UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2014
¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission file number: 000-32585
SUNRISE REAL ESTATE GROUP, INC.
(Name of Small Business Issuer in its Charter)
| Texas | 6500 | 75-2713701 |
| (State or Other Jurisdiction of Incorporation or Organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification No.) |
No. 638, Hengfeng Road 25th Floor, Building A
Shanghai, PRC 200070
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number: + 86-21-6167-2800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act of 1934. Yes ¨ No þ
Check whether the issuer(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes £ No R
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.45 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes £ No R
Indicate by check mark if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K (§229.405 of this Chapter) is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. R
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ¨ | Accelerated filer ¨ | ||
| Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company þ | ||
| Emerging Growth Company ¨ |
Emerging growth company If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes ¨ No þ
The aggregate market value of the common stock held by non-affiliates 16,357,122 shares was approximately $490,714, based on the average opening and closing price of $0.03 for the Common Stock on June 30, 2014.
The number of shares outstanding of the issuer's Common Stock, $0.01 par value, as of June 1, 2017 was 68,691,925 shares.
TABLE OF CONTENTS
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Corporate History
The principal activities of Sunrise Real Estate Group, Inc. (“SRRE”) and its subsidiaries (collectively referred to as the “Company”) are real estate development and property brokerage services, including real estate marketing services, property leasing services; and property management services in the People’s Republic of China (“PRC”). Our current ownership interests in our various subsidiaries and other entities is set forth in the below organizational chart.
Sunrise Real Estate Development Group, Inc. (“CY-SRRE”), a wholly-owned subsidiary of 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. Shanghai Xin Ji Yang Real Estate Consultation Company Limited (“SHXJY”) was established in 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, namely, Suzhou Xin Ji Yang Real Estate Consultation Company Limited (“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. On November 24, 2006, CY-SRRE, SHXJY, a director of SZXJY and a third party established a subsidiary, namely, Suzhou Shang Yang Real Estate Consultation Company Limited (“SZSY”) in the PRC, with CY-SRRE holding a 12.5% equity interest, SHXJY holding a 26% equity interest and the director of SZXJY holding a 12.5% equity interest in SZSY. At the date of incorporation, SRRE and the director of SZXJY entered into a voting agreement that provided that SRRE is entitled to exercise the voting right in respect of his 12.5% equity interest in SZSY. As a result of the voting agreement, SRRE effectively holds has 51% of the voting power of 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 a 75% equity interest in SZXJY.
In October 2011, SHXJY purchased a 24% interest in Linyi Shang Yang Real Estate Consultation Company Limited (“LYSY”) and acquired approximately 103,385 square meters of land for the purpose of developing the land into villa-style residential housing. On March 6, 2012, SHXJY established a wholly-owned subsidiary, namely Linyi Rui Lin Construction and Design Company Limited (“LYRL”). SHXJY’s 24% equity interest in LYSY was then transferred to LYRL. In agreement with Zhang Shu Qin, who owns 51% of LYSY, we have the right to vote 51% interest and thus have 75% of the voting power of LYSY.
LIN RAY YANG Enterprise Ltd. (“LRY”), a wholly-owned subsidiary of SRRE, 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, Shanghai Shang Yang Investment Management and Consulting Company Limited (“SHSY”) in the PRC as a limited liability company. On January 10, 2005, LRY and a PRC third party established a subsidiary, Suzhou Gao Feng Hui Property Management Company Limited (“SZGFH”), 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.
In 2011, we acquired a 49% ownership of Wuhan Yuan Yu Long Property Development Company Limited (“WHYYL”); the purpose of this project company was for a development project in Wuhan.
SRRE was initially 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 May 23, 2006, Sunrise Estate Development Group, Inc. changed its name to Sunrise Real Estate Group, Inc.
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.
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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 million 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 million shares of common stock of SRRE issued in this transaction, SRRE issued 8.5 million 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 was accounted for as a “reverse acquisition” arrangement whereby CY-SRRE and LRY are deemed to have purchased SRRE. However, SRRE remained the legal entity and the Registrant for Securities and Exchange Commission reporting purposes.
General Business Description
SRRE has gone through a series of transactions leading to the completion of a reverse merger on October 5, 2004. Prior to the closing of the exchange agreements described in “Corporate History” above, SRRE was an inactive "shell" company. Following the closing, SRRE, through its two wholly owned subsidiaries, CY-SRRE and LRY, has engaged in the property brokerage services, real estate marketing services, property leasing services and property management services in the PRC.
The Company recognizes that in order to differentiate itself from the market, it should avoid direct competition with large-scale property developers who have their own marketing departments. Our objective is to develop a niche position with marketing alliances with medium size and smaller developers, and become their outsourcing marketing and sales agents. This strategic plan is designed to expand our activities beyond our existing revenue base, enabling us to assume higher investment risk and giving us flexibility in collaborating with partnering developers. The plan is aimed at improving our capital structure, diversifying our revenue base, creating higher values and equity returns.
SRRE operates through its wholly owned subsidiaries, CY-SRRE and LRY. Neither CY-SRRE nor LRY have operations but conduct operations in Mainland China through their respective subsidiaries that are based in the PRC. CY-SRRE operates through its wholly owned subsidiary, SHXJY. LRY operates through its two wholly owned subsidiaries, SHSY and SZGFH. SHXJY and SHSY are property agency business earning commission revenue from marketing and sales services to developers. The main business of SZGFH is to render property rental service, including buildings management and maintenance service for office buildings. Our company organization chart is as follows:
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Figure 1: Company Organization Chart
| 1. | On March 6, 2012, LYRL was established by three Chinese individuals, who held the equity interest in LYRL for SHXJY. At the date of incorporation of LYRL. SHXJY transferred its 24% equity interest in LYSY to LYRL. |
| 2. | It was previously known as Shanghai Shang Yang Real Estate Consultation Co., Limited. The company changed its name to Shanghai Shang Yang Investment Management and Consulting Company Limited onMay 28, 2013. |
| 3. | SHGXL is consolidated into the Company’s financials because the Company has control of the development rights and are beneficiary of the revenue SHGXL generates. |
Our major business is agency sales, whereby our Chinese subsidiaries contract with property developers to market and sell their newly developed property units. For the fiscal year ended December 31, 2014, 100% of our net revenues of $8,210,356 were generated from our brokerage operations. For these services we earned a commission fee calculated as a percentage of the sales prices. We have focused our sales on the whole China market, especially in secondary cities. To expand our business agencies, we have established subsidiaries and branches in Shanghai, Suzhou, Yangzhou, Chongqing, Quanjiao, Hainan, Shangqiu, Chengdu, and Wuhan.
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 the leased properties to cover these lease commitments in the leasing period. In regards to the leasing agreements, we agreed with certain buyers to lower the annual rental return rate for the remaining leasing period from 8.5% for 5 years to 5.8%, and from 8.8% for 8 years to 6%, or to early terminate lease agreements. These leases related to the underwriting project expired in mid-2014.
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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. Beginning in 2012, we commenced our first development project in Wuhan and Linyi and started the initial construction in the first quarter of 2012. In Wuhan, we commenced the construction of Phase 1 of the project in the third quarter of 2012.There are a total of eight buildings. The seven buildings that are open for sale currently have a 70% sales rate. The remaining building has not yet been open for sale. Since October 20, 2014, the Linyi project has constructed 121 units, which encompasses approximately 40% of the gross sales area. Proceeds from sales will be used to finance the constructions of the subsequent phases of the project. We are applying for bank loans and other forms of funding, however, there are no assurances we will be able to obtain future financings. On March 13, 2014, the Company has signed a joint development agreement with ZhongjiPufa Real Estate Co.. According to this agreement, the Company obtained a right to develop the Guangxinglu Project, which located in the, Putuo district, Shanghai, PRC. This project covers a site area of approximately 2,502 square meters for the development of one building of apartment.
Business Activities
Our main operating subsidiaries, SHXJY and SHSY, have engaged in sales and marketing agency work for newly built property units. We also have developed a network of landowners and developers, allowing us to explore opportunities in property investments.
In order to build a cushion against the cyclical nature of the real estate industry and have a more diversified revenue base, we established another operating subsidiary, SZGFH, in 2005 for property management and rental operations.
Additionally, we expanded into real estate development in 2011 by establishing LYSY and investing in WHYYL, an unconsolidated affiliate. LYSY has a real estate development project located in Linyi City Economic Development Zone, Shandong Province, PRC, which covers a site area of approximately 103,385 square meters for development of villa-style residential housing buildings. WHYYL is developing a real estate project in Wuhan, with a site area of approximately 27,950 square meters for development of eight high-rise residential buildings.
On June 6, 2013, SHSY and LYRL together with other 4 investors established a company, namely Shanghai Daerwei, in the PRC in the cosmetic and facial care business. SHSY holds 19% and LYRL holds 11% equity interest of Shanghai Daerwei. The cosmetic and facial care business is still in its early operational stage.
Commission Based Services
Commission based services refer to marketing and sales agency operations, which provide the following services:
a. Integrated Marketing Planning
b. Advertising Planning & Execution
c. Sales Planning and Execution
In this business, we sign a marketing and sales agency agreement with property developers to undertake the marketing and sales activities of a specific project. The scope of service varies according to clients' needs; it could be a full package of all the above services, a combination of any two of the above services or any single service.
All of our revenue in 2014 was from commission-based services. We secure these projects via bidding or direct appointments. As a result of our relationships with existing clients and our sales track record, we have secured a number of cases from prior clients on subsequent phases of projects.
Normally, before a developer retains us, we evaluate and determine the Average Sales Value of a project. This value will be proposed to the developer, and the parties agree on an Average Sales Value as the basis of our agency agreement. The actual sales price of the project is generally priced higher than the Average Sales Value depending on market conditions. On average, we have been to sell the property at a small premium over Average Sales Value.
Our normal commission structure is a combination of the following:
a) Base Commission of 1.0% - 1.5% based on the Average sales value.
b) Surplus Commission of 10% - 30% based on the difference between Average Sales Value and actual sales price.
Our wholly owned subsidiaries, SHXJY and SHSY, engage in this sales and marketing phase of our business.
Real Estate Development
In mid-2011, we established a project company in Wuhan in which we have a 49% stake. We commenced the construction of phase one of the project in the third quarter of 2012 and the pre-sale of the phase one in the first quarter of 2013. There are a total of eight buildings. Seven buildings are open for sale and have a 70% sales rate. The remaining building is expected to be open for sale in mid 2015.
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In October 2011, we established LYSY with 24% stake in the company. During the first quarter of 2012, we acquired approximately 103,385 square meters for the purpose of developing villa-style residential housing. We began construction in mid-2012 and as of December31, 2015 have constructed 121 units, which encompasses all units in phase 1. The phase 2 will begin construction accordingly. Proceeds from sales will be used to finance the constructions of the subsequent phases of the project. The sales started in Novermber2013, we have made sales of 67 units as of January 2016.
In March 2014, we entered into a development project in Shanghai. The investment amount is RMB135 million. On December 26, 2014, we invested RMB135 million. The construction was started in January 2015.In February 1, 2016, the company has got the Per-sale permit and will start its sales soon.
We are applying for bank loans and other forms of funding; however, there are no assurances we will be able to obtain future financings.
Mainland China's Property Sector
The industry's macro environment is improving, and the property sector is gradually developing to be a more regulated market. Stable economic growth provides a solid and secure base for investment returns in the property sector.
GDP Growth of PRC for the period of 2009 through 2014:
| GDP GROWTH | ||||
| 2010 | 10.3 | % | ||
| 2011 | 9.2 | % | ||
| 2012 | 7.8 | % | ||
| 2013 | 7.7 | % | ||
| 2014 | 7.3 | % | ||
Source: National Bureau of Statistics of China
Government regulation
The State Taxation Administration issued the Regulation of Land Value-added Tax Clearing and Administrating in May 2009, effective on June 1, 2009. It requires developers to clear the land value-added tax, which have completed development projects and have finished sale, or have sold development projects under constructed, or have transferred the land use right to others.
In December 2009, the Ministry of Finance, Ministry of Land and Resources, Ministry of Supervision, the Central Government, and five other agencies announced in “Notice Regarding to Improve Upon Land Sale and Receivable Management,” to increase the initial payment of land purchases to 50% of the purchase price and the entire purchase price must be paid in full within the year. Prior to the announcement, initial payment was around 20% to 30%.
On January 1, 2010, the Ministry of Finance and the State Administration of Taxation re-imposed the business tax on total proceeds from the resale of certain residential properties held for less than five years. The China Banking Regulatory Authority withdrew its earlier policy and emphasized the minimum 40% down payment requirement for mortgages for second properties. On March 8, 2010, the Ministry of Land and Resources issued a circular to further strengthen the supervision on land supply, requiring a real estate developer to pay at least 50% of the land premium within one month and 100% within one year after the land use right contract is executed. On April 17, 2010, the State Council issued the Circular on Firmly Restraining Soaring Housing Prices in Certain Cities. According to this circular,
| • | A down payment must be no less than 30% of the purchase price for first self-use housing unit purchases by a family with a gross construction area of more than 90 square meters.; |
| • | The minimum down payment for the second housing unit purchased by a family increased from 40% to 50% and the loan interest rate must be no less than 110% of benchmark lending interest rate; |
| • | Down payment for the third or more housing unit purchased by any family and the loan interest rate must be further increased significantly based on the rate for the first and second housing units, as determined by commercial banks based on their assessment of the risks; |
| • | Commercial banks may suspend extending loans to families for their purchases of the third or more housing units in regions where commercial housing unit prices are too high or have risen too fast or supply of housing units is insufficient. The banks may also suspend extending loans to individuals for their purchase of housing units outside of their registered residence if they cannot furnish evidence of their tax or social insurance premium payment for at least one year locally in the region where the subject housing units are located; and |
| • | Local governments are allowed to limit the total number of housing units one can purchase in certain period in light of the local situation. |
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On January 10, 2010, the government established 11 measures to strengthen management of the real estate market to address rising real estate prices. The measures called for an increasing supply of low-cost houses for low-income families and common residential houses, encouraging reasonably priced house buying while limiting purchases for speculation and investment, strengthening real estate project loan risk management and market supervision, speeding up construction of residential housing projects for low-income households, and specifying responsibilities of local governments.
In January 2011, the State Council released an additional eight new measures to put downward pressure on property prices by:
| 1) | Requiring local governments to set housing price targets in proportion with local income levels for 2011; |
| 2) | Requiring a business tax for housing sales within 5 years of purchase must be levied on total sales value; |
| 3) | Strengthening the management of land supply for housing; |
| 4) | Imposing purchase restrictions in all large- & medium-sized cities. Families already owning a residential property are restricted to buy only one more, while those already owning two or more properties are prohibited to purchase additional properties; |
| 5) | Accelerating the construction of social security residential housings; |
| 6) | Providing that the down payment ratio for second-home purchases must not be less than 60%, up from 50%, with an interest rate at least 1.1 times of the benchmark rate; |
| 7) | Improving guidance for the media's housing market coverage; |
| 8) | Providing for implementation & accountability for local governments over the housing price control targets. |
In May 2011, the National Development and Reform Commission (“NDRC”) began the “one house, one price” policy which requires developers to enhance its disclosure of the residential properties’ offering prices and available supply volume. This policy is designed to prevent developers from posting false supply volume and prices to fuel speculative price volatility.
In July 2011, the China’s State Council declared that it will continue to implement tightening policies and expand the housing purchase restrictions to second and third-tier cities.
In late February and March 2013, the PRC government issued the “New Five Policies” for administration of the housing market and detailed implementation rules, which revealed the PRC government’s strong determination on curbing the increase of housing prices by requiring more stringent implementation of the housing price control measures. For example, in the cities where there are existing restrictions on housing sale, if the housing prices are rising fast due to insufficient local housing supply, the local governments are required to take more stringent measures to restrict housing units from being sold to those households that own more than one housing unit. In these cities, the minimum down payment for the second housing unit purchased by a household may be further increased from 60% and the loan interest rate may be raised to be more than 110% of benchmark lending interest rate, as the local housing price control measures require. The New Five Policies also reiterated and emphasized the implementation of the 20% income tax on capital gain generated from housing unit sale. Following the request of the central government, Beijing, Shanghai and other major cities in China have announced detailed regulations to implement the New Five Policies in late March 2013, to further cool down the local real estate markets.
In July 2012, the Ministry of Land and Resources and the Ministry of Housing and Urban-Rural Development jointly issued a notice to further tighten the land use administration and seek stricter enforcement of the existing real estate market regulations, which include, in particular, enhanced control over the floor area and plot ratio of land for housing purpose, closer scrutiny on the qualification of land bidders, and strengthened investigation and punishment on land bidding winners who leave land idle for more than one year.
Such measures and policies by the government have negatively affected the real estate market and caused a reduction in transactions in the real estate market. While these measures and policies remain in effect, they may continue to depress the real estate market, dissuade would-be buyers from making purchases, reduce transaction volume, cause a decline in average selling prices, and prevent developers from raising the capital they need and increase developers’ costs to start new projects.
Environmental matters
There is a growing concern in regards to the global warming issues affecting the world. The changing weather patterns and abnormal conditions may affect the construction and logistics of developers and this may indirectly cause inverse effect to our operation. Extreme weather conditions may delay in construction of properties; this then may delay the sale of these properties and therefore delaying our future revenue stream.
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Employees
As of December 31, 2014, we had the following number and categories of employees:
| Employees | |
| SRRE | |
| Executive Dept. | 2 |
| Accounting Dept. | 2 |
| Investor Relations Dept. | 1 |
| SHXJY | |
| Administration Dept. | 11 |
| Accounting Dept. | 2 |
| Research & Development Dept. | 4 |
| Marketing Dept. | 18 |
| Chongqing Branch of SHXJY | |
| Accounting Dept. | 1 |
| SZXJY | |
| Administration Dept. | 17 |
| Research & Development Dept. | 11 |
| Advertising & Communication Planning Dept. | 8 |
| Marketing Dept. | 60 |
| SZSY | |
| Administration Dept. | 1 |
| Accounting Dept. | 2 |
| SHSY | |
| Administration Dept. | 9 |
| Accounting Dept. | 3 |
| Development Dept. | 5 |
| SYSY | |
| Marketing Dept. | 20 |
| SZGFH | |
| Administration Dept. | 1 |
| Accounting Dept. | 1 |
| Marketing Dept. | 3 |
| SQSY | |
| Marketing Dept. | 5 |
| WHGFH | |
| Marketing Dept. | 12 |
| LYSY | |
| Accounting Dept | 3 |
| Administration Dept. | 5 |
| Construction Dept. | 10 |
| PR Dept. | 1 |
| Executive Dept. | 1 |
| LYRL | |
| Administration Dept | 3 |
| PTXJY | |
| Marketing Dept | 17 |
| SHRJ | |
| Administration Dept. | 5 |
| Design Dept. | 5 |
| Total | 249 |
None of our employees are represented by a labor union or bound by a collective bargaining unit. We believe that our relationship with its employees is satisfactory.
