NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND DESCRIPTION
OF BUSINESS
Sunrise Real Estate Group, Inc. (“SRRE”)
and its subsidiaries (collectively referred to as “the Company”, “our” or “us”) was incorporated
in Texas on October 10, 1996, under the name of Parallax Entertainment, Inc. (“Parallax”). On December 12, 2003, Parallax
changed its name to Sunrise Real Estate Development Group, Inc. On April 25, 2006, Sunrise Estate Development Group, Inc. filed
Articles of Amendment with the Texas Secretary of State, changing the name of Sunrise Real Estate Development Group, Inc. to Sunrise
Real Estate Group, Inc., effective from May 23, 2006.
As of December 31, 2012, the Company has
the following major subsidiaries and equity investment.
Company Name
|
|
Date of
Incorporation
|
|
Place of
Incorporation
|
|
% of
Ownership
held by the
Company
|
|
Relationship
with the
Company
|
|
Principal activity
|
|
Sunrise Real Estate
Development Group, Inc. (CY-SRRE)
|
|
April 30, 2004
|
|
Cayman Islands
|
|
100%
|
|
Subsidiary
|
|
Investment holding
|
|
Lin Ray Yang Enterprise Limited (“LRY”)
|
|
November 13, 2003
|
|
British Virgin Islands
|
|
100%
|
|
Subsidiary
|
|
Investment holding
|
|
Shanghai Xin Ji Yang
Real Estate Consultation Company Limited (“SHXJY”)
|
|
August 20, 2001
|
|
PRC
|
|
100%
|
|
Subsidiary
|
|
Property brokerage services
|
|
Shanghai Shang Yang
Real Estate consultation Company Limited (“SHSY”)
|
|
February 5, 2004
|
|
PRC
|
|
100%
|
|
Subsidiary
|
|
Property brokerage services
|
|
Suzhou Gao Feng Hui
Property Management Company Limited (“SZGFH”)
|
|
January 10, 2005
|
|
PRC
|
|
100%
|
|
Subsidiary
|
|
Property management and leasing services
|
|
Suzhou Shang Yang Real
Estate Consultation Company Limited (“SZSY”)
|
|
November 24, 2006
|
|
PRC
|
|
38.5%*
|
|
Subsidiary
|
|
Property brokerage and management services
|
|
Suzhou Xi Ji Yang Real
Estate Consultation Company Limited (“SZXJY”)
|
|
June 25, 2004
|
|
PRC
|
|
75%
|
|
Subsidiary
|
|
Property brokerage services
|
|
Linyi Shangyang Real
Estate Development Company Limited (“LYSY”)
|
|
October 13, 2011
|
|
PRC
|
|
24%**
|
|
Subsidiary
|
|
Real estate development
|
|
Shangqiu Shang Yang
Real Estate Consultation Company Limited (“SQSY”)
|
|
October 20, 2010
|
|
PRC
|
|
100%
|
|
Subsidiary
|
|
Property brokerage services
|
|
Wuhan Gao Feng Hui Consultation
Company Limited (“WHGFH”)
|
|
November 10, 2010
|
|
PRC
|
|
60%
|
|
Subsidiary
|
|
Property brokerage services
|
|
Sanya Shang Yang Real
Estate Consultation Company Limited (“SYSY”)
|
|
September 18, 2008
|
|
PRC
|
|
100%
|
|
Subsidiary
|
|
Property brokerage services
|
|
Shanghai Rui Jian Design
Company Limited (“SHRJ”)
|
|
August 15, 2011
|
|
PRC
|
|
100%
|
|
Subsidiary
|
|
Property brokerage services
|
|
Linyi Rui Lin Construction
and Design Company Limited (“LYRL”)
|
|
March 6, 2012
|
|
PRC
|
|
100%
|
|
Subsidiary
|
|
Investment holding
|
|
Putian Xin Ji Yang Real
Estate Consultation Company Limited (“PTXJY”)
|
|
June 5, 2012
|
|
PRC
|
|
100%
|
|
Subsidiary
|
|
Property brokerage services
|
|
Wuhan Yuan Yu Long Real
Estate Development Company Limited (“WHYYL”)
|
|
December 28, 2009
|
|
PRC
|
|
49%
|
|
Equity investment
|
|
Real estate development
|
|
|
*
|
The Company and a shareholder
of SZSY, which holds 12.5% equity interest in SZSY, entered into
a voting agreement that the Company is entitled to exercise the
voting rights in respect of the shareholder’s 12.5% equity
interest in SZSY. The Company effectively holds 51% voting rights
in SZSY and therefore considers SZSY as a subsidiary of the Company.
|
|
**
|
The Company and a shareholder of LYSY,
which holds 51% equity interest in LYSY, entered into a voting agreement
that the Company is entitled to exercise the voting rights in respect
of her 51% equity interest in LYSY. The Company effectively holds 75%
voting rights in LYSY and therefore considers LYSY as a subsidiary
of the Company.
|
CY-SRRE was established in the Cayman
Islands on April 30, 2004 as a limited liability company. CY-SRRE was wholly owned by Ace Develop Properties Limited (“Ace
Develop”), a corporation, of which Lin Chi-Jung, an individual, is the principal and controlling shareholder. SHXJY was
established in the People’s Republic of China (the “PRC”) on August 20, 2001 as a limited liability company.
SHXJY was originally owned by a Taiwanese company, of which the principal and controlling shareholder was Lin Chi-Jung. On June
8, 2004, all the fully paid up capital of SHXJY was transferred to CY-SRRE. On June 25, 2004 SHXJY and two individuals established
a subsidiary, SZXJY in the PRC, at which point in time, SHXJY held a 90% equity interest in SZXJY. On August 9, 2005, SHXJY sold
a 10% equity interest in SZXJY to a company owned by a director of SZXJY, and transferred a 5% equity interest in SZXJY to CY-SRRE.
Following the disposal and the transfer, CY-SRRE effectively held an 80% equity interest in SZXJY.
LRY was established in the British Virgin
Islands on November 13, 2003 as a limited liability company. LRY was owned by Ace Develop, Planet Technology Corporation (“Planet
Tech”) and Systems & Technology Corporation (“Systems Tech”). On February 5, 2004, LRY established a wholly
owned subsidiary, SHSY in the PRC as a limited liability company.
On August 31, 2004, SRRE, CY-SRRE and
Lin Chi-Jung, an individual and agent for the beneficial shareholder of CY-SRRE, i.e., Ace Develop, entered into an exchange agreement
under which SRRE issued 5,000,000 shares of common stock to the beneficial shareholder or its designees, in exchange for all outstanding
capital stock of CY-SRRE. The transaction closed on October 5, 2004. Lin Chi-Jung is Chairman of the Board of Directors of SRRE,
the President of CY-SRRE and the principal and controlling shareholder of Ace Develop.
