ITEM 1. DESCRIPTION OF BUSINESS.
History
We were incorporated in the state of Nevada on January 26, 2009, to serve as a holding company for our former smart home business, which was conducted through our former subsidiary, Home Touch Limited, a Hong Kong Special Administrative Region of China corporation, or HTL. On January 26, 2009, we acquired HTL through a share exchange transaction in which we exchanged 40,000,000 shares of our Common Stock for 10,000 shares of HTL common stock. HTL was originally organized under the name Lexing Group Limited in July 2004 and was renamed Home Touch Limited in 2005.
On July 15, 2010, we effectuated a 1-for-20 reverse stock split, or the Reverse Split, of all issued and outstanding shares of the Company's Common Stock in connection with our plans to attract additional financing and potential business opportunities. As a result of the Reverse Split, our issued and outstanding shares decreased from 40,000,000 to 2,000,000.
On September 27, 2010, we filed a report on Form 8-K disclosing the sale to certain accredited investors on September 21, 2010, of an aggregate of 1,500,000 shares of our Common Stock at a per share price of $0.10, or $150,000 in the aggregate, in accordance with the terms and conditions of certain subscription agreements made with such investors. The Company received net proceeds of approximately $145,000 from the sale of the shares which were used for general corporate purposes. The shares were sold pursuant to the exemption provided by Section 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder. Weng Kung Wong, who was appointed our Chief Executive Officer and director on November 15, 2010, purchased 375,000 shares of our Common Stock in this transaction.
Change in Control, Disposition of Smart Home Business, Acquisition of UHT and Name Change
On November 15, 2010, we consummated the sale to certain accredited investors of an aggregate of 80,000,000 shares of our Common Stock at a per share price of $0.01, or $800,000 in the aggregate, in accordance with the terms and conditions of certain subscription agreements made with such investors. The Company received net proceeds of approximately $795,000 from the sale of the shares which were used for general corporate purposes. The shares were sold pursuant to the exemption provided by Section 4(2) of the Securities Act of 1933, as amended and Regulation D promulgated thereunder. Weng Kung Wong, our Chief Executive Officer and director, purchased an additional 12,750,000 shares of our Common Stock in this transaction.
A change of control occurred in connection with the sale of such shares. David Ng and Stella Wai Yau resigned from their positions as President and Chief Executive Officer of the Company, and as Chief Financial Officer, Chief Operating Officer and Secretary of the Company effective November 15, 2010. The following individuals were appointed to serve as executive officers and directors of the Company:
Name
Office
Weng Kung Wong
Chief Executive Officer, Director
Liong Tat Teh
Chief Financial Officer, Director
Sek Fong Wong
Secretary, Director
On December 6, 2010, we consummated a share exchange, or the Share Exchange, pursuant to which Wooi Khang Pua and Kok Wai Chai, or the UHT Shareholders, transferred to us all of the issued and outstanding shares of Union Hub Technology Sdn. Bhd., or UHT, a company organized under the laws of Malaysia and engaged in the design, development and operation of technologies to enable a community of users to engage in social networking, research and e-commerce on a mobile platform, in exchange for the issuance of 16,500,000 shares of our common stock, par value $0.001 per share, or the Common Stock. As a result of our acquisition of UHT, we became involved in the m-commerce business. The Share Exchange was made pursuant to the terms of a Share Exchange Agreement, or the Exchange Agreement, by and among, and the Company, the UHT Shareholders and UHT. As result of the Share Exchange, UHT became our wholly owned subsidiary. We relied on the exemption from registration pursuant to Section 4(2) of, and Regulation D and/or Regulation S promulgated under, the Securities Act of 1933, as amended, or the Securities Act, in issuing the UHT Shares. Messrs. Pua and Chai are directors of UHT, and each beneficially owns 4.85% of our issued and outstanding common stock.
Concurrently with the Share Exchange, we sold to Up Pride Investments Limited, a British Virgin Islands limited liability company owned by David Gunawan Ng, and Magicsuccess Investments Limited, a British Virgin Islands limited liability company owned by Stella Wai Yau, all of the issued and outstanding securities of HTL for cash consideration of $20,000. In connection with the sale, Mr. Ng and Ms. Yau, our former founders and executive officers, resigned from their positions on our board of directors. Our smart home business was conducted through HTL, and as result of the sale, we ceased our smart home business operations. The sale of HTL securities was made pursuant to the terms of a Common Stock Purchased Agreement, or the Common Stock Purchase Agreement, by and among the Company, HTL, Up Pride Investments Limited and Magicsuccess Investments Limited. We relied on the exemption from registration pursuant to Section 4(2) of, and Regulation D and/or Regulation S promulgated under, the Securities Act of 1933, as amended, or the Securities Act, in selling the HTL securities.
The foregoing descriptions of the Exchange Agreement and Common Stock Purchase Agreement are qualified in their entirety by reference to such agreements which are filed as Exhibits 2.2 and 10.1 to this Annual Report, respectively, and are incorporated herein by reference.
On January 25, 2011, we changed our name to Prime Global Capital Group Incorporated and increased our authorized capital to 1 billion shares of common stock and 100 million shares of preferred stock.
On February 8, 2011, we consummated the sale to 19 of our of existing accredited stockholders of an aggregate of 400,000,000 shares of its common stock, par value $0.001, at a per share price of $0.01, or $4,000,000 in the aggregate, in accordance with the terms and conditions of certain subscription agreements made with such stockholders. Weng Kung Wong, our Chief Executive Officer and director, participated in the transaction and purchased 32,300,000 shares of our common stock on the same terms and conditions as the other stockholders.
The per share closing prices of our common stock and the per share purchase prices paid by our investors on each placement date are described below:
The discount on price provided to our investors at the time were attributable to a variety of factors including the significant risks involved in investing in a Company in its early stages of business development, the low revenues and earnings generated by the Company, concerns regarding the Company’s ability to continue as a going concern which was ultimately expressed in the Company’s financial statements as of October 31, 2011, the size of the investment and the illiquidity of the Company’s securities on the open market.