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RISK FACTORS
SRRE has identified a number of risk factors faced by the Company. These factors, among others, may cause actual results, events or performance to differ materially from those expressed in this 10-K or in press releases or other public disclosures. You should be aware of the existence of these factors.
RISKS RELATING TO THE GROUP
SRRE is a holding company and depends on its subsidiaries’ cash flows to meet its obligations.
SRRE is a holding company, and it conducts all of its operations through its subsidiaries. As a result, its ability to meet any obligations depends upon its subsidiaries’ cash flows and payment of funds as dividends, loans, advances or other payments. In addition, the payment of dividends or the making of loans, advances or other payments to SRRE may be subject to regulatory or contractual restrictions.
Continued losses threaten our operations.
In 2014, we had a net loss of $3,374,928 compared to a net loss of $1,355,263 in 2013.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 debt or equity financing as needed. We have been able to secure new bank lines of credit and secure additional loans from affiliates to fund our operations to date. However, 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.
Our invoicing for commissions may be delayed.
Generally, we recognize our commission revenues after the contracts signed with developers are completed and confirmations are received from the developers. However, sometimes we do not recognize income even when we have rendered our services for any of the following reasons:
| a. | The developers have not received payments from potential purchasers who have promised to pay the outstanding sum by cash; |
| b. | The purchasers, who need to obtain mortgage financing to pay the outstanding balance due, are unable to obtain the necessary financing from their banks; |
| c. | Banks are sometimes unwilling to grant the necessary bridge loan to the developers in time due to the developers’ relatively low credit rating; |
| d. | The developers tend to be in arrears with sales commissions; therefore, do not grant confirmation to us to be able to invoice them accordingly. |
Development of new business may stretch our cash flow and strain our operation efficiency.
Business expansion and the need to integrate operations arising from the expansion may place a significant strain on our managerial, operational and financial resources, and will further contribute to a need to increase in our financial needs.
Our acquisition of new property may involve risks.
These acquisitions involve several risks including, but not limited to, the following:
a. The acquired properties may not perform as well as we expected or ever become profitable.
b. Improvements to the properties may ultimately cost significantly more than we had originally estimated.
Additional acquisitions might harm our business.
As part of our business strategy, we may seek to acquire or invest in additional businesses, products, services or technologies that we think could complement or expand our business. If we identify an appropriate acquisition opportunity, we might be unable to negotiate the terms of that acquisition successfully, finance it, or integrate it into our existing business and operations. We may also be unable to select, manage or absorb any future acquisitions successfully. Furthermore, the negotiation of potential acquisitions, as well as the integration of an acquired business, would divert management time and other resources. We may have to use a substantial portion of our available cash to consummate an acquisition. If we complete acquisitions through exchange of our securities, our shareholders could suffer significant dilution. In addition, we cannot assure you that any particular acquisition, even if successfully completed, will ultimately benefit our business.
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Our real estate investments are subject to numerous risks.
We are subject to risks that generally relate to investments in real estate. The investment returns available from equity investments in real estate depend in large part on the amount of income earned and capital appreciation generated by the related properties, as well as the expenses incurred. In addition, a variety of other factors affect income from properties and real estate values, including governmental regulations, insurance, zoning, tax and eminent domain laws, interest rate levels and the availability of financing. For example, new or existing real estate zoning or tax laws can make it more expensive and/or time-consuming to develop real property or expand, modify or renovate properties. When interest rates increase, the cost of acquiring, developing, expanding or renovating real property increases and real property values may decrease as the number of potential buyers decrease. Similarly, as financing becomes less available, it becomes more difficult both to acquire and to sell real property. Finally, governments can, under eminent domain laws, take real property. Sometimes this taking is for less compensation than the owner believes the property is worth. Any of these factors could have a material adverse impact on results of our operations or financial condition. In addition, equity real estate investments, such as the investments we hold and any additional properties that we may acquire, are relatively difficult to sell quickly. If our properties do not generate sufficient revenue to meet operating expenses, including debt servicing and capital expenditures, our income will be reduced.
Competition, economic conditions and similar factors affecting us, and the real estate industry in general, could affect our performance.
Our properties and business are subject to all operating risks common to the real estate industry. These risks include:
| a. | Adverse effects of general and local economic conditions; |
| b. | Increases in operating costs attributable to inflation and other factors; and |
| c. | Overbuilding in certain property sectors. |
These factors could adversely affect our revenues, profitability and results of operations.
Our business is susceptible to fluctuations in the real estate market of China, especially in certain areas of eastern China where a significant portion of our operations are concentrated, which may adversely affect our revenues and results of operations.
We conduct our real estate services business in China. Our business depends substantially on the conditions of the PRC real estate market. Demand for private residential real estate in China has grown rapidly in the recent decade but such growth is often coupled with volatility in market conditions and fluctuation in real estate prices. Fluctuations of supply and demand in China’s real estate market are caused by economic, social, political and other factors. To the extent fluctuations in the real estate market adversely affect real estate transaction volumes or prices, our financial condition and results of operations may be materially and adversely affected.
As a significant portion of our operations is concentrated in Shanghai and Jiangsu Province, any decrease in demand or real estate prices or any other adverse developments in these regions may materially and adversely affect our total real estate transaction volumes and average selling prices, which may in turn adversely affect our revenues and results of operations. These economic uncertainties involve, among other things, conditions of supply and demand in local markets and changes in consumer confidence and income, employment levels, increase in mortgage interest rates and government regulations. These risks and uncertainties could periodically have an adverse effect on consumer demand for and the pricing of our homes, which could cause our operating revenues to decline. In addition, builders are subject to various risks, many of them outside the control of the homebuilder including competitive overbuilding, availability and cost of building lots, materials and labor, adverse weather conditions, cost overruns, changes in government regulations, and increases in real estate taxes and other local government fees. A reduction in our revenues could in turn negatively affect the market price of our securities.
Our business may be materially and adversely affected by government measures aimed at China’s real estate industry.
The real estate industry in China is subject to government regulations. Until 2009, the real estate markets in a number of major cities in China had experienced rapid and significant growth. Before the global economic crisis hit all the major economies worldwide in 2009, the PRC government had adopted a series of measures to restrain what it perceived as unsustainable growth in the real estate market. From 2003 to 2013, the PRC government introduced a series of specific administrative and credit-control measures including, but not limited to, setting minimum down payment requirements for residential and commercial real estate transactions, limiting availability of mortgage loans, and tightening governmental approval process for certain real estate transactions.
In cities such as Beijing and Shanghai, we have seen the effects of such policies and regulatory measures. The sales volumes for real properties in Beijing and Shanghai decreased significantly after the policy change. The sale prices for certain properties in such cities are also weakened. The PRC government’s policy and regulatory measures on the PRC real estate sector could adversely affect the property purchasers’ ability to obtain mortgage financing or significantly increase the cost of mortgage financing and reduce market demand for properties. These factors may materially and adversely affect our business, financial condition, results of operations and prospects.
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Despite the recent government measures aimed at maintaining the long-term stability of the real estate market, there is no assurance that the PRC government will not continue to adopt new measures in the future that may result in short-term downward adjustments and uncertainty in the real estate market.
Our business may be materially and adversely affected as a result of decreased transaction volumes or real estate prices that may follow these adjustments or market uncertainty.
We operate in a highly competitive environment.
Our competitors may be able to adapt more quickly to changes in customer needs or to devote greater resources than we can to developing and expanding our services. Such competitors could also attempt to increase their presence in our markets by forming strategic alliances with other competitors, by offering new or improved services or by increasing their efforts to gain and retain market share through competitive pricing. As the market for our services matures, price competition and penetration into the market will intensify. Such competition may adversely affect our gross profits, margins and results of operations. There can be no assurance that we will be able to compete successfully with existing or new competitors.
We may be unable to effectively manage our growth.
We will need to manage our growth effectively, which may entail devising and effectively implementing business and integration plans, training and managing our growing workforce, managing our costs, and implementing adequate control and reporting systems in a timely manner. We may not be able to successfully manage our growth or to integrate and assimilate any acquired business operations. Our failure to do so could affect our success in executing our business plan and adversely affect our revenues, profitability and results of operations.
If we fail to successfully manage our planned expansion of operations, our growth prospects will be diminished and our operating expenses could exceed budgeted amounts.
Our ability to offer our services in an evolving market requires an effective planning and management process. We have expanded our operations rapidly since inception, and we intend to continue to expand them in the foreseeable future. This rapid growth places significant demand on our managerial and operational resources and our internal training capabilities. In addition, we have hired a significant number of employees and plan to further increase our total work force. This growth will continue to substantially burden our management team. To manage growth effectively, we must:
| a. | Implement and improve our operational, financial and other systems, procedures and controls on a timely basis. |
| b. | Expand, train and manage our workforce, particularly our sales and marketing and support organizations. |
We cannot be certain that our systems, procedures and controls will be adequate to support our current or future operations or that our management will be able to handle such expansion and still achieve the execution necessary to meet our growth expectations. Failure to manage our growth effectively could diminish our growth prospects and could result in lost opportunities as well as operating expenses exceeding the amount budgeted.
We may be unable to maintain internal funds or obtain financing or renew credit facilities in the future.
Adequate financing is one of the major factors, which can affect our ability to execute our business plan in this regard. We finance our business mainly through internal funds, bank loans or raising equity funds. There is no guarantee that we will always have internal funds available for future developments or we will not experience difficulties in obtaining financing and renewing credit facilities granted by financial institutions in the future. In addition, there may be a delay in equity fundraising activities. Although in August and November 2014,we issued 40,000,000 shares of stock of the Company in the aggregate for cash of approximately $3,400,000 to Ace Develop, with Lin Chi-Jung, our CEO, President and Chairman, the sole shareholder of Ace Develop, our access to obtain debt or equity financing depends on the bank’s willingness to lend and on conditions in the capital markets, and we may not be able to secure additional sources of financing on commercially acceptable terms, if at all. If we cannot raise additional capital on acceptable terms, we may not be able to develop or enhance our services, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements. To fully realize our business objectives and potential, we may require additional financing. If we are unable to obtain any necessary additional financing, we will be required to substantially curtail our approach to implementing our business objectives. Additional financing may be debt, equity or a combination of debt and equity. If equity is used, it could result in significant dilution to our shareholders.
We require substantial capital resources to fund our land use rights acquisition and property developments, which may not be available.
Property development is capital intensive. Our ability to secure sufficient financing for land use rights acquisition and property development depends on a number of factors that are beyond our control, including market conditions in the capital markets, the PRC economy and the PRC government regulations that affect the availability and cost of financing for real estate companies.
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In order to strengthen liquidity management and regulate money and credit supply, the People’s Bank of China raised the RMB reserve requirement ratio for depository financial institutions. Prior to December 2011, the People’s Bank of China raised the reserve requirement ratio by an additional 1.5%. Effective on December 5, 2011, the People’s Bank of China reduced the RMB reserve requirement ratio by 0.5%. Effective on February 24, 2012 and May 18, 2012, People’s Bank of China decided to further cut the RMB reserve requirement ratio by 0.5% twice. The reserve requirement ratio refers to the amount of funds that banks must hold in reserve against deposits made by their customers. These increases in the reserve requirement ratio have reduced the amount of commercial bank credit available to businesses in China, including us.
Our operations and growth prospects may be significantly impeded if we are unable to retain our key personnel or attract additional key personnel, particularly since experienced personnel and new skilled personnel are in short supply.
Competition for key personnel is intense. As a small company, our success depends on the service of our executive officers, and other skilled managerial and technical personnel, and our ability to attract, hire, train and retain personnel. There is always the possibility that certain of our key personnel may terminate their employment with us to work for one of our competitors at any time for any reason. There can be no assurance that we will be successful in attracting and retaining key personnel. The loss of services of one or more key personnel could have a material adverse effect on us and would materially impede the operation and growth of our business.
If our partnering developers experience financial or other difficulties, our business and revenues could be adversely affected.
As a service-based company, we greatly depend on the working relationships and agency contracts with its partnering developers. We are exposed to the risks that our partnering developers may experience financial or other difficulties, which may affect their ability or will to carry out any existing development projects or resell contracts, thus delaying or canceling the fulfillment of their agency contracts with us. Any of these factors could adversely affect our revenues, profitability and results of operations.
Our partnering developers are subject to extensive government regulation which could make it difficult for them to obtain adequate funding or additional funding. Various PRC regulations restrict developers’ ability to raise capital through external financings and other methods, including, but not limited to, the following:
| · | developers cannot pre-sell uncompleted residential units in a project prior to achieving certain development milestones specified in related regulations; | |
| · | PRC banks are prohibited from extending loans to real estate companies to fund the purchase of land use rights; | |
| · | developers cannot borrow from a PRC bank for a particular project unless we fund at least 35% of the total investment amount of that project using our own capital; | |
| · | developers cannot borrow from a PRC bank for a particular project if we do not obtain the land use right certificate for that project; | |
| · | property developers are strictly prohibited from using the proceeds from a loan obtained from a local bank to fund property developments outside of the region where the bank is located; and | |
| · | PRC banks are prohibited from accepting properties that have been vacant for more than three years as collateral for a loan. |
We may fail to obtain, or may experience material delays in obtaining necessary government approvals for any major property development, which will adversely affect our business.
The real estate industry is strictly regulated by the PRC government. Property developers in China must abide by various laws and regulations, including implementation rules promulgated by local governments to enforce these laws and regulations. Before commencing, and during the course of, development of a property project, we need to apply for various licenses, permits, certificates and approvals, including land use rights certificates, construction site planning permits, construction work planning permits, construction permits, pre-sale permits and completion acceptance certificates. We need to satisfy various requirements to obtain these certificates and permits. To date, we have not encountered serious delays or difficulties in the process of applying for these certificates and permits, but we cannot guarantee that we will not encounter serious delays or difficulties in the future. In the event that we fail to obtain the necessary governmental approvals for any of our major property projects, or a serious delay occurs in the government’s examination and approval progress, we may not be able to maintain our development schedule and our business and cash flows may be adversely affected.
We may be unable to complete our property developments on time or at all.
The progress and costs for a development project can be adversely affected by many factors, including, without limitation:
| · | delays in obtaining necessary licenses, permits or approvals from government agencies or authorities; |
| · | shortages of materials, equipment, contractors and skilled labor; |
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| · | disputes with our third-party contractors; |
| · | failure by our third-party contractors to comply with our designs, specifications or standards; |
| · | difficult geological situations or other geotechnical issues; |
| · | on-site labor disputes or work accidents; and natural catastrophes or adverse weather conditions. |
Any construction delays, or failure to complete a project according to our planned specifications or budget, may delay our property sales, which could harm our revenues, cash flows and our reputation.
If we fail to establish and maintain strategic relationships, the market acceptance of our services, and our profitability, may suffer.
To offer services to a larger customer base, our direct sales force depends on strategic partnerships, marketing alliances, and partnering developers to obtain customer leads and referrals. If we are unable to maintain our existing strategic relationships or fail to enter into additional strategic relationships, we will have to devote substantially more resources to the marketing of our services. We would also lose anticipated customer introductions and co-marketing benefits. Our success depends in part on the success of our strategic partners and their ability to market our services successfully. In addition, our strategic partners may not regard us as significant for their own businesses. Therefore, they could reduce their commitment to us or terminate their respective relationships with us, pursue other partnerships or relationships, or attempt to develop or acquire services that compete with our services. Even if we succeed in establishing these relationships, they may not result in additional customers or revenues.
We are subject to the risks associated with projects operated through joint ventures.
Some of our projects are operated through joint ventures in which we have controlling interests. We may enter into similar joint ventures in the future. Any joint venture investment involves risks such as the possibility that the joint venture partner may seek relief under Chinese insolvency laws, or have economic or business interests or goals that are inconsistent with our business interests or goals. While the bankruptcy or insolvency of our joint venture partner generally should not disrupt the operations of the joint venture, we could be forced to purchase the partner’s interest in the joint venture, or the interest could be sold to a third party. Additionally, we may enter into joint ventures in the future in which we have non-controlling interests. If we do not have control over a joint venture, the value of our investment may be affected adversely by a third party that may have different goals and capabilities than ours. It may also be difficult for us to exit a joint venture that we do not control after an impasse. In addition, a joint venture partner may be unable to meet its economic or other obligations, and we may be required to fulfill those obligations.
We are subject to the risks associated with projects operated through joint ventures.
Some of our projects are operated through joint ventures in which we have controlling interests. We may enter into similar joint ventures in the future. Any joint venture investment involves risks such as the possibility that the joint venture partner may seek relief under federal or state insolvency laws, or have economic or business interests or goals that are inconsistent with our business interests or goals. While the bankruptcy or insolvency of our joint venture partner generally should not disrupt the operations of the joint venture, we could be forced to purchase the partner’s interest in the joint venture, or the interest could be sold to a third party. Additionally, we may enter into joint ventures in the future in which we have non-controlling interests. If we do not have control over a joint venture, the value of our investment may be affected adversely by a third party that may have different goals and capabilities than ours. It may also be difficult for us to exit a joint venture that we do not control after an impasse. In addition, a joint venture partner may be unable to meet its economic or other obligations, and we may be required to fulfill those obligations.
We are subject to risks relating to acts of God, terrorist activity and war.
Our operating income may be reduced by acts of God, such as natural disasters or acts of terror, in locations where we own and/or operate significant properties and areas from which we draw customers and partnering developers. Some types of losses, such as from earthquake, hurricane, terrorism and environmental hazards, may be either uninsurable or too expensive to justify insuring against. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in any particular property, as well as any anticipated future revenue from such property. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property. Similarly, wars (including the potential for war), terrorist activity (including threats of terrorist activity), political unrest and other forms of civil strife as well as geopolitical uncertainty have caused in the past, and may cause in the future, our results to differ materially from anticipated results.
We have limited business insurance coverage in China.
The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products. As a result, we do not have any business liability or disruption insurance coverage for our operations in China. Any business disruption, litigation or natural disaster might result in substantial costs and diversion of resources.
We may be affected by global climate change or by legal, regulatory, or market responses to such change.
There is a growing concern in regards to the global warming issues affecting the world. The changing weather patterns and abnormal conditions may affect the construction and logistics of developers and this may indirectly cause inverse effect to our operation. Extreme weather conditions may delay in construction of properties; this then may delay the sale of these properties and therefore delaying our future revenue stream. There may be regulations in manufacturing materials for property construction and new building codes in response to global warming that may delay construction and/or create further expenses to the developers. These possible changes may indirectly affect our business.
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Our real estate development operating results may not achieve our goals.
As there are many variables to developing a real estate project, we face the risk of running out of funds mid construction and may have to delay or be unable to continue developing the project. We may also run into market downturn and not be able to sell any of the housings we’ve developed. If any of the above happens, we may face an extreme cash shortage and will directly affect our business.
The staff of our accounting department lack training and experience in the accounting principles generally accepted in the United States (“U.S. GAAP”), which may result in accounting errors in the financial statements that we file with the Securities and Exchange Commission (the “SEC”).
