NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
1.
NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING
POLICIES
Nature of
Operations
San
Lotus Holding Inc. (the
“Company”
or
“San
Lotus”),
was
incorporated
on
June 21,
2011
in the State of
Nevada and changed our state of incorporation from the State of Nevada to the State of California on July 21, 2015. Since its
incorporation, the Company has focused on business-related travel services and
real estate development. The Company’s principal business activities are in
Taiwan.
In 2015, through the acquisition of Mao Ren International
Inc., the Company acquired liquidation rights to certain properties
collateralized by a Taiwanese company. See Note 4.
In 2015 and part of 2016, the Company, through the acquisition
of XO Experience Inc. from the former Chairman of the Company, was engaged in
the provision of travel services, including hotel reservation services, airline
ticketing, and travel packages in the United States. In December 2016, the
Company decided to dissolve XO Experience Inc.
On January 1, 2017, through the acquisitions of AHI Film
Inc. and AHI Records Inc., the Company acquired certain ancillary assets and
know-how including: (1) intellectual property rights on media assets and media
production capabilities and (2) proprietary research knowledge on tourism
development in Japan for future overseas development. The media assets, held by
AHI Film Inc., AHI Records Inc. and their subsidiaries, include a feature
motion picture; professional-grade photographs; professional-grade video
footage; two completed music albums; and one semi-completed music album as well
as other miscellaneous items. Through the acquisitions of AHI Film Inc. and AHI
Records, Inc., key personnel have been retained to ensure that crucial
functions to media production are kept in house for future development.
On January 1, 2017, through the acquisition of San Lotus
Holding Inc. (BVI) and in anticipation of the Company’s planned investments in
Japan, the Company acquired proprietary research knowledge on tourism
development in Japan. The proprietary knowledge includes historical research;
economic statistics report; geographic analysis; real estate investment
analysis; and most notably tourism specific research with a particular focus on
destination real estate development.
On April 1, 2017,
the Company acquired Da Ren
International Insurance Brokers Co. Ltd
. in anticipation
of its future develpement
in the insurance brokerage market.
Basis of Presentation and Measurement
These unaudited consolidated interim financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States (“U.S. GAAP”) for interim financial information and with
the instructions to Form 10-Q and Article 8 of Regulation S-X under the
Securities Exchange Act of 1934, as amended. Accordingly, they do not include
all of the information and footnotes required by U.S. GAAP for annual financial
statements. These unaudited consolidated interim financial statements should be
read in conjunction with the audited consolidated financial statements for the
year ended December 31, 2016 as filed in our Annual Report on Form 10-K on May
12, 2017. In the opinion of the Company’s management, these financial
statements reflect all adjustments, consisting of normal recurring adjustments,
necessary to present fairly the Company’s financial position at September 30,
2017 and the results of its operations for the nine months then ended.
Operating results for the nine months ended September 30, 2017 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2017. The 2016 year-end balance sheet data was derived from
audited financial statements but does not include all disclosures required by
U.S. GAAP.
Consolidation Policy
The consolidated financial statements of the Company
include the accounts of San Lotus Holding, Inc. and its subsidiaries,
Intercompany accounts and transactions have been eliminated upon consolidation. The following companies have been
consolidated as at September 30, 2017:
Company
name
|
Registered
|
Purpose of entity
|
Green Forest Management Consulting Inc. (“Green
Forest”)
|
Taiwan
|
Land holding company
|
Da Ren International Development Inc. (“Da Ren”)
|
Taiwan
|
Land holding company
|
Mao Ren International Inc. (“
Mao Ren”)
|
Taiwan
|
Liquidation rights to collateralized land
|
Da Ren International Insurance Brokers Co. Ltd. (“Da Ren
Insurance”)
|
Taiwan
|
Insurance broker
|
AHI Film Inc.
|
U.S.A.
|
Media production company
|
AHI Record Inc. (“AHI Record”)
|
U.S.A.
|
Music production company
|
San Lotus Holding Inc. (BVI) (“San Lotus BVI”)
|
British Virgin Islands
|
Overseas holding company
|
XO Experience Inc. (“
XO”)
|
U.S.A.
|
Travel services
|
All of the subsidiares listed above are wholly owned by
the Company. AHI Film Inc. has two wholly owned subsidiaries, City For Rent LLC . and AHI Post Production Inc., and one subsidiary, Animedia
TV Inc., of which AHI Film Inc. owns 82.78% of the outstanding shares.
Going Concern
The accompanying consolidated financial statements were
prepared on a going concern basis, which assumes the realization of assets and
discharge of liabilities in the normal course of business. As shown in the
accompanying consolidated financial statements, the Company had an accumulated
deficit of $23,771,094 as of September 30, 2017.
The Company faces all the risks common to companies at
the early stage, including capitalization and uncertainty of funding sources,
high initial expenditure levels, uncertain revenue streams and difficulties in
managing growth. The Company's losses raise substantial doubt about its ability
to continue as a going concern. The Company is currently addressing its
liquidity issue by continually seeking investment capital through private
placements of common stock and debt. Through the collection of its long-term
receivable (see Note 4), the Company expects to have cash receipts to fund its
operations. The Company believes its current and future plans enable it to
continue as a going concern. The Company's ability to achieve these objectives
cannot be determined at this time. These consolidated financial statements do
not give effect to any adjustments which would be necessary should the Company
be unable to continue as a going concern and therefore be required to realize
its assets and discharge its liabilities other than the normal course of
business and at amounts which may differ from those in the accompanying
consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity
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 financial statements and the reported amounts of revenue and expenses during the reporting period. These judgments, estimates and assumptions are
continuously evaluated and are based on management’s experience and knowledge
of the relevant facts and circumstances. While management believes the
estimates to be reasonable, actual results could differ from those estimates
and could impact future results of operations and cash flows. Significant estimates incorporated into the Company’s consolidated
financial statements include the estimated recoverable amount of the long-term
receivable, the estimated useful lives for depreciable and amortizable assets
and litigation contingencies and claims.