Approval to Initiate Uplisting Process and Transition to Large Accelerated Filer Status
On December 12, 2011, our board of directors approved, authorized and directed our officers to initiate the process for listing shares of the Company’s common stock on one or more U.S. national securities exchanges including the NYSE Amex Equities Exchange. We have elected to delay uplisting efforts until the end of calendar year 2014 or 2015 to focus on implementing our business plan.
As of October 31, 2012, we became a large accelerated filer.
Current Business Operations
Current Corporate Structure
A chart of our current corporate structure is set forth below:
During fiscal year 2013, we operated in the following four business segments: (i) the provision of IT consulting, programming and website development services; (ii) our oilseeds business; (iii) our real estate business and (iv) the distribution of consumer products. During the last three fiscal years, each of our business segments accounted for the amount and percentage of net revenue set forth below:
Our cash and net assets are located in Malaysia and the PRC. As of October 31, 2013, the amount of cash and net assets located in Malaysia was $516,983 and $35,868,899.
As of October 31, 2013, the amount of cash held by our PRC subsidiary was $132,231, all of which is restricted, and the amount of net assets held by our PRC subsidiary was $426,531, of which approximately $384,000 is free of restriction and $42,531 is restricted. The amount of cash and net assets located outside of PRC as of October 31, 2013 was $132,231 and $426,531. To date, we have not yet transferred any cash out of the PRC. We currently intend to reinvest PRC derived proceeds in the PRC. If we elect to move our cash outside of the PRC, we will be subject to withholding taxes of approximately 5%.
Additional information regarding the countries from which our revenues are derived and the location of our cash and net assets are provided in Notes 3 and 17, respectively, to our financial statements.
Our m-commerce and consumer distribution products businesses are operated through UHT. Our oilseeds business is operated through Virtual Setup Sdn. Bhd., or VSSB, and Shenzhen Max Trend Green Energy Co. Ltd., or Max Trend WFOE. VSSB operates out palm oil plantation, and Max Trend WFOE sells castor seeding and provides technical know-how under a bundled sales arrangement. Our real estate business is operated through PGCG Assets Holdings Sdn. Bhd., or PGCG Assets.
Our initial business plan launched in July 2010 broadly contemplated the development, distribution and operation of mobile and online social networking, ecommerce and search products and services. However, as a result of the challenges we experienced in implementing our m-commerce business plan, we entered the oilseeds and real estate businesses in 2012 and scaled back our software and consumer goods distribution businesses. Since the commencement of our business segments, we (through our subsidiaries):
·Acquired a palm oil plantation in Malaysia which is operated through VSSB (May 2012);
·Commenced sales of castor seeding and provision of technical know-how under a bundled sales arrangement through our subsidiaries Max Trend International Limited, a Hong Kong limited liability company, or Max Trend HK, which owns Max Trend WFOE (during quarter ended July 31, 2012);
·Became a party to a trial planting arrangement with Srira Cha province, Thailand, for the cultivation of castor plants (indefinitely suspended);
·Acquired 21.8921 hectares (54.10 acres) of vacant development land located in Selangor, Malaysia, which is subject to a 99-year leasehold, expiring July 30, 2100 (July 26, 2012);
·Acquired Dunford Corporation Sdn. Bhd., or Dunford, whose primary assets consist of two parcels of undeveloped land located in Selangor, Malaysia aggregating approximately 31 acres (October 17, 2012);
·Acquired a 15 story commercial building located at Geran 10010, Lot 238 Section 43, Town and District of Kuala Lumpur, Wilayah Persekutuan, Kuala Lumpur, Malaysia (December 2012); and
·Acquired a 12 story commercial building located at Megan Avenue 1, No. 189, Jalan Tun Razak, 50400 Kuala Lumpur, Malaysia (July 2013).
Description of Our Oilseeds Business
Palm Oil Cultivation
Palm oil is an edible vegetable oil obtained by crushing the fruit of the palm oil tree, commonly referred to as fresh fruit bunches. Palm oil is one of seventeen major oils traded in the global edible oils and fats market and has broad commercial and industrial uses. According to Oil World, 2011, palm oil accounted for approximately 27%, or approximately 47,520,000 tons, of the world’s annual consumption of 176 million tons of the 17 primary edible oils and fats in 2010/2011. Global consumption of palm oil increased significantly from approximately 11,398,000 tons in 1990/1991 to approximately 52.1 million tons in 2012.
Crude palm oil (CPO) is extracted through a process of sterilizing and pressing of the palm oil tree’s fresh fruit bunches (FFB). Each FFB can contain over a thousand individual fruits. During the extraction process, seeds are separated from the fruit, and upon cracking the seed’s shell, the kernel inside is separated for further processing to yield palm kernel oil (PKO). Derivatives of CPO and PKO are used throughout the world for many food and non-food applications including cooking oil, margarine, ice cream, non dairy creamer, soaps, detergents, animal feed, cosmetics and industrial lubricants.
Palm oil is one of the few perennial crops that is harvested all year round. Palm oil trees require constant rain throughout the year and are limited to tropical environments located in the ten-degree belt around the equator such as South East Asia, West Africa and South America. The largest producers of palm oil are Malaysia and Indonesia, which account for approximately 85 percent of annual global palm oil production.
The commercial life span of a palm oil tree is estimated to be up to 25 years. Palm oil is recognized as being significantly more productive due to its high oil yield per hectare compared to other edible oil sources, such as soybeans and rapeseed. Palm oil, due to its high edible oil productivity per hectare, is one of the world’s most efficient crops for the production of edible oils, which is an important component of the human food supply. Palm oil can yield up to ten to fifteen times more edible oil per hectare than the leading alternatives such as soya, rapeseed, canola or corn.
We believe the palm oil industry is well positioned in the years ahead for the following reasons:
·Demand for CPO, in common with other vegetable oils, has remained relatively robust, even through the current global economic turbulence. We believe that this is being driven by growing demand from the food industry which is anticipated to increase in line with expectations of higher GDP growth from the three key consuming/buying markets: China, India and the EU. We believe that demand for vegetable oils is accelerating, due largely to income growth in populous regions and the influence of biodiesel programs.
