or (iv) if these regulations change or are interpreted differently in the future, our business operations
in China would be materially and adversely affected, and the value of your shares would substantially decrease or even become worthless.
Further, if we fail to renew these contractual arrangements upon their expiration, we would not be able to continue our business operations
unless the then current PRC law allows us to directly operate businesses in China.
In addition, if any variable interest entity or
all or part of its assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our
business activities, which could materially and adversely affect our business, financial condition and results of operations. If any of
the variable interest entities undergoes a voluntary or involuntary liquidation proceeding, its shareholders or unrelated third-party
creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially
and adversely affect our business and our ability to generate revenues.
All of these contractual arrangements are governed
by PRC law and provide for the resolution of disputes through arbitration in the PRC. The legal environment in the PRC is not as developed
as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability
to enforce these contractual arrangements. In the event we are unable to enforce these contractual arrangements, we may not be able to
exert effective control over our operating entities and we may be precluded from operating our business, which would have a material adverse
effect on our financial condition and results of operations.
These contractual arrangements may not be as effective
as direct ownership in providing us with control over our VIE. For example, our VIE and its shareholders could breach their contractual
arrangements with us by, among other things, failing to conduct their operations in an acceptable manner or taking other actions that
are detrimental to our interests. If we had direct ownership of our VIE, we would be able to exercise our rights as a shareholder to effect
changes in the board of directors of our VIE, which in turn could implement changes, subject to any applicable fiduciary obligations,
at the management and operational level. However, under the current contractual arrangements, we rely on the performance by our VIE and
its shareholders of their obligations under the contracts to exercise control over our VIE. The shareholders of our consolidated VIE may
not act in the best interests of our company or may not perform their obligations under these contracts. Such risks exist throughout the
period in which we intend to operate certain portions of our business through the contractual arrangements with our VIE.
If our VIE or its shareholders fail to perform
their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources
to enforce such arrangements. For example, if the shareholders of our VIE refuse to transfer their equity interest in our VIE to us or
our designee if we exercise the purchase option pursuant to these contractual arrangements, or if they otherwise act in bad faith toward
us, then we may have to take legal actions to compel them to perform their contractual obligations. In addition, if any third parties
claim any interest in such shareholders’ equity interests in our VIE, our ability to exercise shareholders’ rights or foreclose
the share pledge according to the contractual arrangements may be impaired. If these or other disputes between the shareholders of our
VIE and third parties were to impair our control over our VIE, our ability to consolidate the financial results of our VIE would be affected,
which would in turn result in a material adverse effect on our business, operations and financial condition.
In the opinion of our PRC legal counsel, each
of the contractual arrangements among our WFOE, our VIE and its shareholders governed by PRC laws are valid, binding and enforceable,
and will not result in any violation of PRC laws or regulations currently in effect. However, our PRC legal counsel has also advised us
that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and
rules. Accordingly, the PRC regulatory authorities may ultimately take a view that is contrary to the opinion of our PRC legal counsel.
In addition, it is uncertain whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or
if adopted, what they would provide. PRC government authorities may deem that foreign ownership is directly or indirectly involved in
our VIE’s shareholding structure. If our corporate structure and contractual arrangements are deemed by the Ministry of Industry
and Information Technology, MIIT, or the Ministry of Commerce, MOFCOM, or other regulators having competent authority to be illegal, either
in whole or in part, we may lose control of our consolidated VIE and have to modify such structure to comply with regulatory requirements.
However, there can be no assurance that we can achieve this without material disruption to our VIE’s business. Furthermore, if we
or our VIE is found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required
permits or approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations
or failures, including, without limitation:
| ● | revoking the business license and/or operating licenses of our WFOE or our VIE; |
| ● | discontinuing or placing restrictions or onerous conditions on our operations through any transactions
among our WFOE and our VIE; |
| ● | imposing fines, confiscating the income from our WFOE, our VIE or its subsidiaries, or imposing other
requirements with which we or our VIE may not be able to comply; |
| ● | placing restrictions on our right to collect revenues; |
| ● | requiring us to restructure our ownership structure or operations, including terminating the contractual
arrangements with our VIE and deregistering the equity pledges of our VIE, which in turn would affect our ability to consolidate, derive
economic interests from, or exert effective control over our VIE; or |
| ● | taking other regulatory or enforcement actions against us that could be harmful to our business. |
The imposition of any of these penalties would
result in a material and adverse effect on our ability to conduct our business. In addition, it is unclear what impact the PRC government
actions would have on us and on our ability to consolidate the financial results of our VIE in our consolidated financial statements,
if the PRC government authorities were to find our corporate structure and contractual arrangements to be in violation of PRC laws and
regulations. If the imposition of any of these government actions causes us to lose our right to direct the activities of our VIE or our
right to receive substantially all the economic benefits and residual returns from our VIE and we are not able to restructure our ownership
structure and operations in a satisfactory manner, we would no longer be able to consolidate the financial results of our VIE in our consolidated
financial statements. Either of these results, or any other significant penalties that might be imposed on us in this event, would have
a material adverse effect on our financial condition and results of operations.
