NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Description of business
Great China International Holdings, Inc., (the “Company”) was incorporated in the State of Nevada on December 4, 1987, under the name of Quantus Capital, Inc. The Company, through its various subsidiaries, is engaged in commercial and residential real estate leasing, management, consulting, investment, development and sales in the city of Shenyang, Liaoning Province, in the People’ Republic of China (“PRC”).
2. Summary of significant accounting policies
Principles of consolidation
The
accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Silverstrand International Holdings Company Limited, Shenyang Maryland International Industry Company Limited, Shenyang Ai Zhuang Trading Co., Ltd (“Ai Zhuang”), and the 53% owned entity, Panacea Co., Ltd. Ai Zhuang and Panacea Co
., Ltd. All significant inter-company transactions and balances within the Company are eliminated in consolidation.
Use of estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Foreign currency translation
The Company uses the United States dollar for financial reporting purposes. The Company’s subsidiaries maintain their books and records in their functional currency - Chinese Yuan Renminbi (CNY), being the primary currency of the economic environment in which their operations are conducted. All assets and liabilities are translated at the current exchange rate, stockholder’s equity are translated at the historical rates and income statement and statement of cash flows items are translated at the average exchange rate for the period. As a result, amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes in the corresponding balances on the balance sheet. The resulting translation adjustments are reported under other comprehensive as a component of shareholders’ equity.
Cash and cash equivalents
The Company considers all cash on hand and in banks, including accounts in book overdraft positions, certificates of deposit and other highly-liquid investments with maturities of three months or less, when purchased, to be cash and cash equivalents.
Allowance for doubtful accounts
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and other receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. As of March 31, 2016 and December 31, 2015, the Company reserved $3,458,701 and $1,644,340 respectively, for other receivable bad debt, and $681,233 and $675,929, respectively, for accounts receivable bad debt. The Company also reserved $0 and $2,415,944 respectively for loans receivable as of March 31, 2016 and December 31, 2015 respectively.
Property and equipment is being depreciated over the estimated useful lives of the related assets. Depreciation is computed on the straight-line basis over useful lives as follows:
|
8-26 years
|
Equipment
|
5 years
|
Automobile
|
5 years
|
Office furniture and fixtures
|
5 years
|
6
Repairs and maintenance costs are normally charged to the statement of operations and other comprehensive income in the year in which they are incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the asset, the expenditure is capitalized as an additional cost of the asset.
Property and equipment are evaluated annually for any impairment in value. Where the recoverable amount of any property and equipment is determined to have declined below its carrying amount, the carrying amount is reduced to reflect the decline in value. There were no property and equipment impairments recognized as of March 31, 2016 and December 31, 2015 respectively.
Properties held for rental
Properties include buildings held for rental and land use rights, which are being depreciated over the estimated useful lives of the related assets. Depreciation is computed on the straight-line basis over 20-26 years. As of March 31, 2016 and December 31, 2015, net property held for rental amounted to $34,885,960 and $35,502,002 respectively. Accumulated depreciation of rental properties amounted to $35,985,386 as of March 31, 2016 and $35,044,528 as of December 31, 2015.
Revenue recognition
Rental income and management fee income – The Company recognizes the rental income on the straight-line basis over the terms of the tenancy agreements. The management fee, including the service fee mainly for property management, maintenance and repair, and security, is recognized quarterly over the terms of the tenancy agreements.
Real estate sales – Revenue from the sales of development properties is recognized by the full accrual method when the sale is consummated. A sale is not considered consummated until (1) the parties are bound by the terms of a contract, (2) all consideration has been exchanged, (3) any permanent financing of which the seller is responsible has been arranged, (4) all conditions precedent to closing have been performed, (5) the seller does not have substantial continuing involvement with the property, and (6) the usual risks and rewards of ownership have been transferred to the buyer. Sales transactions not meeting all the conditions of the full accrual method are accounted for using the deposit method of accounting. Under the deposit method, all costs are capitalized as incurred, and payments received from the buyer are recorded as a deposit liability.
Real estate capitalization and cost allocation – Real estate held for development or sale is stated at cost or estimated net realizable value, whichever is lower. Costs include land and land improvements, direct construction costs and development costs, including predevelopment costs, interest on indebtedness, real estate taxes, insurance, construction overhead and indirect project costs. Selling and advertising costs are expensed as incurred. Total estimated costs of multi-unit developments are allocated to individual units based upon specific identification methods.