·We believe that per capita vegetable oil consumption in developing Asian countries remains low relative to other more developed nations. As per capita income increases in these developing nations, we expect that the demand for palm oil will increase, as the population is able to consume more foods that use palm oil (especially packaged foods such as chocolates, creamers and fast food).
·Environmental concerns and the increasing price of crude mineral oils have resulted in a worldwide trend to utilize vegetable oils such as rapeseed oil, soybean oil and palm oil for the production of biofuels and electricity. We believe that the growth in the production of biodiesel will be particularly pronounced in Asia. In addition, biofuel initiatives in Europe, such as the edible oil requirement for food, are causing an increase in demand for vegetable oils, primarily rapeseed, by biofuel producers. In turn, we anticipate that Europe’s demand for palm oil will increase in food processing, as locally produced oil crops are diverted for biofuel usage.
·We also expect industrial palm oil use to grow given its increasing use as an oleo chemical and biodiesel feedstock.
VSSB manages and operates our palm oil plantation in Malaysia. Our plantation cultivates and distributes FFBs to third party oilseed processors located in Malaysia that extract, refine and resell palm oil. The byproducts of the refinery process are sold to other manufacturers further downstream to produce various derivative products.
If our cultivation operations expand, we may consider building or acquiring one or more oil mills to extract and sell CPO and PKO from FFB cultivated on our own plantation and on smaller local plantations.
Management believes that the value of its palm oil plantation has increased since its acquisition, and while it has not pursued any discussions or received any formal offers regarding the sale of its plantation, it may also consider selling sales offers in the future it a sale would maximize return to its investors.
Farming of Castor Crops
Castor oil is a non-edible fatty oil extracted from seeds of castor crops by pressing followed by solvent extraction. A broad range of innovative chemicals and end use products are generated from castor oil. These chemicals and products have widespread applications in agricultural, cosmetics, electronics and telecommunications, food, lubricant, paper and ink, perfume, paints and adhesive, pharmaceutical, plastics, polymers and rubber industries.
India is by far the largest producer and exporter of castor oil, followed by China and Brazil. However, many other countries - especially from South East Asia, Africa and South America - are showing significant interest in being large-scale producers of castor crop, castor oil and castor chemicals. The largest importers of castor oil are China, Europe and the United States.
Compared to many other crops, castor crop requires relatively fewer inputs such as water, fertilizers and pesticides and can be grown on marginal land. At the same time, crop yields can be significantly improved through application of proper procedures during sowing and maintenance and use of high-yield hybrid varieties.
We initially planned to manage and operate castor seed operations in Thailand and China. On December 8, 2011, we entered into a Memorandum of Understanding, or the Thailand MOU, with Mr. Wichai Samphantharat, Chief District Officer of Srira Cha province, Thailand, to commence trial planting of castor crops with independent contract farmers on 20 Rai (approximately 8 acres) of land in Srira Cha province, Thailand. As a result of unexpected changes in the political climate in Srira Cha, Thailand, our trial planting arrangement there has been indefinitely suspended.
During the twelve months ended October 31, 2013, we did not generate revenue from the sale of castor seeds or from the provision of consulting services to castor farmers. Management believes that its castor business operates at a competitive disadvantage due to China’s tax policies, which favor local enterprises. As a result and together with the soft pricing for castor seeds, our ability to effectively compete has been adversely affected. If we are unable to successfully compete by the second quarter of calendar year 2014, there is a great likelihood that we will discontinue the distribution of castor seeds in China.
Oil Seeds Pricing
CPO, PKO and castor oils are commodities traded in a worldwide competitive market with high pricing volatility. Factors affecting pricing of these commodities (which in turn affect the prices for FFBs and castor seeds) include:
·Estimated output based on the acreage, weather conditions and pest infestation etc.;
·Shifting cropping patterns in producing countries;
·Leftover stocks from the previous years’ production after meeting the demand;
·Consumption and export pattern;
·Energy prices; and
·Government policies and intervention.
If energy prices remain high with crude oil prices being maintained at US$100 per barrel, we believe that prices of all vegetable oils are likely to increase as vegetable oil prices are expected to remain linked to prices in the fuel sector. We further believe that the current financial condition and the growing nexus between crude oil prices and vegetable oil prices brought on by the increased reliance on oils for biofuels will exacerbate the pricing volatility and uncertainty already inherent in our industry.
Because we do not exert significant pricing power over our products, we expect margin expansion to occur through more cost effective manufacturing processes or by way of value addition, branding and retail packaging. We do not, however, have any current plans to brand our products or seek retail customers.
During the twelve months ended October 31, 2013, the pricing for castor seeds and palm oil products was generally soft. As a result, while we have increased the output of our oil palm plantation, we were not able to achieve our anticipated revenue increases.
Description of Our Real Estate Business
Our real estate business operations consist of the acquisition, development, management, operation and sale of commercial and residential real estate properties located in Malaysia, primarily in Kuala Lumpur and Selangor. We anticipate generating revenues from sales of developed properties and from rental income from our commercial properties. Developed property sales can include condominium units, individual villas and bungalows at our future Shah Alam 2 Eco Residential Development project located in Selangor, Malaysia. We may also sell properties under development, undeveloped properties or commercial properties, if opportunities arise that we believe will maximize overall asset values.
Real Estate Market Conditions in Malaysia
According to a survey released by the Star, a newspaper of general circulation in Malaysia, in early 2012, the volume of property transactions in Malaysia has steadily increased during the period beginning 2009 and ending 2011 as set forth below.
According to the Property Market Report 2012 published by the Malaysian Ministry of Finance’s Valuation and Property Services Department, the number of property transactions fell from 430,403 in 2011 to 427,520 in 2012, a drop of 0.7%. While the number of transactions has dropped, the value of transactions has increased from RM137.8 billion in 2011 to RM142.8 billion in 2012, or an increase of 3.6%.
In July 2011, the Malaysian government introduced measures meant to discourage real estate speculation, including increased property gain taxes and restrictions on foreign ownership of property. On January 1, 2012, the Malaysian central bank implemented stricter lending guidelines, which has already lowered residential loan approval rates.