Our executive offices are located in the PRC. Our entire bookkeeping and accounting staff is located there. Our books and records are maintained in Chinese, using Chinese accounting principles. Chinese accounting principles vary in many important respects from U.S. GAAP. To file our Company’s financial statements with the SEC, our accounting staff must convert the financial statements from Chinese accounting principles to U.S. accounting principles. However, none of the members of our accounting staff has extensive experience or training in the preparation of financial statements under U.S. accounting principles. Neither do we have any employee who has previous experience in accounting for a U.S. public company. This situation creates a risk that the financial statements we file with the SEC will fail to present our financial condition and/or results of operations as required by SEC rules and U.S. GAAP.
We have identified material weaknesses in our internal control over financial reporting. If we fail to develop or maintain an effective system of internal controls, we may not be able to accurately report our financial results and prevent fraud. As a result, current and potential stockholders could lose confidence in our financial statements, which would harm the trading price of our common stock.
Companies that file reports with the SEC, including us, are subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404. SOX 404 requires management to establish and maintain a system of internal control over financial reporting and annual reports on Form 10-K filed under the Exchange Act to contain a report from management assessing the effectiveness of a company’s internal control over financial reporting. A report of our management is included under Item 9A.“Controls and Procedures” of this report. We are a smaller reporting company and, consequently, are not required to include an attestation report of our auditor in this annual report. However, if and when we become subject to the auditor attestation requirements under SOX 404, we can provide no assurance that we will receive an unqualified report from our independent auditors.
During its evaluation of the effectiveness of internal control over financial reporting as of December 31, 2014, management identified a material weakness relating to our lack of sufficient accounting personnel with an appropriate understanding of U.S. GAAP and SEC reporting requirements. Although we are undertaking steps to address these material weaknesses, the existence of a material weakness is an indication that there is more than a remote likelihood that a material misstatement of our financial statements will not be prevented or detected in the current or any future period.
We are undertaking remedial measures, which measures will take time to implement and test, to address the material weakness. There can be no assurance that such measures will be sufficient to remedy the material weakness identified or that additional material weaknesses or other control or significant deficiencies will not be identified in the future. If we continue to experience material weaknesses in our internal controls or fail to maintain or implement required new or improved controls, such circumstances could cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements, or adversely affect the results of periodic management evaluations and, if required, annual auditor attestation reports. Each of the foregoing results could cause investors to lose confidence in our reported financial information and lead to a decline in our stock price. If we cannot produce reliable financial reports, investors could lose confidence in our reported financial information, the market price of our common stock could decline significantly, we may be unable to obtain additional financing to operate and expand our business, and our business and financial condition could be harmed. See Item 9A.“Controls and Procedures” for more information.
RISKS RELATING TO OUR SECURITIES
Our controlling shareholders could take actions that are not in the public shareholders’ best interests.
As of March 31, 2016, Ace Develop directly controls 64.80% of our outstanding common stock and Lin Chi-Jung, our Chairman, is the sole shareholder of Ace Develop. As of March 31, 2016, Robert Lin Investments directly controls 6.57% of our outstanding common stock and Lin Chao Chun, one of our directors, is the principal and controlling shareholder of Robert Lin Investments. Accordingly, pursuant to our Articles of Incorporation and bylaws, Ace Develop and Lin Chi-Jung, and Robert Lin Investments and Lin Chao Chun, by virtue of their controlling ownership of share interests, will be able to exercise substantial influence over our business by directly or indirectly voting at either shareholders meetings or the board of directors meetings in matters of significance to us and our public shareholders, including matters relating to:
a. Election of directors and officers;
b. The amount and timing of dividends and other distributions;
c. Acquisition of or merger with another company; and
d. Any proposed amendments to our Articles of Incorporation.
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Future sales of our common stock could adversely affect our stock price.
If our shareholders sell substantial amounts of our common stock in the public market, the market price of our common stock could be adversely affected. In addition, the sale of these shares could impair our ability to raise capital through the sale of additional equity securities.
We are traded on the OTCQB, which can be a volatile market.
Our common stock is quoted on the OTCQB, a quotation system for equity securities. It is a more limited trading market than the Nasdaq Capital Market, and timely and accurate quotations of the price of our common stock may not always be available. Investors may expect trading volume to be low in such a market. Consequently, the activity of only a few shares may affect the market and may result in wide swings in price and in volume.
We may be subject to exchange rate fluctuations.
A majority of our revenues are received, and a majority of our operating costs are incurred, in Renminbi. Because our financial statements are presented in U.S. Dollars, any significant fluctuation in the currency exchange rates between the Renminbi and the U.S. Dollar will affect our reported results of operations. We do not currently engage in currency-hedging transactions.
Trading of our common stock is limited, which may make it difficult for investors to sell their shares at times and prices that investors feel are appropriate.
Trading of our common stock has been extremely limited. This adversely effects the liquidity of our common stock, not only in terms of the number of shares that can be bought and sold at a given price, but also through delays in the timing of transactions and reduction in security analysts’ and the media’s coverage of us. This may result in lower prices for our common stock than might otherwise be obtained and could also result in a larger spread between the bid and asked prices for our common stock.
There is a limited market for our common stock and an active trading market for our common stock may never develop.
Trading in our common stock has been limited and has been characterized by wide fluctuations in trading prices, due to many factors that may have little to do with a company’s operations or business prospects.
Because it may be a “penny stock,” it will be more difficult for shareholders to sell shares of our common stock.
In addition, our common stock may be considered a “penny stock” under SEC rules because it has been trading on the OTC Bulletin Board at prices lower than $1.00. Broker-dealers who sell penny stocks must provide purchasers of these stocks with a standardized risk-disclosure document prepared by the SEC. This document provides information about penny stocks and the nature and level of risks involved in investing in the penny-stock market. A broker must also give a purchaser, orally or in writing, bid and offer quotations and information regarding broker and salesperson compensation, make a written determination that the penny stock is a suitable investment for the purchaser, and obtain the purchaser’s written agreement for the purchaser. Broker-dealers also must provide customers that hold penny stocks in their accounts with such broker-dealers a monthly statement containing price and market information relating to the penny stock. If a penny stock is sold to investors in violation of the penny stock rules, investors may be able to cancel the purchase and get the money back. The penny stock rules may make it difficult for investors to sell their shares of our stock, and because of these rules, there is less trading in penny stocks. Moreover, many brokers simply choose not to participate in penny-stock transactions. Accordingly, investors may not always be able to resell shares of our common stock publicly at times and at prices that investors feel are appropriate.
Our stock price is, and we expect it to remain, volatile, which could limit investors’ ability to sell stock at a profit.
Since the completion of the SRRE /CY-SRRE/LRY share exchange transactions the market price of our common stock has ranged from a high of $0.05 per share to a low of $0.01 per share in 2014. The volatile price of our stock makes it difficult for investors to predict the value of our investment, to sell shares at a profit at any given time, or to plan purchases and sales in advance. A variety of factors may affect the market price of our common stock. These include, but are not limited to:
a. Announcements of new technological innovations or new commercial services by our competitors or us;
b. Developments concerning proprietary rights;
c. Regulatory developments in Mainland China and foreign countries;
d. Period-to-period fluctuations in our revenues and other results of operations;
e. Economic or other crises and other external factors;
f. Changes in financial estimates by securities analysts; and
g. Sales of our common stock.
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We will not be able to control many of these factors, and we believe that period-to-period comparisons of our financial results will not necessarily be indicative of our future performance.
The stock market in general has experienced extreme price and volume fluctuations that may have been unrelated and disproportionate to the operating performance of individual companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance.
Because we have not paid and do not plan to pay cash dividends, investors will not realize any income from an investment in our common stock unless and until investors sell their shares at profit.
We did not pay cash dividends on our common stock in 2014, and we do not anticipate paying any cash dividends in the near future. Investors should not rely on an investment in our stock if they require dividend income. Further, investors will only realize income on an investment in our stock in the event they sell or otherwise dispose of their shares at a price higher than the price they paid for their shares. Such a gain would result only from an increase in the market price of our common stock, which is uncertain and unpredictable.
We intend to retain all of our earnings for use in our business and do not anticipate paying any cash dividends in the near future.
The payment of any future dividends will be at the discretion of the Board of Directors and will depend upon a number of factors, including future earnings, the success of our business activities, general financial condition, future prospects, general business conditions and such other factors as our Board of Directors may deem relevant.
RISKS RELATING TO THE REAL ESTATE INDUSTRY IN YANGTZE DELTA AND OTHER AREAS OF THE PRC
The real estate market in Yangtze Delta and other areas of the PRC is at an early stage of development.
We are subject to real estate market conditions in the PRC generally and Yangtze Delta in particular. Private ownership of property in the PRC is still at an early stage of development. Although there is a perception that economic growth in the PRC and the higher standard of living resulting from such growth will lead to a greater demand for private properties in the PRC, it is not possible to predict with certainty that such a correlation exists as many social, political, economic, legal and other factors may affect the development of the property market. The level of uncertainty is increased by the limited availability of accurate financial and market information as well as the overall low level of transparency in the PRC.
The PRC property market, including the Yangtze Delta property market, is volatile and may experience oversupply and property price fluctuations. The central and local governments frequently adjust monetary and other economic policies to prevent and curtail the overheating of the PRC and local economies, and such economic adjustments may affect the real estate market in Yangtze Delta and other parts of China. Furthermore, the central and local governments from time to time make policy adjustments and adopt new regulatory measures in a direct effort to control the over development of the real estate market in China, including Yangtze Delta. Such policies may lead to changes in market conditions, including price instability and an imbalance of supply and demand of residential properties, which may materially adversely affect our business and financial conditions. Also, there is no assurance that there will not be over development in the property sector in Yangtze Delta and other parts of China in the future. Any future over development in the property sector in Yangtze Delta and other parts of China may result in an oversupply of properties and a fall of property prices in Yangtze Delta or any of our other markets, which could adversely affect our business and financial condition. The lack of a liquid secondary market for residential property may discourage investors from acquiring new properties. The limited amount of property mortgage financing available to PRC individuals may further inhibit demand for residential developments.
Local government may issue further restrictive measures in the future.
In January, 2011, the Shanghai municipal government put forward a local restrictive policy. The policy prohibits residential housing purchases for 1) non-local residents, who are not able to provide a local tax payment or social security payment certificate over one year within the most recent two years, 2) local resident, who is already in possession of two residential units. The policy also limits residential housing purchases for 1) non-local residents, who are able to provide local tax payment certificate over one year, to only one unit, 2) local residents, who are already in possession of only one residential unit, to one additional residential unit.
We cannot assure you that the local government in Shanghai or Jiangsu Province will not issue further restrictive measures in the future. The local government’s restrictive regulations and measures could increase our operating costs in adapting to these regulations and measures, limit our access to capital resources or even restrict our business operations, which could further adversely affect our business and prospects.
We face increasing competition, which may adversely affect our revenues, profitability and results of operations.
In recent years, a large number of property companies have begun undertaking property sales and investment projects in Yangtze Delta and elsewhere in the PRC. Some of these property companies may have better track records and greater financial and other resources than we do. The intensity of the competition may adversely affect our business and financial position. In addition, the real estate market in Yangtze Delta and elsewhere in the PRC is rapidly changing. If we cannot respond to the changes in the market conditions more swiftly or effectively than our competitors do, our business and financial position will be adversely affected.
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If the availability or attractiveness of mortgage financing were significantly limited, many of our prospective customers would not be able to purchase the properties, thus adversely affecting our business and financial position.
Mortgages are becoming increasingly popular as a means of financing property purchases in the PRC. An increase in interest rates may significantly increase the cost of mortgage financing, thus reducing the affordability of mortgages as a source of financing for residential property purchases. The PRC government has increased the down payment requirements and imposed certain other conditions that make mortgage financing unavailable or unattractive for some potential property purchasers. There is no assurance that the down payment requirements and other conditions will not be further revised. If the availability or attractiveness of mortgage financing is further significantly limited, many of our prospective customers would not be able to purchase the properties and, as a result, our business and future prospects would be adversely affected.
Our future prospects are heavily dependent on the performance of property sectors in specific geographical areas.
The properties we resell and intend to invest in are mainly based in Yangtze Delta. Our future prospects are, therefore, heavily dependent on the continued growth of the property sector around Yangtze Delta, and our business may be affected by any adverse developments in the supply and demand or housing prices in the property sector around Yangtze Delta.
The current level of property development and investment activity in Yangtze Delta and other markets is substantial. However, there is no assurance that such property resale and investment activity in Yangtze Delta or any of our other markets will continue at this level in the future or that we will be able to benefit from the future growth of these property markets.
Our revenues and operating income could be reduced by adverse conditions specific to our property locations.
The properties we resell and intend to invest in are concentrated geographically and are located predominately in Yangtze Delta. As a result, our business and our financial operating results may be materially affected by adverse economic, weather or business conditions in this area. Adverse conditions that affect these areas such as economic recession, changes in extreme weather conditions and natural disasters, may have an adverse impact on our operations.
RISKS RELATING TO THE PEOPLES REPUBLIC OF CHINA
All of our current prospects and deals are generated in Mainland China; thus all of our revenues are derived from our operations in the PRC. Accordingly, our business, financial condition, results of operations and prospects are subject, to a significant extent, to economic, political and legal developments in the PRC.
PRC economic, political policies and social conditions could adversely affect our business.
The economy of PRC differs from the economies of most developed countries in a number of respects, including the amount of government involvement, level of development, growth rate and control of foreign exchange and allocation of resources.
The PRC Government has been reforming the PRC economic system from planned economy to market oriented economy for more than 20 years, and has also begun reforming the government structure in recent years. These reforms have resulted in significant economic growth and social progress. Although we believe these reforms will have a positive effect on our overall and long-term development, we cannot predict whether any future changes in PRC’s political, economic and social conditions, laws, regulations and policies will have any adverse effect on our current or future business, results of operations or financial condition.
Changes in foreign exchange regulations may adversely affect our ability to pay dividends and could adversely affect our results of operations and financial condition.
Substantially all of our revenues and operating expenses are denominated in Renminbi. Conversion of Renminbi is under strict government regulation in the PRC. The Renminbi is currently freely convertible under the "current account", including trade and service related foreign exchange transactions and payment of dividends, but not under the "capital account", which includes foreign direct investment and loans. Under the existing foreign exchange regulations in the PRC, we will be able to pay dividends in foreign currencies without prior approval from the State Administration for Foreign Exchange by complying with certain procedural requirements. However, there is no assurance that the above foreign policies regarding payment of dividends in foreign currencies will continue in the future.
Fluctuation of the Renminbi could materially affect the value of, and dividends payable on, the common stock.
The value of the Renminbi is subject to changes in the PRC Government’s policies and depends to a large extent on China’s domestic and international economic and political developments, as well as supply and demand in the local market. Since 1994, the official exchange rate for the conversion of Renminbi to U.S. Dollars has generally been stable, and in 2005 the official exchange rate between U.S. Dollars and Renminbi had a little fluctuation. However, we cannot give any assurance that the value of the Renminbi will continue to remain stable against the U.S. Dollar or any other foreign currency. Since our income and profit are denominated in Renminbi, any devaluation of the Renminbi would adversely affect the value of, and dividends, if any, payable on, our shares in foreign currency terms.
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Our operations could be adversely affected by changes in the political and economic conditions in the PRC. The PRC is our main market and accounted for all of our revenue. Therefore, we face risks related to conducting business in the PRC. Changes in the social, economic and political conditions of the PRC may adversely affect our business. Unfavorable changes in government policies, political unrest and economic developments may also have a negative impact on our operations.
Since the adoption of the “open door policy” in 1978 and the “socialist market economy” in 1993, the PRC government has been reforming and is expected to continue to reform its economic and political systems. Any changes in the political and economic policies of the PRC government may lead to changes in the laws and regulations or the interpretation of the same, as well as changes in the foreign exchange regulations, taxation and import and export restrictions, which may, in turn, adversely affect our financial performance. While the current policy of the PRC government seems to be one of imposing economic reform policies to encourage foreign investments and greater economic decentralization, we cannot assure that such a policy will continue to prevail in the future.
The PRC Legal System Embodies Uncertainties
The PRC legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little value as precedents. In 1979, the PRC Government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past 28 years has significantly enhanced the protections afforded to various forms of foreign investment in Mainland China. Our PRC operating subsidiaries, wholly foreign-owned enterprises (“WFOEs”), are subject to laws and regulations applicable to foreign investment in the PRC in general and laws and regulations applicable to WFOEs in particular. However, these laws, regulations and legal requirements are constantly changing, and their interpretation and enforcement involve uncertainties. These uncertainties could limit the legal protections available to us and other foreign investors. In addition, we cannot predict the effect of future developments in the PRC legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the pre-emption of local regulations by national laws.
Our shareholders may not be able to enforce U.S. civil liabilities claims.
Our assets are located outside the United States and are held through subsidiaries incorporated under the laws of the Cayman Islands, British Virgin Islands and the PRC. Our current operations are conducted in the PRC. In addition, our directors and officers are residents of the PRC. As a result, it may be difficult for shareholders to implement service of process on these individuals. In addition, there is uncertainty as to whether the courts of China would recognize or enforce judgments of United States courts obtained against the Company or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state thereof, or be competent to hear original actions brought in these countries against us or such persons predicated upon the securities laws of the United States or any state thereof.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
We own our headquarter office space at No.638, Hengfeng Road, 28th Floor, Shanghai, PRC. We have also rented regional field support offices in various cities in Mainland China, including Shanghai, Suzhou, Putuo, Chongqing, Quanjiao, Shangqiu, Linyi and Wuhan. We lease the facilities that house our regional field support offices. The terms of the leases do not contain rent escalation, or contingent rent, renewal, or purchase options.
The Company also owns two floors and four units of the Sovereign Building in Suzhou, PRC. One floor is held for the Company’s own use, and the remaining properties are held for long term investment purposes.
Currently we are not a party to any legal proceeding that could reasonably be expected to have material impact on our operations or finances. However, from time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in any such matter may harm our business.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is quoted on the OTCQB system under the symbol “SRRE.” The following table sets forth the high and low quotations of our common stock reported by the OTCQB system for the periods indicated. Effective in March, 2011, quotations for our common stock were reported by the OTCQB system.
Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commissions, and may not necessarily represent actual transactions.
(Expressed in U.S. Dollars based on Yahoo Finance)
| 2014 | 2013 | |||||||||||||||
| High | Low | High | Low | |||||||||||||
| First quarter | $ | 0.05 | $ | 0.05 | $ | 0.02 | $ | 0.01 | ||||||||
| Second quarter | $ | 0.05 | $ | 0.03 | $ | 0.15 | $ | 0.01 | ||||||||
| Third quarter | $ | 0.09 | $ | 0.01 | $ | 0.02 | $ | 0.01 | ||||||||
| Fourth quarter | $ | 0.04 | $ | 0.04 | $ | 0.05 | $ | 0.01 | ||||||||
As of December 31, 2014, we have approximately 597 record holders of our common stock. On December 31, 2014, the closing price of our common stock was $0.04.