Impairment – If real estate is determined to be impaired, it will be written down to its fair market value. Real estate held for development or sale costs include the cost of land use rights, land development and home construction costs, engineering costs, insurance costs, wages, real estate taxes, and interest related to development and construction. All costs are accumulated by specific projects and allocated to residential and commercial units within the respective projects. The Company leases the land for the residential unit sites under land use rights with various terms from the government of the PRC. The Company evaluates the carrying value for impairment based on the undiscounted future cash flows of the assets. Write-downs of inventory deemed impaired would be recorded as adjustments to the cost basis. No depreciation is provided for construction in progress.
Other income consists of land leveling income, parking lot income, cleaning income and etc. This income was recognized as the services were performed and the settled amount has been paid in accordance with the terms of the agreement.
Earnings (loss) per share
Basic earnings (loss) per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income by the weighted-average number of common shares and dilutive potential common shares outstanding during the period.
As of March 31, 2016 and December 31, 2015, respectively, there were no outstanding securities or other contracts to issue common stock, such as options, warrants or conversion rights, which would have a dilutive effect on earnings per share as the effect of options outstanding at that time was anti- dilutive.
7
Income taxes
The Company accounts for income taxes using an asset and liability approach which allows for the recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
The Company recognizes 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 basis 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 difference are expected to affect taxable income.
The Company records a valuation allowance for deferred tax assets, if any, based on its estimates of its future taxable income as well as its tax planning strategies when it is more likely than not that a portion or all of its deferred tax assets will not be realized.
Non-controlling interest represents the portion of equity that is not attributable to the Company. The net income (loss) attributable to non-controlling interests are separately presented in the accompanying statements of income and other comprehensive income. Losses attributable to non-controlling interests in a subsidiary may exceed the interest in the subsidiary’s equity. The related non-controlling interest continues to be attributed its share of losses even if that attribution results in a deficit of the non-controlling interest balance. The non-controlling interest % of entity Panacea Co., Ltd., which was set up in April 2015, was 47%, with the amount of $109,935 and $142,782 as of March 31, 2016 and December 31, 2015, respectively.
Concentrations of business and credit risk
Financial instruments that potentially subject the Company to concentrations of credit risk are cash and cash equivalents, accounts receivable and other receivables arising from its normal business activities. The Company places its cash and cash equivalents in what it believes to be credit-worthy financial institutions. The Company maintains large sums of cash in two major banks in China. The aggregate balance in such accounts as of March 31, 2016 was $2,245,457. There is no insurance securing these deposits in China. The Company has a diversified customer base, most of which are in China.
The Company controls credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.
Statement of cash flows
Cash flows from the Company's operations is calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes in the corresponding balances on the balance sheet.
Recent accounting pronouncements
There have been no new accounting pronouncements during the period ended March 31, 2016 that are of significance, or potential significance, to the Company.
Reclassifications
Certain amounts in the 2015 financial statements may have been reclassified to conform to the 2016 presentation. These reclassifications had no effect on previously reported results of operations or retained earnings.
3. Loans receivable
The company entered into series of collateralized loan agreements with third parties from 2009, the total loan receivable is $0 and $0 as of March 31, 2016 and December 31, 2015, respectively.
8
During 2011, the Company entered into a collateralized loan agreement with Beijing Sihai Real Estate Development Ltd., pursuant to which the Company loaned $2,788,254 due on November 29, 2013, and then resigned the agreement at the same terms due on November 29, 2015. The loan bears interest at a variable rate based on the Peoples’ Bank of China lending rate applicable to the period plus 10%. As of the December 31,2012, the balance of loan receivable was $3,916,449 according to the updated loan agreement. In 2013, the Company collected $2,304,742 on the loan, and then again made a loan of $2,925,249 to Beijing Sihai Real Estate Development Ltd. In 2014, the Company collected $161,171 on the loan. Although the loan will be due on November 29, 2015, the Company accrued bad debt provision of $2,764,078 with the consideration of uncertain collectability of the remaining loan balance. On January 19, 2015, the Company subsequently collected $1,611,707 on the loan. In December 24, 2015, the Company collected $617,494 on the loan. In March 29, 2016, the Company collected $620,347 on the loan. The net loan receivable from Beijing Sihai Real Estate Development Ltd., was $2,143,731 and $2,764,078 as of December 31, 2015 and December 31, 2014, respectively.
