GREEN GIANT INC. The following discussion and analysis of financial condition and results of operations relates to the operations and financial condition reported in the financial statements ofGreen Giant Inc. for the fiscal years endedSeptember 30, 2022 and 2021 and should be read in conjunction with such financial statements and related notes included in this report.
Preliminary Note Regarding Forward-Looking Statements.
We make forward-looking statements in Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report based on the beliefs and assumptions of our management and on information currently available to us. Forward-looking statements include information about our possible or assumed future results of operations which follow under the headings "Business and Overview," "Liquidity and Capital Resources," and other statements throughout this report preceded by, followed by or that include the words "believes," "expects," "anticipates," "intends," "plans," "estimates" or similar expressions. Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in these forward-looking statements, including the risks and uncertainties described below and other factors we describe from time to time in our periodic filings with theSEC . We therefore caution you not to rely unduly on any forward-looking statements. The forward-looking statements in this report speak only as of the date of this report, and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise. These forward-looking statements include, among other things, statements relating to:
? our ability to sustain our project development
? our ability to obtain additional land use rights at favorable prices;
? the market for real estate in Tier 3 and 4 cities and counties;
? our ability to obtain additional capital in future years to fund our planned
expansion; or
? economic, political, regulatory, legal and foreign exchange risks associated
with our operations. Our Business Overview We conduct substantially all of our business throughShaanxi Guangsha Investment andDevelopment Group Co., Ltd , in Hanzhong,Shaanxi Province . Since the initiation of our business, we have been focused on expanding our business in certain Tier 3 and Tier 4 cities and counties inChina . For the fiscal year of 2022, our sales and net loss were approximately$9.1 million and$108.1 million , representing a decrease of approximately 84.5% and 1796.0% from fiscal 2021, respectively. The year-over-year decrease was mainly caused by the following reasons: 1) The macro-control of the real estate market by the Chinese government, mainly suppressed in the past 12 months; 2)China's economic downturn due to repeated epidemic; 3) Lower disposable income resulted in the decreased demand for housing; 4) The Company is a real estate developer in the third and fourth tier cities inChina , the decline in house prices is especially obvious than that in the first tier and second tier cities. For the fiscal year of 2022, our average selling price ("ASP") for real estate projects located in Yang County was approximately$524 per square meter, decreased from ASP of$585.7 per square meter in fiscal 2021 due to less commercial units sold inYangzhou Palace during fiscal 2022. The ASP of our Hanzhong real estate projects was approximately$629 per square meter for the fiscal year of 2022, compared to the ASP of$638 per square meter for fiscal 2021 due to the increased market price in the Hangzhong area. Market Outlook
On
46
OnNovember 14, 2022 China Banking andInsurance Regulatory Commission , theMinistry of Housing andUrban-Rural Development and theCentral Bank issued the "Notice on the Relevant Work of Commercial Banks Issuing letters of Guarantee to Replace the Pre-sale Supervision Funds" (the "Pre-sale Supervision Funds Notice"). Commercial banks' house related credit business is expected to expand. The "Financial Support for Real Estate Notice" issued sixteen measures to generate power at both supply and demand ends, it further clarifies the support policies for housing credit. Many policies have been implemented at the document system level for the first time, or will push banks to increase their support for the real estate market. It is expected to positively affect the conservative attitude of commercial banks to intervene in the development of loan market and support the increasing demand from home buyers for mortagage loans.
The Company intends to remain focused on our existing construction projects in Hanzhong City and Yang County, deepening our institutional sales network, enhancing our cost and operational synergies and improving cash flows and strengthening our balance sheet.