Also on August 31, 2004, SRRE, LRY and
Lin Chi-Jung, an individual and agent for beneficial shareholders of LRY, i.e., Ace Develop, Planet Tech and Systems Tech, entered
into an exchange agreement under which SRRE issued 10,000,000 shares of common stock to the beneficial shareholders, or their
designees, in exchange for all outstanding capital stock of LRY. The transaction was closed on October 5, 2004. Lin Chi-Jung is
Chairman of the Board of Directors of SRRE, the President of LRY and the principal and controlling shareholder of Ace Develop.
Regarding the 10,000,000 shares of common stock of SRRE issued in this transaction, SRRE issued 8,500,000 shares to Ace Develop,
750,000 shares to Planet Tech and 750,000 shares to Systems Tech.
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
for Securities and Exchange Commission reporting purposes. All shares and per share data prior to the acquisition have been restated
to reflect the stock issuance as a recapitalization of CY-SRRE and LRY.
On January 10, 2005, LRY and a PRC third
party established a subsidiary, SZGFH, a limited liability company in the PRC, with LRY holding 80% of the equity interest in
SZGFH. On May 8, 2006, LRY acquired 20% of the equity interest in SZGFH from the third party. Following the acquisition, LRY effectively
holds 100% of the equity interest in SZGFH.
On November 24, 2006, CY-SRRE, SHXJY,
a shareholder of SZXJY and a third party established a subsidiary, SZSY in the PRC, with CY-SRRE holding a 12.5% equity interest,
SHXJY holding a 26% equity interest and the shareholder of SZXJY holding a 12.5% equity interest in SZSY. At the date of incorporation,
SRRE and the shareholder of SZXJY entered into a voting agreement that SRRE is entitled to exercise the voting right in respect
of its 12.5% equity interest in SZSY. Following that, SRRE effectively holds 51% voting rights in SZSY.
On September 24, 2007, CY-SRRE sold a
5% equity interest in SZXJY to a company owned by a director of SZXJY. Following the disposal, CY-SRRE effectively holds 75% equity
interest in SZXJY.
In January 2011, SYSY acquired 49% equity
interest in a project company in the PRC, WHYYL to expand its operations to real estate development business. WHYYL is developing
a real estate project in Wuhan, the PRC on a parcel of land covering approximately 27,950 square meters with an estimated construction
period of 3 years. The Company accounts for this investment using the equity method.
On October 13, 2011, SHXJY, four individual
investors and an unrelated company established a project company in the PRC, namely LYSY to develop villa-style residential housing
buildings with an estimated construction period of 4 years. SHXJY holds 24% equity interest in LYSY. At the date of its incorporation,
SRRE and an individual shareholder holding 51% equity interest in LYSY entered into a voting agreement that the Company is entitled
to exercise the voting right of her 51% equity interest in LYSY. The Company effectively holds 75% voting rights in LYSY and considers
LYSY as a subsidiary of the Company.
On March 6, 2012, SHXJY established a
subsidiary in the PRC, LYRL. The equity interest in LYRL is held by three Chinese individual in trust for SHXJY. At the date its
incorporation, SHXJY transferred its 24% equity interest in LYSY to LYRL.
The principal activities of the Company
are property brokerage services, including property marketing, leasing and management services; and real estate development in
the PRC.
NOTE 2 –SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of Accounting and Principles
of Consolidation
The Company’s consolidated financial
statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S.
GAAP”).
The consolidated financial statements
include the financial statements of Sunrise Real Estate Group, Inc. and its subsidiaries. All significant inter-company accounts
and transactions have been eliminated on consolidation.
Investments in business entities, in which
the Company does not have control but has the ability to exercise significant influence over operating and financial policies,
are accounted for using the equity method.
Going Concern
The Company’s consolidated financial
statements have been prepared on a going concern, which contemplates the realization of assets and satisfaction of liabilities
and commitments in the normal course of business. As of December 31, 2012, the Company has a working capital deficiency, accumulated
deficit from recurring net losses for the current and prior years, and significant short-term debt obligations currently in default
or maturing in less than one year. These factors raise substantial doubts about the Company’s ability to continue as a going
concern.
Management believes that the Company will
generate sufficient cash flows to fund its operations and to meet its obligations on timely basis for the next twelve months by
successful implementation of its business plans, obtaining continued support from its lenders to rollover debts when they became
due, and securing additional financing as needed. If events or circumstances occur that the Company is unable to successfully
implement its business plans, fails to obtain continued supports from its lenders or to secure additional financing, the Company
may be required to suspend operations or cease business entirely.
The accompanying financial statements
do not include any adjustments related to the recoverability and classification of assets or the amounts and classifications of
liabilities that might be necessary should the Company be unable to continue as a going concern.
Use of Estimates
The preparation of financial statements
in accordance with U.S GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company follows the provisions of
Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures (“ASC 820”). It
clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to
classify the inputs used in measuring fair value as follows:
Level 1-Inputs are unadjusted quoted prices
in active markets for identical assets or liabilities available at the measurement date.
Level 2-Inputs are unadjusted quoted prices
for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets
that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable
market data.
Level 3-Inputs are unobservable inputs
which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the
asset or liability based on the best available information.
The carrying amounts reported in the accompanying
consolidated balance sheets for cash and cash equivalents, restricted cash, accounts receivable, promissory deposits, amount due
from an unconsolidated affiliate, other receivables and deposits, deferred tax assets, bank loans, promissory notes payable, accounts
payable, amounts due to directors, other payables and accrued expenses, other taxes payable and income taxes payable approximate
their fair value based on the short-term maturity of these instruments. The fair value of the deposits received from underwriting
sales approximate their carrying amounts because the deposits were received in cash.
Concentrations of Credit Risk
Financial instruments that potentially
expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, accounts
receivable, other receivables and deposits. The Company places its cash and cash equivalents with reputable financial institutions
with high credit ratings.
The Company conducts credit evaluations
of customers and generally does not require collateral or other security from customers. The Company establishes an allowance
for doubtful accounts primarily based upon the age of the receivables and factors relevant to determining the credit risk of specific
customers. The amount of receivables ultimately not collected by the Company has generally been consistent with management's expectations
and the allowance established for doubtful accounts.
Major Customers
During the years ended December 31, 2012
and 2011, there was no customer that accounted for more than 10% of our net revenue
Cash and Cash Equivalents
Cash and cash equivalents include cash
on hand and all highly liquid investments with an original maturity of three months or less.
The Company maintains cash and cash equivalents
with various banks in the PRC which are not insured or otherwise protected. Should any of these banks holding the Company’s
cash deposits become insolvent, or if the Company is otherwise unable to withdraw funds for any reason, the Company could lose
the cash on deposit with that particular bank.
Foreign Currency Translation and Transactions
The functional currency of SRRE, CY-SRRE
and LRY is U.S. dollars (“$”) and their financial records are maintained and the financial statements prepared in
U.S. dollars. The functional currency of the Company’s subsidiaries and affiliate in China is Renminbi (“RMB”)
and their financial records and statements are maintained and prepared in RMB.