Notwithstanding these measures, we expect housing prices to continue to rise in Malaysia as a whole, albeit at a slower place, in the near future as a result of the following factors.
1.Malaysia has a modern and sophisticated infrastructure that is being further enhanced by government initiatives to facilitate foreign investment in Malaysia, including tax incentives and easing of laws governing foreign ownership of property.
2.Malaysia is situated near Australia, Bali and Singapore, attracting investments and visitors from these countries. Beaches, resorts, mild weather conditions with average temperatures ranging from 21 to 30 degrees Celsius together with modern medical and recreational facilities create a year-round tourist trade in Malaysia.
3.English is widely spoken, facilitating property purchase transactions. The cost of living in Malaysia is moderate and compares favorably with other countries. Consequently, purchase and maintenance costs associated with real property investments are reasonable.
4.Malaysia economy is expected to remain bullish which has resulted in a strong demand for quality commercial and residential properties to meet the needs of an expanding expatriate population and vibrant tourism. The upsurge in commercial activity is more prominent in major cities such as Kuala Lumpur.
Because our real estate holdings will be concentrated in Selangor and Kuala Lumpur, Malaysia, we expect that the financial condition and results of operations of our real estate segment will be highly dependent upon market conditions for real estate activity in those regions. We expect that our future operating cash flows and, ultimately, our ability to develop our properties and expand our real estate business will be largely dependent on the level of our real estate sales and leasing activities. These activities in turn will be significantly affected by future real estate market conditions in Selangor and Kuala Lumpur, Malaysia, including development costs, interest rate levels, the availability of credit to finance real estate transactions, demand for residential and commercial real estate, and regulatory factors including our use and development entitlements. These market conditions historically move in periodic cycles, and can be volatile in specific regions. Because of the concentration of our assets primarily in Selangor and Kuala Lumpur, Malaysia, we believe that market conditions in these regions will significantly affect our real estate business.
Our Commercial Real Estate Holdings
We generate rental income from our 12 story and 15 story commercial properties and anticipate generating income from the sale of developed properties. As October 31, 2013, 10 of the 12 stories of our 12 story building have been leased to tenants at market rates. Most of these tenants are parties to two-year leases. We expect to generate approximately $185,000 of gross rental income on an annualized basis from our 12 story building based upon full occupancy of our 12 story building at prevailing market rates.
On December 18, 2013, we leased the entirety of our 15 story commercial building to a tenant that intends to convert the building and operate it as a business hotel. As part of the lease transaction, we assigned to such tenant all of our rights and benefits as a landlord under a separate Rental Agreement previously made between us and a retailer located on the first floor of such building. The initial term of the lease is twenty (20) years, expiring November 30, 2033, with a one-time option to renew for an additional ten (10) year period. The monthly rental rate is RM550,000 (approximately US$175,543) for the first three years. Thereafter, the rental rate shall be increased to the then prevailing market rate or in increments of 5%-10% every three-year period, whichever is higher. We expect to generate approximately $2,284,000 in rental income from this tenant. The foregoing description of the lease agreement is qualified in its entirety by reference to such agreement, which is filed as Exhibit 10.4 to this Annual Report and is incorporated herein by reference.
If the business of our tenant is adversely affected, we will be required to seek replacement tenants. There can be no assurance that the business of our tenant will continue for the term of the lease or that we will be able to find a replacement tenant if our tenant is no longer able to meet its lease obligations. If we are unable to lease out the building, our operating results may be materially and adversely affected. We expect demand for commercial property to remain steady and positive for 2014. As a result, we do not anticipate significant challenges in leasing out or 12 story and 15 story commercial buildings.
Development Activities. We hold a 99-year leasehold interest to 21.8921 hectares (54.10 acres) of vacant development land, or the Land, and two parcels of vacant land aggregating approximately 31 acres, or the Dunford Parcels, all located in Selangor, Malaysia. We intend to develop the Land into the Shah Alam 2 Eco Residential Development project and hope to develop the Dunford Parcels into the Bandar Sungai Long High Grade Villas Community project. For better cash flow planning, we have strategized that the development of our Bandar Sungai Long High Grade Villas Community project will be commenced once we have successfully sold Phase 2 of the Shah Alam 2 Eco Residential Development project. This means the timing for commencement of Bandar Sungai Long High Grade Villas Community Project is dependent on the sales of the Phase 2 of our Shah Alam 2 Eco Residential Development project. If we are not able to successfully develop, market and sell our Shah Alam 2 Eco Residential Development project, our ability to complete all or any portion of our Bandar Sungai Long High Grade Villas Community Project may be adversely affected.
Shah Alam 2 Eco Residential Development
Shah Alam 2 is an existing third party development sprawled over 1,163 acres of prime land within Bandar Puncak Alam. It is located in Selangor in the burgeoning Klang Valley area in which Malaysia’s capital is also situated. Upon completion, it is anticipated to be an integrated and self-contained township approximately 10 times the size of Subang Jaya, one of Malaysia’s most celebrated suburbs, with a population of approximately 500,000. We believe that Shah Alam 2 may rival even Shah Alam, the Selangor state capital, in terms of size and dynamism.
Our project, the Shah Alam 2 Eco Residential Development, will be located within the Shah Alam 2 development. Encompassing 54.1 acres, the project will feature superlink homes, semi-detached homes, bungalows, high-end condominiums and commercial shop-offices with an environment-friendly theme emphasizing the importance of a sustainable lifestyle. All the residential parcels will be gated and guarded for increased security.
The Selangor state government has imposed a freeze on development approvals affecting the land on which our project will be situated in connection with a legal dispute with a township developer. We have made an appeal to the state government to approve our development order based upon the fact that we are the rightful landowner and should not be affected by the legal dispute between the state government and the township developer. If the development order can be successfully secured in the first quarter of 2014, we hope to submit building plans in the first calendar quarter of 2014 and commence construction in the third calendar quarter of 2014. We hope to complete construction by the end of calendar 2019. We intend to commence sales activities in the third calendar quarter of 2014. There is no assurance that we will be able to successfully secure a development order by the first quarter of 2014 or at all. If we are unable to secure such an order, we will be unable to develop our Shah Alam 2 Eco Residential Project, which would materially and adversely affect our business plan, results of operations and financial condition.