Discontinued Operations
The
Company follows the policy of segregating the assets and liabilities of
subsidiaries or lines of business on its balance sheet from the assets and
liabilities of continuing subsidiaries or lines of business when it has decided
to close or dispose of a subsidiary or line of business. The Company also
follows the policy of separately disclosing the assets and liabilities and the
net operations of a subsidiary or line of business in its financial statements
when it has decided to close or dispose of a subsidiary or line of business.
Business Combinations
The Company accounts for business combinations under the
acquisition method of accounting, which requires the Company to record assets
acquired, liabilities assumed and any non-controlling interest in the acquisition
at their respective fair values as of the acquisition date in the Company's
consolidated financial statements.
Foreign Currency Translation Adjustment
The Company’s financial statements are presented in the U.S.
dollar (“$”), which is the Company’s reporting currency, while its functional
currencies are the U.S. Dollar for its U.S. based operations and New Taiwan
Dollar (“NTD”) for its Taiwanese based operations. Transactions in foreign
currencies are initially recorded at the functional currency rate prevailing at
the date of transaction. Any differences between the initially recorded amount
and the settlement amount are recorded as a gain or loss on foreign currency
transactions in the statements of operations. Monetary assets and liabilities
denominated in foreign currency are translated at the functional currency rate
of exchange prevailing at the balance sheet date. Any differences are taken to
profit or loss as a gain or loss on foreign currency transaction in the
statements of operations.
The Company translates the assets and liabilities into U.S.
dollars using the rate of exchange prevailing at the balance sheet date and the
statements of operations and cash flows are translated at an average rate
during the reporting period. Adjustments resulting from the translation from
NTD into U.S. dollars are recorded in stockholders’ equity as part of
accumulated other comprehensive income (loss).
Reclassification
Certain prior period amounts have been reclassified to
conform to current period presentation.
Cash
and
Cash
Equivalents
Cash
and
cash
equivalents
include
cash
and
all
highly
liquid
instruments
with
original
maturities
of
three
months
or
less.
Allowance
for Uncollectible Accounts Receivable
An
allowance for uncollectible accounts receivable is estimated based on
historical experience, credit quality, age of the accounts receivable balances,
and economic conditions that may affect a customer’s ability to pay. The
allowance for uncollectible accounts receivable was zero as of September 30, 2017
and December 31, 2016.
Long-term
receivable
Long-term
receivables include liquidation rights to proceeds from collateralized land. An
allowance for uncollectible receivable is estimated based on historical data
and land appraisal report provided by third party specialists. The allowance
for uncollectible long-term receivable was zero as of September 30, 2017 and
December 31, 2016.
Fair Value of Financial Instruments
All financial instruments classified as current assets
and liabilities are carried at cost, which approximates fair value, because of
the short-term maturities of those instruments.
Financial
instruments measured at fair value are classified into one of three levels in
the fair value hierarchy according to the relative reliability of the inputs
used to estimate the fair values. The three levels of the fair value hierarchy
are:
Level
1 - Unadjusted quoted prices in active markets for identical assets or
liabilities;
Level
2 - Inputs other than quoted prices that are observable for the asset or
liability either directly or indirectly; and
Level
3 - Inputs that are not based on observable market data.
Property
and
Equipment
Property and equipment are stated at cost. Expenditures
for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives as
follows:
Property
and equipment
|
Estimated
Useful Life
|
Vehicles
|
5 years
|
Equipment
|
2~5 years
|
Goodwill and intangible assets
Goodwill
represents the excess of costs over fair value of the net assets of businesses
acquired. Goodwill and intangible assets acquired in a business combination and
determined to have an indefinite useful life are not amortized, but instead
tested for impairment at least annually, or more frequently if certain
circumstances indicate a possible impairment may exist. The Company performs
its annual impairment assessment for goodwill and indefinite-lived intangible
assets in December of each year.
The
Company performs a one-step test in its evaluation of the carrying value of
goodwill, if qualitative factors determine it is necessary to complete a
goodwill impairment test. In the evaluation, the fair value of the relevant
reporting unit is determined and compared to the carrying value. If the fair
value is greater than the carrying value, then the carrying value is deemed to
be recoverable, and no further action is required. If the fair value estimate
is less than the carrying value, goodwill is considered impaired for the amount
by which the carrying amount exceeds the reporting unit’s fair value, and a
charge is reported in impairment of goodwill in our consolidated statements of
operations.
Assets
with definite lives are carried at cost less accumulated amortization.
Intangible assets with definite lives are amortized using the straight-line
method over the estimated economic life.
Impairment
of
Long-Lived
Assets
The
Company
reviews
long-lived
assets
and
certain
identifiable
intangibles
held
and
used
by
the
Company
for
impairment
whenever
events
or
changes
in
circumstances
indicate
that
the
carrying
amount
of
an
asset
may
not
be
recoverable.
The
Company
evaluates
its
long
lived
assets
for
impairment
annually
or
more
often
if
events
and
circumstances
warrant.
Events
relating
to
recoverability
may
include
significant
unfavorable
changes
in
business
conditions,
recurring
losses,
or
a
forecasted
inability
to
achieve
break-even
operating
results
over
an
extended
period.