The Company started the construction of the
InDecember 2019 , a novel strain of coronavirus (COVID-19) surfaced. COVID-19 has spread rapidly to many parts of the PRC and other parts of the world in the first quarter of 2020, which has caused significant volatility in the PRC and international markets. There is significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the PRC and international economies. For the year endedSeptember 30, 2022 , the COVID-19 pandemic did not have did have a material net impact on the Company's financial position and operating results, espeically Yang County which is operation was shut down. On and off fromAugust 2022 onwards The extent of the impact on the Company's future financial results will be dependent on future developments such as the length and severity of the crisis, the potential resurgence of the pandemic, future government actions in response to the pandemic and the overall impact of the COVID-19 pandemic on the local economy and real estate markets, among many other factors, all of which remain highly uncertain and unpredictable. Given this uncertainty, the Company is currently unable to quantify the future impact of the COVID-19 pandemic on its future operations, financial condition, liquidity and results of operations if the current situation continues.
Liangzhou road related projects
InSeptember 2013 , the Company entered into an agreement ("Liangzhou Agreement") with the Hanzhong local government on theLiangzhou Road reformation and expansion project ("Liangzhou Road Project "). Pursuant to the Liangzhou Agreement, the Company was contracted to reform and expand the Liangzhou Road, a commercial street in downtown Hanzhong City, with a total length of 2,080 meters and width of 30 meters and to resettle the existing residents in the Liangzhou Road area. The government's original road construction budget was approximately$33million in accordance with the Liangzhou Agreement. The Company, in return, is being compensated by the local government to have an exclusive right on acquiring at least 394.5 Mu (approximately 65 acres) land use rights in a specified residential zone of Hanzhong City.The Liangzhou Road Project's road construction started at the end of 2013. In 2014, the original scope and budget on the Liangzhou Road reformation and expansion project was extended, because the local government included more area and resettlement residences into the project, which resulted in additional investments from the Company. In return, the Company was authorized by the local government to develop and manage the commercial and residential properties surrounding the Liangzhou Road project. 47
As of
Oriental Garden Phase II
Oriental Garden Phase II project is planned to consist of 8 high-rise residential buildings and 6 commercial buildings with total planned GFA of 370,298 square meters. The project will also include a farmer's market.
[[Image Removed]]Liangzhou Mansion [[Image Removed]]Liangzhou Mansion project is planned to consist of 7 high-rise building and commercial shops on the first floor with total planned GFA of 160,000 square meters.Pearl Commercial Plaza [[Image Removed]]Pearl Commercial Plaza is planned to consist one office building, one service apartment (or hotel), classical architecture style of Chinese traditional houses and shopping malls with total planned GFA of 124,191 square meters. The Company plans to start these three real estate projects in 2022 after the road construction passes the local government's inspection and approval. These related projects may take 2-3 years to be fully completed.Road Construction Other road construction projects mainly included the Yang CountyEast 2nd Ring Road construction project. The Company was engaged by the Yang County local government to construct theEast 2nd Ring Road with a total length of 2.15 km. The local government is required to repay the Company's project investment costs within 3 years after completion of the project with interest at the interest rate based on the commercial borrowing rate with the similar term published by the China Construction Bank (which as ofSeptember 30, 2022 -was 4.75%). The local government's repayment could be used by the Company to reduce local surcharges or taxes otherwise required in the real estate development. The road construction was substantially completed as ofSeptember 30, 2021 and is in the process of government review and approval. For the year endedSeptember 30, 2022 , the Company received local government' installment payments of approximately$2.1 million and the final payment approximately of$4.5 million is pending the local government's approval . The installment received was included in the Company's customer deposits as ofSeptember 30, 2022 . 48 InSeptember 2012 , the Company was approved by the Hanzhong local government to construct four municipal roads with a total length of approximately 1,192 meters. The project was deferred and then restarted during the quarter endedMarch 31, 2014 . As ofSeptember 30, 2022 , the local government was still in the process of assessing the budget for these projects, which is expected to be
completed in fiscal 2023. Under development: Estimated Completion time of construction
Hanzhong City Hanfeng Beiyuan The road construction was substantially
completed and is pending local government's
acceptance.
completed and is pending local government's
acceptance.
Hanzhong City Beidajie project Under planning stage and waiting for local
government's zoning plan
Yang County East 2nd Ring Road The road construction was substantially
completed and is pending local government's
acceptance.
