RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-Q In addition to historical information, this Form 10-Q contains forward-looking statements. Forward-looking statements are based on our current beliefs and expectations, information currently available to us, estimates and projections about our industry, and certain assumptions made by our management. These statements are not historical facts. We use words such as "anticipates", "expects", "intends", "plans", "believes", "seeks", "estimates", and similar expressions to identify our forward-looking statements, which include, among other things, our anticipated revenue and cost of our agency and investment business. Because we are unable to control or predict many of the factors that will determine our future performance and financial results, including future economic, competitive, and market conditions, our forward-looking statements are not guarantees of future performance. They are subject to risks, uncertainties, and errors in assumptions that could cause our actual results to differ materially from those reflected in our forward-looking statements. We believe that the assumptions underlying our forward-looking statements are reasonable. However, the investor should not place undue reliance on these forward-looking statements. They only reflect our view and expectations as of the date of this Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statement in light of new information, future events, or other occurrences. There are several risks and uncertainties, including those relating to our ability to raise money and grow our business and potential difficulties in integrating new acquisitions with our current operations, especially as they pertain to foreign markets and market conditions. These risks and uncertainties can materially affect the results predicted. The Company's future operating results over both the short and long term will be subject to annual and quarterly fluctuations due to several factors, some of which are outside our control. These factors include but are not limited to fluctuating market demand for our services, and general economic conditions. The following Management's Discussion and Analysis ("MD&A") is intended to help the reader understandSunrise Real Estate Group, Inc. ("SRRE"). MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes.
OVERVIEW
InOctober 2004 , the former shareholders ofSunrise Real Estate Development Group, Inc. (Cayman Islands ) ("CY-SRRE") andLIN RAY YANG Enterprise Ltd. ("LRY") acquired a majority of our voting interests in share exchange. Before the completion of the share exchange, SRRE had no continuing operations, and its historical results would not be meaningful if combined with the historical results of CY-SRRE, LRY and their subsidiaries. As a result of the acquisition, the former owners of CY-SRRE and LRY hold a majority interest in the combined entity. Generally accepted accounting principles require in certain circumstances that a company whose shareholders retain the majority voting interest in the combined business be treated as the acquirer for financial reporting purposes. Accordingly, the acquisition has been accounted for as a "reverse acquisition" arrangement whereby CY-SRRE and LRY are deemed to have purchased SRRE. However, SRRE remains the legal entity and the Registrant forSecurities and Exchange Commission reporting purposes. The historical financial statements prior toOctober 5, 2004 are those of CY-SRRE and LRY and their subsidiaries. All equity information and per share data prior to the acquisition have been restated to reflect the stock issuance as a recapitalization of CY-SRRE and LRY. SRRE and its subsidiaries, namely, CY-SRRE, LRY,Shanghai Xin Ji Yang Real Estate Consultation Company Limited ("SHXJY"),Shanghai Shang Yang Real Estate Consultation Company, Ltd. ("SHSY"),Suzhou Gao Feng Hui Property Management Company, Ltd , ("SZGFH"),Suzhou Shang Yang Real Estate Consultation Company ("SZSY"),Suzhou Xin Ji Yang Real Estate Consultation Company, Ltd. ("SZXJY"),Linyi Shang Yang Real Estate Development Company Ltd ("LYSH"),Shangqiu Shang Yang Real Estate Consultation Company, Ltd. , ("SQSY"),Wuhan Gao Feng Hui Consultation Company Ltd. (WHGFH),Sanya Shang Yang Real Estate Consultation Company, Ltd. ("SYSH"),Shanghai Rui Jian Design Company, Ltd. , ("SHRJ"), andWuhan Yuan Yu Long Real Estate Development Company, Ltd. ("WHYYL") are sometimes hereinafter collectively referred to as "the Company", "we", "our" or "us".
The principal activities of the Company are real estate development and sales, real estate investments, property leasing services and property management services in the PRC.