The
Company
evaluates
the
recoverability
of
long-lived
assets
based
upon
forecasted
undiscounted
cash
flows.
Should
impairment
in
value
be
indicated,
the
carrying
value
of
intangible
assets
will
be
adjusted,
based
on
estimates
of
future
discounted
cash
flows
resulting
from
the
use
and
ultimate
disposition
of
the
asset.
Income
Taxes
The
Company
recognizes
deferred
tax
liabilities
and
assets
based
on
the
differences
between
the
financial
statement
carrying
amounts
and
the
tax
basis
of
assets
and
liabilities,
using
enacted
tax
rates
in
effect
in
the
years
the
differences
are
expected
to
reverse. Deferred
income
tax
benefit
(expense)
results
from
the
change
in
net
deferred
tax
assets
or
deferred
tax
liabilities. A valuation
allowance
is
recorded
when,
in
the
opinion
of
management,
it
is
more
likely
than
not
that
some
or
all
of
any
deferred
tax
assets
will
not
be
realized.
Revenue recognition
The Company recognizes revenues when all of the following
have occurred: persuasive evidence of arrangement with the customer, services
have been performed, fees are fixed or determinable and collectability of the
fees is reasonably assured. For
commission revenues, the Company recognizes at the later of the
billing or the effective date of the related insurance policies.
The commission is based on a percentage basis in the
contract and is determined by the insurance carrier in advance of the
contractual period.
The Company recognizes
supplemental commission revenues using internal data and information received
from insurance carriers that allows the Company to reasonably estimate the
supplemental commissions earned in the period. A supplemental commission is a
commission paid by an insurance carrier that is above the base commission paid,
is determined by the insurance carrier, and is established periodically in
advance of the contractual period based on historical performance criteria.
Net Earnings (Loss)
Per
Share
Basic
earnings
(loss)
per
share
is
calculated
based
upon
the
weighted
average
number
of
common
shares
outstanding.
Common
equivalent
shares
are
excluded
from
the
computation
of
the
diluted
loss
per
share
if
their
effect
would
be
anti-dilutive.
For
the
periods
presented
,
the
Company
did
not
have
any
common
equivalent
shares that would be dilutive.
Recently Issued Accounting
Pronouncements
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting
Standards Update, (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”),
which supersedes nearly all existing revenue recognition guidance under U.S.
GAAP. The core principle is that a company should recognize revenue when
promised goods or services are transferred to customers in an amount that
reflects the consideration to which an entity expects to be entitled for those
goods or services. ASU 2014-09 defines a five-step process to achieve this core
principle and, in doing so, more judgment and estimates may be required within
the revenue recognition process than are required under existing U.S. GAAP. The
standard is effective for annual periods beginning after December 15, 2017, and
interim periods therein, and shall be applied either retrospectively to each
period presented or as a cumulative-effect adjustment as of the date of
adoption. In May 2016, the FASB issued Accounting Standards Update No. 2016-12,
Revenue from Contracts with Customers. This update provides further guidance on
applying collectability criterion to assess whether the contract is valid and
represents a substantive transaction on the basis whether a customer has the
ability and intention to pay the promised consideration. The requirements of
this standard include an increase in required disclosures. Management has not
yet selected a transition method and is currently analyzing the impact of the
adoption of this guidance on the Company’s consolidated financial statements,
including assessing changes that might be necessary to information technology
systems, processes and internal controls to capture new data and address
changes in financial reporting. The Company believes that the adoption of the
standard will not have a significant impact on its consolidated financial
statements.
The
Company does not believe that any other recently issued effective
pronouncements, or pronouncements issued but not yet effective, if adopted,
would have a material effect on the accompanying consolidated financial
statements.
NOTE
2. PROPERTY AND EQUIPMENT
Property
and equipment at September 30, 2017 and December 31, 2016 consisted of the
following:
|
September
30, 2017
|
December
31, 2016
|
Land
|
$ 6,634,911
|
$ 5,902,201
|
Vehicles
|
80,775
|
67,960
|
Equipment
|
54,989
|
55,069
|
Property and equipment - gross
|
6,770,675
|
6,025,230
|
Accumulated
depreciation
|
(65,339)
|
(68,845)
|
Property
and equipment - net
|
$ 6,705,336
|
$ 5,956,385
|
During
the nine months ended September 30, 2017, the Company acquired three properties
with a total area of approximately 6,830 square meters in Kyushu, Japan. These
properties are held in trust for the benefit of the Company under the name of
the Company’s chairman, Kuan Yu Chen.
The
seller of 3 pieces of land that the Company acquired in 2013 has a first lien
on the land until 2019. The land is located in Taiwan and has a book value of
approximately $2 million (NTD 60,000,000).
For
the three and nine months ended September 30, 2016 and 2017, depreciation
expense was as follows:
|
Three
Months Ended September 30, 2017
|
Three
Months Ended September 30, 2016
|
Nine
Months Ended September 30, 2017
|
Nine
Months Ended September 30, 2016
|
Depreciation
expense
|
$ 21,872
|
$ 3,681
|
$ 33,843
|
$ 39,697
|
In
June 2016, the Company sold 2 vehicles, details of the transactions are listed
below:
Sale
proceeds
|
$ 44,000
|
Net book value on disposal date
|
34,214
|
Realized gain on disposal
|
$ 9,786
|
NOTE
3. DISPOSAL OF XO EXPERIENCE INC.
On December 31, 2016, the
Company decided to dissolve XO. The Company segregated the assets and
liabilities of XO on its balance sheet from the assets and liabilities of
continuing subsidiaries when it decided to dissolve XO. As a result of
the decision to dissolve XO, XO’s assets, liabilities, revenues and expenses
have been classified as discontinued operations on the consolidated statement
of operations for the three and nine months ended September 30,
2016. The components of discontinued operations
summarized on the statements of operations are as follows:
|
Three Months Ended September
30, 2016
|
Nine Months Ended September
30, 2016
|
Revenue
|
$ -
|
$ 156,276
|
General
and administrative expenses
|
(35,917)
|
(143,695)
|
Net income (loss) from discontinued operations
|
$ (35,917)
|
$ 12,581
|
There were no
assets or liabilities related to XO on the balance sheets as of September 30,
2017 and December 31, 2016.