Foreign currency transactions during the
year are translated into each company’s denominated currency at the exchange rates ruling at the transaction dates. Gain
and loss resulting from foreign currency transactions are included in the consolidated statement of operations. Assets and liabilities
denominated in foreign currencies at the balance sheet date are translated into each company’s denominated currency at year-end
exchange rates. All exchange differences are dealt with in the consolidated statements of operations.
The financial statements of the Company’s
operations based outside of the United States have been translated into U.S. dollars in accordance with ASC 830. Management has
determined that the functional currency for each of the Company’s foreign operations is its applicable local currency. When
translating functional currency financial statements into U.S. dollars, year-end exchange rates are applied to the consolidated
balance sheets, while average exchange rates as to revenues and expenses are applied to consolidated statements of operations.
The effect of foreign currency translation adjustments are included as a component of accumulated other comprehensive income in
shareholders’ equity.
The exchange rates as of December 31,
2012 and December 31, 2011 are $1: RMB6.2855 and $1: RMB6.3009, respectively.
The RMB is not freely convertible into
foreign currency and all foreign exchange transaction must take place through authorized institutions. No representation is made
that the RMB amounts could have been, or could be, converted into U.S. dollars at the rate used in translation.
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.
For the years ended December 31, 2012
and 2011, the Company had not recognized any impairment for real estate property under development.
Property and Equipment, Net
Property and equipment are stated at cost
less accumulated depreciation and any impairment losses. Depreciation is computed using the straight-line method to allocate the
cost of depreciable assets over the estimated useful lives of the assets as follows:
|
|
Estimated
Useful Life
(in years)
|
|
|
|
|
|
Furniture and fixtures
|
|
|
5-10
|
|
Computer and office equipment
|
|
|
5
|
|
Motor vehicles
|
|
|
5
|
|
Properties
|
|
|
20
|
|
Maintenance, repairs and minor renewals
are charged directly to the statement of operations as incurred. Additions and improvements are capitalized. When assets are disposed
of, the related cost and accumulated depreciation thereon are removed from the accounts and any resulting gain or loss is included
in the statement of operations.
Investment Properties, net
Investment properties are stated at cost
less accumulated depreciation and any impairment losses. Depreciation is computed using the straight-line method to allocate the
cost of depreciable assets over their respective estimated useful lives of 20 years.
Significant additions that extend property
lives are capitalized and are depreciated over their respective estimated useful lives. Routine maintenance and repair costs are
expensed as incurred.
Impairment of Long-lived Assets
In accordance with ASC 360, "Accounting
for the Impairment or Disposal of Long-Lived Assets" (“ASC 360”), the Company is required to review its long-lived
assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable
through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever
any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair
value.
The Company tests long-lived assets, including
property and equipment, investment properties and other assets, for recoverability when events or circumstances indicate that
the net carrying amount is greater than its fair value. Assets are grouped and evaluated at the lowest level for their identifiable
cash flows that are largely independent of the cash flows of other groups of assets. The Company considers historical performance
and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the
future estimated cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated
expected undiscounted future cash flows, the Company measures the amount of impairment by comparing the carrying amount of the
asset to its fair value. The estimation of fair value is generally determined by using the asset's expected future discounted
cash flows or market value. The Company estimates fair value of the assets based on certain assumptions such as budgets, internal
projections, and other available information as considered necessary. There is no impairment of long-lived assets during the years
ended December 31, 2012 and 2011.
Long Term Investments
The Company accounts for long term investments
in equities as follows.
Investment in Unconsolidated affiliates
Affiliates are entities over which the
Company has significant influence, but which it does not control. The Company generally considers an ownership interest of 20%
or higher to represent significant influence. Investments in unconsolidated affiliates are accounted for by the equity method
of accounting. Under this method, the Company’s share of the post-acquisition profits or losses of affiliates is recognized
in the income statement and its shares of post-acquisition movements in other comprehensive income are recognized in other comprehensive
income. Unrealized gains on transactions between the Company and its affiliates are eliminated to the extent of the Company’s
interest in the affiliates; unrealized losses are also eliminated unless the transaction provides evidence of an impairment of
the asset transferred.
When the Company’s share of losses
in an affiliate equals or exceeds its interest in the affiliate, the Company does not recognize further losses, unless the Company
has incurred obligations or made payments on behalf of the affiliate.
The Company is required to perform an
impairment assessment of its investments whenever events or changes in business circumstances indicate that the carrying value
of the investment may not be fully recoverable. An impairment loss is recorded when there has been a loss in value of the investment
that is other than temporary. The Company recorded any impairment losses in any of the periods reported.
Other Investments
Where the Company has no significant influence,
the investment is classified as other assets in the balance sheet and is carried under the cost method. Investment income is recognized
by the Company when the investee declares a dividend and the Company believes it is collectible. The Company periodically evaluates
the carrying value of its investment under the cost method and any decline in value is included in impairment of cost of the investment.
Government Subsidies
Government subsidies include cash subsidies
received by the Company’s subsidiaries in the PRC from local governments.
In recognizing the benefit of government
subsidies in accordance with U.S. GAAP, the Company considers intended use of and restrictions of the subsidy, the requirements
for the receipt of funds, and whether or not the incentive is given for immediate financial support, or to encourage activities
such as land development in specified area. Each grant is evaluated to determine the propriety of classification on the consolidated
statements of operations and consolidated balance sheets. Those grants that are substantively reimbursements of specified costs
are matched with those costs and recorded as a reduction in costs. Those benefits that are more general in nature or driven by
business performance measures are classified as revenue.
During the year ended December 31, 2012
and 2011, the Company received refundable government subsidy of $5,252,173 and $0, respectively. The subsidy is given to reimburse
the land acquisition costs and certain construction costs incurred for the Company’s property development project in Linyi,
and is repayable if the Company fails to complete the subsidized property development project before the agreed date. The Company
recorded the subsidy received as a deferred government subsidy.
Revenue Recognition
Agency commission revenue from property
brokerage is recognized when the property developer and the buyer complete a property sales transaction, and the property developer
grants confirmation to us to be able to invoice them accordingly. The time when we receive the commission is normally at the time
when the property developer receives from the buyer a portion of the sales proceeds in accordance with the terms of the relevant
property sales agreement, or the balance of the bank loan to the buyer has been funded, or recognized under the sales schedule
or other specific items of agency sales agreement with developer. At no point does the Company handle any monetary transactions
nor act as an escrow intermediary between the developer and the buyer.
Revenue from marketing consultancy services
is recognized when services are provided to clients, fees associated to services are fixed or determinable, and collection of
the fees is assured.
Rental revenue from property management
and rental business is recognized on a straight-line basis according to the time pattern of the leasing agreements.
The Company accounts for underwriting
sales in accordance with ASC 976-605 “Accounting for Sales of Real Estate” (Formerly Statement of Financial Accounting
Standards No. 66) (“ASC 976-605”). The commission revenue on underwriting sales is recognized when sales have been
consummated, generally when title is transferred and the Company no longer has substantial continuing involvement with the real
estate asset sold. If the Company provides certain rent guarantees or other forms of support where the maximum exposure to loss
exceeds the gain, it defers the related commission income and expenses by applying the deposit method. In future periods, the
commission income and related expenses are recognized when the remaining maximum exposure to loss is reduced below the amount
of income deferred.