20 Table of Contents RECENT DEVELOPMENTS Our major business is real estate agency sales, real estate marketing services, real estate investments, property leasing services, property management services, and real estate development in the PRC. Additionally, we expand our business to the field of financial activities such as entity investment, fund management, financial services and so on. Since we started our agency sales operations in 2001, we have established a reputation as a sales and marketing agency for new projects. With our accumulated expertise and experience, we intend to take a more aggressive role by participating in property investments. We plan to select property developers with outstanding qualifications as our strategic partners, and continue to build strength in design, planning, positioning and marketing services. InOctober 2011 , we established LYSY and own 34% of the company. During the first quarter of 2012, we acquired approximately 103,385 square meters for the purpose of developing villa-style residential housing. The LYSY project has divided into three phases. Phase 1 has completed construction of 121 units inMay 2015 and sold 119 units out of all 121 units at the end ofJuly 31, 2022 . Phase 2 was divided into north and south area and completed construction of 84 units at the end of 2020. All 84 units have been sold during phase 2 by the end ofJuly 31, 2022 . Phase 3 began construction in first quarter of 2021and pre-sold 20 units out of 51units as ofJuly 31, 2022 . InSeptember 2020 , the Company expanded the Linyi project by purchasing additional 54,312 square meters in the amount of228 million RMB for future development. OnMarch 13, 2014 , the Company signed a joint development agreement withZhongji Pufa Real Estate Co. ("SHGXL"). According to this agreement, the Company has obtained a right to develop the Guangxinglu ("GXL") project, located at 182 lane Guangxinglu, Putuo district,Shanghai , PRC. This project covers a site area of approximately 2,502 square meters for the development of one apartment building. In 2016, the government issued a regulation prohibiting the by-unit sale of commercial-use buildings. The apartment unit sale for the GXL project was put on hold until the government reviewed our project's status. During that time, we rented any unsold apartment units while not recognizing the units previously sold before the regulation. InMarch 2019 , we received government confirmation that our project cannot be sold on a unit-by-unit basis going forward. The Company decided to continue operating the project by renting the units. These unsold units are recognized as investment in properties in Note 8. We also recognized all the units that were sold before the regulation in our financial statement for the fiscal year endedDecember 31, 2019 . SHDEW was established inJune 2013 with its business as a skincare and cosmetic company. SHDEW's online Wechat stores had a membership of over ten million members as ofJuly 25, 2021 . SHDEW develops its own skincare products as well as improving its online ecommerce platform. SHDEW sells products under its own brands as well as the products from third parties. The products include skincare, cosmetics, personal care products such as soaps, shampoos, skin care devices and children's apparel. SHDEW has an online shopping app, "???," where consumers can purchase its cosmetics and skincare products as well as products imported intoChina . InOctober 2018 , HATX purchased the property in Huai'an, Qingjiang Pu district with an area of 78,030 square meters. InDecember 2018 , we established HAZB with a 78.46% ownership for the purpose of real estate investment and inMarch 2019 , HAZB purchased 100% of HATX and its land usage rights to the Huai'an property. The Huai'an project, namedTianxi Times , started its first phase development in early 2019 with a GFA of 82,218 sqm totaling 679 units, and started its second phase in 2020 with a GFA of 99,123 sqm totaling 873 units. As ofJuly 31, 2022 , the Company sold and pre-sold 506 units and 163 units, respectively, out of 679 units of the first phase and pre-sold 364 out of 873 of the second phase.
RECENTLY ADOPTED ACCOUNTING STANDARDS
InFebruary 2016 , the FASB issued ASU 2016-02 which establishes new accounting and disclosure requirements for leases. ASU No. 2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. ASU 2016-02 requires classification of all cash payments within operating activities in the statement of cash flows. Disclosures are required to provide the amount, timing and uncertainty of cash flows arising from leases. The Company adopted ASU 2016-02 in the first quarter of 2022 using the effective date approach to recognize and measure leases as of the adoption date. The Company has elected to utilize the available practical expedient to not separate lease components from non-lease components as well as the package of practical expedients that allows the Company not to reassess (1) whether any expired or existing contracts as of the adoption date are or contain a lease, (2) lease classification for any expired or existing leases as of the adoption date and (3) initial direct costs for any existing leases as of the adoption date. At the date of adoption onJanuary 1, 2022 , this guidance had no impact to the Company's condensed consolidated financial statements. 21
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InAugust 2020 , theFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, which, among other things, provides guidance on how to account for contracts on an entity's own equity. This ASU eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity's own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, this ASU modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. The amendments in this ASU are effective for the public companies for fiscal years beginning afterDecember 15, 2021 , including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning afterDecember 15, 2020 . The Company adopted this standard onJanuary 1, 2022 , which had no material impact to the Company's condensed consolidated financial statements.
NEW ACCOUNTING PRONOUNCEMENTS
Accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption. The Company does not discuss new accounting pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. These financial statements are prepared in accordance with generally accepted accounting principles inthe United States ("U.S. GAAP"), which requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities and revenues and expenses, to disclose contingent assets and liabilities on the date of the consolidated financial statements, and to disclose the reported amounts of revenues and expenses incurred during the financial reporting period. The most significant estimates and assumptions include revenue recognition, and the useful lives and impairment of property and equipment, and investment properties, the valuation of real estate property under development, the recognition of government subsidies, and the provisions for income taxes. We continue to evaluate these estimates and assumptions that we believe to be reasonable under the circumstances. We rely on these evaluations as the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We believe critical accounting policies as disclosed in this Form 10-Q reflect the more significant judgments and estimates used in preparation of our consolidated financial statements. We believe there have been no material changes to our critical accounting policies and estimates.