During 2011, the Company entered into a collateralized loan agreement with Shenyang Landing Concrete Ltd., pursuant to which, the Company loaned $2,417,561, due on March 27, 2013. The loan bears interest at a variable rate based on the Peoples’ Bank of China lending rate applicable to the period. On November 30, 2011, the Company, along with Shenyang Landing Concrete Ltd., reassigned the loan amount to KaiyuanHongyun Concrete Admixture Ltd., with the same terms due on November 30, 2013. In August 15, 2013, the loan agreement was extended to August 15, 2015, on the same terms. As of the March 12, 2015, the company collected all the loan receivable from KaiyuanHongyun Concrete Admixture Ltd.
During 2009, the Company entered into an uncollateralized loan agreement with ZhongxinGuoan Ltd., pursuant to which the Company loaned $2,014,634 due on October 30, 2011. The loan bore interest at a variable rate based on the Peoples’ Bank of China lending rate applicable to the period. Subsequent to the issuance of the loan, the Company determined that the loan was uncollectible and recorded a reserve on the entire loan amount. Therefore this loan is not included in the loans receivable on the balance sheet. During the fourth quarter of 2011, this loan was reassigned to Shenyang Konggang New City Investment Development Ltd., who is working on a development project with ZhongxinGuoan Ltd. The loan remains uncollateralized and is now due on October 30, 2015. The loan bears interest at a variable rate based on the Peoples’ Bank of China lending rate applicable to the period. On May 31, 2015, the Company collected $1,543,734 on the loan. As of March 31, 2016, the net loan receivable from Shenyang Konggang New City Investment Development Ltd. was $385,934.
4. Property and equipment
Property, Plant & Equipment consisted of the following:
|
March 31,
2016
|
|
December 31,
2015
|
|
|
|
|
|
|
Building
|
$
|
15,214
|
|
$
|
15,144
|
Automobile
|
|
1,142,044
|
|
|
1,136,790
|
Office equipment & Furniture
|
|
619,130
|
|
|
609,932
|
|
|
1,776,387
|
|
|
1,761,866
|
Accumulated depreciation
|
|
(1,545,375)
|
|
|
(1,536,066)
|
Property and equipment, net
|
$
|
231,013
|
|
$
|
225,800
|
The Company recorded depreciation expense relating to properties held for rental, as well as property and equipment amounting to $768,086 and $
815,139
for the three months ended March 31, 2016 and 2015, respectively, of which, $2,207 and $5,015 were recorded as general and administrative expense, respectively.
As of March 31, 2016, fixed assets and rental property totaling $6,062,709 were pledged as security for various bank loans totaling $3,109,222.
5. Accrued expenses
Accrued expenses consisted of the following:
|
March 31,
2016
|
|
December 31,
2015
|
|
|
|
|
|
|
Payroll and welfare payable
|
$
|
3,218
|
|
$
|
4,260
|
Accrued expenses
|
|
8,980
|
|
|
9,116
|
Total
|
$
|
12,198
|
|
$
|
13,376
|
9
6. Other payables
Other payables consisted of the following:
|
March 31,
2016
|
|
December 31,
2015
|
Customer guarantee deposit
|
$
|
1,104,515
|
|
$
|
1,117,614
|
Customer deposit for property decoration
|
|
21,247
|
|
|
18,502
|
Miscellaneous payable
|
|
790,350
|
|
|
781,663
|
Total
|
$
|
1,916,112
|
|
$
|
1,917,779
|
7. Tax payables
Tax payables consisted of the following:
|
March 31,
2016
|
|
December 31,
2015
|
|
|
|
|
|
|
Income tax payable in Mainland China
|
$
|
1,394,920
|
|
$
|
1,576,275
|
Business tax
|
|
809,686
|
|
|
602,586
|
Land VAT payable
|
|
2,327,097
|
|
|
2,316,391
|
Other levies
|
|
(41,844)
|
|
|
(27,691)
|
Total
|
$
|
4,489,859
|
|
$
|
4,467,561
|
8. Payable to disposed subsidiary
The Company had amounts due to a Loyal Best, a previously disposed of entity, as of March 31, 2016 and December 31, 2015 in the amount of $807,342 and $803,628, respectively.