All revenues represent gross revenues
less sales and business tax.
Comprehensive Income (Loss)
In accordance with ASC 220-10-55, comprehensive
income (loss) is defined as all changes in equity except those resulting from investments by owners and distributions to owners.
The Company’s only components of comprehensive loss during the years ended December 31, 2012 and 2011 were net loss and
foreign currency translation adjustments.
Net Earnings (Loss) per Common Share
The Company computes net earnings (loss)
per share in accordance with ASC 260, “Earnings per Share” (“ASC 260”). Under the provisions of ASC 260,
basic net earnings (loss) per share is computed by dividing net earnings (loss) available to common shareholders for the period
by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net earnings
(loss) per share recognizes common stock equivalents, however; potential common stock in the diluted EPS computation is excluded
in net loss periods, as their effect is anti-dilutive.
Advertising expenses
Advertising costs are expensed as incurred.
For the years ended December 31, 2012 and 2011, the Company recorded advertising expenses of $60,480 and $2,007, respectively.
Income Taxes
The Company accounts for income taxes
in accordance with ASC 740, “Income Taxes” (“ASC 740”), which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences
between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax
laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation
allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The Company recognizes tax benefits that
satisfy a greater than 50% probability threshold and provides for the estimated impact of interest and penalties for such tax
benefits. The Company did not incur any interest or penalties related to potential underpaid income tax expenses during the years
ended December 31, 2012 and 2011
Reclassifications
We have reclassified certain items in
the consolidated financial statements for prior periods to be comparable with the classification for the year ended December 31,
2012.
Recently Adopted Accounting Standards
In May 2011, the Financial Accounting
Standard Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2011-04, Topic 820 - Fair Value
Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial
Reporting Standards (“IFRSs”) (“ASU 2011-04”). The amendments establish common requirements for measuring
fair value and related disclosures in accordance with U.S.GAAP and IFRSs. This amendment did not require additional fair value
measurements. ASU 2011-04 became for the first interim and annual periods beginning after December 15, 2011, and should be applied
prospectively. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
In June 2011, the FASB issued ASU No.
2011-05, Topic 220 - Comprehensive Income: Presentation of Comprehensive Income (“ASU 2011-05”). The amendments eliminate
the option of presenting the components of other comprehensive income as part of the statement of changes in stockholders' equity,
require consecutive presentation of the statement of net income and other comprehensive income and require reclassification adjustments
from other comprehensive income to net income to be shown on the financial statements. In December 2011, the FASB issued ASU No.
2011-12, Topic 220 - Comprehensive Income: Deferral of the Effective Date for Amendments to the Presentation of Reclassifications
of Items out of Accumulated Other Comprehensive Income in ASU 2011-05 (“ASU 2011-12”) to defer the effective date
of the provision requiring entities to present reclassification adjustments out of accumulated other comprehensive income by component
in both the statement in which net income is presented and the statement in which other comprehensive income is presented. However,
the remaining requirements of ASU 2011-05 became for the first interim and annual periods beginning after December 15, 2011. The
adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
In
September 2011, the FASB issued ASU No. 2011-08, Topic 350 - Intangibles - Goodwill and Other: Testing Goodwill for Impairment
(“ASU 2011-08”), which amends current guidance to allow a company to first assess qualitative factors to determine
whether it is necessary to perform the two-step quantitative goodwill impairment test. The amendment also improves previous guidance
by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining
whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. ASU 2011-08 became
for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of
this guidance did not have a material impact on the Company’s consolidated financial statements
.
New Accounting Pronouncements Not Yet
Adopted
In December 2011, the FASB issued ASU
No. 2011-11, Topic 210 - Balance Sheet: Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). ASU 2011-11
requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements
to understand the effect of those arrangements on its financial position. ASU 2011-11 will be effective for fiscal years beginning
on or after January 1, 2013, with retrospective application for all comparable periods presented. The Company does not expect
the adoption of this guidance to have a material effect on the Company’s consolidated financial statements.
In February 2013, the FASB issued ASU
2013-12, Topic 220 - Accumulated Other Comprehensive Income (“ASU 2013-02”). ASU 2013-02 changes the presentation
requirements of significant reclassifications out of accumulated other comprehensive income in their entirety and their corresponding
effect on net income. For other significant amounts that are not required to be reclassified in their entirety, the standard requires
the company to cross-reference to related footnote disclosures. ASU 2013-02 became effective for the company on January 1, 2013.
The Company does not expect the adoption of this guidance to have a material effect on the Company’s consolidated financial
statements.
In March 2013, the FASB issued ASU 2013-05
Topic 830 – Foreign Currency Matters (“ASU 2013-05”). ASU 2013-05 resolves the diversity in practice about whether
Subtopic 810-10, Consolidation—Overall, or Subtopic 830-30, ASU 2013-05 applies to the release of the cumulative translation
adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a
controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale
of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. In addition, the amendments
in this Update resolve the diversity in practice for the treatment of business combinations achieved in stages (sometimes also
referred to as step acquisitions) involving a foreign entity. ASU 2013-02 became effective for the company prospectively for fiscal
years (and interim reporting periods within those years) beginning after December 15, 2013. The Company does not expect the adoption
of this guidance to have a material effect on the Company’s consolidated financial statements.
NOTE 3 – RESTRICTED CASH
The Company is required to maintain certain
deposits with the bank that provide mortgage loans to the Company. As of December 31, 2012 and 2011, the Company held cash deposits
of $1,352,319 and $1,349,014, respectively, as security for its bank loans (see Note 11). These balances are subject to withdrawal
restrictions and are not covered by insurance.
NOTE 4- PROMISSORY DEPOSITS
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
Promissory deposits paid to property developers (Note a)
|
|
$
|
1,038,899
|
|
|
$
|
1,226,809
|
|
Auction deposit (Note b)
|
|
|
-
|
|
|
|
2,317,129
|
|
|
|
$
|
1,038,899
|
|
|
$
|
3,543,938
|
|
|
(a)
|
Promissory deposits are paid to property developers in respect
of the real estate projects where the Company has been appointed
as sales agent. The balances are unsecured, interest free and recoverable
on completion of the respective projects.
|
|
(b)
|
In the year ended December 31, 2011, the Company paid an auction
deposit of $2,317,129 in relation to its property development project
in Linyi, the PRC. During the year ended December 31, 2012, the Company
has acquired the related land use right and the deposit has been
returned to the Company.
|
NOTE 5 – REAL ESTATE PROPERTY
UNDER DEVELOPMENT
Real estate property under development
represents the Company’s real estate development project in Linyi, the PRC (“Linyi Project”), which is located
on the junction of Xiemen Road and Hongkong Road in Linyi City Economic Development Zone, Shandong Province, PRC. This project
covers a site area of approximately 103,385 square meters for the development of villa-style residential housing buildings. The
Company acquired the site in the first quarter of 2012, and commenced construction of this project in mid 2012.