If completed, we expect our Shah Alam 2 Eco Residential Development project to comprise of the following:
We believe that we will require approximately $3.5 million to obtain the necessary permits and $3.6 million to commence the first of six phases of construction. We believe that we will require approximately $15 million in the aggregate to market, promote and complete construction of our Shah Alam 2 Eco Residential Development Project. We hope to finance the $15 million through a combination of loans, funds from ongoing building sales and operating capital.
Bandar Sungai Long High Grade Villas Community
We do not intend to commence development of our Bandar Sungai Long High Grade Villas Community project until we have successfully sold Phase 2 of the Shah Alam 2 Eco Residential Development project. If we are able to successfully develop the Bandar Sungai Long High Grade Villas Community project, we anticipate that the project will consist of a high-end gated and guarded community encompassing approximately 31 acres of landscaped areas with the following types of properties:
Description of Our Software and Consumer Product Distribution Businesses
Our software business during fiscal 2013 consisted of providing after-sales maintenance and support and or website development services arising from previously purchased software products. We have significantly scaled back this segment and rely on the personal relationships of our executive officers and directors to generate sales. Revenue attributable to software sales may fluctuate depending upon the availability of sales opportunities.
Our consumer product distribution business consists of trading luxury consumer products. We have significantly scaled back this segment and rely on the personal relationships of our executive officers and directors to generate sales. We do not expect our consumer goods business to generate significant revenue on a going forward basis.
Near-Term Requirements For Additional Capital And Business Strategy
We intend to focus on our near-term goal of developing the Land and the Dunford Parcels through prudent use of available resources and our long-term goal of maximizing the value of our development projects. We believe that Malaysia is a desirable market and we intend to continue exploring acquisitions in Kuala Lumpur and the Selangor region. We believe that our developments will have inherent value given their unique nature and location and that this value should be sustainable in the future.
For the immediate future, we intend to continue financing future real estate acquisitions and development through sales of our securities to existing shareholders and loans from financial institutions. We periodically conduct internal discussions to obtain the necessary financing, however, there can be no assurance that we will be able to obtain sufficient funds on acceptable terms to timely meet our obligations.
As of October 31, 2013, we had cash and cash equivalents of $659,647. We consummated the purchase of our 12 story commercial building in July 2013, financing the acquisition through a combination of cash and a bank loan. We believe that we will require approximately $3.5 million to obtain the necessary permits and $3.6 million to commence the first of six phases of construction, which we hope to occur in the third calendar quarter of 2014. We believe that we will require approximately $15 million in the aggregate to market, promote and complete construction of our Shah Alam 2 Eco Residential Development Project. We hope to finance the $15 million through a combination of loans, funds from ongoing building sales and operating capital.
Distribution
Our consumer goods are sold to customers generated from the personal relationships of our executive officers which may be located outside of Malaysia.
Customers of our oilseeds business principally consist of oilseed processors, refineries and oilseed product manufacturers. Our products are distributed in bulk from our plantations directly to our customers’ facilities. Initially, we intend to transport our products through third party transportation systems. If our oilseeds business expands, we may explore developing our own transportation system by acquiring or leasing trucks, trailers, railroad tank and hopper cars.
Marketing, Sales and Support
We do not intend to engage in marketing efforts with respect to our software and consumer goods distribution operations. We intend to rely on the personal relationships of our executive officers in effecting any sales of our IT services and consumer goods. Our former m-commerce and product distribution sales and support staff now focus on identifying land for the cultivation of our oil seeds and preparation for the marketing activities of our real estate development projects.
We do not and have no immediate plans to engage in marketing activities with respect to our oilseeds business as our FFBs are sold in bulk to extractors and processors.
Once we commence construction of our Shah Alam 2 Eco Residential Development or Bandar Sungai Long High Grade Villas Community projects, we expect to initiate marketing activities directed toward prospective purchasers of our units.
Major Customers
We generated net revenues of $1,955,282 during the fiscal year ended October 31, 2013. Our software products and services business accounted for approximately 81.9% of our net revenue and were sold to customers located in Malaysia. We are not a party to any long-term agreements with our customers.
During the fiscal year ended October 31, 2013, the following four customers accounted for 10% or more of our total net revenues:
During the fiscal year ended October 31, 2012, the following three customers accounted for 10% or more of our total net revenues:
All of our major customers are located in Malaysia.
Key Vendors
All of our key vendors are located in Malaysia. We are not parties to long-term agreements with our major vendors. In light of our decreased emphasis on our software and consumer goods business segments, we expect to engage the services of these vendors on a limited basis in the future. We do not anticipate difficulties in locating alternative developers and other vendors as needed.
During the fiscal year ended October 31, 2013, the following vendor accounted for 10% or more of our purchases:
During the fiscal year ended October 31, 2012, the following vendor accounted for 10% or more of our purchases:
Competition and Market Position
Oilseeds Business
Our oilseeds business is characterized by intense competition, pricing volatility and foreign currency risks. Our competitors range from small-scale operators to fully integrated multinational enterprises with significant financial, technical, sales, marketing and other resources. In addition to palm oil and castor oil producers, our competitors also include producers of alternative vegetable oils such as soybean, rapeseed, cottonseed, peanut, sunflower seed and corn oils.
Market fundamentals that affect supply and demand of our products include land shortages, water constraints, climate change, global warming, low operating margin, inadequate quality control and quality assurance mechanisms leading to adulteration, food laws and poor implementation and low depth liquidity in futures markets. Non-fundamental factors include politics, inflation, investor interest, government policies and liquidity.
Multinational corporations are able to take advantage of economies of scale that allow them to command high quality with lower costs, access cheaper credit, minimize losses and decrease input costs. Multinational corporations also tend to have a greater ability to absorb volatility in production and pricing and respond to uncertainty. We believe that the current financial crisis, global volatility in commodity prices and the growing nexus between crude oil prices and vegetable oil prices brought on by the increased reliance on oils for biofuels have only served to exacerbate the volatility and uncertainty already inherent in our industry.