RESULTS OF OPERATIONS
Year ended
Revenues The following is a breakdown of revenue for the years endedSeptember 30, 2022 and 2021: For the years ended September 30, 2022 2021 Revenue recognized for completed condominium real estate projects,$ 9,577,405 $ 58,915,239 Less: sales tax (505,652 ) (424,074 ) Revenue net of sales tax$ 9,071,753 $ 58,491,165
Revenue recognized for completed condominium real estate projects
The following table summarizes our revenue generated by different projects:
For the Years Ended September 30,
2022 2021 Variance
Revenue % Revenue % Variance %
Projects:
Yangzhou Pearl Garden
Phase I and II $ - - % $ 564,758 1.0 % $ (564,758 ) (100.0 )%
Oriental Pearl Garden 810,220 8.5 % 2,186,355 3.7 % (1,376,135 ) (62.9 )%
Nanyuan II Project - - % 43,625,590 74.0 % (43,625,590 ) (100.0 )%
Mingzhu Garden
(Nanyuan and Beiyuan)Phase I and II 1,063,278 11.1 % 768,494 1.3 % 294,784 38.4 % Yangzhou Palace 7,703,907 80.4 % 11,770,042 20.0 % (4,066,135 ) (34.6 )% Total Revenue 9,577,405 100.0 % 58,915,239 100 % (49,337,834 ) (83.7 )% Sales Tax (505,652 ) - (424,074 ) - (81,578 ) (19.2 )% Revenue net of sales tax$ 9,071,753 -$ 58,491,165 $ (49,419,412 ) (84.5 )%
Our revenues are derived from the sale of residential buildings, commercial store-fronts and parking spaces in projects that we have developed. Compared to last year, revenues before sales tax decreased by$49.4 million to approximately$9.6 million for the year endedSeptember 30, 2022 . The total GFA sold for the remaining real estate projects during the yearSeptember 30, 2022 and 2021 was 16,182 square meters and 25,687 square meters, respectively. The sales tax for the years endedSeptember 30, 2022 was approximately$0.5 million , decreased by 19.2% from fiscal 2021, consistent with the decreased revenue in fiscal 2022. 49 The year-over-year decrease in revenue was mainly caused by the following reasons: 1) The macro-control of the real estate market by the Chinese government, mainly suppressed in the past 12 months; 2)China's economic downturn due to recurring epidemic; 3) Lower disposable income resulted in the decreased demand for housing; 4) The Company is a real estate developer in the third and fourth tier cities inChina , the decline in house prices is especially obvious than that in the first tier and second tier cities. Cost of sales The following table sets forth a breakdown of our cost of revenues for the years indicated. For the Years Ended September 30, 2022 2021 Variance Cost Percentage Cost Percentage Variance % Land use rights$ 582,548 10.6 %$ 4,418,450 9.5 %$ (3,835,902 ) (86.8 )%
Construction costs 4,906,863 89.4 % 42,091,551
90.5 % (37,184,688 ) (88.3 )%
Total $ 5,489,411 100.0 % $ 46,510,001 100 % $ (41,020,590 ) (88.2 )%
Our cost of sales consists primarily of costs associated with land use rights
and construction costs. Cost of sales are capitalized and allocated to
development projects using a specific identification method. Costs are allocated
to specific units within a project based on the ratio of the sales area of units
to the estimated total sales area of the project or phase of the project times
the total cost of the project or phase of the project.