As
of December 31, 2016, the Company wrote off XO’s residual net receivable due
from companies owned by our former CEO and Chairman totaling $27,836.
NOTE
4. LONG-TERM RECEIVABLES
In
February 2010, prior to the Company’s acquisition of Mao Ren, Mao Ren acquired,
from Chiu, Pao-Chi, Chiun Jing Inc., Haug Inc., Jiu Bang Inc., and Wan Fu Inc.
(together, “Mao Ren Creditors”), rights to partial proceeds from future sales
of collateralized land pledged by a Taiwanese company. In exchange, Mao Ren
assumed a payable liability to Mao Ren Creditors for the same amount. Among the
Mao Ren Creditors, Chiu, Pao-Chi represents a group of unidentified creditors
to the Taiwanese company and Chiun Jing Inc., Haug Inc., Jiu Bang Inc., and Wan
Fu Inc. represents different groups of creditors of the Taiwanese company.
Mao Ren
initially recorded a long-term receivable of approximately $30 million
(NT$913,401,823)
based on a report provided by an independent appraiser at initial recognition. The appraised
value constitutes the carrying amount of the seller because the agreements with
the creditors stipulated that the maximum amount the creditors could recover is
limited to the proceeds received from the sale of the collateralized land
relative to their proportionate investment.
Subsequent
to Mao Ren’s transaction with Mao Ren Creditors,
three private companies were
incorporated by Chen, Kuan Yu, our Chairman, and Yu, Chien Yang, our former
Director to represent Mao Ren Creditors.
These three
private companies assumed the debt which Mao Ren owed to Mao Ren Creditors and
in turn accepted promissory notes from Mao Ren as consideration.
On
March 31, 2015, Green Forest acquired all of the issued and outstanding common
stock of Mao Ren in exchange for $1 from Chiu, Pao-Chi, Chiun Jing Inc., Haug
Inc., Jiu Bang Inc., and Wan Fu Inc. The main assets and liabilities acquired
from Mao Ren included the liquidation rights to proceeds from collateralized
land totaling $18,190,911 and related promissory notes payable totaling
$18,190,911, respectively.
On
June 12, 2015, the Company issued 29,464,575 common shares to settle the notes
issued to the three private companies. The common stock issued was recorded at
the par value of $1 per share. The difference between the carrying amount (that
being the cost of the seller) and the par value was recorded in accumulated
deficit. The Company issued those shares to our Chairman in trust for the first
group of individual creditors. The second group of creditors, who wish to
collect cash
proceeds
from the sale of collateralized land, settled with the second private
company (owned by our former Director)
whereby the former director
would be personally liable to settle the amounts with the second group of
creditors. The remaining third group of creditors were not identified and the
Company has not been able to locate those creditors.
During 2016,
three
parcels of the
land
were sold and a total of approximately $11.5 million (NT$347,702,849) was
allocated to the Company by the government agencies. Of the amount
allocated to the Company, about $10.1 million (NT$304,792,503) was
received by the Company
in 2016. The remaining balance is under dispute with other creditors of the
Taiwanese company.
Balances of
long-term receivable are as follows:
|
September
30, 2017
|
December
31, 2016
|
Long-term
receivable
|
$ 8,688,955
|
$ 8,148,290
|
NOTE
5. ACQUISITION OF AHI FILM INC.
On
August 31, 2016, the Company entered into an agreement to purchase all
outstanding shares of AHI Film from Chang, Hsin-Yu, the sole
shareholder of AHI Film and AHI Film’s creditor’s rights from
Yu, Chien-Yang, a former director and major shareholder of the Company.
The closing date of this acquisition is January 1, 2017. The Company concluded
that the transaction is an acquisition of assets.
Assets
acquired and liabilities assumed at the acquisition date are as follows:
Cash
|
$ 111,702
|
Accounts
receivable
|
716
|
Prepaid
expenses and other current assets
|
17,310
|
Fixed
assets
|
31,635
|
Media
assets
|
4,261,597
|
Accounts
payable
|
(12,801)
|
Other
payables
|
(4,388,368)
|
Other
current liabilities
|
(21,790)
|
Consideration
paid
|
$ 1
|
The Company performed an impairment test on the media assets
acquired after acquisition and determined that the full balance of the assets
is impaired due to the uncertainty in the ultimate benefit to the Company.
NOTE 6. ACQUISITION OF AHI RECORD INC.
On
August 31, 2016, the Company entered into an agreement to purchase all
outstanding shares of AHI Records Inc. from Chang, Hsin-Yu, the sole
shareholder of AHI Records Inc. and AHI Records’ creditor’s rights
from Yu, Chien-Yang, a former director and major shareholder of the
Company. This transaction closed on
January 1, 2017. The Company concluded that the transaction is an acquisition
of assets.
Assets
acquired and liabilities assumed at the acquisition date are as follows:
Cash
|
$ 1,973
|
Media
assets
|
440,509
|
Other
payable
|
(442,481)
|
Consideration
paid
|
$ 1
|
The Company performed an impairment test on the assets acquired
after acquisition and determined that the full balance of the assets is to be
impaired due to the uncertainty in the ultimate benefit to the Company.