We believe that our competitive position will depend on our ability to mitigate volatility and uncertainty in our industry. We hope to achieve this by obtaining economies of scale, developing vendor relationships, obtaining and maintaining protection of our intellectual property, recruiting and retaining qualified personnel and securing adequate capital resources. While we expect to compete primarily on the basis of pricing and vendor relationships, we believe that the diversion of vegetable oil for use as biofuels will offer us an opportunity to achieve and sustain an acceptable margin of return for the foreseeable future.
Real Estate
The real estate development business in Malaysia is highly competitive and fragmented. We compete against numerous public and private developers of varying sizes, ranging from local to national in scope. As a result, we may be competing for investment opportunities, financing, and potential buyers with entities that may possess greater financial, marketing, or other resources than we have. Competition for potential buyers has been intensified by an increase in the number of available properties resulting from the recent boom in the Malaysian real estate market. Our prospective customers generally have a variety of choices of new and existing homes and home sites when considering a purchase. We attempt to differentiate our properties primarily on the basis of community design, quality, uniqueness, amenities, location and developer reputation.
The real estate investment industry in Malaysia is highly fragmented among individuals, partnerships and public and private entities, with no dominant single entity or person. Although we may compete against large sophisticated owners and operators, owners and operators of any size can provide effective competition for prospective tenants. We compete for tenants primarily on the basis of property location, rent charged, and the design and condition of improvements.
Software Operations
Our software business is characterized by intense competition and rapidly changing and converging, as well as new and disruptive, technologies. We face formidable competition in every aspect of our software business. Our competitors may be local or international enterprises and may have financial, technical, sales, marketing and other resources greater than ours. These companies may also compete with us in recruiting and retaining qualified personnel and consultants.
Our competitive position will depend on our ability to attract and retain qualified engineers and other personnel, develop effective proprietary products and solutions, the personal relationships of our executive officers and directors, and our ability to secure adequate capital resources. We compete to attract and retain customers of our services. We expect to compete in this area on the basis of price, vendor relationships, usefulness, availability, and ease of use of our services.
Consumer Goods
Our consumer goods business is characterized by intense competition and foreign currency risks. Our competitors are small-scale to medium size operators that may have greater financial, technical, sales, marketing and other resources than us.
Our competitive position will depend on our ability to identify and deliver desirable goods at attractive price points. We compete to attract customers for goods that we source. We expect to compete in these areas on the basis of price, product availability and vendor relationships.
Intellectual Property
We intend to protect our investment in the research and development of our products and technologies. We intend to seek the widest possible protection for significant product and process developments in our major markets through a combination of trade secrets, trademarks, copyrights and patents, if applicable. We anticipate that the form of protection will vary depending upon the level of protection afforded by the particular jurisdiction. Currently, our revenue is derived principally from our operations in Malaysia where intellectual property protection may be limited and difficult to enforce. In such instances, we may seek protection of our intellectual property through measures taken to increase the confidentiality of our findings.
We intend to register trademarks as a means of protecting the brand names of our companies and products. We intend protect our trademarks against infringement and also seek to register design protection where appropriate.
We rely on trade secrets and unpatentable know-how that we seek to protect, in part, by confidentiality agreements. Our policy is to require some of our employees to execute confidentiality agreements upon the commencement of employment with us. These agreements provide that all confidential information developed or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and not disclosed to third parties except in specific limited circumstances. The agreements also provide that all inventions conceived by the individual while rendering services to us shall be assigned to us as the exclusive property of our company. There can be no assurance, however, that all persons who we desire to sign such agreements will sign, or if they do, that these agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets or unpatentable know-how will not otherwise become known or be independently developed by competitors.
Government Regulation
Malaysia
All of our business segments are subject to the general laws in Malaysia governing businesses including labor, occupational safety and health, general corporations, intellectual property and other similar laws. Our software and consumer goods trading are not subject to specific laws material to our operations outside of these general laws.
Oilseeds
Our oilseeds business is subject to many additional laws addressing land, environmental, labor, wildlife and crop cultivation matters. By way of example, we are subject to the Land Acquisition Act of 1960, which specifies the conditions under which the Malaysian government may acquire by eminent domain private land (including our palm oil plantation) to pursue its social policies. We are also subject to various environmental laws including the Environmental Quality (Prescribed Activities) (Environmental Impact Assessment) Order 1987 which governs land clearing, air emissions, waste water discharges and other similar matters, the Workers’ Minimum Standard of Housing & Amenities Act 1990 which requires us to provide our plantation workers with reasonable housing and amenities, water, electricity and addresses other sanitation related matters, other labor laws governing minimum wages, wage increases and occupational health and safety, the Pesticides Act 1974 (Pesticides Registration) Rules 1988, Pesticides (Licensing for sale and storage) Rules 1988 and Pesticides (Labeling) Regulations 1984 which govern the registration, use, labeling and storage of pesticides and the Protection of Wildlife Act 1972 which governs the capture and destruction of certain protected wildlife.
We are also subject to taxes, tariffs, duties, subsidies and incentives and import and export restrictions on palm oil products, foreign and domestic policies regarding genetically modified organisms, renewable fuel, and low carbon fuel mandates which can influence the planting of species of crops, the location and size of crop production, and the volume and types of imports and exports. These factors all affect the viability and volume of production of the Company’s products, and industry profitability.
International trade disputes can adversely affect the trade flow of our goods by limiting or disrupting trade between countries or regions. Future government policies may adversely affect the supply of, demand for, and prices of the Company’s products, restrict the Company’s ability to do business in its existing and target markets, and can negatively impact the Company’s revenues and operating results.
Real Estate
Our real estate investments are subject to extensive local, city, county and state rules and regulations regarding permitting, zoning, subdivision, utilities and water quality as well as federal rules and regulations regarding air and water quality and protection of endangered species and their habitats. Such regulation may delay development of our properties and result in higher than anticipated developmental and administrative costs.