Cost of sales was approximately
Land use rights cost: The cost of land use rights includes the land premium we pay to acquire land use rights for our property development sites, plus taxes. Our land use rights cost varies for different projects according to the size and location of the site and the minimum land premium set for the site, all of which are influenced by government policies, as well as prevailing market conditions. Costs for land use rights for the year endedSeptember 30, 2022 were approximately$0.6 million , as compared to approximately$4.4 million for fiscal 2021, representing an decrease of approximately$3.8 million from the same period of last year. The decrease was consistent with the fact that total GFA sold in fiscal 2022 was significantly decreased from previous year. Construction cost: We outsource the construction of all of our projects to third party contractors, whom we select through a competitive tender process. Our construction contracts provide a fixed payment which covers substantially all labor, materials and equipment costs, subject to adjustments for some types of excess, such as design changes during construction or changes in government-suggested steel prices. Our construction costs consist primarily of the payments to our third-party contractors, which are paid over the construction period based on specified milestones. In addition, we purchase and supply a limited range of fittings and equipment, including elevators, window frames and door frames. Our construction costs for the year endedSeptember 30, 2022 were approximately$4.9 million as compared to approximately$42.1 million for last year, representing a decrease of approximately$37.2 million . The decrease in construction cost was due to less real estate property units sold during fiscal 2022. 50 Gross profits
Gross profit was approximately$3.6million for the year endedSeptember 30, 2022 as compared to gross profit of approximately$12.0 million in the prior year, representing an decrease of$8.4 million . The gross margin was 37.4% in fiscal 2022 as compared to gross margin of 17.1% in last year due to the revenue structure change. The GFA of commercial store-fronts is higher than residential buildings in fiscal 2022 and the average selling price of commercial store-fronts is also much higher than previous year. For the Year Ended September 30 2022 2021 Gross Gross Gross Gross Variance Project Profit Margin Profit Margin Variance % Yangzhou Pearl Garden Phase I and II $ - -$ 122,007 22 %$ (122,007 ) (100.0 )% Yangzhou Palace 3,028,858 39.3 % 2,822,485 24 % 206,373 7.3 % Mingzhu Garden (Mingzhu Nanyuan and Beiyuan) Phase I and II 431,523 40.6 % 211,825 28 % 219,698 103.7 % Nanyuan II project - % 8,619,750 20 % (8,619,750 ) (100.0 )% Oriental Pearl Garden 627,613 77.5 % 629,171 29 % (1,558 ) (0.2 )% Sales Tax (505,652 ) - (424,074 )
- (81,578 ) (19.2 )%
Impairment losses on
real estate property
development completed - - - - - - %Total Gross Profit$ 3,582,342 37.4 %$ 11,981,164
20.3 %$ (8,398,822 ) (70.1 )% Operating expenses The following table presents our operating expenses by nature for the periods indicated: For the years ended September 30, 2022 2021
General and administrative expenses$ 31,198,365 $
2,691,170 Selling expenses 361,746 186,886 Impairment of contract assets 5,264,748 -
Impairment of real estate property under development 73,624,727
-
Total operating expenses$ 110,449,586 $
2,878,056
Percentage of revenue after sales tax 1,217.5 %
4.9 %
General and administrative expenses were $31,198,365 for 2022 compared to
$2,691,170 for 2021. The year-on-year increase for 2022 was $28,507,195 mainly
attributable to the issuance of 5,990,000 common shares to the Consultants being
fully paid in RMB126.9 million (US$19.4 million ) when issued and litigation case
of construction contract dispute with Zhejiang Hongcheng Construction Group Co.,
Ltd. in amount of RMB64.68 million (US$9.87 million )
Interest expense, net
Net interest income was less than $0.1 million for the year ended September 30,
2022 and 2021.
51
Other income, net
For the year ended
Income taxes PRC Taxes Our Company is governed by the Enterprise Income Tax Law ofthe People's Republic of China concerning private-run enterprises, which are generally subject to tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments. For the years endedSeptember 30, 2022 and 2021, the Company is subject to income tax rate of 25% on taxable income. Although the possibility exists for reinterpretation of the application of the tax regulations by higher tax authorities in the PRC, potentially overturning the decision made by the local tax authority, the Company has not experienced any reevaluation of the income taxes for prior years. The PRC tax rules are different from the local tax rules and the Company is required to comply with local tax rules. The difference between the two tax rules will not be a liability of the Company. There will be no further tax payments for the difference. For the years endedSeptember 30, 2022 , the Company's effective income tax rate was 6%, increased from effective income tax rate of 28% for the year endedSeptember 30, 2021 . The lower effective income tax rate in fiscal 2022 was caused by the loss in fiscal year 2022. Net income We reported net loss of approximately$108.1million for the year endedSeptember 30, 2022 , as compared to the net income approximately$6.4 million for fiscal 2021. The decrease of$114.5 million in our net income was primarily due to more revenue reported for fiscal 2021 as discussed above under Revenues and Gross Profit Other comprehensive income We operate primarily in the PRC and the functional currency of our operating subsidiary is the Chinese Renminbi ("RMB"). The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation. Translation adjustments amounted to approximately$11.4 million and$9.4million for the years endedSeptember 30, 2022 and 2021, respectively. The balance sheet amounts with the exception of equity atSeptember 30, 2022 were translated atRMB7.1135 to1.00 USD as compared to6.4434 RMB to1.00 USD atSeptember 30, 2021 . The equity accounts were stated at their historical rate. The average translation rates applied to the income statements accounts for the years endedSeptember 30, 2022 and 2021 were6.5532 RMB to1.00 USD and6.5072 RMB to1.00 USD , respectively.