9. Loan Payable
Loans payable (including accrued interest) consisted of the following:
|
|
Due on
|
|
Interest per Annum
|
|
March 31,
2016
|
|
December 31,
2015
|
Bank loan
|
|
6-12-2016
|
|
8.775%
|
|
$
|
3,109,222
|
|
$
|
4,631,202
|
|
|
|
|
|
|
|
|
|
|
|
Less current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,109,222
|
|
$
|
4,631,202
|
The above loans are secured by Company rental properties.
For the period ended March 31, 2016 and 2015, the Company’s incurred interest expense of $65,636 and $493,112, respectively.
10. Statutory reserve
As stipulated by the Company Law of the People’s Republic of China (PRC), net income after taxation can only be distributed as dividends after appropriation has been made for the following:
|
i.
|
Making up cumulative prior years’ losses, if any;
|
|
|
|
|
ii.
|
Allocations to the “Statutory Surplus Reserve” of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company’s registered capital;
|
|
|
|
|
iii.
|
Allocations of 5% to 10% of income after tax, as determined under PRC accounting rules and regulations, to the Company’s “Statutory Common Welfare Fund”, which is established for the purpose of providing employee facilities and other collective benefits to the Company’s employees; and statutory common welfare fund is no longer required per the new cooperation law executed in 2006; and
|
|
|
|
|
iv.
|
Allocations to the discretionary surplus reserve, if approved in the stockholders’ general meeting.
|
10
The Company did not contribute to statutory reserve for the period ended March 31, 2016 and 2015, respectively.
11. Segment information
ASC 280 requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.
During 2016 and 2015, the Company was organized into two main business segments: (1) Property for sale, and (2) Rental income and Income of management fee of commercial buildings. The following table presents a summary of operating information for the period ended March 31, 2016 and 2015 and certain balance sheet information as of March 31, 2016 and December 31, 2015, respectively.
|
|
|
March 31
|
|
|
|
2016
|
|
2015
|
Revenues from unaffiliated customers:
|
|
|
|
|
|
|
Rental income & Management fee
|
|
1,838,367
|
|
|
1,901,878
|
|
Consumer product sales
|
|
4,286
|
|
|
-
|
|
|
Consolidated
|
$
|
1,842,652
|
|
|
1,901,878
|
Operating income (loss):
|
|
|
|
|
|
|
Rental income & Management fee
|
|
841,161
|
|
|
23,733
|
|
Consumer product sales
|
|
(93,959)
|
|
|
-
|
|
Corporation (1)
|
|
(96,385)
|
|
|
(48,920)
|
|
|
Consolidated
|
$
|
650,817
|
|
|
(25,187)
|
Net income (loss) before taxes:
|
|
|
|
|
|
|
Rental income & Management fee
|
|
837,204
|
|
|
(414,827)
|
|
Consumer product sales
|
|
(93,899)
|
|
|
-
|
|
Corporation (1)
|
|
(96,385)
|
|
|
(48,985)
|
|
|
Consolidated
|
$
|
646,920
|
|
|
(463,812)
|
Identifiable assets:
|
|
|
|
|
|
|
Rental income & Management fee
|
|
38,030,735
|
|
|
42,418,105
|
|
Consumer product sales
|
|
375,602
|
|
|
-
|
|
Corporation (1)
|
|
7,094,676
|
|
|
2,980,393
|
|
|
Consolidated
|
$
|
45,501,012
|
|
|
45,398,498
|
Depreciation and amortization:
|
|
|
|
|
|
|
Rental income & Management fee
|
|
768,460
|
|
|
815,139
|
|
Corporation (1)
|
|
1,460
|
|
|
|
|
|
Consolidated
|
$
|
769,920
|
|
|
815,139
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
Rental income & Management fee
|
|
4,008
|
|
|
1,315
|
|
Consumer product sales
|
|
30,180
|
|
|
-
|
|
|
Consolidated
|
$
|
34,188
|
|
|
1,315
|
(1). Unallocated loss from Operating income (loss) and Net income before provision for income taxes are primarily related to general corporate expenses.