NOTE
7. ACQUISITION OF SAN LOTUS HOLDING INC (BVI)
On August 31, 2016, the Company entered
into an agreement to purchase all outstanding shares of San Lotus BVI from
Chang, Hsin-Yu, the sole shareholder of San Louts BVI and San Lotus
BVI’s creditor’s right from Yu, Chien-Yang, a former director and
major shareholder. This transaction closed on January 1, 2017.
The
following table summarizes the assets acquired and liabilities assumed at the
acquisition date:
Cash
|
$ 100
|
Intangible
assets
|
1,313,849
|
Other
payable
|
(1,313,948)
|
Consideration
paid
|
$ 1
|
The Company performed an impairment test on the assets acquired
after acquisition and determined that the full balance of the assets is to be
impaired due to the uncertainty in the ultimate benefit to the Company.
NOTE
8. ACQUISITION OF
Da Ren
International Insurance Brokers Co. Ltd
On
December 31, 2016, the Company entered into an agreement to purchase all
outstanding shares of Da Ren Insurance from Wu, Ting–Kuang, the sole
shareholder of Da Ren Insurance.
The purpose of the
acquisition of Da Ren Insurance was to complement the future development of the
Company’s real estate holdings.
This transaction was closed on April 1,
2017. Da Ren Insurance and the Company had common officers and directors at the
time of acquisition.
The
following table summarizes the preliminary estimated fair values of the assets
acquired and liabilities assumed at the acquisition date (translated using the
exchange rate on the acquisition date):
Cash
|
$ 46,848
|
Receivables
|
155,596
|
Other
assets
|
58,352
|
Intangible
assets
|
157,283
|
Other
payable
|
(73,093)
|
Consideration
paid
|
$ 344,986
|
The Company is in the process of obtaining information necessary
to measure the fair value of the assets acquired and liabilities assumed; thus
the provisional measurements of intangibles, and liabilities assumed are
subject to change, which could be significant. The Company will finalize the
amounts recognized as it obtains the information necessary to complete the
analysis.
The Company expects to finalize these amounts as soon as possible
but no later than one year from the acquisition date.
NOTE
9. INTANGIBLE ASSETS
On April 1, 2017, the Company acquired all outstanding shares of
Da Ren Insurance. See Note 8. The Company is in the process of obtaining
information to measure the fair value of the assets acquired and liabilities
assumed in connection with the acquisition and no amortization has been
recorded to date. As of September 30, 2017, the Company recorded $158,459 as
intangible assets (translated using the exchange rate on September 30, 2017)
NOTE
10. EQUITY
On July 7, 2017, the Company prepaid $39,313 (NTD 1,200,000) to
purchase the Company’s common shares from an individual. The shares have not
been received and the prepayment was included under other current assets in the
consolidated balance sheet at September 30, 2017.
NOTE
11. FORMATION OF AHI FILM’S LLC SUBSIDIARIES
On April 23, 2017, AHI Film formed four LLC subsidiaries to
develop four separate film projects. The specifics of the film projects have
yet to be determined. Through September 30, 2017, there are no transactions in
these subsidiaries.
NOTE
12. RELATED PARTY TRANSACTIONS
Amount due from or to
related parties
wa
s as follows:
|
September 30, 2017
|
December 31, 2016
|
Due from:
|
|
|
Chen, Kuan Yu, Chairman
|
$ 78,000
|
$ 78,000
|
Yu, Chien Yang, former Director
|
8,000
|
78,000
|
Autarky Consulting Inc.
|
77,854
|
25,516
|
Da Chuang Business Management Consultants.
|
20,362
|
8,030
|
Due from related parties
|
$ 184,216
|
$ 189,546
|
|
|
|
Due to:
|
|
|
Chen, Kuan Yu, Chairman
|
$ 11,879
|
$ -
|
Autarky Consulting Inc.
|
100,345
|
33,160
|
Yu, Chien Yang, former Director
|
89,131
|
7,023
|
Due to related parties
|
$ 201,355
|
$ 40,183
|
The
Company’s Chairman is the Chief Financial Officer of Autarky Consulting Inc.
and one of the directors of Da Chuang Business Management Consultants.
The
amounts due from/to related parties are non-interest bearing, unsecured and
have no fixed terms of repayment.
The
acquisitions of AHI Film Inc., AHI Records Inc., San Lotus Holding Inc. (BVI)
and Da Ren Insurance in 2017 are considered to be transactions with related
parties.
NOTE 13. COMMITMENTS AND CONTINGENCIES
Operating lease
The Company has several operating leases, primarily for
offices and employee dormitories. Payments under operating leases, including
periodic rent escalation and rent holidays, are expensed on a straight-line
basis over the lease term. Future minimum lease payments under non-cancellable
operating leases as of September 30, 2017 are as follows:
|
Year ended December 31, 2017
|
Year ended December 31, 2018
|
Year ended December 31, 2019
|
Total
|
Lease
payments
|
$ 17,121
|
$ 47,458
|
$ 2,752
|
$ 67,331
|
Rent expense was
as follows:
|
Three Months Ended
September 30, 2017
|
Three Months Ended September 30, 2016
|
Nine Months Ended
September 30, 2017
|
Nine Months Ended September 30, 2016
|
Rental
expense
|
$ 20,179
|
$ 16,791
|
$ 54,059
|
$ 35,926
|
Contingent payable to creditors of Mao Ren
As outlined in Note 4, the Company could not locate the
third group of creditors of Mao Ren and could not settle any of their debts.