Liquidity and Capital Resources
Cash Flow
52
Year endedSeptember 30, 2022 as compared to year endedSeptember 30, 2021
Comparison of cash flows results for the fiscal year ended
For the years ended
September 30,
2022 2021 VarianceNet cash (used in) provided by operating activities$ (757,507 ) $ (604,167 ) $ (153,340 ) Net Cash Used in Investing Activities (26,936,915 ) - (26,936,915 ) Net cash (used in) provided by financing activities$ 28,936,915 $ -$ 28,936,915 Effect of changes of foreign exchange rate on cash$ (339,505 ) $
201,820$ (541,325 ) Net (decrease) in cash$ 902,988 $ (402,347 ) $ 1,305,335 Operating activities
Net cash used in operating activities during fiscal 2022 was approximately$0.8 million , consisting of net loss of approximately$108.1 million , net changes in our operating assets and liabilities, which mainly included a decrease in real estate property completed of approximately$5.5 million due to the sales of real estate properties, a$8.4 million increase in other payables to suppliers and an increase of$9.5 million in Accrued expenses. Investing activities
Net cash used in investing activities during fiscal 2022 was approximately
Financing activities
Net cash provided by financing activities during fiscal 2022 was
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
As an industry practice, the Company provides guarantees to PRC banks with respect to loans procured by the purchasers of the Company's real estate properties for the total mortgage loan amount until the completion of obtaining the "Certificate of Ownership" of the properties from the government, which generally takes six to twelve months. Because the banks provide loan proceeds without getting the "Certificate of Ownership" as loan collateral during the six to twelve months' period, the mortgage banks require the Company to maintain, as security for the Company's obligations under such guarantees, restricted cash of at least 5% of the mortgage proceeds. If a purchaser defaults on its payment obligations, the mortgage bank may deduct the delinquent mortgage payment from the security deposit and require the Company to pay the excess amount if the delinquent mortgage payments exceed the security deposit. If the delinquent mortgage payments exceed the security deposit, the banks may require us to pay the excess amount. If multiple purchasers default on their payment obligations at around the same time, we will be required to make significant payments to the banks to satisfy our guarantee obligations. If we are unable to resell the properties underlying defaulted mortgages on a timely basis or at prices higher than the amounts of our guarantees and related expenses, we will suffer financial losses. The Company has made necessary reserves in its restricted cash account to cover any potential mortgage defaults as required by the mortgage lenders. The Company has not experienced any delinquent mortgage loans and has not experienced any losses related to this guarantee. As ofSeptember 30, 2022 andSeptember 30, 2021 , our outstanding guarantees in respect of our customers' mortgage loans amounted to approximately$24.87 million and$66.0 million , respectively. As ofSeptember 30, 2022 andSeptember 30, 2021 , the amount of security deposits provided for these guarantees was approximately$1.78 million and$3.3 million , respectively, and the Company believes that such reserves
are sufficient. Inflation
Inflation has not had a material impact on our business and we do not expect inflation to have a material impact on our business in the near future.