We rely on contractual arrangements with
our variable interest entity and its subsidiary in China for our business operations, which may not be as effective in providing operational
control or enabling us to derive economic benefits as through ownership of controlling equity interests.
We are a holding company with no material operations
of our own. We conduct a substantial majority of our operations through our subsidiaries established and the VIE in the PRC. We rely on
and expect to continue to rely on our wholly owned PRC subsidiary’s contractual arrangements with Guangsha and its shareholders
to operate our business. These contractual arrangements may not be as effective in providing us with control over Guangsha as direct
ownership in providing us with control over Guangsha, or enabling us to derive economic benefits from the operations of Guangsha. Under
the current contractual arrangements, as a legal matter, if Guangsha or any of Guangsha Shareholders fails to perform its, his or her
respective obligations under these contractual arrangements, we may have to incur substantial costs and resources to enforce such arrangements,
and rely on legal remedies available under PRC laws, including seeking specific performance or injunctive relief, and claiming damages,
which we cannot assure you will be effective. For example, if Guangsha Shareholders were to refuse to transfer their equity interests
in Guangsha to us or our designated persons when we exercise the purchase option pursuant to these contractual arrangements, we may have
to take a legal action to compel them to fulfill their contractual obligations. Furthermore, if we had direct ownership of Guangsha,
we would be able to exercise our rights as a shareholder to effect changes in the board of directors of Guangsha, which in turn could
implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the VIE Agreements,
we rely on the performance by Guangsha and its shareholders of their obligations under the contracts to exercise control over Guangsha.
The shareholders of Guangsha may not act in the best interests of our Company or may not perform their obligations under these contracts.
Such risks exist throughout the period in which we intend to operate certain portions of our business through the contractual arrangements
with Guangsha. In addition, if any third parties claim any interest in such shareholders’ equity interests in the VIE, our ability
to exercise shareholders’ rights or foreclose the share pledge according to the contractual arrangements may be impaired. If these
or other disputes between the shareholders of the VIE and third parties were to impair our control over the VIE, our ability to consolidate
the financial results of the VIE would be affected, which would in turn result in a material adverse effect on the business, operations
and financial condition.
Our PRC counsel, Shaanxi Jiameng Law Firm, has
advised us that the ownership structure of the PRC entities does not violate PRC laws or regulations currently in effect, and that the
contractual arrangements are valid, binding and enforceable, and do not result in any violation of PRC laws or regulations currently in
effect. However, there are substantial uncertainties regarding the interpretation and application of current PRC Laws, and there can be
no assurance that the PRC government will ultimately take a view that is consistent with such opinion.
If (i) the applicable PRC authorities invalidate
these contractual arrangements for violation of PRC laws, rules and regulations, (ii) any variable interest entity or its shareholders
terminate the contractual arrangements or (iii) any variable interest entity or its shareholders fail to perform its/his/her obligations
under these contractual arrangements, our business operations in China would be materially and adversely affected, and the value of your
shares would substantially decrease. Further, if we fail to renew these contractual arrangements upon their expiration, we would not be
able to continue our business operations unless the then current PRC law allows us to directly operate businesses in China.
In addition, if any variable interest entity or
all or part of its assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our
business activities, which could materially and adversely affect our business, financial condition and results of operations. If our variable
interest entity undergoes a voluntary or involuntary liquidation proceeding, its shareholders or unrelated third-party creditors may claim
rights to some or all of their assets, thereby hindering our ability to operate our business, which could materially and adversely affect
our business and our ability to generate revenues.