Should these creditors come forward to claim their debt, there is a risk that
the Company would be obligated to settle with these creditors and the potential
obligation could result in a liability to the Company. As at the date of these
financial statements, the Company cannot reasonably estimate the amount of any
contingent payments to these creditors. During 2016, the courts liquidated a
large plot of land and allocated proceeds to the Company. The courts did not
set aside any amount for the creditors that cannot be reached and have not come
forward to place the claim during the process, and therefore the Company
believes it does not have a resulting financial liability to such creditor.
NOTE 14. SEGMENT INFORMATION
The
Company has two principal reportable segments, one of which is considered to be
discontinued operations at September 30, 2017. These reportable segments
were determined based on the nature of products and services offered.
Reportable segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance.
The following table lists the Company’s operating
results by segment:
|
Nine
months ended September 30, 2017
|
Nine
months ended September 30, 2016
|
Travel Services*
|
$ -
|
$ 12,581
|
Real Estate
|
(161,152)
|
(160,359)
|
Other
|
(1,110,355)
|
-
|
Impairment loss
|
(6,017,900)
|
-
|
Net loss
|
$ (7,289,407)
|
$ (147,778)
|
* The Company’s travel services business segment is
considered to be a discontinued operations as at December 31, 2016 due to the
dissolution of XO which is the only entity carrying out travel services.
Further information about this segment is outlined in Note 3.
The following table lists the Company’s capital assets
by geographical area:
|
September 30, 2017
|
December 31, 2016
|
U.S.A.
|
$ 16,121
|
$ -
|
Taiwan
|
6,340,961
|
5,956,385
|
Japan
|
348,254
|
-
|
Capital assets
|
$ 6,705,336
|
$ 5,956,385
|
NOTE
15. CONCENTRATIONS
Credit
risk
Financial
instruments that potentially subject the Company to concentration of credit
risk consist primarily of cash and cash equivalents. The Company places its
cash with high quality financial institutions. The majority of the Company’s
cash is deposited with banks in Taiwan. The government-owned Central Deposit
Insurance Corporation in Taiwan provides deposit insurance coverage limit of up
to $98,994 (NT$3,000,000) per depositor. As of September 30, 2017, the Company
had $49,867 held by banks in Taiwan.
NOTE 16. RESTATEMENT AND CORRECTION OF ERRORS
Subsequent
to the issuance of the Company’s 2015 consolidated financial statements on May
6, 2016, the Company became aware of errors in certain previously reported
amounts in its 2015 consolidated financial statements related to the acquistion
of XO and Mao Ren and the application of its revenue recognition policy. These
errors were related to the measurement of the purchase price allocation on
acquistion dates and the subsequent measurement of these amounts as well as the
recognition policy of the revenue from the travel services business. The
Company has also identified other adjustments that have been corrected as part
of this restatement, including classification of related party balances, and
adjustments to accounts receivable and unearned revenue related to errors in
revenue recognition. The errors in revenue recognition are related to the fact
that the Company booked revenue on a gross basis instead of net basis in
accordance with ASC 605-45 Revenue Recognition: Principal Agent Considerations.
The purchase price allocation has been adjusted to reflect the estimated fair
value of Mao Ren’s long-term receivable. The Company determined its previously
issued consolidated financial statements should be restated to correct these
errors. The following tables summarize the impact of the restatement on our
previously reported consolidated balance sheets as of September 30, 2016,
consolidated statement of comprehensive loss, and consolidated statement of
cash flows for the nine months period ended September 30, 2016.
Consolidated balance sheet at
September 30, 2016:
|
As previously reported
|
Adjustments
|
As restated
|
Current
assets
|
|
|
|
Cash
|
$ 53,424
|
$ -
|
$ 53,424
|
Prepaid
expenses and other current assets
|
1,325,808
|
(412,495)
|
913,313
|
Due
from related parties
|
-
|
171,686
|
171,686
|
Current
assets
|
1,379,232
|
(240,809)
|
1,138,423
|
Property
and equipment, net
|
6,133,563
|
-
|
6,133,563
|
Goodwill
|
1,194,674
|
(1,194,674)
|
-
|
Long-term
receivables
|
27,280,037
|
(10,096,718)
|
17,183,319
|
Other
assets
|
8,052
|
-
|
8,052
|
Total
Assets
|
$ 35,995,558
|
$ (11,532,201)
|
$ 24,463,357
|
|
|
|
|
Current
liabilities
|
|
|
|
Accounts
payable and accrued liabilities
|
$ 506,484
|
$ (238,903)
|
$ 267,581
|
Due
to related parties
|
-
|
22,199
|
22,199
|
Total
liabilities
|
506,484
|
(216,704)
|
289,780
|
|
|
|
|
Common
stock
|
42,003,333
|
-
|
42,003,333
|
Additional
paid-in capital
|
24,000
|
-
|
24,000
|
Treasury
stock
|
(1,815,415)
|
(462,360)
|
(2,277,775)
|
Subscription
receivable
|
(2,963,389)
|
2,963,389
|
-
|
Accumulated
deficit
|
(1,202,200)
|
(13,939,192)
|
(15,141,392)
|
Accumulated
other comprehensive loss
|
(557,255)
|
122,666
|
(434,589)
|
Total
Liabilities and Equity
|
$ 35,995,558
|
$ (11,532,201)
|
$ 24,463,357
|
Consolidated statement of loss and comprehensive loss
for the nine months ended
September 30, 2016:
|
As previously reported
|
Adjustments
|
As currently reported (Restated)
|
Revenue
|
$ 482,421
|
$ (482,421)
|
$ -
|
Cost
of sales
|
479,129
|
(479,129)
|
-
|
Gross
profit
|
3,292
|
(3,292)
|
-
|
General
and administrative expenses
|
280,342
|
(110,556)
|
169,786
|
Gain
(loss) from operations
|
(277,050)
|
107,264
|
(169,786)
|
|
|
|
|
Other
income