As of December 31, 2012, land use rights
included in real estate property under development totaled $11,531,286.
NOTE 6 - OTHER RECEIVABLES AND DEPOSITS
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
Advances to staff
|
|
$
|
40,477
|
|
|
$
|
65,632
|
|
Rental deposits
|
|
|
44,154
|
|
|
|
99,927
|
|
Prepayment related to Linyi Project
|
|
|
-
|
|
|
|
482,219
|
|
Other receivables
|
|
|
269,144
|
|
|
|
216,035
|
|
|
|
$
|
353,775
|
|
|
$
|
863,813
|
|
Other receivables and deposits as of December
31, 2012 and 2011 are stated net of allowance for doubtful accounts of $73,864 and $0, respectively.
NOTE 7 – PROPERTY AND EQUIPMENT
,
NET
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
Furniture and fixtures
|
|
$
|
354,446
|
|
|
$
|
77,292
|
|
Computer and office equipment
|
|
|
281,975
|
|
|
|
242,346
|
|
Motor vehicles
|
|
|
761,702
|
|
|
|
789,943
|
|
Properties
|
|
|
9,367,650
|
|
|
|
2,399,866
|
|
|
|
|
10,765,773
|
|
|
|
3,509,447
|
|
Less: Accumulated depreciation
|
|
|
(1,462,512
|
)
|
|
|
(1,103,618
|
)
|
|
|
$
|
9,303,261
|
|
|
$
|
2,405,829
|
|
Depreciation and amortization expense
for property and equipment amounted to $454,382 and $402,545 for the years ended December 31, 2012 and 2011, respectively.
All properties as of December 31, 2012 and
2011 were pledged as collateral for the Company’s bank loans (See Note 11).
NOTE 8 – INVESTMENT PROPERTIES,
NET
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
Investment properties
|
|
$
|
9,851,376
|
|
|
$
|
9,827,298
|
|
Less: Accumulated depreciation
|
|
|
(3,449,907
|
)
|
|
|
(2,906,766
|
)
|
|
|
$
|
6,401,469
|
|
|
$
|
6,920,532
|
|
Depreciation and amortization expense
for investment properties amounted to $536,019 and $523,785 for the years ended December 31, 2012 and 2011, respectively.
All investment properties as of December
31, 2012 and 2011 were pledged as collateral for the Company’s bank loans (See Note 11).
NOTE 9 – INVESTMENT IN AND AMOUNT
DUE FROM AN UNCONSOLIDATED AFFILIATE
In January 2011, the Company invested
$4,147,027 for acquiring 49% equity interest in WHYYL to expand its operations to real estate development business. WHYYL is developing
a real estate project in Wuhan, the PRC on a parcel of land covering approximately 27,950 square meters with a 3-year planned
construction period. The Company has accounted for this investment using the equity method as the Company has the ability to exercise
significant influence over their activities.
As of December 31, 2012, the investment
in WHYYL was $4,316,031, which included its equity in net loss of WHYYL, net of income taxes, totaling $230,490 for the year.
The following table sets forth the financial information of WHYYL.
|
|
For the year ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
470,387
|
|
|
$
|
-
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
Current assets
|
|
$
|
19,387,419
|
|
|
$
|
8,663,870
|
|
Non-current assets
|
|
|
298,872
|
|
|
|
-
|
|
Total assets
|
|
|
19,686291
|
|
|
|
8,663,870
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
11,674,515
|
|
|
|
-
|
|
Total equity
|
|
$
|
8,011,776
|
|
|
$
|
8,663,870
|
|
As of December 31, 2012, the Company has
a balance of $4,316,031 due from WHYYL, which bears interest at a rate of 15% per annum, is unsecured and has no fixed term of
repayment. During the year ended December 31, 2012, the Company recorded interest income of $177,295 from WHYYL.
During the year ended December 31, 2012
and 2011, the Company had no impairment loss for investment in an unconsolidated affiliate.
NOTE 10 – OTHER INVESTMENTS,
NET
As of December 31, 2012 and 2011, investments
accounted using the cost method consist of various companies engaging in real estate agency or property related services.
During the year ended December 31, 2012
and 2011, the Company recorded no income from its other investments, and recorded allowances of impairment loss on other investments
of $136,060 and $0, respectively.
NOTE 11 – BANK LOANS
In August 2012, the Company entered into
a 3-year revolving facility line of credit agreement with First Sino Bank. Under the terms of the agreement, the Company could
borrow a maximum amount of $5,695,649 (RMB35,800,000) as of December 31, 2012. The borrowings under this facility bear interest
at a rate per annum equal to 125% of the prevailing base lending rate for periods ranging from 1 year to 3 years as announced
by the People’s Bank of China (“PBOC”). The average interest rate for the year ended December 31, 2012 was 7.6875%
per annum. The facility of credit is secured by all of the Company’s properties included in property and equipment (See
Note 7) and the restricted cash of $1,352,318 (See Note 3), guaranteed by a director of the Company, and matures on March 31,
2015. Borrowings under this facility are renewable for an additional period not longer than 12 months and are due not later than
March 31, 2015. As of December 31, 2012, the Company had outstanding loan balances of $5,695,649 (RMB35,800,000) under this facility
line of credit.
In April 2012, the Company entered into
a 3-year non-revolving facility line of credit agreement with First Sino Bank. Under the terms of the agreement, the Company could
borrow a maximum amount of $11,932,225 (RMB75,000,000) as of December 31, 2012. The borrowings under this facility bear interest
at a rate per annum equal to 125% of the prevailing base lending rate for periods ranging from 1 year to 3 years as announced
by PBOC. The average interest rate for the year ended December 31, 2012 was 7.6875% per annum. The facility of credit is secured
by all of the Company’s investment properties (See Note 8) and guaranteed by a director of the Company, and matures on March
31, 2015. Borrowings under this facility are renewable for an additional period not longer than 36 months and are due not later
than March 31, 2015. As of December 31, 2012, the Company had outstanding loan balances of $11,932,225 (RMB75,000,000) under this
facility line of credit.
In November 2009, the Company entered
into a 3-year revolving facility line of credit agreement with First Sino Bank. Under the terms of the agreement, the Company
could borrow a maximum amount of $8,750,298 (RMB55,000,000) as of December 31, 2012. The borrowings under this facility bear interest
at a rate equal to 110% of the prevailing 1-year base lending rate announced by PBOC. The average interest rate for the year ended
December 31, 2011 was 7.5440% per annum. The facility of credit was secured by all of the Company’s properties included
in property and equipment (See Note 7) and the restricted cash of $872,891 (RMB5,500,000) (See Note 3), and was guaranteed by
a director of the Company and an unrelated company, and matures on November 30, 2013. Borrowings under this facility are renewable
for a period not longer than 12 months and are due not later than November 30, 2013. As of December 31, 2012 and 2011, the Company
had outstanding balances of $0 and $8,728,912, respectively.