All of these contractual arrangements are governed
by PRC law and provide for the resolution of disputes through arbitration in the PRC. The legal environment in the PRC is not as developed
as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability
to enforce these contractual arrangements. In the event we are unable to enforce these contractual arrangements, we may not be able to
exert effective control over our operating entity and we may be precluded from operating our business, which would have a material adverse
effect on our financial condition and results of operations.
We are a holding company, and will rely on dividends paid
by our subsidiaries for our cash needs. Any limitation on the ability of our subsidiaries to make dividend payments to us, or any tax
implications of making dividend payments to us, could limit our ability to pay our parent company expenses or pay dividends to holders
of our common stock.
We are a holding company and conduct substantially
all of our business through our PRC subsidiary, which is a limited liability company established in China. We may rely on dividends to
be paid by our PRC subsidiary to fund our cash and financing requirements, including the funds necessary to pay dividends and other cash
distributions to our shareholders, to service any debt we may incur and to pay our operating expenses. If our PRC subsidiary incurs debt
on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions
to us.
Under PRC laws and regulations, our PRC subsidiary,
which is a wholly foreign-owned enterprise in China, may pay dividends only out of its accumulated profits as determined in accordance
with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise is required to set aside at least 10% of
its accumulated after-tax profits each year, if any, to fund a certain statutory reserve fund, until the aggregate amount of such fund
reaches 50% of its registered capital.
Our PRC subsidiary generates primarily all of
its revenue in Renminbi, which is not freely convertible into other currencies. As a result, any restriction on currency exchange may
limit the ability of our PRC subsidiary to use its Renminbi revenues to pay dividends to us. The PRC government may continue to strengthen
its capital controls, and more restrictions and substantial vetting process may be put forward by State Administration of Foreign Exchange
for cross-border transactions falling under both the current account and the capital account. Any limitation on the ability of our PRC
subsidiary to pay dividends or make other kinds of payments to us could materially and adversely limit our ability to grow, make investments
or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.
In addition, the Enterprise Income Tax Law and
its implementation rules provide that a withholding tax rate of up to 10% will be applicable to dividends payable by Chinese companies
to non-PRC-resident enterprises unless otherwise exempted or reduced according to treaties or arrangements between the PRC central government
and governments of other countries or regions where the non-PRC resident enterprises are incorporated. Any limitation on the ability of
our PRC subsidiary to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments
or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.
We may not be able to consolidate the financial
results of our affiliated companies or such consolidation could materially and adversely affect our operating results and financial condition.
Our business is conducted through Guangsha, which
is considered a VIE for accounting purposes, and we, through Shaanxi HGS, are considered the primary beneficiary, thus enabling us
to consolidate our financial results in our consolidated financial statements. In the event that in the future a company we hold as a
VIE no longer meets the definition of a VIE under applicable accounting rules, or we are deemed not to be the primary beneficiary, we
would not be able to consolidate line by line that entity’s financial results in our consolidated financial statements for reporting
purposes. Also, if in the future an affiliate company becomes a VIE and we become the primary beneficiary, we would be required to consolidate
that entity’s financial results in our consolidated financial statements for accounting purposes. If such entity’s financial
results were negative, this would have a corresponding negative impact on our operating results for reporting purposes.
Because we rely on the Contractual Arrangements
for our revenue, the termination of these agreements would severely and detrimentally affect our continuing business viability under our
current corporate structure.
We are a holding
company, and all of our business operations are conducted through the Contractual Arrangements. Although Guangsha does not have termination
rights pursuant to the Contractual Arrangements, it could terminate, or refuse to perform under, the Contractual Arrangements. Because
neither we, nor our subsidiaries, own equity interests of Guangsha, the termination or non-performance of the Contractual Arrangements
would sever our ability to consolidate Guangsha and to receive payments from them under our current holding company structure. While we
are currently not aware of any event or reason that may cause the Contractual Arrangements to terminate, we cannot assure you that such
an event or reason will not occur in the future. In the event that the Contractual Arrangements are terminated, this would have a severe
and detrimental effect on our continuing business viability under our current corporate structure, which, in turn, would affect the value
of your investment.
Contractual arrangements in relation to our
VIE may be subject to scrutiny by the PRC tax authorities and they may determine that we or our VIE owe additional taxes, which could
negatively affect our financial condition and the value of your investment.