53
Critical Accounting Policies and Management Estimates
Revenue recognition
The Company adopted FASB ASC Topic 606 Revenue from Contracts with Customers
("ASC 606") on October 1, 2018 using the modified retrospective approach. Under
ASC 606, Revenue from Contracts with Customers, revenue is recognized in
accordance with the transfer of goods and services to customers at an amount
that reflects the consideration that the Company expects to be entitled to for
those goods and services. The Company determines revenue recognition through the
following steps:
? identification of the contract, or contracts, with a customer;
? identification of the performance obligations in the contract;
? determination of the transaction price, including the constraint on variable
consideration;
? allocation of the transaction price to the performance obligations in the
contract; and
? recognition of revenue when (or as) the Group satisfy a performance obligation.
Most of the Company's revenue is derived from real estate sales of condominiums
and commercial property in the PRC. The majority of the Company's contracts
contain a single performance obligation involving significant real estate
development activities that are performed together to deliver a real estate
property to customers. Revenues arising from real estate sales are recognized
when or as the control of the asset is transferred to the customer. The control
of the asset may transfer over time or at a point in time. For the sales of
individual condominium units in a real estate development projects, the Company
has an enforceable right to payment for performance completed to date, revenue
is recognized over time by measuring the progress towards complete satisfaction
of that performance obligation ("percentage completion method"). Otherwise,
revenue is recognized at a point in time when the customer obtains controlof the asset.
Under percentage completion method, revenue and profit from the sales of long-term real estate development properties is recognized by the percentage of completion method on the sale of individual units when all the following criteria are met:
a. Construction is beyond a preliminary stage.
b. The buyer is committed to the extent of being unable to require a refund
except for non-delivery of the unit or interest.
c. Sufficient units have already been sold to assure that the entire property
will not revert to rental property.
d. Sales prices are collectible.
e. Aggregate sales proceeds and costs can be reasonably estimated.
If any of the above criteria is not met, proceeds shall be accounted for as deposits until the criteria are met.
Under the percentage of completion method, revenues from individual real estate
condominium units sold under development and related costs are recognized over
the course of the construction period, based on the completion progress of a
project. The progress towards complete satisfaction of the performance
obligation is measured based on the Company's efforts or inputs to the
satisfaction of the performance obligation, by reference to the contract costs
incurred up to the end of reporting period as a percentage of total estimated
costs for each contract. In relation to any project, revenue is determined by
calculating the ratio of incurred costs, including land use rights costs and
construction costs, to total estimated costs and applying that ratio to the
contracted sales amounts. Cost of sales is recognized by determining the ratio
of contracted sales during the period to total estimated sales value and
applying that ratio to the incurred costs. Current period amounts are calculated
based on the difference between the life-to-date project totals and the
previously recognized amounts.
54
Any changes in significant judgments and/or estimates used in determining
construction and development revenue could significantly change the timing or
amount of construction and development revenue recognized. Changes in total
estimated project costs or losses, if any, are recognized in the period inwhich they are determined. Revenue from the sales of completed real estate condominium units is recognized at the time of the closing of an individual unit sale. This occurs when the customer obtains the physical possession, the legal title, or the significant risks and rewards of ownership of the assets and the Company has present right to payment and the collection of the consideration is probable. For municipal road construction projects, fees are generally recognized at the time of the projects are completed. Contract balances Timing of revenue recognition may differ from the timing of billing and cash receipts from customers. The Company records a contract asset when revenue is recognized prior to invoicing, or a contract liability when cash is received in advance of recognizing revenue. A contract asset is a right to consideration that is conditional upon factors other than the passage of time. Contract assets include billed and billable receivables, which are the Company's unconditional rights to consideration other than to the passage of time. Contract liabilities include cash collected in excess of revenues. Customer deposits are excluded from contract liabilities.
The Company has elected to apply the optional practical expedient for costs to obtain a contract which allows the Company to immediately expense sales commissions (included under selling expenses) because the amortization period of the asset that the Company otherwise would have used is one year or less. Contract assets and liabilities are generally classified as current based on our contract operating cycle.