In March 2010, the Company entered into
a 3-year revolving facility line of credit agreement with First Sino Bank. Under the terms of the agreement, the Company could
borrow a maximum amount of $2,386,445 (RMB15,000,000) as of December 31, 2012. The borrowings under this facility bear interest
at a rate equal to 110% of the prevailing 1-year base lending rate announced by PBOC. The average interest rate for the year ended
December 31, 2011 was 7.5440% per annum. The facility of credit was secured by all of the Company’s investment properties
(See Note 8) and the restricted cash of $477,289 (RMB3,000,000) (See Note 3), and was guaranteed by a director of the Company
and an unrelated company, and matured on January 31, 2013. Borrowings under this facility are renewable for a period not longer
than 3 months and are due not later than April 30, 2013. As of December 31, 2012 and 2011, the Company had outstanding balances
of $0 and $2,380,612, respectively.
NOTE 12– PROMISSORY NOTES PAYABLE
The promissory notes payable consist of
the following unsecured notes to unrelated parties. One of these promissory notes with outstanding balances of $3,853,052 as of
December 31, 2012 has matured on January 31, 2013 and is currently in default.
During 2012, the Company issued a promissory
note to an unrelated third party to finance its acquisition of real estate properties for the use as the Company’s headquarter.
The promissory note with a principal of $6,730,779 bears interest at a rate of 7% per annum, is unsecured and repayable by a payment
of $2,915,481 on August 31, 2012 and the remaining balance on January 31, 2013. The Company had made the first repayment but has
not repaid the remaining balance. As of December 31, 2012, the outstanding principal in default and unpaid interest related to
this promissory note amounted to $3,853,052. The Company is currently negotiating with the note holder for an extension of the
repayment date.
The promissory note with a principal of
$300,000 bears interest at a rate of 15% per annum, is unsecured and has no fixed term of repayment. As of December 31, 2012 and
2011, the outstanding principal and unpaid interest related to this promissory note amounted to $307,500 and $330,000, respectively.
The promissory note with a principal of
$843,211 bears interest at a rate of 15% per annum, is unsecured and has no fixed term of repayment. As of December 31, 2012 and
2011, the outstanding principal and unpaid interest related to this promissory note amounted to $1,088,219 and $883,207, respectively.
The promissory note with a principal
of $158,707 bears interest at a rate of 15% per annum, was unsecured and had no fixed term of repayment. As of December 31,
2011, the outstanding principal and unpaid interest related to this promissory note amounted to $158,707. The Company has
fully repaid this promissory note during the year ended December 31, 2012..
The promissory note with a principal of
$317,415 born interest at a rate of 15% per annum, was unsecured and had no fixed term of repayment. As of December 31, 2011,
the outstanding principal and unpaid interest related to this promissory note amounted to $353,125. The Company has fully repaid
this promissory note during the year ended December 31, 2012.
During 2012, the Company issued a promissory
note with a principal of $792,293 to an unrelated party. This promissory note bear interest at a rate of 15% per annum, is unsecured
and has no fixed term of repayment. As of December 31, 2012, the outstanding principal and accrued interest related to this promissory
note amounted to $905,324.
During the year ended December 31, 2012
and 2011, the interest expense related to these promissory notes was $643,711 and $133,352, respectively.
NOTE 13 – AMOUNTS DUE TO DIRECTORS
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
Lin Chi-Jung
|
|
$
|
7,683,507
|
|
|
$
|
5,153,025
|
|
Lin Chao-Chin
|
|
|
22,225
|
|
|
|
27,109
|
|
Lin Hsin-Hung
|
|
|
1,440
|
|
|
|
5,708
|
|
|
|
$
|
7,707,172
|
|
|
$
|
5,185,842
|
|
|
(a)
|
The balance due to Lin Chi-Jung consists of a balance of unpaid
salaries and reimbursements totaling $35,797 (2011: $17,854) and advances
together with unpaid interest totaling $7,647,710 (2011:
$5,035,171).
|
The balance of unpaid salaries and reimbursements
is unsecured, interest-free and has no fixed term of repayment.
The advances from Lin Chi-Jung bear interest at
rates ranging from 9.6% to 18% per annum. During the year ended December 31, 2012 and 2011, the interest expense related to these
advances amounted to $712,560 and $617,873, respectively.
|
(b)
|
The balances due to Lin Chao-Chin
and Lin Hsin-Hung are unsecured, interest-free and have no fixed term
of repayment.
|
During the year ended December 31, 2012
and 2011, the advances from directors were $3,275,746 and $3,895,300, respectively; the repayments of advances from directors
were $1,406,188 and $52,509, respectively.
NOTE 14 - OTHER PAYABLES AND ACCRUED
EXPENSES
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
Accrued staff commission and bonus
|
|
$
|
890,419
|
|
|
$
|
772,669
|
|
Rental deposits received
|
|
|
945,309
|
|
|
|
956,455
|
|
Customer deposits
|
|
|
1,217,087
|
|
|
|
1,190,306
|
|
Advances from unrelated parties
|
|
|
1,288,680
|
|
|
|
-
|
|
Dividend payable to noncontrolling interests
|
|
|
237,582
|
|
|
|
254,826
|
|
Accrued expenses
|
|
|
346,861
|
|
|
|
87,149
|
|
Other payables
|
|
|
420,304
|
|
|
|
313,516
|
|
|
|
$
|
5,346,242
|
|
|
$
|
3,574,921
|
|
Advances from unrelated parties are unsecured,
interest-free and have no fixed term of repayment.
NOTE 15 – INCOME TAX PAYABLE
Sunrise Real Estate Group, Inc. and its
subsidiaries in the British Virgin Islands and the Cayman Islands do not generate any income and therefore are not subject to
income taxes in the U.S., the British Islands or the Cayman Islands. The Company conducts substantially all of its business through
its PRC operating subsidiaries and they are subject to PRC income taxes. The Company’s subsidiaries in the PRC are subject
to the standard 25% tax rate in the year ended December 31, 2012 and 2011.