Under applicable PRC laws and regulations, arrangements
and transactions among related parties may be subject to audit or challenge by the PRC tax authorities within ten years after the taxable
year when the transactions are conducted. We could face material and adverse tax consequences if the PRC tax authorities determine that
the VIE contractual arrangements were not entered into on an arm’s-length basis in such a way as to result in an impermissible reduction
in taxes under applicable PRC laws, rules and regulations, and adjust the income of our VIE in the form of a transfer pricing adjustment.
The PRC tax authorities could effectively disregard our VIE structure, resulting in increased tax liabilities. A transfer pricing adjustment
could, among other things, result in a reduction of expense deductions recorded by our VIE for PRC tax purposes, which could in turn increase
tax liabilities without reducing our tax expenses. In addition, the PRC tax authorities may impose late payment fees and other penalties
on our VIE for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely
affected if our VIE’s tax liabilities increase or if it is required to pay late payment fees and other penalties.
We conduct our business through Guangsha
by means of Contractual Arrangements. If the PRC courts or administrative authorities determine that these contractual arrangements do
not comply with applicable regulations, we could be subject to severe penalties and our business could be adversely affected. In addition,
changes in such PRC laws and regulations may materially and adversely affect our business.
There are uncertainties regarding the interpretation
and application of PRC laws, rules and regulations, including the laws, rules and regulations governing the validity and enforcement of
the Contractual Arrangements between Shaanxi HGS and Guangsha. We have been advised by our PRC counsel, the Shaanxi Jiameng Law Firm,
based on their understanding of the current PRC laws, rules and regulations, that (i) the structure for operating our business in China
(including our corporate structure and Contractual Arrangements with Shaanxi HGS, Guangsha and its shareholders) will not result in any
violation of PRC laws or regulations currently in effect; and (ii) the Contractual Arrangements among Shaanxi HGS and Guangsha and its
shareholders governed by PRC law are valid, binding and enforceable, and will not result in any violation of PRC laws or regulations currently
in effect. However, there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and
regulations concerning foreign investment in the PRC, and their application to and effect on the legality, binding effect and enforceability
of the contractual arrangements. In particular, we cannot rule out the possibility that PRC regulatory authorities, courts or arbitral
tribunals may in the future adopt a different or contrary interpretation or take a view that is inconsistent with the opinion of our PRC
legal counsel. Therefore, the Contractual Arrangements may be determined by PRC authorities to be inconsistent with the laws and regulations
of the PRC, including those related to foreign investment in certain industries.
If any of our PRC entities or their ownership
structure or the Contractual Arrangements are determined to be in violation of any existing or future PRC laws, rules or regulations,
or any of our PRC entities fail to obtain or maintain any of the required governmental permits or approvals, the relevant PRC regulatory
authorities would have broad discretion in dealing with such violations, including:
| ● | revoking the business and operating licenses; |
| ● | discontinuing or restricting the operations; |
| ● | imposing conditions or requirements with which the PRC entities may not be able to comply; |
| ● | requiring us and our PRC entities to restructure the relevant ownership structure or operations, including
termination of the contractual arrangements with our VIE and deregistering the equity pledge of our VIE, which in turn would affect our
ability to consolidate, derive economic interests from, or exert effective control our VIE; |
| ● | imposing fines or confiscating the income from our PRC subsidiaries or our VIE. |
The imposition of any of these penalties would
severely disrupt our ability to conduct business and have a material adverse effect on our financial condition, results of operations
and prospects.
The shareholders of our VIE may have actual
or potential conflicts of interest with us and as a result may refuse to perform, or may breach, the Contractual Arrangements, which may
materially and adversely affect our business and financial condition.
The shareholders of our VIE may have actual or
potential conflicts of interest with us. These shareholders may refuse to perform or sign or may breach, or cause our VIE to breach, or
refuse to renew, the existing Contractual Arrangements, which would have a material and adverse effect on our ability to effectively control
our VIE and receive economic benefits from it. As a result, control over, and funds due from, our VIE may be jeopardized if the shareholders
of our VIE breach, or refuse to renew, the Contractual Arrangements. For example, the shareholders may be able to cause our agreements
with our VIE to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements
to us on a timely basis. We cannot assure you that when conflicts of interest arise any or all of these shareholders will act in the best
interests of our Company or such conflicts will be resolved in our favor. Currently, we do not have any arrangements to address potential
conflicts of interest between these shareholders and our Company. If we cannot resolve any conflict of interest or dispute between us
and these shareholders, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to
substantial uncertainty as to the outcome of any such legal proceedings.