The following critical accounting policies rely upon assumptions and estimates and were used in the preparation of our condensed consolidated financial statements.
Revenue Recognition
Most of the Company's revenue is derived from real estate sales in the PRC. The majority of the Company's contracts contain a single performance obligation involving significant real estate development activities that are performed together to deliver a real estate property to customers. Revenues arising from real estate sales are recognized when or as the control of the asset is transferred to the customer. The control of the asset may transfer over time or at a point in time. For the sales of individual condominium units in a real estate development project, the Company has an enforceable right to payment for performance completed to date, revenue is recognized over time by measuring the progress towards complete satisfaction of that performance obligation. Otherwise, revenue is recognized at a point in time when the customer obtains control of the asset.
All revenues represent gross revenues less sales and business tax.
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ASC 606 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of the contract(s) which include (i) identifying the contract(s) with the customer, (ii) identifying the separate performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the separate performance obligations, and (v) recognizing revenue when each performance obligation is satisfied. ASC 606 also specifies the accounting for the incremental costs of obtaining a contract and the costs directly related to fulfilling a contract. In addition, ASC 606 requires extensive disclosures. The Company adopted ASC 606 onJanuary 1, 2018 using the modified retrospective approach with no restatement of comparative periods and no cumulative-effect adjustment to retained earnings recognized as of the date of adoption. A significant portion of the Company's revenue is derived from development and sales of condominium real estate property in the PRC, with revenue previously recognized using the percentage of completion method. Under the new standard, to recognize revenue over time similar to the percentage of completion method, contractual provisions need to provide the Company with an enforceable right to payment and the Company has no alternative use of the asset. Historically, all contracts executed contained an enforceable right to home purchase payments and the Company had no alternative use of assets, therefore, the adoption of ASC 606 did not have a material impact on the Company's consolidated financial statements.
Real Estate Property under Development
Real estate property under development, which consists of residential unit sites and commercial and residential unit sites under development, is stated at the lower of carrying amounts or fair value less selling costs. Expenditures for land development, including cost of land use rights, deed tax, pre-development costs and engineering costs, 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 value of units to the estimated total sales value times the total project costs. Costs of amenities transferred to buyers are allocated as common costs of the project that are allocated to specific units as a component of total construction costs. For amenities retained by the Company, costs in excess of the related fair value of the amenity are also treated as common costs. Results of operations of amenities retained by the Company are included in current operating results. In accordance with ASC 360, "Property, Plant and Equipment" ("ASC 360"), real estate property under development is subject to valuation adjustments when the carrying amount exceeds fair value. An impairment loss is recognized only if the carrying amount of the assets is not recoverable and exceeds fair value. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to be generated by the assets.
Income Taxes
The Company accounts for income taxes under ASC 740, Income Taxes. Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations. Deferred tax assets or liabilities were off-set by a 100% valuation allowance; therefore there has been no recognized benefit as ofJune 30, 2022 andDecember 31, 2021 .
RESULTS OF OPERATIONS
We provide the following discussion and analyses of our changes in financial condition and results of operations for the 3 months and 6 months period endedJune 30, 2022 with comparisons to the same periods endedJune 30, 2021 . 23 Table of Contents Revenue
The following table shows the net revenue detail by line of business:
Three Months Ended June 30, Six Months Ended June 30, 2022 % to total 2021 % to total % change 2022 % to total 2021 % to total % change Agency sales - - - - - - - - - (100) Property management 108,966 0.31 305,416 5.09
(64) 432,635 0.94 627,998 7.51 (31) House sales 34,948,572 99.69 5,699,917 94.91 513 45,447,301 99.06 7,738,936 92.49 487 Net revenues 35,057,538 100 6,005,333 100 484 45,879,936 100 8,366,934 100 448 The net revenue in the second quarter of 2022 was$35,057,538 , which increased 484% from$6,005,333 in the second quarter of 2021. The net revenue in the first two quarters of 2022 was$45,879,936 , which represented a increase of 448% from$8,366,934 , in the first two quarter of 2021. In the second quarter of 2022, property management, and house sales represented 0.31%, and 99.69% of our net revenues, respectively. For the first two quarters of 2022, property management, and house sales represented 0.94%, and 99.06% of our net revenues, respectively. The increase in net revenue in the first two quarter of 2022 was mainly due to we recognized the sales revenue of the Huaian project in the first quarter
of 2022. Property Management Property management represented 0.31% of our revenue for the first two quarters of 2022 and revenue from property management decreased by 64% compared with
the same period in 2021. House sales
For the first two quarters of 2022, the Company recognized revenue of house sales of Huaian project. House sales represented 99.69% of our revenue for the first two quarters of 2022.