|
9,427
|
-
|
9,427
|
Net
loss from continuing operations
|
(267,623)
|
107,264
|
(160,359)
|
Net
income from discontinued operations
|
-
|
12,581
|
12,581
|
Net
income (loss)
|
$ (267,623)
|
$ 119 845
|
$ (147,778)
|
|
|
|
|
Loss
per share - Basic and diluted
|
$ (0.02)
|
$ 0.00
|
$ (0.00)
|
Weighted
average shares outstanding - basic and diluted
|
10,723,343
|
29,002,215
|
39,725,558
|
|
|
|
|
Net
income (loss)
|
$ (267,623)
|
$ 119,845
|
$ (147,778)
|
Foreign
exchange translation
|
-
|
1,254,871
|
1,254,871
|
Total
comprehensive loss
|
$ (267,623)
|
$ 1,374,716
|
$ 1,107,093
|
Consolidated statement of cash flows for the nine
months ended September 30, 2016:
|
As previously reported
|
Adjustments
|
As currently reported (Restated)
|
Net
cash provided by (used in) operating activities
|
$ (123,100)
|
$ 165,343
|
$ 42,243
|
Net
cash provided by investing activities
|
42,767
|
77,200
|
119,967
|
Net
cash used in financing activities
|
-
|
(130,362)
|
(130,362)
|
Effect
of exchange rate on cash
|
(2,368)
|
16,263
|
13,895
|
Change
in cash and cash equivalents during the period
|
(82,701)
|
128,444
|
45,743
|
Cash
and cash equivalents, beginning of the period
|
136,125
|
(128,444)
|
7,681
|
Cash
and cash equivalents, end of the period
|
$ 53,424
|
$ -
|
$ 53,424
|
Item
2. Management's Discussion and Analysis of Financial Condition and Results of
Operation
This Quarterly Report on
Form 10-Q contains "forward-looking" statements as such term is
defined in the Private Securities Litigation Reform Act of
1995. These forward-looking statements consist of information
relating to the Company that is based on the beliefs of the Company's
management as well as assumptions made by and information currently available
to the Company's management. When used in this report, the words
"anticipate," "believe," "estimate,"
"expect" and "intend" and words or phrases of similar
import, as they relate to the Company or Company management, are intended to
identify forward-looking statements. Such statements reflect the current risks,
uncertainties and assumptions related to certain factors including, without
limitation, competitive factors, general economic conditions, customer
relations, relationships with vendors, the interest rate environment,
governmental regulation and supervision, seasonality, distribution networks,
product introductions and acceptance, technological change, changes in industry
practices, onetime events and other factors described herein and in other
filings made by the Company with the Securities and Exchange Commission. Based
upon changing conditions, should any one or more of these risks or
uncertainties materialize, or should any underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated, expected or intended. The Company does not
intend to update these forward-looking statements.
BUSINESS
OVERVIEW
San Lotus
Holding Inc was incorporated in the State of Nevada on June 21, 2011. We
changed our state of incorporation from the State of Nevada to the State of
California on July 21, 2015. There are two main segments to our business - (1)
travel services and (2) development of destination real estate.
Travel Services
- this part of our business aims to market travel products to the growing
"retired baby boomer" market, which was an initial focus on the Asian
market, via developing and operating a global travel and leisure agency
business. We also had plans to develop joint ventures with partners in Asia to
develop further potential travel related services to the market.
The
transaction to enter the travel business ultimately occurred on August 14,
2015, when we purchased XO Experience Inc. ("XO"), a company based in
Rosemead, California. We purchased XO for $1 and a cash infusion of $150,000
into the business. XO was incorporated at the end of fiscal year 2013, although
it had carried nominal business until the time of the purchase. This was a
related party transaction because the owner of the travel business was also the
Chairman of our Company at the time. He resigned in January 2016. Our then
chairman owned several other travel businesses at the time and the purpose of
this transaction was to enable our Company to enter the travel market. In
conjunction with the acquisition of XO, we had a series of various letters of
intent with other travel agencies in both Canada and the United States to
acquire their locations through our then Chairman's connections, including
those travel agencies owned by him. We also explored the opportunities of setting
up travel agencies in Taiwan and purchasing travel agencies in other countries
in our quest to enter the international travel business. These ultimately did
not complete once our former chairman resigned in January 2016, and
accordingly, our sole entrance into the market included only the purchase of
XO.
XO provided
two types of services - (1) Customers would purchase tour packages to their
travel destinations through XO, including accommodation, ground transportation
and arranged tours, etc. We would then purchase the actual tours from local
tour operators who provide the services and we would mark up our services
accordingly. Effectively, we act as agents to our customer. (2) We retail
travel products, such as plane tickets, and earn commission from our suppliers.
After the departure of our former Chairman in January 2016, we continued to
operate XO, although experiencing challenges in operating the business without
our former Chairman, who was also the previous owner of XO. During the fourth
quarter of 2016, we ultimately decided to dissolve XO and are in the process of
dissolving the company. We have therefore considered XO to be a discontinued
operation.