Any failure by our VIE or its shareholders to perform their obligations
under the Contractual Arrangements, or any unauthorized use of indicia of corporate power or authority, would have a material adverse
effect on our business.
We refer to the shareholders of our VIE as its
nominee shareholders because although they remain the holders of equity interests on record in our VIE, pursuant to the terms of the relevant
power of attorney, such shareholders have irrevocably authorized the individual appointed by Shaanxi HGS to exercise their rights as a
shareholder of the VIE. If our VIE or its shareholders fail to perform their respective obligations under the Contractual Arrangements
or if any physical instruments, such as chops and seals, or other indicia of corporate power or authority, are used without our authorization,
we may have to incur substantial costs and expend additional resources to seek legal remedies under PRC laws, including specific performance
or injunctive relief, and/or claiming damages, which we cannot assure you will be effective under PRC laws. For example, if the shareholders
of our VIE were to refuse to transfer their equity interest in the VIE to us or our designee if we exercise the purchase option pursuant
to the Contractual Arrangements, or if they were otherwise to act in bad faith toward us, then we may have to take legal action to compel
them to perform their contractual obligations.
The Contractual Arrangements are governed by PRC
laws. Accordingly, any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as
developed as in other jurisdictions, such as the U.S. As a result, uncertainties in the PRC legal system could limit our ability to enforce
the Contractual Arrangements or could affect the validity of the Contractual Arrangements, and as a result we may not be able to exert
effective control over our VIE, and our ability to conduct our business may therefore be materially adversely affected.
Our current corporate structure and business operations may be
affected by the newly enacted Foreign Investment Law.
On March 15, 2019, the National People’s
Congress approved the Foreign Investment Law, which took effect on January 1, 2020. Since it is relatively new, uncertainties exist in
relation to its interpretation and its implementation rules that are yet to be issued. The Foreign Investment Law does not explicitly
classify whether variable interest entities that are controlled through contractual arrangements would be deemed as foreign-invested enterprises
if they are ultimately “controlled” by foreign investors. However, it has a catch-all provision under definition of “foreign
investment” that includes investments made by foreign investors in China through other means as provided by laws, administrative
regulations or the State Council of the PRC, or the State Council. Therefore, it still leaves leeway for future laws, administrative regulations
or provisions of the State Council to provide for contractual arrangements as a form of foreign investment. Therefore, there can be no
assurance that our control over our VIE through contractual arrangements will not be deemed as a foreign investment in the future.
The Foreign Investment Law grants national treatment
to foreign-invested entities, except for those foreign-invested entities that operate in industries specified as either “restricted”
or “prohibited” from foreign investment in a “negative list”. The Foreign Investment Law provides that foreign-invested
entities operating in “restricted” or “prohibited” industries will require market entry clearance and other approvals
from relevant PRC government authorities. If our control over our VIE through contractual arrangements are deemed as foreign investment
in the future, and any business of our VIE is “restricted” or “prohibited” from foreign investment under the “negative
list” effective at the time, we may be deemed to be in violation of the Foreign Investment Law, the contractual arrangements that
allow us to have control over our VIE may be deemed as invalid and illegal, and we may be required to unwind such contractual arrangements
and/or restructure our business operations, any of which may have a material adverse effect on our business operations. In addition,
as the Chinese government has been updating the Negative List in recent years and reducing the sectors prohibited or restricted for foreign
investment, it is probable in the future that, even if our VIE is identified as a FIE, it is still allowed to acquire or hold equity of
enterprises in sectors currently prohibited or restricted for foreign investment.
Furthermore, the PRC Foreign Investment Law provides
that foreign invested enterprises established according to the existing laws regulating foreign investment may maintain their structure
and corporate governance within five years after the implementing of the PRC Foreign Investment Law.
In addition, the PRC Foreign Investment Law also
provides several protective rules and principles for foreign investors and their investments in the PRC, including, among others, that
a foreign investor may freely transfer into or out of China, in Renminbi or a foreign currency, its contributions, profits, capital gains,
income from disposition of assets, royalties of intellectual property rights, indemnity or compensation lawfully acquired, and income
from liquidation, among others, within China; local governments shall abide by their commitments to the foreign investors; governments
at all levels and their departments shall enact local normative documents concerning foreign investment in compliance with laws and regulations
and shall not impair legitimate rights and interests, impose additional obligations onto FIEs, set market access restrictions and exit
conditions, or intervene with the normal production and operation activities of FIEs; except for special circumstances, in which case
statutory procedures shall be followed and fair and reasonable compensation shall be made in a timely manner, expropriation or requisition
of the investment of foreign investors is prohibited; and mandatory technology transfer is prohibited.