No cash dividends were declared on our common stock in 2014 and 2013. The major reason for not declaring any cash dividends is that we are still a growing company and require sufficient liquidity to fund our business activities. In the future, in the event we have funds available for distribution, we may consider paying cash dividends on our common stock.
The Company did not repurchase any of its outstanding equity securities nor have any sales of unregistered securities during the year ended December 31, 2014.
In August and November 2014, the Company issued 40 million shares in aggregate at $0.085 per share for $3,400,000 for cash in aggregate to Ace Develop, of which Lin Chi-Jung, our CEO, President and Chairman, is the sole shareholder.
ITEM 6. SELECTED FINANCIAL DATA
Not Applicable.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand Sunrise 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
In October 2004, the former shareholders of Sunrise Real Estate Development Group, Inc. (Cayman Islands) (“CY-SRRE”) and LIN RAY YANG Enterprise Ltd. (“LRY”) acquired a majority of our voting interests in a 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 for Securities and Exchange Commission reporting purposes. The historical financial statements prior to October 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.
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SRRE and its subsidiaries, namely, CY-SRRE, LRY, Shanghai Xin Ji Yang Real Estate Consultation Company Limited (“SHXJY”), Shanghai Shang Yang Investment Management and Consulting Company Limited(“SHSY”), Suzhou Gao Feng Hui Property Management Company Limited, (“SZGFH”), Suzhou Shang Yang Real Estate Consultation Company Limited (“SZSY”), Suzhou Xin Ji Yang Real Estate Consultation Company Limited (“SZXJY”), LinyiRui Lin Construction and Design Company Limited (“LYRL”), Linyi Shang Yang Real Estate Development Company Limited (“LYSY”), Shangqiu Shang Yang Real Estate Consultation Company Limited (“SQSY”), Wuhan Gao Feng Hui Consultation Company Limited (“WHGFH”), Sanya Shang Yang Real Estate Consultation Company Limited (“SYSY”), Shanghai Rui Jian Design Company Limited (“SHRJ”), Putian Xin Ji Yang Real Estate Consultation Company Limited (“PTXJY”), and its equity investments in affiliates, namely Wuhan Yuan Yu Long Real Estate Development Company Limited (“WHYYL”), Shanghai Xin Xing Yang Real Estate Brokerage Company Limited (“SHXXY”)and Xin Guang Investment Management and Consulting Company Limited (“XG”) are sometimes hereinafter collectively referred to as “the Company,” “our” or “us”.
The principal activities of the Company are real estate agency sales, real estate marketing services, real estate investments, property leasing services and property management services in the PRC.
RECENT DEVELOPMENTS
Our major business is agency sales, whereby our Chinese subsidiaries contracted with property developers to market and sell their newly developed property units. For these services we earn a commission fee calculated as a percentage of the sales prices. We have focused our sales on the whole China market, especially in secondary cities. To expand our agency business, we have established subsidiaries or branches in Shanghai, Suzhou, Kunshan and Hainan, and branches in Nanchang, Yangzhou, Nanjing, Chongqing, Wuhan, Linyi and Shangqiu
In mid-2011, we established a project company in Wuhan in which we have a 49% ownership. We commenced the construction of Phase 1 of the project in the third quarter of 2012 and the pre-sale of Phase 1 in the first quarter of 2013. We have begun Phase 2 construction of the project in the second quarter of 2013 and the pre-sale of Phase 2 was started in mid-August. The Wuhan project is planned to include seven residential buildings with three buildings being part of Phase 1 and four buildings in Phase 2.
The Wuhan project was supposed to have its handover from the construction contractor, Hubei Fifth Constructions Co. (“HFCC”), on December 31, 2014, but because of a dispute between the Company and HFCC, the handover was delayed and is currently under court review.
In January 2012, we established LYSY in which we have a 24% ownership. During the first quarter of 2012, we acquired approximately 103,385 square meters for the purpose of developing villa-style residential housing. We began construction in mid-2012 and through September 30, 2013 have constructed 98 units which encompasses approximately one-third of the gross sales area. Proceeds from sales will be used to finance the construction of the subsequent phases of the project. As of September 30, 2013, none of such units has been sold. We are applying for bank loans and other forms of funding, however, there are no assurances we will be able to obtain future financings. On March 13, 2014, the Company has signed a joint development agreement with ZhongjiPufa Real Estate Co.. According to this agreement, the Company obtained a right to develop the Guangxinglu Project, which located in the, Putuo district, Shanghai, PRC. This project covers a site area of approximately 2,502 square meters for the development of one building of apartment.
We are applying for bank loans and other forms of funding, however, there are no assurances we will be able to obtain future financings.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-K
In addition to historical information, this Form 10-K 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-K. 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.
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New Accounting Pronouncements
In February 2013, the FASB issued ASU No. 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (“ASU 2013-04”). The objective of ASU 2013-04 is to provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation (within the scope of this guidance) is fixed at the reporting date. Examples of obligations within the scope of ASU 2013-04 include debt arrangements, other contractual obligations, and settled litigation and judicial rulings. ASU 2013-04 is effective for the Group for interim reporting periods beginning July 1, 2014, however, early adoption is permitted. We do not expect that the adoption of ASU 2013-04 will have a material impact on the Company’s consolidated financial statements.
In March 2013, the FASB issued ASU No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (“ASU 2013-05”),, which specifies that a cumulative translation adjustment (“CTA”) should be released into earnings when an entity ceases to have a controlling financial interest in a subsidiary or group of assets within a consolidated foreign entity and the sale or transfer results in the complete or substantially complete liquidation of the foreign entity. For sales of an equity method investment that is a foreign entity, a pro rata portion of CTA attributable to the investment would be recognized in earnings when the investment is sold. When an entity sells either a part or all of its investment in a consolidated foreign entity, CTA would be recognized in earnings only if the sale results in the parent no longer having a controlling financial interest in the foreign entity. In addition, CTA should be recognized in earnings in a business combination achieved in stages. For public entities, ASU 2013-05 is effective for reporting periods beginning after December 15, 2013, with early adoption permitted. We do not expect that the adoption of ASU 2013-05 will have a material impact on the Company’s consolidated financial statements.
In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740) (“ASU 2013-11”) to provide guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carry forward, similar tax loss, or tax credit carry forward exists. This ASU requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carry forward, a similar tax loss, or a tax credit carry forward, with certain exceptions. The modifications to ASC Topic 740 resulting from the issuance of ASU 2013-11 are effective for fiscal years beginning after December 15, 2013 and interim periods within those years. Early adoption is permitted. We do not expect that the adoption of ASU 2013-11 will have a material impact on the Company’s consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern (“ASU 2014-15”). This update requires an entity's management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). When conditions or events raise substantial doubts about an entity’s ability to continue as a going concern, management shall disclose: i) the principal conditions or events that raise substantial doubt about the entity's ability to continue as a going concern; ii) management's evaluation of the significance of those conditions or events in relation to the entity's ability to meet its obligations; and iii) management's plans that are intended to mitigate the conditions or events - and whether or not those plans alleviate the substantial doubt about the entity's ability to continue as a going concern. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and early application is permitted. We are currently evaluating the impact of adopting ASU 2014-15 on our results of operations or financial condition.
In February 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement Period Adjustments (“ASU 2015-16”). this Update require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this Update require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this Update require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date
In August 2015, the FASB issued ASU No. 2015-14 (“ASU 2015-15”), an update to ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). This update provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. This update is effective for annual and interim periods beginning after December 15, 2016, which will require us to adopt these provisions in the first quarter of fiscal 2018. Early application is not permitted. This update permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect this guidance will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting. The amendments in this Update defer the effective date of Update 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
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All other entities should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. All other entities may apply the guidance in Update 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities also may apply the guidance in Update 2014-09earlier as of an annual reporting period beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which the entity first applies the guidance in Update2014-09.
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 in the 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 the collection of accounts receivable, and the useful lives and impairment of property and equipment, goodwill and intangible assets, the valuation of deferred tax assets and inventories 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-K 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 consolidated financial statements:
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 the 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 the 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.
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.
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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.
There is no impairment of real estate property under development during the years ended December 31, 2014 and 2013.
Impairment of Long-lived Assets
In accordance with ASC 360, "Accounting for the Impairment or Disposal of Long-Lived Assets", 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, 2014 and 2013.
The Wuhan project was due to have its handover from the construction contractor, Hubei Fifth Constructions Co. (“HFCC”), on December 31, 2014, but because of a dispute between the Company and HFCC, the handover was delayed and is currently under court review. The Company checked with its legal consul, evaluated the issue and recorded an investment impairment of $0.
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, 2014 and 2013.
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.
As of December 31, 2014, the Company received refundable government subsidies of $5,421,706 (2013: $5,441,360). The subsidy is given to reimburse the land acquisition costs and certain construction costs incurred for the Company’s property development project, and are repayable if the Company fails to complete the subsidized property development project by the agreed date. The Company recorded the subsidy received as a deferred government subsidy
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RESULTS OF OPERATIONS
We provide the following discussion and analyses of our changes in financial condition and results of operations for the year ended December 31, 2014 with comparisons to the historical year ended December 31, 2013.
Net Revenues
The following table shows the detail for net revenues by line of business:
| Years Ended December 31, | ||||||||||||||||||||
| 2014 | % to total | 2013 | % to total | % change | ||||||||||||||||
| Agency sales | 5,332,047 | 62 | 8,012,928 | 71 | (33 | ) | ||||||||||||||
| Property management | 1,409,267 | 16 | 2,491,630 | 22 | (43 | ) | ||||||||||||||
| Underwriting sales | 1,870,324 | 22 | 735,633 | 7 | 154 | |||||||||||||||
| Net revenues | 8,611,639 | 100 | 11,240,190 | 100.00 | (23 | ) | ||||||||||||||
The net revenue for 2014 was $8,611,639, a decrease of 23% from $11,240,190 in2013. In 2014, agency sales represented 62% of the total net revenue, property management represented 16%. The decrease in 2014 is mainly due to the decrease in the revenue from our agency sales and property management.
Agency Sales
In 2014, 62% of our net revenue was derived from agency sales, which was primarily from the business activities of SHXJY, SHSY and their subsidiaries and branches. As compared with 2013, net revenue of agency sales in 2014decreased by 33%.The decrease is mainly due to there were less sales agency projects during this year.
Government policies enacted in 2011 aiming to stabilize real estate prices affected many businesses in the real estate industry. Despite these restrictive policies, we were able to increase our agency sales revenue. We are continually seeking stable growth in our agency sales business in 2015. However, there can be no assurance that we will be able to do so.
Property Management
During the year of 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, 2006, and the Company has the right to sublease the leased properties to cover these lease commitments in the leasing period. In regards to the leasing agreements, we have agreed with certain buyers and have lowered the annual rental return rate for the remaining leasing period from 8.5% for 5 years to 5.8%, and from 8.8% for 8 years to 6%. These sub-leasing agreements related to the underwriting project have been expired in mid-2014. Any sub-leasing agreements entered will not be related to the 2005/2006 leasing agreements but on a case by case basis.
We expect that the income from the sub-leasing business will be on a stable growth trend in 2015and that it can cover the lease commitments in the leasing period as a whole. However there can be no assurance that we will achieve these objectives.
Underwriting Sales
In February 2004, SHSY entered into an agreement to underwrite an office building in Suzhou, known as Suzhou Sovereign Building. Being the sole distribution agent for this office building, SHSY committed to a sales target. Property underwriting sales are comparatively a higher risk business model compared to our pure commission based agency business. Under this higher risk business model, the Underwriting Model, our commission is not calculated as a percentage of the selling price; instead, our commission revenue is equivalent to the price difference between the final selling price and underwriting price. We negotiate with a developer for an underwriting price that is as low as possible, with the guarantee that all or a majority of the units will be sold by a specific date. In return, we are given the flexibility to establish the final selling price and earn the price difference between the final selling price and the underwriting price. The risk of this kind of arrangement is that if there is any unsold unit on the expiration date of the agreement, we may have to absorb the unsold property units from developers at the underwriting price and hold them in our inventory or as investments.
The Company accounts for its underwriting sales revenue with underwriting rent guarantees in accordance with ASC 967-605, “Accounting for Sales of Real Estate” (Formerly Statement of Financial Accounting Standards No. 66, “Accounting for Sales of Real Estate”. The deposit method has been used for the 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.
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Cost of Revenues
The following table shows the cost of revenues detail by line of business:
| Years Ended December 31, | ||||||||||||||||||||
| 2014 | % to total | 2013 | % to total | % change | ||||||||||||||||
| Agency sales | 2,673,051 | 62 | 2,677,581 | 60 | 0 | |||||||||||||||
| Property management | 1,143,781 | 26 | 1,567,534 | 36 | (27 | ) | ||||||||||||||
| Underwriting sales | 533,858 | 12 | 167,004 | 4 | 219 | |||||||||||||||
| Cost of revenues | 4,350,690 | 100 | 4,412,118 | 100.00 | (1 | ) | ||||||||||||||
The cost of revenues for 2014 was $4,350,690; this was a decrease of 1%from $4,412,118 for 2013. In 2014, agency sales represented 62%of total cost of revenues, property management represented 26%. The decrease of cost of revenues is mainly due to the decrease of cost of revenue of property management and increase of cost of revenue of underwriting sales.
Agency Sales
As compared with 2013, the cost of agency sales in 2014 decreased by 0.17%. This slight decrease was mainly due to a decrease in travelling and miscellaneous expenses.
Property Management
The cost of revenue from property management of 2014 was $1,143,781, which a slight decrease to $1,567,534 during the year of 2013.
Underwriting Sales
The cost of underwriting sales represents selling cost, such as staff costs and advertising expenses, associated to the underwriting sales.
Operating Expenses
The following table shows operating expenses detailed by line of business:
| Years Ended December 31, | ||||||||||||||||||||
| 2014 | % to total | 2013 | % to total | % change | ||||||||||||||||
| Agency sales | 1,198,594 | 63 | 1,249,248 | 52 | (4 | ) | ||||||||||||||
| Property management | 85,818 | 4 | 94,150 | 4 | (9 | ) | ||||||||||||||
| Real estate development | 631,341 | 33 | 1,049,597 | 44 | (40 | ) | ||||||||||||||
| Operating expenses | 1,915,753 | 100 | 2,392,995 | 100 | (20 | ) | ||||||||||||||
The operating expenses of 2014 were $1,915,753, which close to $2,392,995 in 2013. In 2014, the expenses pertaining to agency sales represented 63% of the total operating expenses, property management represented 4% and real estate development represented 33%.
Agency Sales
When compared to 2013, the operating expenses for agency sales decreased 4% in 2014. The primary reason for the decrease in 2014 was the decrease in staff costs and salary expense.
Property Management
When compared to2013, the operating expenses decreased 9%for property management in 2014. The decrease was primarily due to a decrease in salary.
| 25 |
Real Estate Development
The operating expenses related to our real estate development business decreased 40% as compared to the previous year. This decreased was mainly due to the decrease activities of our sales promotion activities in Linyi Project.
General and Administrative Expenses
The general and administrative expenses in 2014 were $4,587,529, decreasing 40% from $7,611,693 in 2013. The primary reason for the decrease was a decrease due to the impairment write-off in 2013 in operations and thus a decrease in staff costs and an overall decrease in expenses.
Operating Income
In 2014, we had an operating loss of $2,242,333, representing a decrease from an operating income of $3,178,141 in 2013. The decrease in profit to a loss was mainly due to there was no such a big impairment write-off of impairment compared to 2013.
Interest Income
Interest income decreased from $1,114,907 in 2013 to $853,055 in 2014. The decrease was mainly due to the decreased income from WHYYL, which had got a bank loan carried lower interest rates.
Interest Expense
When compared to 2013, the interest expense in 2014 decreased 12% to $3,401,238. The decrease of interest expense is mainly due to the capitalized interest expense of Linyi project and Shanghai Guangxinlu project.
Major Related Party Transactions
Amount Due To Directors
The amounts due to directors as of December 31, 2014 were $10,129,247. The amounts due are as follows:
Amount Due To Lin Chi-Jung
The amount due to Lin Chi-Jung as of December 31, 2014 was $10,073,426, which consists of a balance of unpaid salaries and reimbursements totaling $44,416 and advances made in 2014together with unpaid interest totaling $10,029,010.
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 18% to 36% per annum. During the year ended December 31, 2014and 2013, the interest expense related to these advances amounted to $1,763,546 and $2,024,041, respectively.
Amount Due To Lin Chao-Chin
The balances due to Lin Chao-Chin as of December 31, 2014 was $23,027, which is unsecured, interest-free and has no fixed term of repayment.
Amount Due To Lin Hsin Hung
The balance due to Lin Hsin Hung as of December 31, 2014 was $32,794, which is unsecured, interest-free and has no fixed term of repayment.
Amount Due From An Unconsolidated Affiliate
Advances to the unconsolidated affiliate, WHYYL, as of December 31, 2014 amounted to $2,695,010.The balance bears interest at a rate of 15% per annum, which effective to December31, 2014 is unsecured and has no fixed term of repayment. During the year ended December 31, 2014, the Company recorded interest income of $744,909 related to the advances.
LIQUIDITY AND CAPITAL RESOURCES
In 2014, our principal sources of cash were revenues from our agency sales and property management businesses, new bank loans and promissory notes, and advances from directors. Most of our cash resources were used to fund our revenue related expenses, such as salaries and commissions paid to the sales force, daily administrative expenses and the maintenance of regional offices, and the repayments of our borrowings and promissory notes.
| 26 |
We ended the period with a cash position of $1,626,583.
Net cash used in the Company’s operating activities for 2014 was $28,418,905, representing an increased use of cash in the amount of $19,790,761 in 2014 as compared to the cash used for 2013. The increase was primarily attributable to the increase in cash used in real estate property under development in the amount of $26,417,488.
Net cash used in the Company’s investing activities was $335,210, representing a decrease of $1,531,634 as compared to the cash used in investing activities for 2013. The decrease in cash used in investing activities was primarily attributable to the decrease in cash used in capital contribution to unconsolidated affiliate of $1,932,220in 2013.
Net cash provided by the Company’s financing activities was $28,257,125, representing an increase of $11,131,851 from those in 2013. This increase was primarily attributable to advances from an affiliate in the amount of $17,166,415.
The cash needs for 2014 will be for the repayments of bank notes, promissory notes, and funds required to finance the Company’s future projects in property agency and real estate developments.
If our business 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 and affiliates, as we have done previously, but there can be no guarantee that we will be able to obtain such funds through the issuance of debt or equity that are with terms satisfactory to management and our board of directors.
As of December 31, 2014, the Company had a working capital deficiency of $9,527,421, an accumulated deficit from recurring net losses of $19,780,232 and short-term debt obligations of $91,038,087. 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. We have been able to secure new bank lines of credit and secure additional loans from affiliates to fund our operations to date. However, 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.
Indebtedness
The company’s indebtedness is described under “Note 11-Bank Loans”, “Note 12-Promissory Notes Payable”, “Note 13- Amounts Due To Directors” and “Note 19-Long Term Borrowings” to the Company’s accompanying consolidated financial statements for the years ended December 31, 2014 and 2013 in Item 8.