The Company provides "mortgage loan guarantees" only with respect to buyers who make down-payments of 20%-50% of the total purchase price of the property. The period of the mortgage loan guarantee begins on the date the bank approves the buyer's mortgage and we receive the loan proceeds in our bank account and ends on the date the "Certificate of Ownership" evidencing that title to the property has been transferred to the buyer. The procedures to obtain the Certificate of Ownership take six to twelve months (the "Mortgage Loan Guarantee Period"). If, after investigation of the buyer's income and other relevant factors, the bank decides not to grant the mortgage loan, our mortgage-loan based sales contract terminates and there will be no guarantee obligation. If, during the Mortgage Loan Guarantee Period, the buyer defaults on his or her monthly mortgage payment for three consecutive months, we are required to return the loan proceeds back to the bank, although we have the right to keep the customer's deposit and resell the property to a third party. Once the Certificate of Property has been issued by the relevant government authority, our loan guarantee terminates. If the buyer then defaults on his or her mortgage loan, the bank has the right to take the property back and sell it and use the proceeds to pay off the loan. The Company is not liable for any shortfall that the bank may incur in this event. To date, no buyer has defaulted on his or her mortgage payments during the Mortgage Loan Guarantee Period and the Company has not returned any loan proceeds pursuant to its mortgage loan guarantees. Use of estimates The preparation of financial statements in conformity withU.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes, and disclosure of contingent liabilities at the date of the consolidated financial statements. Estimates are used for, but not limited to, the assumptions and estimates used by management in recognizing development revenue under the percentage of completion method, the selection of the useful lives of property and equipment, provision necessary for contingent liabilities, revenue recognition, taxes and budgeted costs. Management believes that the estimates utilized in preparing its consolidated financial statements are reasonable and prudent. Actual results could differ from these estimates. 55
Real estate property development completed and under development
Real estate property consists of finished residential unit sites, commercial offices and residential unit sites under development. The Company leases the land for the residential unit sites under land use right leases with various terms from the PRC government. The cost of land use rights is included in the development cost and allocated to each project. Real estate property development completed and real estate property under development are stated at the lower of cost or fair value.
Expenditures for land development, including cost of land use rights, deed tax, pre-development costs, and engineering costs, exclusive of depreciation, are capitalized and allocated to development projects by the specific identification method. Costs are allocated to specific units within a project based on the ratio of the sales area of units to the estimated total sales area of the project (or phase of the project) multiplied by the total cost of the project (or phase of the project).
Cost of amenities transferred to buyers is allocated to specific units as a component of total construction cost. The amenity cost includes landscaping, road paving, etc. Once the projects are completed, the amenities are under control of the property management companies.
Real estate property development completed and under development are subject to valuation adjustments when the carrying amount exceeds fair value. An impairment loss is recognized only if the carrying amount of the asset is not recoverable and exceeds fair value. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to be generated by the asset. The Company reviewed all of its real estate projects for future losses and impairment by comparing the estimated future undiscounted cash flows for each project to the carrying value of such project. For the years endedSeptember 30, 2022 , the Company recognized$67.8 million impairment for real estate property under development. Capitalization of Interest Interest incurred during and directly related to real estate development projects is capitalized to the related real estate property under development during the active development period, which generally commences when borrowings are used to acquire real estate assets and ends when the properties are substantially complete or the property becomes inactive. Interest is capitalized based on the interest rate applicable to specific borrowings or the weighted average of the rates applicable to other borrowings during the period. Interest capitalized to real estate property under development is recorded as a component of cost of real estate sales when related units are sold. All other interest is expensed as incurred. Subsequent Events OnJanuary 12, 2023 , the Company andFT Global Capital Inc. ("FT Global") entered into a settlement agreement (the "FT Global Settlement Agreement"), pursuant to which FT Global has waived all claims and liabilities against the Company in connection with the Company's private placement inOctober 2022 and terminated the Exclusive Placement Agent Agreement entered by and between the Company and FT Global inMay 2022 . Under the terms of the FT Global Settlement Agreement, the Company is obligated to pay to FT Global cash compensation of$40,000 and share compensation of 40,000 shares of the Company's restricted common stock.
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