Income tax benefit consists of
|
|
Year ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
PRC
|
|
|
|
|
|
|
|
|
Current tax
|
|
$
|
175,458
|
|
|
$
|
(930,154
|
)
|
Deferred tax benefit
|
|
|
(188,616
|
)
|
|
|
-
|
|
Total income tax benefit
|
|
$
|
(13,158
|
)
|
|
$
|
(930,154
|
)
|
Income taxes represent current PRC income
taxes, which are calculated at the applicable statutory income tax rate on the assessable income for the years ended December
31, 2012 and 2011. A reconciliation of the provision for income taxes, with amounts determined by applying the PRC statutory income
tax rate to loss before income taxes, is as follows:
|
|
Year ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
Provision for income tax benefit at PRC statutory tax rate of 25%
|
|
$
|
(813,569
|
)
|
|
$
|
(521,076
|
)
|
Permanent differences
|
|
|
55,274
|
|
|
|
(102,724
|
)
|
Under (Over)-provision for income tax in prior years
|
|
|
7,168
|
|
|
|
(954,841
|
)
|
Change in valuation allowance
|
|
|
737,609
|
|
|
|
648,487
|
|
Total income tax benefit
|
|
$
|
(13,158
|
)
|
|
$
|
(930,154
|
)
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Details of deferred taxes
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Deferred gain from underwriting sales
|
|
$
|
131,668
|
|
|
$
|
308,126
|
|
Net operating losses carryforwards
|
|
|
2,928,970
|
|
|
|
2,748,808
|
|
|
|
|
3,060,638
|
|
|
|
3,056,934
|
|
Less: Valuation allowance
|
|
|
(2,871,263
|
)
|
|
|
(3,056,934
|
)
|
Total deferred tax assets, net – Non-current
|
|
$
|
189,375
|
|
|
$
|
-
|
|
In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not
be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during
the periods in which those temporary differences become deductible or are utilized. Management considers the scheduled reversal
of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon
an assessment of the level of historical taxable income and projections for future taxable income over the periods in which the
deferred tax assets are tested whether they are deductible or can be utilized, management believes that the deferred tax assets
amounting to $2,871,263 and $3,056,934 resulting from net operating loss carry forwards and deferred gain from underwriting sales
as of December 31, 2012 and 2011, respectively, are not more likely than not to be realized.
The Company adopted ASC 740-10-25 Accounting
for Uncertainty in Income Taxes and such adoption did not have any material impact on the accompanying consolidated financial
statements. The Company is subject to income taxes in the PRC. Tax regulations are subject to the interpretation of the related
tax laws and regulations and require significant judgment to apply. All tax positions taken, or expected to be taken, continue
to be more likely than not ultimately settled at the full amount claimed. The Company’s tax filings are subject to the PRC
tax bureau’s examination for a period up to 5 years. The Company is not currently under any examination by the PRC tax bureau.
NOTE 16 – DEFERRED GOVERNEMNET
SUBSIDY
Deferred government subsidy consists of
the cash subsidy provided by the local government.
During the year ended December 31, 2012
and 2011, the Company received refundable government subsidies of $5,252,173 and $0, respectively. The subsidy is given to reimburse
the land acquisition costs and certain construction costs incurred for the Company’s property development project, and is
repayable if the Company fails to complete the subsidized property development project before the agreed date. All the government
subsidy is deferred and included as deferred government subsidy in consolidated balance sheets.
NOTE 17 –DEPOSITS RECEIVED FROM
UNDERWRTING SALES
The Company accounts for its underwriting
sales revenue with underwriting rent guarantees using the deposit method in accordance with ASC 976-605 (formerly SFAS No.66).
Revenue from the sales of floor space with underwriting rent guarantees until the revenues generated by sub-leasing properties
exceed the guaranteed rental amount due to the purchasers.
NOTE 18 – SHAREHOLDERS’
EQUITY
On January 1, 2011, the Company entered
into a securities purchase agreement with Good Speed Services Limited, an unrelated company, pursuant to which the Company issued
2,500,000 shares of common stock of the Company at the price of $0.20 each for the aggregate cash consideration of $500,000 on
June 24, 2011.
On January 22, 2011, the Company entered
into a securities purchase agreement with Better Time International Limited, an unrelated company, pursuant to which the Company
issued 2,500,000 shares of common stock of the Company at the price of $0.20 each for the aggregate cash consideration of $500,000
on September 30, 2011.
There were no shares issued during the
year ended December 31, 2012.
NOTE 19 – STATUTORY RESERVE
According to the relevant corporation
laws in the PRC, a PRC company is required to transfer at least 10% of its profit after taxes, as determined under accounting
principles generally accepted in the PRC, to the statutory reserve until the balance reaches 50% of its registered capital. The
statutory reserve can be used to make good on losses or to increase the capital of the relevant company.
According to the Law of the PRC on Enterprises
with Wholly-Owned Foreign Investment, the Company PRC’s subsidiaries are required to make appropriations from after-tax
profits as determined under accounting principles generally accepted in the PRC (“PRC GAAP”) to non-distributable
reserves. These reserve funds include one or more of the following: (i) a general reserve, (ii) an enterprise expansion reserve
and (iii) a staff bonus and welfare fund. A wholly-owned PRC subsidiary is not required to make appropriations to the enterprise
expansion reserve but annual appropriations to the general reserve are required to be made at 10% of the profit after tax as determined
under PRC GAAP at each year-end, until such fund has reached 50% of its respective registered capital. The staff welfare and bonus
reserve is determined by the board of directors. The general reserve is used to offset future losses. The subsidiary may, upon
a resolution passed by the stockholders, convert the general reserve into capital. The staff welfare and bonus reserve are used
for the collective welfare of the employees of the subsidiary. The enterprise expansion reserve is for the expansion of the subsidiary
operations and can be converted to capital subject to approval by the relevant authorities. These reserves represent appropriations
of the retained earnings determined in accordance with Chinese law.
In addition to the general reserve, the
Company’s PRC subsidiaries are required to obtain approval from the local PRC government prior to distributing any registered
share capital. Accordingly, both the appropriations to general reserve and the registered share capital of the Company’s
PRC subsidiary are considered as restricted net assets and are not distributable as cash dividends. As of December 31, 2012 and
December 31, 2011, the Company’s statutory reserve fund was $782,987.
NOTE 20- COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
The Company leases certain of its office
properties under non-cancellable operating lease arrangements. Payments under operating leases are expensed on a straight-line
basis over the periods of their respective terms, and the terms of the leases do not contain rent escalation, or contingent rent,
renewal, or purchase options. There are no restrictions placed upon the Company by entering into these leases. Rental expenses
under operating leases for the years ended December 31, 2012 and 2011 were $188,393 and $233,050, respectively.
As of December 31, 2012, the Company had
the following operating lease obligations falling due.
|
|
|
|
|
|
Amount
|
|
|
|
|
|
Within one year
|
|
$
|
89,174
|
|
Two to five years
|
|
|
-
|
|
|
|
$
|
89,174
|
|
During 2005 and 2006, SZGFH entered into
leasing agreements with certain buyers of the Sovereign Building underwriting project to lease the properties for them. These leasing
agreements on these properties are for 62% of the floor space that was sold to third party buyers. In accordance with the leasing
agreements, the owners of the properties can have a rental return of 8.5% and 8.8% per annum for a period of 5 years and 8 years,
respectively. The leasing period started in the second quarter of 2006 and the Company had the right to sublease these properties
to cover these lease commitments in the leasing periods. In 2009, we agreed with certain buyers to amend the agreed 5-year annual
return rate from 8.5% to 5.8% and the agreed 8-year annual return rate from 8.8% to 6% for the remaining lease, or to terminate
their lease agreements early. As of December 31, 2012, the Company has the following leasing commitment related to these properties.
|
|
|
|
|
|
Amount
|
|
|
|
|
|
Within one year
|
|
$
|
971,062
|
|
Two to five years
|
|
|
255,318
|
|
|
|
$
|
1,226,380
|
|
|
|
|
|
|
An accrual for onerous contracts was recognized
which is equal to the difference between the present value of the sublease income and the present value of the associated lease
expense at the appropriate discount rate. During the year ended December 31, 2012 and 2011, the Company had no significant provision
for onerous contracts.