Promissory Notes – As of December 31, 2014, the Company had an aggregate amount due under outstanding promissory notes to parties other than banks in the amount of $13,396,206 bearing interest at rates varying from 12% to 36%. The interest expense on promissory notes amounted to $1,998,862 and $813,626 as of December 31, 2014 and 2013, respectively.
Bank Loans - In January 2014, the Company obtained a bank loan of $ 1,307,403 (RMB8,000,000) from the Bank of China, bearing interest at a rate of 7.56% per annum. The loan is secured by the properties of two unrelated parties and matures on March 5, 2015. As of December 31, 2014, the outstanding balance of this loan was $1,307,403.
In August 2012, the Company entered into a three-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 $5,850,629 (RMB35,800,000) as of December 31, 2014. 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 as of December 31, 2014 was 7.6875% per annum. The credit facility is secured by all of the Company’s properties included in property and equipment (See Note 7) and the restricted cash of $0.00 as of December 31, 2014 and $246,895 as of December 31, 2013(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, 2014 and December 31, 2013, the Company had outstanding loan balances of $4,984,475 and $5,002,543, respectively, under this facility line of credit.
In April 2012, the Company entered into a three-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 $12,256,905 (RMB75,000,000) as of December 31, 2014. 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 six months ended December 31, 2014 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, 2014 and December 31, 2013, the Company had outstanding loan balances of $12,256,905 and $12,301,332, respectively, under this facility line of credit.
| 27 |
Advances from Officers and Directors - The Company has also financed its operations in part with advances from officers and directors. At December 31, 2014, the Company had borrowings together with unpaid interest expense as of December 31, 2014 and December 31, 2013 were $10,129,247 and $10,908,277, respectively. The balances are unsecured and interest bearing at rates ranging from 9.6% to 36.5% per annum.
The interest expense on amounts due to directors, which amount is entirely due to Lin Chi-Jung, amounted to $2,358,322 and $1,999,062 for the year ended December 31, 2014 and 2013.
OFF BALANCE SHEET ARRANGEMENTS
We do not have any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency forward contracts. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development services with us.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not applicable.
| 28 |
ITEM 8. FINANCIAL STATEMENTSAND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| 29 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Sunrise Real Estate Group, Inc.
We have audited the accompanying consolidated balance sheets of Sunrise Real Estate Group, Inc. and subsidiaries (the Company) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the years in the two year period ended December 31, 2014. Sunrise Real Estate Group, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sunrise Real Estate Group, Inc. as of December 31, 2014 and 2013, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has a working capital deficiency, accumulated deficit from recurring net losses for the current and prior years, and significant debt obligations are maturing in less than one year. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 2 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
As described in Note 24 to the financial statements, the Company has made material adjustments to the consolidated financial statements for the year ended December 31, 2013 that were previously filed.
| /s/Kenne Ruan, CPA, P.C. | |
| Woodbridge, Connecticut | |
| June 6, 2017 |
| 30 |
SUNRISE
REAL ESTATE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Expressed in U.S. Dollars)
| December 31, | December 31, | |||||||
| 2014 | 2013 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 1,626,583 | $ | 2,055,251 | ||||
| Restricted cash (Note 3) | 1,535,894 | 1,679,733 | ||||||
| Accounts receivable, net | 1,270,299 | 1,239,549 | ||||||
| Promissory deposits (Note 4) | 1,190,972 | 1,127,353 | ||||||
| Real estate property under development (Note 5) | 71,377,187 | 31,644,480 | ||||||
| Amount due from an unconsolidated affiliate (Note 9) | 2,695,010 | 3,538,939 | ||||||
| Other receivables and deposits, net (Note 6) | 1,814,721 | 132,818 | ||||||
| Total current assets | 81,510,666 | 41,418,123 | ||||||
| Property and equipment, net (Note 7) | 8,470,080 | 9,116,137 | ||||||
| Investment properties, net (Note 8) | 5,700,845 | 6,108,523 | ||||||
| Deferred tax assets | 17,203 | 0 | ||||||
| Investments in unconsolidated affiliates(Note 9) | 5,476,491 | 5,753,256 | ||||||
| Other investments, net (Note 10) | 163,425 | 0 | ||||||
| Total assets | $ | 101,338,710 | $ | 62,396,039 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Bank loans (Note 11) | $ | 18,548,782 | $ | 18,616,018 | ||||
| Current portion of long term borrowings (Note 19) | 6,890,960 | 4,592,498 | ||||||
| Promissory notes payable (Note 12) | 13,396,206 | 4,811,670 | ||||||
| Amounts due to directors (Note 13) | 10,129,247 | 10,908,277 | ||||||
| Accounts payable (Note 14) | 10,531,908 | 5,665,811 | ||||||
| Customer deposits (Note 15) | 12,306,707 | 3,318,609 | ||||||
| Amount due to an affiliate (Note 16) | 17,396,948 | 21,090- | ||||||
| Other payables and accrued expenses (Note 17) | 1,415,056 | 1,410,004 | ||||||
| Other taxes payable (Note 18) | 301,775 | 296,109 | ||||||
| Income Taxes payable | 120,498 | 139,684 | ||||||
| Total current liabilities | 91,038,087 | 49,779,770 | ||||||
| Long term borrowings (Note 19) | 8,171,270 | 6,888,747 | ||||||
| Deposit received from underwriting sales | 1,397,825 | |||||||
| Deferred government subsidy (Note 20) | 5,421,706 | 5,441,358 | ||||||
| Total liabilities | 104,631,063 | 63,507,700 | ||||||
| Commitments and contingencies (Note 22) | ||||||||
| Stockholders’ equity | ||||||||
| Common stock, par value $0.01 per share; 200,000,000 shares Authorized; 68,691,925 and 28,691,925 shares issued and outstanding as of December 31, 2014 and 2013, respectively | 686,919 | 286,919 | ||||||
| Additional paid-in capital | 7,570,008 | 4,570,008 | ||||||
| Statutory reserve (Note 21) | 812,582 | 812,467 | ||||||
| Accumulated losses | (19,780,232 | ) | (16,126,545 | ) | ||||
| Accumulated other comprehensive income | 259,173 | 228,007 | ||||||
| Total deficit of Sunrise Real Estate Group, Inc. | (10,451,550 | ) | (10,229,144 | ) | ||||
| Non-controlling interests | 7,159,197 | 9,117,483 | ||||||
| Total stockholders’ equity | (3,292,353 | ) | (1,111,661 | ) | ||||
| Total liabilities and stockholders’ equity | $ | 101,338,710 | $ | 62,396,039 | ||||
See accompanying notes to consolidated financial statements.
| 31 |
SUNRISE REAL ESTATE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in U.S. Dollars)
| Years Ended December 31, | ||||||||
| 2014 | 2013 | |||||||
| Net revenues | $ | 8,611,639 | $ | 11,240,190 | ||||
| Cost of revenues | (4,350,690 | ) | (4,412,118 | ) | ||||
| Gross income | 4,260,949 | 6,828,072 | ||||||
| Operating expenses | (1,915,753 | ) | (2,392,995 | ) | ||||
| General and administrative expenses | (4,587,529 | ) | (7,611,693 | ) | ||||
| Operating income (loss) | (2,242,333 | ) | (3,176,616 | ) | ||||
| Other income (expenses) | ||||||||
| Interest income | 853,055 | 1,114,907 | ||||||
| Interest expense | (3,401,238 | ) | (3,888,737 | ) | ||||
| Other income | 53,967 | 302,972 | ||||||
| Equity in loss of unconsolidated affiliates, net of income taxes | (445,280 | ) | (746,749 | ) | ||||
| Total other expenses | (2,939,496 | ) | (3,217,607 | ) | ||||
| Loss before income taxes | (5,181,829 | ) | (6,394,223 | ) | ||||
| Income taxes (Note 18) | (30,583 | ) | (349,296 | ) | ||||
| Net loss | (5,212,412 | ) | (6,743,519 | ) | ||||
| Less: Net loss attributable to non-controlling interests | 1,558,726 | 4,117,056 | ||||||
| Net loss attributable to stockholders of Sunrise Real Estate Group, Inc. | $ | (3,653,686 | ) | $ | (2,626,463 | ) | ||
| Loss per share - basic and fully diluted | $ | (0.09 | ) | $ | (0.04 | ) | ||
| Weighted average common shares outstanding - Basic and fully diluted | 37,404,254 | 28,691,925 | ||||||
See accompanying notes to consolidated financial statements.
| 32 |
SUNRISE REAL ESTATE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Expressed in U.S. Dollars)
| Years Ended December 31, | ||||||||
| 2014 | 2013 | |||||||
| Net loss | $ | (5,212,412 | ) | $ | (6,743,519 | ) | ||
| Other comprehensive income - Foreign currency translation adjustment | (9,670 | ) | 816,007 | |||||
| Total comprehensive loss | (5,222,082 | ) | (5,927,512 | ) | ||||
| Less: Comprehensive loss attributable to non-controlling interests | 1,599,561 | 3,675,785 | ||||||
| Total comprehensive loss attributable to stockholders of Sunrise Real Estate Group, Inc. | $ | (3,622,521 | ) | $ | (2,251,727 | ) | ||
See accompanying notes to consolidated financial statements.
| 33 |
SUNRISE REAL ESTATE GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Expressed in U.S. Dollars)
| Common Stock | ||||||||||||||||||||||||||||||||
| Number
of shares issued | Amount | Additional Paid-in Capital | Statutory
Reserve | Accumulated
Losses | Accumulated Other Comprehensive Income | Non- controlling Interests | Total Stockholders’ (Deficit) Equity | |||||||||||||||||||||||||
| Balance, January 1, 2012 | 28,691,925 | $ | 286,919 | $ | 4,570,008 | $ | 782,987 | $ | (13,500,082 | ) | $ | 359,183 | $ | 12,793,268 | $ | (5,292,283 | ) | |||||||||||||||
| Net loss | - | - | - | - | (2,626,463 | ) | - | (4,117,055 | ) | (6,743,519 | ) | |||||||||||||||||||||
| Cash dividends paid to Surplus reserve non-controlling interests | - | - | - | 29,480 | - | - | - | 29,480 | ||||||||||||||||||||||||
| Capital contribution from non-controlling interests of new consolidated subsidiaries | - | - | - | - | - | - | 39,160 | 39,160 | ||||||||||||||||||||||||
| Translation of foreign operations | - | - | - | - | - | (131,176 | ) | 402,110 | 270,934 | |||||||||||||||||||||||
| Balance, December 31, 2013 | 28,691,925 | 286,919 | 4,570,008 | 812,467 | (16,126,545 | ) | 228,007 | 9,117,483 | 1,111,661 | |||||||||||||||||||||||
| Shares issued | 40,000,000 | 400,000 | 3,000,000 | 3,400,000 | ||||||||||||||||||||||||||||
| Surplus reserve | 115 | 115 | ||||||||||||||||||||||||||||||
| Loss for the year | (3,653,686 | ) | (1,558,726 | ) | (5,212,412 | ) | ||||||||||||||||||||||||||
| Cash dividends to non-controlling interest | (358,725 | ) | (358,725 | ) | ||||||||||||||||||||||||||||
| Capital contribution from non-controlling interests of new consolidated Subsidiaries | - | - | - | - | - | - | - | |||||||||||||||||||||||||
| Translation of foreign Operations | - | - | - | - | - | 31,166 | (40,835 | ) | (9,670 | ) | ||||||||||||||||||||||
| Balance, December 31, 2014 | 68,691,925 | $ | 686,919 | $ | 7,570,008 | $ | 812,582 | $ | (19,780,232 | ) | $ | 259,173 | $ | 7,159,197 | $ | (3,292,353 | ) | |||||||||||||||
See accompanying notes to consolidated financial statements.
| 34 |
SUNRISE REAL ESTATE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in U.S. Dollars)
| Years ended December 31, | ||||||||
| 2014 | 2013 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | (5,212,412 | ) | $ | (6,743,519 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Depreciation and amortization | 1,063,659 | 1,155,691 | ||||||
| Loss on disposal of property and equipment | 14,348 | 20,176 | ||||||
| Impairment loss on investments | 143,732 | |||||||
| Bad debt | 11,964 | 147,626 | ||||||
| Equity in net loss of unconsolidated affiliates | 445,280 | 603,017 | ||||||
| Impairment loss on Real estate property under development | 981,724 | 3,870,303 | ||||||
| Changes in assets and liabilities | ||||||||
| Accounts receivable | (35,076 | ) | 620,523 | |||||
| Promissory deposits | (67,401 | ) | (55,534 | ) | ||||
| Real estate property under development | (40,658,188 | ) | (14,240,700 | ) | ||||
| Customer deposits | 8,961,568 | 2,035,166 | ||||||
| Amount due from unconsolidated affiliates | 840,416 | - | ||||||
| Other receivables and deposits | (1,687,147 | ) | 152,629 | |||||
| Deferred tax assets | (17,129 | ) | 192,518 | |||||
| Accounts payable | 4,865,647 | 4,990,328 | ||||||
| Other payables and accrued expenses | (278,846 | ) | (2,807,283 | ) | ||||
| Deferred government subsidy | - | - | ||||||
| Interest payable on promissory notes | 1,998,862 | 813,626 | ||||||
| Interest payable on amounts due to directors | 1,763,546 | 1,451,212 | ||||||
| Taxes payable | (18,602 | ) | (15,372 | ) | ||||
| Other Tax payable | 6,706 | 151,419 | ||||||
| Deposits received from underwriting sales | (1,397,824 | ) | (568,629 | ) | ||||
| Net cash used in operating activities | (28,418,905 | ) | (8,083,071 | ) | ||||
| Cash flows from investing activities | ||||||||
| Acquisition of investments | - | (256,000 | ) | |||||
| Acquisition of property, plant and equipment | (83,630 | ) | (223,447 | ) | ||||
| Proceeds from disposal of property and equipment | - | - | ||||||
| Capital contribution to unconsolidated affiliates | (353,115 | ) | (2,285,335 | ) | ||||
| Advances to an unconsolidated affiliate | (12,825 | ) | 897,938 | |||||
| Repayment of advances to unconsolidated affiliates | 114,360 | - | ||||||
| Net cash used in investing activities | (335,210 | ) | (1,866,844 | ) | ||||
| Cash flows from financing activities | ||||||||
| Funds received from capital increase | 3,400,000 | - | ||||||
| Restricted cash | 137,183 | (281,609 | ) | |||||
| Capital contribution from non-controlling interests of new consolidated subsidiaries | - | 40,585 | ||||||
| New bank loans | 9,397,715 | 30,535,833 | ||||||
| Repayments of bank loans | (5,838,636 | ) | (18,777,596 | ) | ||||
| Advances from directors | 64,340 | 9,823,922 | ||||||
| Repayments of advances from directors | (2,606,917 | ) | (8,074,030 | ) | ||||
| Advances from an affiliate | 17,187,211 | 20,796 | ||||||
| Proceeds from promissory notes | 16,063,333 | 334,191 | ||||||
| Repayments of promissory notes | (9,477,660 | ) | (2,490,241 | ) | ||||
| Dividends paid to non-controlling interests | (69,444 | ) | - | |||||
| Net cash provided by financing activities | 28,257,125 | 11,131,851 | ||||||
| Effect of exchange rate changes on cash and cash equivalents | 68,323 | (60,808 | ) | |||||
| Net increase (decrease) in cash and cash equivalents | (428,667 | ) | 1,121,128 | |||||
| Cash and cash equivalents at beginning of year | 2,055,251 | 934,123 | ||||||
| Cash and cash equivalents at end of year | $ | 1,626,584 | $ | 2,055,251 | ||||
| 35 |
SUNRISE REAL ESTATE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(Expressed in U.S. Dollars)
| Years ended December 31, | ||||||||
| 2014 | 2013 | |||||||
| Supplemental disclosure of cash flow information | ||||||||
| Income taxes paid | $ | 54,313 | $ | 158,172 | ||||
| Interest paid | 5,349,991 | 3,681,642 | ||||||
See accompanying notes to consolidated financial statements.
| 36 |
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, 2014, the Company has the following major subsidiaries and equity investments.
| 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 XinJi 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%1 | 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 | |||||
| LinyiShangyang Real Estate Development Company Limited (“LYSY”) | October 13, 2011 | PRC | 24%2 | 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 RuiJian Design Company Limited (“SHRJ”) | August 15, 2011 | PRC | 100% | Subsidiary | Property brokerage services | |||||
| LinyiRui Lin Construction and Design Company Limited (“LYRL”) | March 6, 2012 | PRC | 100%3 | Subsidiary | Investment holding | |||||
| PutianXinJi Yang Real Estate Consultation Company Limited (“PTXJY”) | June 5, 2012 | PRC | 55% | Subsidiary | Property brokerage services |
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| Company Name | Date of Incorporation |
Place of Incorporation |
% of Ownership held by the Company |
Relationship with the Company |
Principal activity | |||||
| ShanghaiXinJi Yang Real Estate Brokerage Company Limited (“SHXJYB”) | January 28, 2013 | PRC | 75%4 | Subsidiary | Property brokerage services | |||||
| Wuhan Yuan Yu Long Real Estate Development Company Limited (“WHYYL”) | December 28, 2009 | PRC | 49% | Equity investment | Real estate development | |||||
| Shanghai Xin Xing Yang Real Estate Brokerage Company Limited (“SHXXY”) | September 28, 2011 | PRC | 40% | Equity investment | Property brokerage services | |||||
| XinGuang Equity Investment Management (Shanghai) Company Limited (“XG”) | December 17, 2012 | PRC | 49% | Equity investment | Equity investment and consultancy | |||||
| Shanghai Da Er Wei Trading Company Limited (“SHDEW”) | June 6, 2013 | PRC | 30% | Equity investment | Import and export trading | |||||
| Shanghai Hui Tian (“SHHT”) | July 25, 2014 | PRC | 100% | Subsidiary | Investment holding | |||||
| Shanghai Tian Xi (“SHSYTX”) | August 19, 2014 | PRC | 100% | Subsidiary | Investment holding | |||||
| Shenzhen Hui Tian (“SZHT”) | October 15, 2014 | PRC | 100% | Subsidiary | Investment holding |
| 1. | 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. |
| 2. | 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. |
| 3. | The equity interest in LYRL is held by three Chinese individuals in trust for SHXJY. |
| 4. | On January 28, 2013, CY-SRRE, SZXJY and an unrelated party established a subsidiary in the PRC, SHXJYB, with CY-SRRE holding a 15% equity interest and SZXJY holding a 60% equity interest in SHXYJB. |
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 (“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, 2004SHXJY 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.
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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 holds100% 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 a12.5% 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 September 28, 2011, SRRE and four individual investors established a company, SHXXY, in the PRC to provide real estate brokerage services. SRRE holds 40% equity interest in SHXXY.
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 individuals in trust for SHXJY. At the date its incorporation, SHXJY transferred its 24% equity interest in LYSY to LYRL.