Notwithstanding the above, the PRC Foreign Investment
Law stipulates that foreign investment includes “foreign investors invest through any other methods under laws, administrative regulations
or provisions prescribed by the State Council”. Therefore, there are possibilities that future laws, administrative regulations
or provisions prescribed by the State Council may regard contractual arrangements as a form of foreign investment, and then whether our
contractual arrangement will be recognized as a foreign investment, whether our contractual arrangement will be deemed to be in violation
of the foreign investment access requirements and how the above-mentioned contractual arrangement will be handled are uncertain.
The Chinese government may exercise significant
oversight influence over the manner in which we must conduct our business activities. We are currently not required to obtain approval
from Chinese authorities to list on U.S. exchanges, however, if our VIE or the holding company were required to obtain approval in the
future and were denied permission from Chinese authorities to list on U.S. exchanges, we will not be able to continue listing on U.S.
exchange, which would materially affect the interest of the investors.
The Chinese government has exercised and continues
to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability
to operate through our VIE in China may be harmed by changes in its laws and regulations, including those relating to taxation, environmental
regulations, land use rights, property and other matters. The central or local governments of these jurisdictions may impose new, stricter
regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our
compliance with such regulations or interpretations. Accordingly, government actions in the future, including any decision not to continue
to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation
of economic policies, could have a significant effect on economic conditions in China or particular regions thereof, and could require
us to divest ourselves of any interest we then hold in Chinese properties.
For example, the Chinese cybersecurity regulator
announced on July 2021 that it had begun an investigation of Didi Global Inc. (NYSE: DIDI) and two days later ordered that the company’s
app was removed from smartphone app stores. On July 24, 2021, the General Office of the Communist Party of China Central Committee and
the General Office of the State Council jointly released the Guidelines for Further Easing the Burden of Excessive Homework and Off-campus
Tutoring for Students at the Stage of Compulsory Education, pursuant to which foreign investment in such firms via mergers and acquisitions,
franchise development, and variable interest entities are banned from this sector.
We believe that our operations in China are in
material compliance with all applicable legal and regulatory requirements. However, the Company’s business segments may be
subject to various government and regulatory interference in the provinces in which they operate. The Company could be subject to regulation
by various political and regulatory entities, including various local and municipal agencies and government sub-divisions. The Company
may incur increased costs necessary to comply with existing and newly adopted laws and regulations or penalties for any failure to comply, and
such compliance or any associated inquiries or investigations or any other government actions may:
| ● | delay or impede our development; |
| ● | result in negative publicity or increase the Company’s operating costs; |
| ● | require significant management time and attention; and |
Furthermore, it is uncertain when and whether
the Company will be required to obtain permission from the PRC government to list on U.S. exchanges in the future, and even when such
permission is obtained, whether it will be denied or rescinded. Although the Company is currently not required to obtain permission from
any of the PRC federal or local government to obtain such permission and has not received any denial to list on the U.S. exchange, our
operations could be adversely affected, directly or indirectly, by existing or future laws and regulations relating to its business or
industry, which could result in a material adverse change in the value of our securities, potentially rendering it worthless. As a result,
both you and us face uncertainty about future actions by the PRC government that could significantly affect our ability to offer or continue
to offer securities to investors and cause the value of our securities to significantly decline or be worthless.
If any of our affiliated entities becomes
the subject of a bankruptcy or liquidation proceeding, we may lose the ability to use and enjoy assets held by such entity, which could
materially and adversely affect our business, financial condition and results of operations.
We currently conduct our operations in China through
our Contractual Arrangements. As part of these arrangements, substantially all of our assets that are significant to the operation of
our business are held by our VIE. If the becomes bankrupt and all or part of its become subject to liens or rights of third-party creditors,
we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial
condition and results of operations. In addition, if any of our affiliated entities undergoes a voluntary or involuntary liquidation proceeding,
its equity owner or unrelated third-party creditors may claim rights relating to some or all of these assets, which would hinder our ability
to operate our business and could materially and adversely affect our business, our ability to generate revenue and the market price of
our common stock.