Cost of Revenue
The following table shows the cost of revenue detail by line of business:
Three Months Ended June 30, Six Months Ended June 30, 2022 % to total 2021 % to total % change 2022 % to total 2021 % to total % change Agency sales - - - - (100) - - - - (100) Property management 392,400 1.29 419,213 8.04 (6) 792,132 1.94 809,343 10.89 (2) House sales 30,089,273 98.71 4,797,953 91.96 527 399,529,224 98.06 6,621,144 89.11 503 Cost of revenues 30,481,673 100 5,217,166 100 484 40,745,054 100 7,430,487 100 448 The cost of revenues for the second quarter of 2022 was$30,481,673 , which increased 484% from$5,217,166 during the second quarter of 2021. The cost of revenues for the first two quarters of 2022 was$40,745,054 , which increased 448% from$7,40,487 during the first two quarters of 2021. For the second quarter of 2022, property management, and house sales represented 1.29%, and 98.71% of our cost of revenues, respectively. For the first two quarters of 2022, property management, and house sales represented 1.94%, and 98.06% of our cost of revenues, respectively. The increase in the cost of revenue in the second quarter and first two quarter of 2022 was mainly cost of revenue was recognized of Huaian project for house sales.
Property management
The cost of revenue for property management for the first two quarters of 2022 was$792,132 , a decrease of 2% from$809,343 for the same period in 2021. This was mainly due to less business for the property management. 24 Table of Contents House sales
For the first two quarters of 2022, the Company recognized cost of revenue for house sales of the Huaian project. House sales represented 98.06% of our cost of revenue for the first two quarters of 2022.
Operating Expenses
The following table shows the operating expenses detail by line of business: Three Months Ended June 30, Six Months Ended June 30, 2022 % to total 2021 % to total % change 2022 % to total 2021 % to total % change Agency sales - - - - (100) - - - - (100) Property management 14,611 5.84 321,999 37.66 (95) 436,929 45.87 518,190 27.10 (15) House sales 235,672 94.16 532,956 62.34 (56) 515,656 54.13 1,393,996 72.90 (63) Operating expenses 250,283 100 854,955 100 (70) 952,585 100 1,912,086 100 (50)
The operating expenses for the second quarter of 2022 were$250,283 , which decreased 70% from$854,955 for the same period in 2021. The total operating expenses for the first two quarters of 2022 were$952,585 , which decreased 50% from$1,912,086 for the same period in 2021. In the second quarter of 2022, property management, and house sales represented 37.66%, and 62.34% of the total operating expenses, respectively. For the first two quarters of 2022, property management, and house sales represented 45.87%, 54.13% of the total operating expenses, respectively. The decrease in the overall operating expense resulted from the decrease in house sales for the second quarter and the first two quarters of 2022.
Property management
The operating expenses for property management for the first two quarters of 2022 were$436,929 , a decrease of 15% from$518,190 in the same period in 2021. The decrease is mainly due to consulting expenses relating to the business
in the period in 2022. House sales
The operating expenses for house sales for the first two quarters of 2022 were
General and Administrative Expenses
General and administrative expenses for the first two quarters of 2022 were
Other income, net
Other income, net for the first two quarters of 2022 was the loss of$1,776,436 , an decrease of 453% from the income$502,985 for the same period in 2021. The income decreased mainly due to the paper loss of our stock market investment.
Major Related Party Transaction
A related party is an entity that can control or significantly influence the management or operating policies of another entity to the extent one of the entities may be prevented from pursuing its own interests. A related party may also be any party the entity deals with that can exercise that control. 25 Table of Contents Amount due to directors
The total amount due to directors as of
Amount due toLin Chi-Jung
The balances due to
Amount due to
The amount of
Amount due to affiliate
The amounts due to SHSJ and JXSY, in the amounts of
LIQUIDITY AND CAPITAL RESOURCES
For the first two quarters of 2022, our principal sources of cash were revenues from our house sales collection and property management business, as well as the dividend receipt from the affiliates. Most of our cash resources were used to fund our property development investment and revenue related expenses, such as salaries and commissions paid to the sales force, daily administrative expenses and the maintenance of regional offices.
We ended the period with a cash position of
The Company's operating activities used cash in the amount of
The Company's investing activities used cash resources of
The Company's financing activities provided cash resources of
The potential cash needs for 2022 include the investment in transactional financial assets, the rental guarantee payments and promissory deposits for various property projects as well as our development of the Linyi project and the Huai'an project.
Capital Resources Considering our cash position, available credit facilities and cash generated from operating activities, we believe that we have sufficient funds to operate our existing business for the next twelve months. If our business otherwise grows more rapidly than we currently predict, we plan to raise funds through the issuance of additional shares of our equity securities in one or more public or private offerings. We will also consider raising funds through credit facilities obtained with lending institutions. There can be no guarantee that we will be able to obtain such funds through the issuance of debt or equity or obtain funds that are with terms satisfactory to management and our board of directors.
OFF BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements.
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