On December 17, 2012, LRY together with two corporate investors established a company, namely XG, in the PRC to provide investment management and consulting services. LRY holds 49% equity interest XG. XG has not commenced its operations.
On June 6, 2013, SHSY and LYRL together with other 4 investors established a company, namely Shanghai Daerwei, in the PRC focus on the business of trading on cosmetics. SHSY holds 19% and LYRL holds 11% equity interest of Shanghai Daerwei.
On July 25, August 19 and October 15, 2014, the company established three investment holding company separately, namely SHHT, SHSYTX and SZHT. These three company were 100% subsidiary of the Company and have not commenced its operations.
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, 2014, 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.
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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, customer deposits, 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, and amount due from an unconsolidated affiliate. 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 year ended December 31, 2014, there were two customers that accounted for 21% and 12% of our net revenues separately, and there are $740,498 and $0 accounts receivable from these two customers separately as of December 31, 2014.
During the year ended December 31, 2013, there was one customer that accounted for 19% of our net revenues, and no accounts receivable from this customer as of December 31, 2013.
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Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and all highly liquid investments with an original maturity of three months or less.
The Company maintains cash and cash equivalents with various banks in the PRC which are not insured or otherwise protected. Should any of these banks holding the Company’s cash deposits become insolvent, or if the Company is otherwise unable to withdraw funds for any reason, the Company could lose the cash on deposit with that particular bank.
Foreign Currency Translation and Transactions
The functional currency of SRRE, CY-SRRE and LRY is U.S. dollars (“$”) and their financial records are maintained and the financial statements prepared in U.S. dollars. The functional currency of the Company’s subsidiaries and affiliates 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 ASC830. 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, 2014 and December 31, 2013 are $1: RMB6.1190 and $1: RMB6.0969, 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
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, 2014 and 2013, the Company had recognized any impairment for real estate property under development.
Capitalization of Interest
Interest incurred during and directly related to real estate development projects is capitalized to the related real estate property under development during the active development period, which generally commences when borrowings are used to acquire real estate assets and ends when the properties are substantially complete or the property becomes inactive. Interest is capitalized based on the interest rate applicable to specific borrowings or the weighted average of the rates applicable to other borrowings during the period. Interest capitalized to real estate property under development is expensed as a component of cost of real estate sales when related units are sold. All other interest is expensed as incurred.
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:
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| Estimated Useful Life (in years) | ||
| Furniture and fixtures | 5-10 | |
| Computer and office equipment | 3-5 | |
| 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, 2014 and 2013.
Customer Deposits
Customer deposits consist of amounts received from customers relating to the sale of residential units in the PRC. In the PRC, customers will generally obtain permanent financing for the purchase of their residential unit prior to the completion of the project. The lending institution will provide the funding to the Company upon the completion of the financing rather than the completion of the project. The Company receives these funds and recognizes them as a liability until the revenue can be recognized.
Long Term Investments
The Company accounts for long term investments in equities as follows.
Investments 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.
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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.
Other Investments
Where the Company has no significant influence, the investment is classified as other investments 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.
During the year ended December 31, 2014, the Company provided an allowance for impairment loss on other investments of $Nil (2013: $Nil). As of December 31, 2014, the allowance for impairment loss on other investments amounted to $78,444 (2013: $78,729).
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 of 2012, the Company received no refundable government subsidy amount of $5,278,087 (RMB33,175,416). 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. As of December 31, 2014, the Company’s deferred government subsidy amounted to $5,421,706 (2013: $5,441,358).
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, 2014 and 2013 were net loss and foreign currency translation adjustments.
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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.
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, 2014 and 2013.
New Accounting Pronouncements
In February 2013, the FASB issued ASU No. 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (“ASU 2013-04”). The objective of ASU 2013-04 is to provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation (within the scope of this guidance) is fixed at the reporting date. Examples of obligations within the scope of ASU 2013-04 include debt arrangements, other contractual obligations, and settled litigation and judicial rulings. ASU 2013-04 is effective for the Group for interim reporting periods beginning July 1, 2014, however, early adoption is permitted. We do not expect that the adoption of ASU 2013-04 will have a material impact on the Company’s consolidated financial statements.
In March 2013, the FASB issued ASU No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (“ASU 2013-05”),, which specifies that a cumulative translation adjustment (“CTA”) should be released into earnings when an entity ceases to have a controlling financial interest in a subsidiary or group of assets within a consolidated foreign entity and the sale or transfer results in the complete or substantially complete liquidation of the foreign entity. For sales of an equity method investment that is a foreign entity, a pro rata portion of CTA attributable to the investment would be recognized in earnings when the investment is sold. When an entity sells either a part or all of its investment in a consolidated foreign entity, CTA would be recognized in earnings only if the sale results in the parent no longer having a controlling financial interest in the foreign entity. In addition, CTA should be recognized in earnings in a business combination achieved in stages. For public entities, ASU 2013-05 is effective for reporting periods beginning after December 15, 2013, with early adoption permitted. We do not expect that the adoption of ASU 2013-05 will have a material impact on the Company’s consolidated financial statements.
In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740) (“ASU 2013-11”) to provide guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carry forward, similar tax loss, or tax credit carry forward exists. This ASU requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carry forward, a similar tax loss, or a tax credit carry forward, with certain exceptions. The modifications to ASC Topic 740 resulting from the issuance of ASU 2013-11 are effective for fiscal years beginning after December 15, 2013 and interim periods within those years. Early adoption is permitted. We do not expect that the adoption of ASU 2013-11 will have a material impact on the Company’s consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern (“ASU 2014-15”). This update requires an entity's management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). When conditions or events raise substantial doubts about an entity’s ability to continue as a going concern, management shall disclose: i) the principal conditions or events that raise substantial doubt about the entity's ability to continue as a going concern; ii) management's evaluation of the significance of those conditions or events in relation to the entity's ability to meet its obligations; and iii) management's plans that are intended to mitigate the conditions or events - and whether or not those plans alleviate the substantial doubt about the entity's ability to continue as a going concern. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and early application is permitted. We are currently evaluating the impact of adopting ASU 2014-15 on our results of operations or financial condition.
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In February 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement Period Adjustments (“ASU 2015-16”). This update requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this Update require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this Update require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date
In August 2015, the FASB issued ASU No. 2015-14 (“ASU 2015-15”), an update to ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). This update provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. This update is effective for annual and interim periods beginning after December 15, 2016, which will require us to adopt these provisions in the first quarter of fiscal 2018. Early application is not permitted. This update permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect this guidance will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting. The amendments in this Update defer the effective date of Update 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
All other entities should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. All other entities may apply the guidance in Update 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities also may apply the guidance in Update 2014-09earlier as of an annual reporting period beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which the entity first applies the guidance in Update2014-09.
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, 2014, the Company held cash deposits of $1,426,471 (2013: $1,432,838) as security for its short term borrowings (see Note 11) and cash deposits of $109,422 (2013: $246,895) as guarantee to the banks which provides mortgage loan to individual customers of ours construction products. These balances are subject to withdrawal restrictions and are not covered by insurance.
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NOTE 4 - PROMISSORY DEPOSITS
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.
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 Hong Kong 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 and commenced construction of this project during the fiscal year of 2012.
In March 13, 2014, the Company has signed a joint development agreement with ZhongjiPufa Real Estate Co.. According to this agreement, the Company has got the right to develop the Guangxing LuProject,which located on 182 lane Guangxinglu, Putuo distirct, Shanghai, PRC. This project covers a site area of approximately 2,502 square meters for the development of one building of apartment.
As of December 31, 2014, the real estate property under development totaled $71,377,187 (2013: $31,644,480).
NOTE 6 - OTHER RECEIVABLES AND DEPOSITS
| December 31, | December 31, | |||||||
| 2014 | 2013 | |||||||
| Advances to staff | $ | 33,609 | 12,444 | |||||
| Rental deposits | 40,800 | 4,773 | ||||||
| Prepaid expense | 319,774 | |||||||
| Prepaid tax | 1,066,574 | 17,435 | ||||||
| Other receivables | 353,964 | 98,166 | ||||||
| $ | 1,814,721 | $ | 132,818 | |||||
Other receivables and deposits as of December 31, 2014 are stated net of allowance for doubtful accounts of $159,590 (2013: $147,626).
NOTE 7 - PROPERTY AND EQUIPMENT, NET
| December 31, | December 31, | |||||||
| 2014 | 2013 | |||||||
| Furniture and fixtures | $ | 474,199 | $ | 244,314 | ||||
| Computer and office equipment | 298,055 | 196,267 | ||||||
| Motor vehicles | 762,963 | 922,367 | ||||||
| Properties | 9,623,547 | 9,889,772 | ||||||
| 11,158,764 | 11,252,720 | |||||||
| Less: Accumulated depreciation | (2,688,684 | ) | (2,136,583 | ) | ||||
| $ | 8,470,080 | $ | 9,116,137 | |||||
During the year ended December 31, 2014, depreciation and amortization expense for property and equipment amounted to $679,695 (2013: $671,551).
All properties as of December 31, 2014 and 2013 were pledged as collateral for the Company’s bank loans (See Note 11).
NOTE 8 - INVESTMENT PROPERTIES, NET
| December 31, | December 31, | |||||||
| 2014 | 2013 | |||||||
| Investment properties | $ | 10,119,435 | $ | 10,156,117 | ||||
| Less: Accumulated depreciation | (4,418,590 | ) | (4,047,594 | ) | ||||
| $ | 5,700,845 | $ | 6,108,523 | |||||
During the year ended December 31, 2014, depreciation and amortization expense for investment properties amounted to $383,964 (2013:$ 484,140).
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All investment properties as of December 31,2014and 2013were pledged as collateral for the Company’s bank loans (See Note 11).
NOTE 9 - INVESTMENTS IN AND AMOUNT DUE FROM UNCONSOLIDATED AFFILIATES
The investments in unconsolidated affiliates primarily consist of WHYYL (49%), Shanghai Daerwei (30%), SHXXY and SHXG. As of December 31, 2014, the investment amount in WHYYL and Shanghai Daerwei were $5,218,451 and $258,039 separately. The investments of SHXXY and SHXG have been impaired to $0 as of December 31, 2014.
WHYYL is primarily 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. Shanghai Daerwei is a trading company with cosmetics. The Company has accounted for these investments using the equity method as the Company has the ability to exercise significant influence over their activities.
As of December 31, 2014, the carrying amount of the Company’s investment in WHYYL was $5,218,451 (2013: $5,642,909), which included its equity in loss of WHYYL, net of income taxes, totaling $404,077 (2013: $574.254) for the year. The following table sets forth the financial information of WHYYL.
| Years Ended December 31, | ||||||||
| 2014 | 2013 | |||||||
| Revenues | $ | - | $ | - | ||||
| Net loss | $ | 821,118 | $ | 1,155,647 | ||||
| December 31, | December 31, | |||||||
| 2014 | 2013 | |||||||
| Current assets | $ | 55,563,441 | $ | 53,013,965 | ||||
| Non-current assets | 902,342 | 794,446 | ||||||
| Total assets | 56,465,783 | 53,808,411 | ||||||
| Current liabilities | 45,815,315 | 42,291,701 | ||||||
| Total equity | $ | 10,650,468 | $ | 11,526,300 | ||||
As of December 31, 2014, the Company has a balance of $ 2,695,010(2013: $3,538,939) 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, 2014, the Company recorded interest income of $744,909 (2013: $831,619) from WHYYL.
During the year ended December 31, 2014, the Company provided an allowance for impairment loss on investments in unconsolidated affiliates of $0 (2013: $143,732). As of December 31, 2014, the allowance for impairment loss on investments in unconsolidated affiliates amounted to $236,028 (2013: $236,028).
NOTE 10 - OTHER INVESTMENTS, NET
As of December 31, 2014 and 2013, investments accounted using the cost method consist of various companies engaging in real estate agency or property related services.
During the years ended December 31, 2014 and 2013, the Company recorded no income from other investments. The Company provided an allowance of impairment loss on other investments for the year ended December 31, 2014 of $Nil (2013: $Nil). As of December 31, 2014, the Company’s allowance for impairment loss on other investments amounted to $78,444 (2013: $78,729).
NOTE 11 - BANK LOANS
In January 2013, the Company obtained three bank loans with an aggregate principal amount of $1,307,403 (RMB8,000,000) from Bank of China. The borrowings under these agreements have 1-year term, bearing interest at a rate of 7.5% per annum, and are secured by the properties of two unrelated parties and personally guaranteed by Lin Chi-Jung, the Company’s CEO, President and Chairman, and his wife. In January 2014, the Company renewed and extended the maturity of these loans for a 1-year period by entering into two new loan agreements with Bank of China under the same terms of the previous three loan agreements. As of December 31,2014 and December 31,2013, the total outstanding balance of these loans was $1,307,403 and $1,312,143.
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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 $5,850,629 (RMB35,800,000) as of December 31, 2014. 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 six months ended September 30, 2014 was 7.6875% per annum. The credit facility is secured by all of the Company’s properties included in property and equipment (see Note 7), guaranteed by a director of the Company, and matures on March 31, 2015. As of December 31, 2014 and December 31, 2013, the Company had outstanding loan balances of $ 4,984,475 and $5,002,543, respectively, 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 $ 12,256,905 (RMB75,000,000) as of December 31, 2014. 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 December 31, 2014 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, 2014 and December 31, 2013, the Company had outstanding loan balances of $12,256,905 (RMB75,000,000) and $12,301,332 (RMB75,000,000), respectively, under this facility line of credit.
NOTE 12 - PROMISSORY NOTES PAYABLE
The promissory notes payable consist of the following unsecured notes to unrelated parties. Included in the balances are promissory notes with outstanding principal and unpaid interest of an aggregate of $13,396,206 and $4,811,670 as of December 31, 2014 and December 31, 2013, respectively.
The promissory note with an outstanding principal of $1,877,729 bears interest at a rate of 12% per annum, is unsecured and has a maturity date of January 31, 2013 and the new terms of repayment had not been determined with the debtor and therefore had no fixed term of repayment. As of December 31, 2014 and December 31, 2013, the outstanding principal in default and the unpaid interest related to this promissory note amounted to $1,877,729 and $2,308,974, respectively. The Company is currently making payments towards this loan.
The promissory note with a principal as of December 31, 2014 amounting to $817,127 bears interest at a rate of 0% per annum, is unsecured and has no fixed term of repayment. As of December 31, 2014 and December 31, 2013, the outstanding principal and unpaid interest related to this promissory note amounted to $817,127 and $869,294, respectively.
The promissory note with a principal as of December 31, 2014 amounts to $817,127bears interest at a rate of 0% per annum, is unsecured and has no fixed term of repayment. As of December 31, 2014 and December 31, 2013, the outstanding principal and unpaid interest related to this promissory note amounted to $817,127 and $820,089, respectively.
The promissory note with a principal as of December 31, 2014 amounts to $163,425 bears interest at a rate of 15.75% per annum, is unsecured and has no fixed term of repayment. As of December 31, 2014 and December 31, 2013, the outstanding principal and unpaid interest related to this promissory note amounted to $175,223 and $167,247, respectively.
The promissory note with a principal of $1,634,254 as of December 31, 2014 bears interest at the rate of 20% per annum, is unsecured and has no fixed term of repayment. As of December 31, 2014, the outstanding principal and unpaid interest related to this promissory note amounted to $1,893,465.
The promissory note with a principal of $4,902,762 as of December 31, 2014 bears interest at the rate of 26.7% per annum, is unsecured and has no fixed term of repayment. As of December 31, 2014, the outstanding principal and unpaid interest related to this promissory note amounted to $5,890,701.
The promissory note with a principal of $163,425 as of December 31, 2014 bears interest at the rate of 20% per annum, is unsecured and has no fixed term of repayment. As of December 31, 2014, the outstanding principal and unpaid interest related to this promissory note amounted to $188,212.
The promissory note with a principal of $817,127 as of December 31, 2014 bears interest at the rate of 15% per annum, is unsecured and has no fixed term of repayment. As of December 31, 2014, the outstanding principal and unpaid interest related to this promissory note amounted to $892,030.
The promissory note with a principal of $457,591 as of December 31, 2014 bears interest at the rate of 15% per annum, is unsecured and has no fixed term of repayment. As of December 31, 2014, the outstanding principal and unpaid interest related to this promissory note amounted to $522,093.
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The promissory note with a principal of $300,000 as of December 31, 2014 bears interest at the rate of 15% per annum, is unsecured and has no fixed term of repayment. As of December 31, 2014 and December 31, 2013, the outstanding principal and unpaid interest related to this promissory note amounted to $322,500 and $300,000, respectively..
At December 31, 2013, the outstanding principal and unpaid interest related to this promissory note amounted to $346,066, which has been paid in 2014.
During the year ended December 31, 2014, the interest expense related to these promissory notes was $1,998,862 (2013: $813,626).
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NOTE 13 – AMOUNTS DUE TO DIRECTORS
| December 31, | December 31, | |||||||
| 2014 | 2013 | |||||||
| Lin Chi-Jung | $ | 10,073,426 | $ | 10,866,943 | ||||
| Lin Chao-Chin | 23,027 | 18,224 | ||||||
| Lin Hsin-Hung | 32,794 | 23,110 | ||||||
| $ | 10,129,247 | $ | 10,908,277 | |||||
| (a) | The balance due to Lin Chi-Jung, the Company’s CEO, President and Chairman, consists of a balance of unpaid salaries and reimbursements totaling $44,416 (2013:$90,633) and advances together with unpaid interest totaling $10,029,010 (2013: $10,776,310). |
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 36.5% per annum. During the year ended December 31, 2014, the interest expense related to these advances amounted to $1,763,546 (2013: $2,024,041). Included in the outstanding amounts with Lin Chi-Jung are advances of $ 2,451,381 that are currently in default.
| (b) | The balances due to Lin Chao-Chin and Lin Hsin-Hung are unsecured, interest-free and have no fixed term of repayment. |
NOTE 14 – ACCOUNTS PAYABLE
As of December 31, 2014 and 2013, the balances of accounts payable were $10,531,908 and $5,665,811, respectively. The balance of accounts payable as of December 31, 2014 included unpaid development fee of Linyi project of $7,270,855. The other balance was due to agents of operating business.
NOTE 15 - CUSTOMER DEPOSITS
Customer deposits consisted the sales from real estate development project (Linyi project) which cannot recognized as revenue at the accounting period and deposits received for rental.
Linyi project has started pre-sales in November 2013, as of December 31, 2014, the pre-sales amounted to $12,306,707.
NOTE 16- AMOUNT DUE TO AN AFFILIATE
In August 2014, the company obtained a entrusted bank loan of $16,342,540 (RMB100,000,000) from China Everbright Bank bearing interest at a rate of 14% per annum. The loan is specific for the real estate development of Guxing Lu Project. The loan capital is come from Jiaxing Shangyang, a limited partnership created by the Company and Chongqing Nongxin Investment Co., Ltd. The accrued interest expense of this entrusted loan is $ 915,182 at the end of December 31, 2014.
There are other amount due to affiliates include due to Jiaxing Shangyang, XG and SHXXY, with amount of $114,398, $20,264 and $4,563, respectively.