Risks Relating to our Securities
We have never paid cash dividends and are not likely to do so
in the foreseeable future.
We have never declared or paid any cash dividends
on our common stock. We currently intend to retain any future earnings for use in the operation and expansion of our business. We do not
expect to pay any cash dividends in the foreseeable future but will review this policy as circumstances dictate.
We may be subject to the penny stock rules which
will make the shares of our common stock more difficult to sell.
We may be subject now and in the future to the
SEC’s “penny stock” rules if our shares of common stock sell below $1.00 per share. Penny stocks generally are
equity securities with a price of less than $1.00. The penny stock rules require broker-dealers to deliver a standardized risk disclosure
document prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market.
The broker-dealer must also provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer
and its salesperson, and monthly account statements showing the market value of each penny stock held in the customer’s account.
The bid and offer quotations, and the broker-dealer and salesperson compensation information must be given to the customer orally or in
writing prior to completing the transaction and must be given to the customer in writing before or with the customer’s confirmation.
On June 21, 2019, the “Company received
a letter from the Listing Qualifications staff of The Nasdaq Stock Market (“Nasdaq”) notifying the Company that it is no longer
in compliance with the minimum bid price requirement for continued listing on the Nasdaq Capital Market. Nasdaq Listing Rule 5550(a)(2) requires
listed companies to maintain a minimum bid price of $1.00 per share. The letter noted that the bid price of the Company’s common
stock was below $1.00 for the 30-day period ending June 20, 2019. The notification letter has no immediate effect on the Company’s
listing on the Nasdaq Capital Market. Nasdaq has provided the Company with 180 days, or until January 14, 2020, to regain compliance
with the minimum bid price requirement by having a closing bid price of at least $1.00 per share for a minimum of 10 consecutive business
days. On December 19, 2019, Nasdaq determined that the Company is eligible for an additional 180 calendar day period, or until June 15,
2020, to regain compliance. Given the extraordinary market conditions caused by COVID-19, Nasdaq has determined to toll the compliance
periods for bid price and market value of publicly held shares requirements through June 30, 2020. In that regard, on April 16,
2020, Nasdaq filed an immediately effective rule change with the Securities and Exchange Commission. Accordingly, the Company had
until August 31, 2020, to regain compliance. On November 2, 2020, NASDAQ advised the Company that so long as it remains in compliance
with NASDAQ continued listing standards until March 1, 2021, NASDAQ would grant the Company continued listing on NASDAQ. Should the company
fail to demonstrate compliance with Nasdaq Listing Rule 5550(a)(2) by that date, the Panel will issue a final delist determination and
the Company will be suspended from trading on The Nasdaq Stock Market. The Company maintained compliance through March 1, 2021.
In addition, the penny stock rules require
that prior to a transaction, the broker-dealer must make a special written determination that the penny stock is a suitable investment
for the purchaser and receive the purchaser’s written agreement to the transaction. The penny stock rules are burdensome and
may reduce purchases of any offerings and reduce the trading activity for shares of our common stock. As long as our shares of common
stock are subject to the penny stock rules, the holders of such shares of common stock may find it more difficult to sell their securities.
Our shares of common stock are very thinly
traded, and the price if traded may not reflect our value. There can be no assurance that there will be an active market for our shares
of common stock either now or in the future.
Our shares of common stock are very thinly traded,
and the price if traded may not reflect our value. There can be no assurance that there will be an active market for our shares of common
stock either now or in the future. The market liquidity will be dependent on the perception of our operating business and any steps that
our management might take to bring us to the awareness of investors. There can be no assurance given that there will be any awareness
generated. Consequently, investors may not be able to liquidate their investment or liquidate it at a price that reflects the value of
our business. If a more active market should develop, the price may be highly volatile. Because there may be a low price for our shares
of common stock, many brokerage firms may not be willing to effect transactions in the securities. Even if an investor finds a broker
willing to effect a transaction in the shares of our common stock, the combination of brokerage commissions, transfer fees, taxes, if
any, and any other selling costs may exceed the selling price. Further, many lending institutions will not permit the use of such shares
of common stock as collateral for any loans.
In addition, the securities markets have from
time to time experienced price and volume fluctuations that are not related to the operating performance of particular companies. As a
result, to the extent shareholders sell our shares in a negative market fluctuation, they may not receive a price per share that is based
solely upon our business performance. We cannot guarantee that shareholders will not lose some or all of their investment in our common
stock.