XO was a
brick and mortar location in 9368 Valley Boulevard, Suite 2, Rosemead
California. Up until our exit of that business, that location also served as
our principal executive office. Since the end of 2016, the location of the
principal office has been moved, by virtue of our executive team, to Taiwan
under the address of 3F B302C, No. 185 Kewang Road, Longtan District, Taoyuan
City, Taiwan. On December 31, 2016,
our
wholly-owned subsidiary, Green Forest Management Consulting Inc., a Taiwan
(R.O.C.) corporation, entered into a purchase agreement to acquire
the
outstanding 300,000 shares of Da Ren International Insurance
Brokers Co., Ltd from
Wu, Ting–Kuang
, the
sole shareholder of Da Ren International Insurance Brokers Co.,Ltd, in
exchange for $346,986 (NTD$10,500,000). And, on April 1, 2017, the transaction was
closed. The transaction was also disclosed in the current report on Form 8-K
filed on January 3, 2017.
Development
of Destination Real Estate - Prior to the acquisition of XO, we also acquired
several parcels of land. We have not developed these properties, nor have we
entered into any contracts with developers. Until we have adequate cash for
development work or obtain additional financing, we will hold the land.
Although
there have been a number of attempts to acquire more land in the past, our
landmark event occurred on March 31, 2015 when we purchased Mao Ren
International Inc. ("Mao Ren"), a company incorporated under the laws
of Taiwan (R.O.C.). Mao Ren was set up as an entity, by and on behalf of creditors,
to recover the remaining assets to a Taiwanese company. This Taiwanese company
raised approximately $300 million (including all interest and penalties), to
invest in real estate deals in Taiwan. This scheme promised above-market monthly
returns to approximately 3,000 investors and after several years of rapid
expansion, it became evident that the scheme was unsustainable and resulted in
its eventual collapse. After the collapse, these investors/creditors neither
had the power nor the resources to recover their share of the money owed. After
several attempts, Mao Ren was ultimately incorporated as a brand new entity to
seek for liquidation of the properties owned by the debtor for and on behalf of
the investors/creditors. Accordingly, Mao Ren owned the liquidation rights to
the properties of the debtor. While owning the liquidation rights to the
properties of the debtor, Mao Ren was obligated to pay the creditors approximately $30
million (NTD 913,401,823). After our acquisition of Mao Ren, we assumed the
obligation paying the creditors the $30 million (NTD 913,401,823) on June 12,
2015. This obligation was settled by issuing to the creditors and their
designees 29,464,575 shares of our common stock on June 12, 2015. While
the obligation was settled by the issuance of shares, we retain the liquidation
rights aforementioned. Mao Ren had initially assessed the value of the
liquidation rights as $30 million (NTD 913,401,823) prior to acquisition. Upon
our acquisition of Mao Ren, we have reassessed the value of the liquidation
rights as approximately $18 million (NTD 568,111,405) which included the cash
proceeds received from the land sales that occurred in 2016.
Courts in
Taiwan have recognized our liquidation rights to the properties of debtor, and
therefore administer the actual liquidation of the lands of the debtor with Mao
Ren that has the priority to receive the proceeds from such liquidation. During
2016, the courts liquidated a large plot of land and allocated proceeds of approximately $11
million (NTD$347,702,849) to Mao Ren of which, about $1 million was placed in
escrow as a result of dispute filed by other creditors of the Taiwanese company.
The courts did not set aside any amount for the creditors that cannot be
reached and have not come forward to place the claim during the process, and
therefore we believe Mao Ren does not have a resulting financial liability to
such creditor as of the date of this report.
Currently,
the courts are in the process of liquidating the remaining land parcels and we
expect to realize cash from those sales during fiscal year 2017 and going
forward. Once we realize the cash, our plans are to look at other plots of land
in Asia, with a focus on the real property in Japan.
We have
begun to acquire the ancillary assets and know-how to augment the two main
segments to our main businesses. These ancillary assets and know-how include the
following: (1) intellectual property rights on media assets and media
production capabilities and (2) proprietary research knowledge on tourism
development in Japan and holding structure for future overseas development.
These intellectual property rights on media assets and media production
capabilities were acquired as a result of agreements entered to purchase AHI
Film Inc. and AHI Records Inc. on August 31, 2016. These transactions were
closed on January 1, 2017. The said media assets, which are held under these
two companies and their subsidiaries, include, but not limited to, a feature
motion picture; professional-grade photographs; professional-grade video
footages; two completed music albums; and one semi-completed music album as
well as other miscellaneous items.
On April 23,
2017, AHI Film Inc. formed four subsidiaries, Brownstone, LLC; Anotherotto, LLC;
Backstage Pass, LLC; and Penelope Pitstop, LLC, to produce films. Each of the
foregoing Limited Liability Companies will produce a film. Through the
acquisitions, key personnel have been retained to ensure that the crucial
functions to media production are kept in house for future development. We
have concluded that these transactions were asset acquisitions. Separately, due
to significant projected capital investments into Japan, the substantial
efforts, in both time and resources, are devoted to develop and acquire the
knowledge on the Japanese economy as a whole. Through an agreement entered on
August 31, 2016 and subsequently closed on January 1, 2017 to purchase San
Lotus Holding Inc. registered in British Virgin Islands (the “San Lotus Holding
Inc. (BVI)”), we have acquired proprietary research knowledge on tourism
development in Japan. The said proprietary knowledge includes, but is not
limited to, historical research; economic statistics report; geographic
analysis; real estate investment analysis; and most notably tourism specific
research with particular focus on destination real estate development.
Additionally, San Lotus Holding Inc. (BVI) will be
used as a holding structure for future overseas development. During April and
June, 2017, San Lotus Holding Inc. (BVI) acquired an aggregate of 6,830 square
meters of lands in Kyushu, Japan for a total purchase price of $348,254.