One of the distinguishing features of our Shah Alam 2 Eco Residential Development and Bandar Sungai Long High Grade Villas Community projects is their emphasis on developing a sustainable green lifestyle to reduce their impact on the environment. Accordingly, we expect to make additional environmental related expenditures in developing these projects as well as other projects with an environmental theme. Based on an analysis of our operations in relation to current and presently anticipated environmental requirements, we currently do not anticipate that these costs will have a material adverse effect on our future operations or financial condition.
China
Our castor oil operations are located in China and subject to the general laws in China governing businesses including labor, occupational safety and health, general corporations, intellectual property and other similar laws.
Employment Contracts
The Employment Contract Law was promulgated by the National People’s Congress’ Standing Committee on June 29, 2007 and took effect on January 1, 2008. The Employment Contract Law governs labor relations and employment contracts (including the entry into, performance, amendment, termination and determination of employment contracts) between domestic enterprises (including foreign-invested companies), individual economic organizations and private non-enterprise units (collectively referred to as the “employers”) and their employees.
a.	Execution of employment contracts
Under the Employment Contract Law, an employer is required to execute written employment contracts with its employees within one month from the commencement of employment. In the event of contravention, an employee is entitled to receive double salary for the period during which the employer fails to execute an employment contract. If an employer fails to execute an employment contract for more than 12 months from the commencement of the employee’s employment, an employment contract would be deemed to have been entered into between the employer and employee for a non-fixed term.
b.	Right to non-fixed term contracts
Under the Employment Contract Law, an employee may request for a non-fixed term contract without an employer’s consent to renew. In addition, an employee is also entitled to a non-fixed term contract with an employer if he has completed two fixed term employment contracts with such employer; however, such employee must not have committed any breach or have been subject to any disciplinary actions during his employment. Unless the employee requests to enter into a fixed term contract, an employer who fails to enter into a non-fixed term contract pursuant to the Employment Contract Law is liable to pay the employee double salary from the date the employment contract is renewed.
c.	Compensation for termination or expiry of employment contracts
Under the Employment Contract Law, employees are entitled to compensation upon the termination or expiry of an employment contract. Employees are entitled to compensation even in the event the employer (i) has been declared bankrupt; (ii) has its business license revoked; (iii) has been ordered to cease or withdraw its business; or (iv) has been voluntarily liquidated. Where an employee has been employed for more than one year, the employee will be entitled to such compensation equivalent to one month’s salary for every completed year of service. Where an employee has employed for less than one year, such employee will be deemed to have completed one full year of service.
d.	Trade union and collective employment contracts
Under the Employment Contract Law, a trade union may seek arbitration and litigation to resolve any dispute arising from a collective employment contract; provided that such dispute failed to be settled through negotiations. The Employment Contract Law also permits a trade union to enter into a collective employee contract with an employer on behalf of all the employees.
Where a trade union has not been formed, a representative appointed under the recommendation of a high-level trade union may execute the collective employment contract. Within districts below county level, collective employment contracts for industries such as those engaged in construction, mining, food and beverage and those from the service sector, etc., may be executed on behalf of employees by the representatives from the trade union of each respective industry. Alternatively, a district-based collective employment contract may be entered into.
As a result of the Employment Contract Law, all of our employees have executed standard written employment agreements with us. We have not experienced any significant labor disputes or any difficulties in recruiting staff for our operations.
Foreign Exchange Control and Administration
Foreign exchange in China is primarily regulated by:
·The Foreign Currency Administration Rules (1996), as amended; and
·The Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules.
Under the Foreign Currency Administration Rules, if documents certifying the purposes of the conversion of RMB into foreign currency are submitted to the relevant foreign exchange conversion bank, the RMB will be convertible for current account items, including the distribution of dividends, interest and royalties payments, and trade and service-related foreign exchange transactions. Conversion of RMB for capital account items, such as direct investment, loans, securities investment and repatriation of investment, however, is subject to the approval of SAFE or its local counterpart.
Under the Administration Rules for the Settlement, Sale and Payment of Foreign Exchange, foreign-invested enterprises may only buy, sell and/or remit foreign currencies at banks authorized to conduct foreign exchange business after providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from SAFE or its local counterpart.
As an offshore holding company with a PRC subsidiary, we may (i) make additional capital contributions to our PRC subsidiaries, (ii) establish new PRC subsidiaries and make capital contributions to these new PRC subsidiaries, (iii) make loans to our PRC subsidiaries or consolidated affiliated entities, or (iv) acquire offshore entities with business operations in China in offshore transactions. However, most of these uses are subject to PRC regulations and approvals. For example:
·capital contributions to our PRC subsidiaries, whether existing or newly established ones, must be approved by the Ministry of Commerce or its local counterparts;
·loans by us to our PRC subsidiaries, each of which is a foreign-invested enterprise, to finance their activities cannot exceed statutory limits and must be registered with SAFE or its local branches; and
·loans by us to our consolidated affiliated entities, which are domestic PRC entities, must be approved by the National Development and Reform Commission and must also be registered with SAFE or its local branches.
On August 29, 2008, SAFE issued the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142. Pursuant to SAFE Circular 142, RMB resulting from the settlement of foreign currency capital of a foreign-invested enterprise must be used within the business scope as approved by the applicable government authority and cannot be used for domestic equity investment, unless it is otherwise approved. Documents certifying the purposes of the settlement of foreign currency capital into RMB, including a business contract, must also be submitted for the settlement of the foreign currency. In addition, SAFE strengthened its oversight of the flow and use of RMB capital converted from foreign currency registered capital of a foreign-invested company. The use of such RMB capital may not be altered without SAFE’s approval, and such RMB capital may not be used to repay RMB loans if such loans have not been used. Violations of SAFE Circular 142 could result in severe monetary fines or penalties. We expect that our use of RMB funds have been, and will be, within the approved business scope of our PRC subsidiary. We believe that our PRC subsidiary is permitted to conduct its castor seeds distribution operations and provide consulting services to castor farmers. However, we may not be able to use such RMB funds to make equity investments in the PRC through our PRC subsidiaries. There are no costs associated with applying for registration or approval of loans or capital contributions with or from relevant PRC governmental authorities, other than nominal processing charges. Under PRC laws and regulations, the PRC governmental authorities are required to process such approvals or registrations or deny our application within a prescribed time period, which is usually less than 90 days. The actual time taken, however, may be longer due to administrative delays. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all, with respect to our operations in China. If we fail to receive such registrations or approvals, our ability to use the proceeds from our funds to capitalize our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and ability to fund and expand our business.