According to the leasing agreements, the
Company has an option to terminate any agreement by paying a predetermined compensation. As of December 31, 2012, the compensation
to terminate all leasing agreements is $1,249,568. According to the sub-leasing agreements that have been signed through December
31, 2012, the rental income from these sub-leasing agreements will be $904,221 within one year and $327,279 within two to five
years. However, no assurance can be given that we can collect all of the rental income.
Other commitments
As of December 31, 2012, the Company had
outstanding commitments of $26,298,151 with respect to non-cancellable construction contracts for real estate development.
NOTE 21 - Segment Information
The Company's chief executive officer
and chief operating officer have been identified as the chief operating decision makers. The Company's chief operating decision
makers direct the allocation of resources to operating segments based on the profitability and cash flows of each respective segment.
The Company evaluates performance based
on several factors, including net revenue, cost of revenue, operating expenses, and income from operations. The following tables
show the operations of the Company's operating segments:
|
|
Year ended December
31, 2012
|
|
|
|
Property
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokerage
|
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
Development
|
|
|
Corporate
|
|
|
Total
|
|
Net revenues
|
|
$
|
8,529,990
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,529,990
|
|
Cost of revenues
|
|
|
(4,894,833
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,894,833
|
)
|
Gross profit
|
|
|
3,635,157
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,635,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
(1,288,604
|
)
|
|
|
(113,055
|
)
|
|
|
-
|
|
|
|
(1,401,659
|
)
|
General and administrative
expenses
|
|
|
(2,407,600
|
)
|
|
|
(720,091
|
)
|
|
|
(217,944
|
)
|
|
|
(3,345,635
|
)
|
Operating loss
|
|
|
(61,047
|
)
|
|
|
(833,146
|
)
|
|
|
(217,944
|
)
|
|
|
(1,112,137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
185,696
|
|
|
|
53,303
|
|
|
|
80
|
|
|
|
239,079
|
|
Interest expense
|
|
|
(2,371,218
|
)
|
|
|
-
|
|
|
|
(49,157
|
)
|
|
|
(2,420,375
|
)
|
Miscellaneous
|
|
|
13,777
|
|
|
|
25,379
|
|
|
|
-
|
|
|
|
39,156
|
|
Total other (expenses)
income
|
|
|
(2,171,745
|
)
|
|
|
78,682
|
|
|
|
(49,077
|
)
|
|
|
(2,142,140
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and equity in net loss of an unconsolidated affiliate
|
|
|
(2,232,792
|
)
|
|
|
(754,464
|
)
|
|
|
(267,021
|
)
|
|
|
(3,254,277
|
)
|
Income tax (expense) benefit
|
|
|
(175,098
|
)
|
|
|
188,616
|
|
|
|
-
|
|
|
|
13,518
|
|
Equity in net loss of an unconsolidated affiliate
|
|
|
-
|
|
|
|
(230,490
|
)
|
|
|
-
|
|
|
|
(230,490
|
)
|
Net loss
|
|
$
|
(2,407,890
|
)
|
|
$
|
(796,338
|
)
|
|
$
|
(267,021
|
)
|
|
$
|
(3,471,249
|
)
|
|
|
Year ended December
31, 2011
|
|
|
|
Property
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokerage
|
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
Development
|
|
|
Corporate
|
|
|
Total
|
|
Net revenues
|
|
$
|
8,972,536
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,972,536
|
|
Cost of revenues
|
|
|
(6,231,262
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,231,262
|
)
|
Gross profit
|
|
|
2,741,274
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,741,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
(1,042,241
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,042,241
|
)
|
General and administrative
expenses
|
|
|
(2,129,457
|
)
|
|
|
-
|
|
|
|
(394,764
|
)
|
|
|
(2,524,221
|
)
|
Operating loss
|
|
|
(430,424
|
)
|
|
|
-
|
|
|
|
(394,764
|
)
|
|
|
(825,188
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
13,775
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,775
|
|
Interest expense
|
|
|
(1,457,302
|
)
|
|
|
-
|
|
|
|
(57,480
|
)
|
|
|
(1,514,782
|
)
|
Reversal of overprovided sales taxes in prior years
|
|
|
222,487
|
|
|
|
-
|
|
|
|
-
|
|
|
|
222,487
|
|
Miscellaneous
|
|
|
19,405
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,405
|
|
Total other expenses
|
|
|
(1,201,635
|
)
|
|
|
-
|
|
|
|
(57,480
|
)
|
|
|
(1,259,115
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and equity in net loss of
|
|
|
(1,632,059
|
)
|
|
|
-
|
|
|
|
(452,244
|
)
|
|
|
(2,084,303
|
)
|
an unconsolidated affiliate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
|
930,154
|
|
|
|
-
|
|
|
|
-
|
|
|
|
930,154
|
|
Equity in net loss of an unconsolidated affiliate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net loss
|
|
$
|
(701,905
|
)
|
|
$
|
-
|
|
|
$
|
(452,244
|
)
|
|
$
|
(1,154,149
|
)
|
|
|
Property
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokerage
|
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
Development
|
|
|
Corporate
|
|
|
Total
|
|
As of December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate property under development
|
|
$
|
-
|
|
|
$
|
20,493,851
|
|
|
$
|
-
|
|
|
$
|
20,493,851
|
|
Total assets
|
|
|
24,322,419
|
|
|
|
25,813,935
|
|
|
|
55,681
|
|
|
|
50,192,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate property under development
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total assets
|
|
|
21,962,264
|
|
|
|
-
|
|
|
|
208,419
|
|
|
|
22,170,683
|
|
NOTE 22 – Subsequent Events
On January 7, 2013, the Company obtained
a bank loan of $1,272,771 (RMB8,000,000) from the Bank of China, bearing interest at the rate of 7.56% per annum. The loan is secured
by the properties of two unrelated parties and matures on December 5, 2013.
On January 9, 2013 and February 1, 2013,
the Company obtained advances of $1,272,771 (RMB8,000,000) and $1,081,855 (RMB6,800,000) from a director of the Company, Lin Chi-Jung.
These advances are unsecured, interest-bearing at a rate of 22.20% per annum, and mature on July 9, 2013 and June 1, 2013, respectively.
In February 2013, the Company obtained
additional advances of $1,113,674 (RMB7,000,000) from a director of the Company’s Lin Chi-Jung. These advances are unsecured,
interest-bearing at a rate of 36.50% per annum, and matured on March 31, 2013. The Company has repaid $556,837 (RMB4,000,000) and
has agreed with Lin Chi-Jung to extend the date of maturity of the remaining balance to June 30, 2013.
On February 4, 2013, the Company issued
a promissory note to an unrelated party. The promissory note with a principal of $159,096 (RMB1,000,000) is unsecured, interest-bearing
at a rate of 21.6% per annum, and matured on May 3, 2013. The Company has agreed with the unrelated party to extend the date of
maturity to June 3, 2013.