NOTE 17- OTHER PAYABLES AND ACCRUED EXPENSES
| December 31, | December 31, | |||||||
| 2014 | 2013 | |||||||
| Accrued staff commission and bonus | $ | 532,411 | $ | 675,138 | ||||
| Rental deposits received | 374,680 | 447,260 | ||||||
| Other payables | 217,777 | 287,606 | ) | |||||
| Dividends payable to non-controlling interest | 290,188 | |||||||
| $ | 1,415,056 | $ | 1,410,004 | |||||
Other payables are advances from unrelated parties are unsecured, interest-free and have no fixed term of repayment.
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NOTE 18 - INCOME TAXES PAYABLE
SRRE, CY-SRRE and LRY do not generate any income and therefore are not subject to income taxes in the U.S., the British Virgin 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 years ended December 31, 2014 and 2013.
Income tax benefit consists of
| Years Ended December 31, | ||||||||
| 2014 | 2013 | |||||||
| PRC | ||||||||
| Provision for income tax | $ | 47,711 | $ | 349,295 | ||||
| Deferred tax benefit | (17,129 | ) | 0 | |||||
| Total income tax benefit | $ | 30,583 | $ | 349,295 | ||||
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, 2014 and 2013. 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:
| Years Ended December 31, | ||||||||
| 2014 | 2013 | |||||||
| Provision for income tax benefit at PRC statutory tax rate of 25% | $ | 44,194 | $ | (18,878 | ) | |||
| Permanent differences | (14,116 | ) | 12,428 | |||||
| Under (Over)-provision for income taxes in prior years | 505 | 206,343 | ||||||
| Change in valuation allowance | 149,403 | |||||||
| Total income tax benefit | $ | 30,583 | $ | 349,295 | ||||
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, the Company recorded the deferred tax assets resulting from net operating loss carryforwards of $17,129 as of December 31, 2014 (2013: $Nil).
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 19– LONG TERM BORROWINGS
On May 16, 2013, the Company entered into a project finance loan agreement with China CITIC Bank to finance the development of the Company’s Linyi Project. The loan has a 2-year term in the principal amount of $11,439,778 (RMB70,000,000) at an interest rate of 14.21% per annum, which is 8.06% over the benchmark lending rate from PBOC. For the year ended December 31, 2014, total loan interest was approximately $2,372,564, which was capitalized in the development cost of the Linyi project.
The Company pledged its real estate properties in the Linyi project with carrying value of $45,030,368 as of December 31, 2014. The loan is also subject to certain covenants including floating mortgage ratio not more than 50%. Floating mortgage rate is calculated as the outstanding principal and unpaid interest after deduction of guaranteed funds kept in the stipulated bank account divided by the value of pledged properties. In addition, the Company is required to maintain all monies received from sales of any properties relating to the Linyi project in a stipulated bank account as guaranteed funds, which will be made payments after application and approval procedure. As of December 31, 2014, the cash restricted in relation to the borrowings from China CITIC Bank was $Nil (2013: $246,895).On May 2014, the Company paid $4,575,911 (RMB28,000,000) to the bank. As of December 31, 2014, the Company had outstanding loan balance of $6,863,866 (RMB42,000,000) under this facility line of credit.
On December 16, 2014, the Company entered into a project finance loan agreement with HUAXIA Bank to finance the development of the Company’s Guxinglu Project in Shanghai. The loan has a 3-year term in the principal amount of $19,611,047(RMB120,000,000) at an interest rate of 7.025% per annum. At the end of December 31, 2014, there are $8,171,270 (RMB50,000,000) draw down from this loan facility.
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| December 31, | December 31, | |||||||
| 2014 | 2013 | |||||||
| Outstanding borrowings | $ | 15,062,230 | $ | 11,481,245 | ||||
| Less: Current portion of long term borrowings | 6,890,960 | 4,592,498 | ||||||
| $ | 8,171,270 | $ | 6,888, 747 | |||||
NOTE 20- DEFERRED GOVERNEMNET SUBSIDY
Deferred government subsidy consists of the cash subsidy provided by the local government.
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.
The Company has received refundable government subsidy of $5,421,706 as of December 31, 2014. 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 are repayable if the Company fails to complete the subsidized property development project according to the agreed schedules. The Company recorded the subsidy received as a deferred government subsidy.
NOTE 21- 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, 2014, the Company’s statutory reserve fund was $812,582 (2013: $812,467).
NOTE 22- 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 year ended December 31, 2014 were $50,265 (2013: $254,559).
As of December 31, 2014, the Company had the following operating lease obligations falling due.
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| Amount | ||||
| Year Ending | ||||
| 2015 | $ | 11,299 | ||
| 2016 | - | |||
| 2017 | - | |||
| $ | 11,299 | |||
NOTE 23- 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, 2014 | ||||||||||||||||
| Property | ||||||||||||||||
| Brokerage | Real Estate | |||||||||||||||
| Services | Development | Corporate | Total | |||||||||||||
| Net revenues | $ | 8,611,639 | $ | - | $ | - | $ | 8,611,639 | ||||||||
| Cost of revenues | (4,350,690 | ) | - | - | (4,350,690 | ) | ||||||||||
| Gross income | 4,260,949 | - | - | 4,260,949 | ||||||||||||
| Operating expenses | (1,221,856 | ) | (693,897 | ) | - | (1,915,753 | ) | |||||||||
| General and administrative expenses | (2,845,692 | ) | (1,529,493 | ) | (212,343 | ) | (4,587,529 | ) | ||||||||
| Operating income (loss) | 193,400 | (2,223,390 | ) | (212,343 | ) | (2,242,333 | ) | |||||||||
| Other income (expenses) | ||||||||||||||||
| Interest income | 509,079 | 343,985 | - | 853,055 | ||||||||||||
| Interest expense | (3,356,238 | ) | - | (45,000 | ) | (3,401,238 | ) | |||||||||
| Miscellaneous | 51,712 | ,2,255 | - | 53,967 | ||||||||||||
| Equity in net loss of unconsolidated affiliates | (99,969 | ) | (402,348 | ) | 57,037 | (445,280 | ) | |||||||||
| Total other (expenses) income | (2,895,425 | ) | (56,109 | ) | 12,307 | (2,939,496 | ) | |||||||||
| Loss before income taxes | (2,702,025 | ) | (2,279,499 | ) | (200,305 | ) | (5,181,829 | ) | ||||||||
| Income tax (expense) benefit | (40,518 | ) | 15,639 | (5,704 | ) | (30,583 | ) | |||||||||
| Net income(loss) | $ | (2,742,543 | ) | $ | (2,263,860 | ) | $ | (206,009 | ) | $ | (5,212,412 | ) | ||||
| Year ended December 31, 2013 | ||||||||||||||||
| Property | ||||||||||||||||
| Brokerage | Real Estate | |||||||||||||||
| Services | Development | Corporate | Total | |||||||||||||
| Net revenues | $ | 11,240,190 | $ | - | $ | - | $ | 11,240,190 | ||||||||
| Cost of revenues | (4,412,118 | ) | - | - | (4,412,118 | ) | ||||||||||
| Gross income | 6,828,072 | - | - | 6,828,072 | ||||||||||||
| Operating expenses | (1,343,398 | ) | (1,049,597 | ) | - | (2,392,995 | ) | |||||||||
| General and administrative expenses | (2,725,323 | ) | (4,341,357 | ) | (545,012 | ) | (7,611,693 | ) | ||||||||
| Operating loss | 2,759,350 | (5,390,954 | ) | (545,012 | ) | (3,176,616 | ) | |||||||||
| Other income (expenses) | ||||||||||||||||
| Interest income | 882,584 | 232,307 | 16 | 1,114,907 | ||||||||||||
| Interest expense | (3,808,133 | ) | - | (80,604 | ) | (3,888,737 | ) | |||||||||
| Miscellaneous | 305,944 | (2,972 | ) | - | 302,972 | |||||||||||
| Equity in net loss of an unconsolidated affiliate | (3,751 | ) | (566,267 | ) | (143,732 | ) | (746,749 | ) | ||||||||
| Total other (expenses) income | (2,656,356 | ) | (336,932 | ) | (224,320 | ) | (3,217,607 | ) | ||||||||
| Loss before income taxes and equity in net loss of an unconsolidated affiliate | (102,994 | ) | (5,727,886 | ) | (769,332 | ) | (6,394,223 | ) | ||||||||
| Income tax (expense) benefit | (156,777 | ) | (192,518 | ) | - | (349,296 | ) | |||||||||
| Net loss | $ | (53,783 | ) | $ | (5,920,404 | ) | $ | (769,332 | ) | $ | (6,743,519 | ) | ||||
| 53 |
| Property | ||||||||||||||||
| Brokerage | Real Estate | |||||||||||||||
| Services | Development | Corporate | Total | |||||||||||||
| As of December 31, 2014 | ||||||||||||||||
| Real estate property under development | $ | - | $ | 71,377,187 | $ | - | $ | 77,377,187 | ||||||||
| Total assets | 25,376,692 | 75,908,713 | 53,305 | 101,338,710 | ||||||||||||
| As of December 31, 2013 | ||||||||||||||||
| Real estate property under development | $ | - | $ | 31,644,480 | $ | - | $ | 31,644,480 | ||||||||
| Total assets | 24,122,374 | 38,260,574 | 13,090 | 62,396,039 | ||||||||||||
NOTE 24- ERROR CORRECTION
There were error corrections made in the 2013 financial statements. These corrections were made from updated information and impairments made for the year ended December 31, 2013.
The following summarizes the above error corrections.
| Previously Reported | Adjustment | As Restated | ||||||||||
| Balance Sheets | ||||||||||||
| Total Assets | 61,698,318 | 697,721 | 62,396,039 | |||||||||
| Total Liabilities | 58,095,126 | 5,412,573 | 63,507,699 | |||||||||
| Total liabilities and shareholders’ deficit | (8,856,248 | ) | (1,372,896 | ) | (10,229,144 | ) | ||||||
| Statement of Operations | ||||||||||||
| Net Revenues | 12,763,447 | (1,523,257 | ) | 11,240,190 | ||||||||
| Net Loss | (1,931,311 | ) | (5,357,281 | ) | (7,288,592 | ) | ||||||
| Loss Per Share – Basic and Fully Diluted | (0.04 | ) | (0.06 | ) | (0.1 | ) | ||||||
| Weighted average common shares outstanding – Basic and Fully Diluted | 28,691,925 | 28,691,925 | ||||||||||
NOTE 25 –SUBSEQUENT EVENTS
On March 13, 2015, our Board of Directors engaged Kenne Ruan, CPA, P.C. (“Kenne Ruan”) as the Registrant’s certifying accountant to audit the registrant's financial statements, replacing its former certifying accountant, Finesse CPA, P.C. (“Finesse”). Upon receipt of the notice that the Registrant’s acceptance of the proposal from Kenne Ruan to audit its consolidated financial statements for the fiscal year ending December 31, 2014, Finesse resigned as the Registrant’s certifying accountant on March 13, 2015.
| 54 |
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls or procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues are instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2014, the end of the annual period covered by this report. The evaluation of our disclosure controls and procedures included a review of the disclosure controls’ and procedures’ objectives, design, implementation and the effect of the controls and procedures on the information generated for use in this report. In the course of our evaluation, we sought to identify errors, control problems or acts of fraud and to confirm the appropriate corrective actions, including process improvements, were being undertaken. Our Chief Executive Officer and our Chief Financial Officer have concluded that the Company had a material weakness in its internal control over financial reporting as of December 31, 2014 because the Company’s accounting department personnel had limited knowledge and experience in U.S. GAAP and SEC reporting requirements.
Based on the foregoing, our Chief Executive Officer and our Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were ineffective as of December 31, 2014.
Management's Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and our Chief Financial Officer, the Company has conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2013, based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
During this evaluation, the Company’s management, including our Chief Executive Officer and our Chief Financial Officer, has identified one material weakness in the control environment of the Company. The material weakness is related to the Company’s accounting department personnel having limited knowledge and experience in U.S. GAAP and SEC reporting requirements.
A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. As a result of the material weakness identified above, management concluded that the Company’s internal control over financial reporting was ineffective as of December 31, 2014.
To remediate the material weakness identified in internal control over financial reporting of the Company, we have begun to:
| — | recruit additional personnel with sufficient knowledge and experience in U.S. GAAP and SEC reporting requirements; and |
| — | provide ongoing training courses in U.S. GAAP to existing personnel, including our Chief Financial Officer and our Financial Controller. |
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The Company believes that the consolidated financial statements fairly present, in all material respects, the Company’s consolidated balance sheets as of December 31, 2014 and 2013and the related consolidated statements of operations, comprehensive loss, stockholders'equity, and cash flows for the years ended December 31, 2014 and 2013, in conformity with U.S. GAAP, notwithstanding the material weakness we identified.
This Annual Report on Form 10-K does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act that permit the Company to provide only management's report in this Annual Report.
Changes in Internal Control Over Financial Reporting.
During our fiscal year 2014, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.
None
| 56 |
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
| Date of Appointment | Name of Individual | Age | Position with Company | |||
| October 28, 2003 | LIN CHI-JUNG | 55 | Chief Executive Officer, President and Chairman | |||
| May 23, 2005 | LIN CHAO-CHIN | 65 | Director | |||
| November 28, 2006 | LIN HSIN-HUNG | 60 | Executive Director | |||
| November 23, 2004 | CHEN REN | 67 | Director | |||
| November 23, 2004 | FU XUAN-JIE | 85 | Director | |||
| November 23, 2004 | LI XIAO-GANG | 57 | Director | |||
| June 24, 2013 | MI YONG JUN | 41 | Chief Financial Officer |
Following is biographical information for each of the seven directors consisting of the age, principal occupation, and other relevant information. The designation of "Affiliated" noted beside the director’s name indicates that the director is an officer or employee of Sunrise. The designation of “Independent” noted beside the director’s name indicates that the director is considered an independent director within the meaning of the Marketplace Rules of the Nasdaq Stock Market, Inc., which is the independence standard that we have chosen to report under.
Lin Chi-Jung, CEO, Chairman, and President (Affiliated)
Lin Chi-Jung, age 55, is the Chairman of the Board of Directors of SRRE. He also serves as our President and CEO and the Chairman of all of our operating subsidiaries. Mr. Lin began serving as a Director of SRRE on October 28, 2003, and was appointed Chairman on October 11, 2004. He founded Shanghai Xin Ji Yang Real Estate Consultation Co., Ltd. (“SHXJY”) in late 2001, Shanghai Shang Yang Investment Management and Consulting Co., Ltd. (“SHSY”) in early 2004 and Suzhou Gao Feng Hui Property Management Co., Ltd. (“SZGFH”) in early 2005. Under his leadership and management, SHXJY, SHSY and SZGFH have grown rapidly. Prior to establishing this property business, Mr. Lin invested in the film making and publishing businesses. In his younger days, Mr. Lin was a well known actor in Chinese communities around the world, including Mainland China, Taiwan, North America and South East Asia. The Board believes that Mr. Lin has the experience and qualification as a member of the Board of Directors because of his experience in the real estate industry, his leadership and strategic direction for the Company and his public personality makes him an invaluable asset to the Company. Mr. Lin is not a member of the Board of any other public company or any investment company, neither has he been a member of the boards of directors of such companies for the past five years.
Lin Chao-Chin, Director (Affiliated)
Lin Chao-Chin, age 65, was appointed as a director on May 23, 2005, and serves on our Compensation and Governance and Nominating Committees. He is one of the co-founders of SHXJY. The Board believes Mr. Lin has the experience and skill to serve as a director of the Company because he brings with him 29 years of real estate industry experience, particularly in the areas of agency, property investment, and development services. Prior to starting his business in Mainland China, he co-founded Taipei Xin Lian Yang Property Co. Ltd. in Taiwan in the early 1980’s. Under Mr. Lin’s leadership, this business had contracted sales of NTD 120 Billion (approx. US$ 3.4 billion) and 800 employees. In 2001 he joined Lin Chi-Jung to re-establish his career in Mainland China. Currently, Lin Chao-Chin is managing the day-to-day business operation of SHXJY. Lin Chao-Chin graduated from Taiwan Chung Yuan University with a Bachelors Degree in Business Administration. Mr. Lin is not a member of the Board of any other public company or any investment company, neither has he been a member of the boards of directors of such companies for the past five years.
Lin Hsin-Hung, Executive Director
Lin Hsin Hung, age 60, was appointed as an executive director on November 28, 2006. He graduated from the Economics Department of Taiwan Wen Hua College in 1981. Mr. Lin has served as the Chairman of the Board of Tian Li Manufacture Corporation, Ding Kai Industry Corporation, Hua Wei Development Corporation and an executive Director of Di Heng Capital Management Corporation. The Board believes Mr. Lin has the knowledge and expertise in the capital markets that will benefit to the Company. Mr. Lin is not a member of the board of any other public company or any investment company in the US, neither has he been a member of the boards of directors of such companies for the past five years.
Chen Ren, Director (Independent)
Chen Ren, age 67, was appointed an independent director on November 23, 2004. Mr. Chen is Chairman and General Manager of Shanghai Real Estate Group of Companies. He has been involved in the Shanghai real property market for the past 16 years. Among some of the companies that he has been associated with are: Shanghai She-ye Property Ltd, Shanghai Rui Nan Property Limited, the General Manager of Shanghai Gong Zhi Jing Center and Shanghai An Ju Property Development Center. With his extensive knowledge and experience in the real estate property development industry in China, the Board believes Mr. Chen an asset to the Company serving as one of its independent director. Mr. Chen is not a member of the Board of any other public company or any investment company, neither has he been a member of the boards of directors of such companies for the past five years.
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Fu Xuan-Jie, Director (Independent)
Fu Xuan-Jie, age 85, was appointed an independent director on November 23, 2004, and serves on our Audit, Compensation, and Governance and Nominating Committees. Mr. Fu has been an attorney since February 1980 and has practiced law in his co-founded firm, Fu Xuan-Jie & Associates Law Office since April 1994. Mr. Fu specializes in corporate and international law, especially in the areas of international compensation and other financial matters. Among the clientele that Mr. Fu serves are Coca-Cola, Banque Endosuez, AT&T, and L'Oreal. The Board believes that Mr. Fu’s is qualified to serve on our Board because of his knowledge in corporate and international law. Mr. Fu is not a member of the Board of any other public company or any investment company, neither has he been a member of the boards of directors of such companies for the past five years.
Li Xiao-Gang, Director (Independent)
Li Xiao-Gang, age 57, was appointed an independent director on November 23, 2004, and serves on our Audit, Compensation, and Governance and Nominating Committees. Mr. Li graduated from Shanghai Finance and Economics University in 1984, and joined the Shanghai Academy of Social Science. In 1992, he was appointed the deputy director of the Economics Law Consultation Center of the Shanghai Academy. In 2000, he was the Director of the Foreign Investment Research Center of the Academy. From 1992 to the present, Mr. Li has served as a Director cum Deputy Secretary-General of the Shanghai Consultation Association. The Board believes Mr. Li’s contribution of his views on economy as well as his knowledge of the real estate movement in China invaluable to the Company. Mr. Li is not a member of the Board of any other public company or any investment company, neither has he been a member of the boards of directors of such companies for the past five years.