Currently, we are listed on the NASDAQ Capital
Market. If our financial condition deteriorates, we may not meet continued listing standards on the NASDAQ Capital Market.
The NASDAQ Capital Market requires companies to
fulfill specific requirements in order for their shares to continue to be listed. In order to qualify for continued listing on the NASDAQ
Capital Market, we must meet the following criteria:
| ● | Our stockholders’ equity must be at least $2,500,000; or the market value of our listed securities
must be at least $35,000,000; or our net income from continuing operations in our last fiscal year (or two of the last three fiscal years)
must have been at least $500,000; |
| ● | The market value of our publicly held shares must be at least $1,000,000; |
| ● | The minimum bid price for our shares must be at least $1.00 per share; |
| ● | We must have at least 300 stockholders; |
| ● | We must have at least 500,000 publicly held shares; |
| ● | We must have at least 2 market makers; and |
| ● | We must have adopted NASDAQ-mandated corporate governance measures, including a board of directors comprised
of a majority of independent directors, an Audit Committee comprised solely of independent directors and the adoption of a code of ethics
among other items. |
Current, we are listed on the NASDAQ Capital Market,
but if we are delisted from the NASDAQ Capital Market at some later date, our stockholders could find it difficult to sell our shares.
In addition, if our common stock is delisted from the NASDAQ Capital Market at some later date, we may apply to have our common stock
quoted on the Bulletin Board or in the “pink sheets” maintained by the National Quotation Bureau, Inc. The Bulletin Board
and the “pink sheets” are generally considered to be less efficient markets than the NASDAQ Capital Market. In addition, if
our common stock is not so listed or are delisted at some later date, our common stock may be subject to the “penny stock”
regulations. These rules impose additional sales practice requirements on broker-dealers that sell low-priced securities to persons other
than established customers and institutional accredited investors and require the delivery of a disclosure schedule explaining the nature
and risks of the penny stock market. As a result, the ability or willingness of broker-dealers to sell or make a market in our common
stock might decline. If our common stock is delisted from the NASDAQ Capital Market at some later date or become subject to the penny
stock regulations, it is likely that the price of our shares would decline and that our stockholders would find it difficult to sell their
shares.
The requirements of being a public company
may strain our resources and divert management’s attention, which could have a material adverse effect on our business.
As a public company, we are subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the
listing requirements of the securities exchange on which we list, and other applicable securities rules and regulations. Despite recent
reforms made possible by the JOBS Act, compliance with these rules and regulations will nonetheless increase our legal and financial compliance
costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources. The Exchange Act
requires, among other things, that we file annual, quarterly, and current reports with respect to our business and operating results.
As a result of disclosure of information in this
annual report and in filings required of a public company, our business and financial condition will become more visible, which we believe
may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business
and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims,
and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business,
brand and reputation and results of operations.
The obligation to disclose information publicly
may put us at a disadvantage to competitors that are private companies which could have an adverse effect on our results of operations.
We are a reporting
company in the United States. As a reporting company, we are required to file periodic reports with the Securities and Exchange Commission
upon the occurrence of matters that are material to our Company and stockholders. In some cases, we are required to disclose material
agreements or results of financial operations that we would not be required to disclose if we were a private company. Our competitors
may have access to this information, which would otherwise be confidential. This may give them advantages in competing with our Company.
Similarly, as a U.S.-listed public company, we are governed by U.S. laws that our competitors, which are mostly private Chinese companies,
are not required to follow. To the extent compliance with U.S. laws increases our expenses or decreases our competitiveness against such
companies, this could affect our results of operations.
Securities analysts may not publish favorable
research or reports about our business or may publish no information at all, which could cause our stock price or trading volume to decline.
The trading market will be influenced to some
extent by the research and reports that industry or financial analysts publish about us and our business. We do not control these analysts.
As we are a reporting company in the United States, we may attract research coverage and the analysts who publish information about our
common stock will have had relatively little experience with us or our industry, which could affect their ability to accurately forecast
our results and could make it more likely that we fail to meet their estimates. In the event we obtain securities or industry analyst
coverage, if any of the analysts who cover us provide inaccurate or unfavorable research or issue an adverse opinion regarding our stock
price, our stock price could decline. If one or more of these analysts cease coverage of us or fail to publish reports covering us regularly,
we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline and result in the loss
of all or a part of your investment in us.