Mi Yong Jun (Appointed on June 24, 2013)
Mr. Mi, age 41, was the Chief Financial Officer of Wanbang from 2010 until his appointment as our CFO. From 2009 to 2010, he worked for the Company as the financial controller. Prior to 2009, he worked for Macquarie Banking Limited, as a senior finance manager. Mr. Mi graduated from East China Normal University in 2012 with an MBA degree.
Family Relationships
There are no family relationships among directors, executive officers, or person nominated or chosen to become the directors or executive officers.
Involvement in Certain Legal Proceedings
None of our directors, executive officers, or control persons has been involved in any of the following events during the past ten years:
| · | Any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of bankruptcy or within two years prior to that time; or |
| · | Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); or |
| · | Being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or |
| · | Being found by a court of competent jurisdiction (in a civil violation), the SEC or the Commodity Future Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; or |
| · | Being the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of: any Federal or State securities or commodities law or regulation; or any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity. This violation does not apply to any settlement of a civil proceeding among private litigants; or |
| · | Being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
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Code of Ethics
On October 8, 2005, we adopted a code of ethics. We believe our code of ethics is reasonably designed to deter wrongdoing and promote honest and ethical conduct; provide full, fair, accurate, timely and understandable disclosure in public reports; comply with applicable laws; ensure prompt internal reporting of code violations; and provide accountability for adherence to the code. The Company will provide to any person without charge, upon request, a copy of the corporate code of ethics. Any person wishing a copy should write to Alice Wang, Sunrise Real Estate Group, Inc., Building A, Floor 25, No. 638, Hengfeng Road, Shanghai, PRC 200070.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers, directors and persons who own more than 10% of a registered class of our equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Copies of these filings must be furnished to the Company. Based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the fiscal year ending December 31, 2013, all Section 16(a) filing requirements applicable to our executive officers, directors and greater than 10% beneficial owners have been met on a timely basis.
Information Concerning our Board and Committees of our Board
The Company’s Board has three standing committees: an Audit Committee, Governance and Nominating Committee, and a Compensation Committee. We have a written Audit Committee Charter, Governance and Nominating Committee Charter and Compensation Committee Charter. Except for Lin Chao-Chin, all of our directors serving on our committees are “independent” within the meaning of the Marketplace Rules of the Nasdaq Stock Market, Inc., which is the independence standard that we have chosen to report under.
Audit Committee and Audit Committee Financial Expert
Our Board established the Audit Committee on August 23, 2005. The Audit Committee consists of two members, Fu Xuan-Jie, Li Xiao-Gang, all of whom are “independent” within the meaning of the Marketplace Rules of the Nasdaq Stock Market, Inc., which is the independence standard that we have chosen to report under. With the resignation of Mr. Zhang Xi on April 14, 2014, our Audit Committee currently does not have a financial expert, as that term is used under Item 407(d)(5) of Regulation S-B. The Company is in process of replacing Mr. Zhang Xi.
Governance and Nominating Committee
The Governance and Nominating Committee of the Board consists of Mr. Lin Chao-Chin, Mr. Li Xiao-Gang and Mr. Fu Xuan-Jie. The primary duties of the Governance and Nominating Committee are to identify and review candidates for the Board and recommend candidates for election to the Board, periodically review the skills and characteristics required of Board members in the context of the current Board, and periodically review the Company’s corporate governance policies and recommend modifications to the Board as appropriate. The Governance and Nominating Committee operates pursuant to a charter that was approved by our Board, a current copy of which is available on our website at www.sunrise.sh under the heading “Investor” and subheading “Corporate Governance.”
Our shareholders may recommend director nominees, and the Governance and Nominating Committee will consider nominees recommended by shareholders. We anticipate that nominees recommended by shareholders will be evaluated in the same manner as nominees recommended by anyone else, although the Governance and Nominating Committee may prefer nominees who are personally known to the existing directors and whose reputations are highly regarded. The Governance and Nominating Committee will consider all relevant qualifications as well as the needs of the company in terms of compliance with SEC rules.
While the selection of qualified directors is a complex, subjective process that requires consideration of many intangible factors, the Governance and Nominating Committee and the Board takes into account the following criteria, among others, in considering directors and candidates for the board: judgment, experience, skills and personal character of the candidate, and the needs of the Board.
The Governance and Nominating Committee conducts a process of making a preliminary assessment of each proposed nominee based upon the resume and biographical information, an indication of the individual’s willingness to serve and other background information. This information is evaluated against the criteria set forth above and our specific needs at that time. Based upon a preliminary assessment of the candidate(s), those who appear best suited to meet our needs may be invited to participate in a series of interviews, which are used as a further means of evaluating potential candidates. On the basis of information learned during this process, the Governance and Nominating Committee determines which nominee(s) to recommend to the Board to submit for election at the next annual meeting. The Governance and Nominating Committee uses the same process for evaluating all nominees, regardless of the original source of the nomination.
| 59 |
Compensation Committee
The Compensation Committee of the Board consists of Mr. Lin Chao-Chin, Mr. Li Xiao-Gang and Mr. Fu Xuan-Jie. The primary duties of the Compensation Committee are to annually review and approve the Company’s compensation strategy to ensure that employees are rewarded appropriately; review annually and approve corporate goals and objectives relevant to executive compensation; annually review and determine elements of compensation of the CEO and other officers; and review and recommend compensation for non-employee members of our Board. The Compensation Committee operates pursuant to a charter that was approved by our Board, a current copy of which is available on our website at www.sunrise.sh under the heading “Investor” and subheading “Corporate Governance.”
| 60 |
ITEM 11. EXECUTIVE COMPENSATION
Compensation Philosophy
The Company has established a compensation committee to ensure that employees are reward appropriately based on performance and review the compensation of the CEO and other executive managers annually. Our compensation program for our executive officers and all other employees is designed such that it will not incentivize unnecessary risk-taking as our compensation consists primarily of base salaries without bonuses or stock awards.
The following table reflects the compensation paid to the Company’s Chief Executive Officer and each of the Company’s compensated executive officers whose compensations exceeded $100,000 in fiscal years 2014, 2013 and 2012 for services rendered to the Company and its subsidiaries.
| Name and Principal Position (a) | Year (b) | Salary ($) (c) | Bonus ($) (d) | Stock Awards ($) (e) | Option Awards ($) (f) | Non-Equity Incentive Plan Compensation ($) (g) | Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) (h) | All Other Compensation ($) (i) | Total ($) (j) | |||||||||||||||||||||||||||
| Lin Chi-Jung | 2014 | 72,960 | - | - | - | - | - | 4,505 | 77,465 | |||||||||||||||||||||||||||
| CEO, President & Chairman | 2013 | 72,960 | - | - | - | - | - | 4,505 | 77,465 | |||||||||||||||||||||||||||
| Executive Officer of subsidiaries | 2012 | 72,960 | - | - | - | - | - | 4,505 | 77,465 | |||||||||||||||||||||||||||
| Wang Wen Yan, CFO | 2013 | 21,500 | - | - | - | - | - | 429 | 21,929 | |||||||||||||||||||||||||||
| 2012 | 44,279 | 929 | 45,208 | |||||||||||||||||||||||||||||||||
| Mi Yong Jun | 2014 | 24,500 | - | - | - | - | - | 295 | 24,795 | |||||||||||||||||||||||||||
| CFO (June 24, 2013) | 2013 | 24,500 | - | - | - | - | - | 295 | 24,795 | |||||||||||||||||||||||||||
Option/SAR Grants
The Company has no stock option plan or other equity incentive plan in place. Accordingly, no individual grants of stock options, whether or not in tandem with Stock Appreciation Rights (“SARs”) and freestanding SARs have been made to any executive officer or any director since the Company’s inception, accordingly, no stock options have been exercised by the Company’s officers or directors in any fiscal year.
DIRECTOR COMPENSATION
| Name (a) | Fees Earned or Paid in Cash ($) (b) | Stock Awards ($) (c) | Option Awards ($) (d) | Non-Equity Incentive Plan Compensation ($) (e) | Change in Pension Value and Nonqualified Deferred Compensation Earnings (f) | All Other Compensation ($) (g) | Total ($) (h) | |||||||||||||||||||||
| LIN CHI-JUNG | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
| LIN CHAO-CHIN | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
| LIN HSIN-HUNG | 18,071 | 0 | 0 | 0 | 0 | 0 | 18,071 | |||||||||||||||||||||
| FU XUAN-JIE | 6,966 | 0 | 0 | 0 | 0 | 0 | 6,966 | |||||||||||||||||||||
| LI XIAO-GANG | 6,966 | 0 | 0 | 0 | 0 | 0 | 6,966 | |||||||||||||||||||||
| CHEN REN | 6,966 | 0 | 0 | 0 | 0 | 0 | 6,966 | |||||||||||||||||||||
| ZHANG XI (2) | 6,966 | 0 | 0 | 0 | 0 | 0 | 6,966 | |||||||||||||||||||||
| (1) | There are no stock option, retirement, pension, or profit sharing plans for the benefit of directors. |
| (2) | Zhang Xi resigned as a director effective April 14, 2014 |
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ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of October 20, 2014, the number and percentage of our 48,691,925 shares of common stock outstanding that were beneficially owned by (1) each person known to the Company to be the beneficial owner of five percent or more of our common stock, (2) each director and named executive officer, and (3) all of the Company's directors and executive officers as a group. Unless otherwise indicated, the person listed in the table is the beneficial owner of, and has sole voting and investment power with respect to, the shares indicated.
| Title of Class | Name and Address | Amount and Nature of Beneficial Ownership | Percent of Class | |||||||
| Common | Lin Chi-Jung Hengfeng Road, No. 638, 25th Fl., Bldg A | 44,511,400 | (1) | 64.80 | % | |||||
| Common | Lin Hsin-Hung Hengfeng Road, No. 638, 25th Fl., Bldg A | 334,750 | (2) | 0.49 | % | |||||
| Common | Lin Chao Chun | 4,511,400 | (3) | 6.57 | % | |||||
| All Directors and Officers As a Group | 32,757,550 | 71.85 | % | |||||||
| Common | Better Time International | 3,530,000 | (4) | 5.14 | % | |||||
| Common | Good Speed Service Limited | 3,469,572 | (5) | 5.05 | % | |||||
| Non-Officers and Directors | 6,999,572 | 10.19 | % | |||||||
| (1) | These shares are owned by Ace Develop Properties Limited, of which Mr. Lin Chi-Jung is the sole beneficiary owner |
| (2) | These shares are owned by Glorystar International Enterprise Limited, of which Mr. Lin Hsing Hung is a minority shareholder and an officer. |
| (3) | These shares are owned by Robert Lin Investments, Inc., of which Mr. Lin Chao Chun is the sole beneficiary owner. |
| (4) | The beneficiary owner of Better Time International is Wang Chun-Chieh. |
| (5) | The beneficiary owner of Good Speed Services Limited is Yuan Chi Lung. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Certain Relationships
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.
Amounts Due To Directors
The amounts due to directors as of December 31, 2014 were $10,168,618. The amounts due are as follows:
Amount Due To Lin Chi-Jung
The amount due to Lin Chi-Jung as of December 31, 2014 was $10,112,798, which consists of a balance of unpaid salaries and reimbursements totaling $31,663 and unsecured advances together with unpaid interest totaling $10,081,135.
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 36.5% per annum. During the years ended December 31, 2014 and 2013, the interest expense related to these advances amounted to $1,763,546 and $1,915,510, respectively.
Amount Due to Lin Chao-Chin
The balance due to Lin Chao-Chin as of December 31, 2014 was $NIL.
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Amount Due to Lin Hsin-Hung
The balance due to Lin Hsin-Hungas of December 31, 2014 was $55,820, which is unsecured, interest-free and has no fixed term of repayment.
Advances To An Unconsolidated Affiliate
Advances to an unconsolidated affiliate as of December 31, 2014was$ 2,965,360.The balance bears interest at a rate of 15% per annum, is unsecured and has no fixed term of repayment. During the year ended December 31, 2014, the Company recorded interest income of $262,754 related to the advances.
Director Independence
Fu Xuan-Jie, Li Xiao-Gang and Chen Ren, constitute members of the Board of Directors and are each “independent” within the meaning of the Marketplace Rules of the Nasdaq Stock Market, Inc..
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Our independent accountant is Kenne Ruan CPA, P.C. (“Kenne Ruan”). As reported in our Form 8-K filed on March13, 2015, the Company appointed Kenne Ruan as its independent accountant effective immediately. Our previous independent accountant was Finesse CPA, P.C. (“Finesse”). Set below are aggregate fees billed by Kenne Ruan and Finesse for professional services rendered the audit and quarterly reviews of the Company’s financial statements included in our Forms 10-K and 10-Q for the fiscal years ended December 31, 2014 and 2013.
Audit Fees
For the years ended December 31, 2014 and 2013, the fees billed from Kenne Ruan and Finesse were $117,666 (2013: $61,507) and $NIL (2013: $154,177), respectively.
Audit-Related Fees
None.
Tax Fees
None.
All Other Fees
Finesse and Kenne Ruan did not bill the Company any additional fees for professional services rendered to the Company during the fiscal years ended December 31, 2014 and 2013.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
According to the charter of the Audit Committee, the Company’s policy on pre-approval of audit and permissible non-audit services of independent auditors is to pre-approve all audit services and permissible non-audit services by the independent accountants, as set forth in Section 10A of the Exchange Act and the rules and regulations promulgated thereunder by the SEC. The Audit Committee may establish pre-approval policies and procedures, as permitted by Section 10A of the Exchange Act and the rules and regulations promulgated thereunder by the SEC, for the engagement of independent accountants to render services to the Company, including but not limited to policies that would allow the delegation of pre-approval authority to one or more members of the Audit Committee, provided that any pre-approvals delegated to one or more members of the Audit Committee are reported to the Audit Committee at its next scheduled meeting.
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| (a) | Financial Statements and Schedules |
The financial statements filed as part of this filing are listed on the index to the Financial Statements, Item 8 of Part II.
Exhibit Index
| Exhibit | ||
| Number | Description | |
| 2.1 | Exchange Agreement dated as of August 31, 2004 by and among Lin Ray Yang Enterprise Ltd., Lin Chi-Jung, as agent for the beneficial shareholders of such company, and the Company, incorporated by reference to our Current Report on Form 8-K filed on September 8, 2004. | |
| 2.2 | Exchange Agreement dated as of August 31, 2004 by and among Sunrise Real Estate Development Group, Inc., a Cayman Islands company, Lin Chi-Jung, as agent for the beneficial shareholder of such company, and the Company, incorporated by reference to our Current Report on Form 8-K filed on September 8, 2004. | |
| 3.1 | Articles of Incorporation, incorporated by reference to Exhibit 3.1 of Form-10 QSB filed on April 23, 2001. | |
| 3.1a | Amendments to the Articles of Incorporation, incorporated by reference to Exhibits 3.1a and 3.1b to Form-10-KSB for the fiscal year ended December 31, 2003 filed on April 14, 2004. | |
| 3.1b | Articles of Amendment to the Articles of Incorporation dated April 25, 2006, incorporated by reference to Exhibit 3.1b of Form-10 QSB filed on November 14, 2006. | |
| 3.2 | Bylaws, incorporated by reference to Exhibit 3.2 of Form-10SB filed on April 23, 2001. | |
| 7.1 | Letter from Kenne Ruan, CPA, P.C. dated August 14, 2012 (Incorporated by reference from Form 8-K) filed on August 17, 2012). | |
| 7.2 | Letter from Kenne Ruan, CPA, P.C. dated February 16, 2013 (Incorporated by reference from Form 8-K) filed on February 21, 2013). | |
| 10.1 | Financial Advisory Agreement dated January 15, 2006 between Sunrise Real Estate Group, Inc. and Marco Partners, Inc., incorporated by reference to Exhibit 10.1 to Form SB-2 filed on February 13, 2006. | |
| 10.2 | Consultancy Service Agreement dated January 15, 2006 between Sunrise Real Estate Group, Inc. and Chiang Hui Hsiung, incorporated by reference to Exhibit 10.2 to Form SB-2 filed on February 13, 2006. | |
| 10.3 | Placement Agent Agreement dated June 15, 2006 between Sunrise Real Estate Group, Inc. and Midtown Partners & Co., LLC. (Filed on January 28, 2011) | |
| 10.21 | Stock Purchase Agreement, dated as of January 22, 2011 between Sunrise Real Estate Group, Inc. and Better Times International Limited (Filed on January 28, 2011) | |
| 10.22 | Stock purchase agreement dated August 20, 2014 between Sunrise Real Estate Group, Inc. and Ace Develop Properties Limited (Filed on August 21, 2014) | |
| 10.23 | Stock purchase agreement dated November10, 2014 between Sunrise Real Estate Group, Inc. and Ace Develop Properties Limited (Filed on November 10, 2014) | |
| 14 | Code of Ethics | |
| 21.1 | Subsidiaries of the Company, incorporated by reference to Exhibit 21.1 to Form SB-2 filed on February 13, 2006.(Incorporated by reference from Form 8-K dated September 30, 2011) |
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| 31.1 | Certification of Lin Chi-Jung, pursuant to Rule 15d-14(a). | |
| 31.2 | Certification of Mi Yong Jun, pursuant to Rule 15d-14(a). | |
| 32.1 | Certifications of Lin Chi-Jung, pursuant to 18 U.S.C. 1350. | |
| 32.2 | Certifications of Mi Yong Jun, pursuant to 18 U.S.C. 1350. | |
| 99.1 | Press Release dated March 27, 2012, titled Sunrise Real Estate Group, Inc. Announces Resignation and appointment of CFO.(Incorporated by reference from Form 8-K dated March27, 2012) | |
| 101 | XBRL data files of Financial Statements and Notes contained in this Annual Report on Form 10-K. |
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Sunrise Real Estate Group, Inc.
| /s/ Lin Chi-Jung | ||
| BY: Lin Chi-Jung | ||
| Principal Executive Officer and Director | ||
| DATE: June 20, 2017 | ||
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Lin Chi-Jung | Principal Executive Officer | June 20, 2017 | ||
| Lin Chi-Jung | and Director | |||
| /s/ Mi Yong Jun | Chief Financial Officer | June 20, 2017 | ||
| Mi Yong Jun | ||||
| /s/ Lin Chao-Chin | Director | June 20, 2017 | ||
| Lin Chao-Chin | ||||
| /s/ Lin Hsin Hung | Director | June 20, 2017 | ||
| Lin Hsin-Hung | ||||
| /s/ Fu Xuan-Jie | Director | June 20, 2017 | ||
| Fu Xuan-Jie | ||||
| /s/ Li Xiao-Gang | Director | June 20, 2017 | ||
| Li Xiao-Gang | ||||
| /s/ Chen Ren | Director | June 20, 2017 | ||
| Chen Ren |
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