The value of the Renminbi against the US dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. Historically, the conversion of Renminbi into foreign currencies, including US dollars, has been based on rates set by the People’s Bank of China. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the US dollar. Under the new policy, the Renminbi will be permitted to fluctuate within a band against a basket of certain foreign currencies. There remains significant international pressure on the PRC government to adopt a substantial liberalization of its currency policy, which could result in a further and more significant appreciation in the value of the Renminbi against the US dollar.
The fluctuation of the Renminbi against the US dollar and other currencies may have an impact on our figures in our consolidated financial information presented elsewhere in this prospectus.
Dividend Distributions
The principal regulations governing dividend distributions of wholly foreign-owned enterprises include:
·the Companies Law (2005);
·the Wholly Foreign-Owned Enterprise Law (2000); and
·the Wholly Foreign-Owned Enterprise Law Implementing Rules (2001).
Under these regulations, wholly foreign-owned enterprises in the PRC may pay dividends only out of their accumulated profits as determined in accordance with PRC accounting standards and regulations. In addition, these wholly foreign-owned enterprises are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds, until the aggregate amount of such fund reaches 50% of its registered capital. At the discretion of these wholly foreign-owned enterprises, they may allocate a portion of their after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends.
Max Trend WFOE is regulated by the laws governing foreign-invested enterprises in the PRC. Accordingly, it is required to allocate 10% of its after-tax profits based on PRC accounting standards each year to their general reserves until the accumulated amount of such reserves has exceeded 50% of its registered capital, after which no further allocation is required to be made. These reserve funds, however, may not be distributed to equity owners except in accordance with PRC laws and regulations. In addition, due to the failure of these laws and regulations to define or interpret the terms “non-profit,” “for-profit” or “for the purpose of making a profit” as they relate to our business, we cannot assure you that the PRC government authorities will not request our subsidiary to use its after-tax profits for its own development and restrict our subsidiary’s ability to distribute their after-tax profits to us as dividends.
On March 16, 2007, the National People’s Congress approved and promulgated a new tax law, the PRC Enterprise Income Tax Law, or “EIT Law,” which took effect on January 1, 2008. Pursuant to the new EIT law and its implementing regulations, dividends payable by a foreign-invested enterprise to its foreign enterprise (but not individual) investors will be subject to a 10% withholding tax if the foreign investors are considered as non-resident enterprises without any establishment or place of business within China or if the dividends payable have no connection with the establishment or place of business of the foreign investors within China, to the extent that the dividends are deemed China sourced income, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. Hong Kong, where Max Trend HK is incorporated, has such a tax treaty with China.
In addition, as clarified by a notice jointly promulgated by the Ministry of Finance and the State Administration of Taxation of the PRC on February 22, 2008, distribution of accumulated profits of foreign-invested enterprises will be subject to withholding tax.
A fuller discussion of the EIT Law and its application to us is set forth in our risk factors under the section entitled “Risks Related to Our Operations In China”.
As of October 31, 2013, the registered capital of Max Trend WFOE was approximately $158,000, and it had retained earnings of approximately $247,000. Our PRC subsidiary will be able to pay dividends to our offshore entities when it has generated accumulated profits and meet the requirements for statutory reserve funds.
As of October 31, 2013, the amount of cash held by our PRC subsidiary was $132,231, all of which is restricted , and the amount of net assets held by our PRC subsidiary was $426,531, of which approximately $384,000 is free of restriction and $42,531 is restricted.
Seasonality
Our real estate, software and consumer goods businesses are not subject to seasonality.
Our oilseeds business is subject to seasonality in the growing cycles, procurement, and transportation of our oilseeds. Price variations and availability of raw agricultural commodities may cause fluctuations in our working capital levels. In addition, these seasonal trends will likely cause fluctuations in our quarterly results, including fluctuations in sequential revenue growth rates.
Insurance
We maintain property, business interruption and casualty insurance which we believe is in accordance with customary industry practices in Malaysia and China, but we cannot predict whether this insurance will be adequate to fully cover all potential hazards incidental to our business.
Employees
As of December 20, 2013, we had 19 employees in Malaysia and 2 employees in China, all of which are full-time. Our employees are in the following principal areas:
Operations - 4
Administrative / Finance - 8
Marketing - 2 (China)
Management- 4
Plantation operations - 3
Except as indicated above, our employees of the company are located in Malaysia and are primarily focused on our oilseeds and real estate businesses. None of our employees are members of a trade union. We believe that we maintain good relationships with our employees, and have not experienced any strikes or shutdowns and have not been involved in any labor disputes.
We are required to make contributions under a defined contribution pension plan for all of our eligible employees in Malaysia and the PRC. We are required to contribute a specified percentage of the participants’ relevant income based on their ages and wages level. The total contributions made were $59,957, $58,621 and $30,250 for the years ended October 31, 2013, 2012 and 2011, respectively.
Corporation Information
Our principal executive offices are located at 11-2, Jalan 26/70A, Desa Sri Hartamas, 50480 Kuala Lumpur, Malaysia, telephone at +603 6201 3198, facsimile at +603 6201 3226. Our website is located at www. http://www.pgcg.cc. Copies of our annual report on Form 10-K, quarterly reports on Form 10-Q and amendments to those reports filed or furnished pursuant to the Exchange Act are available on our website. You may request copies of such filings free of charge by writing to our corporate offices.
ITEM 1A.
ITEM 1A. Risk Factors.
An investment in our securities involves a high degree of risk. You should consider carefully the following information about these risks, together with the other information contained in this report before making an investment decision. Our business, prospects, financial condition, and results of operations may be materially and adversely affected as a result of any of the following risks. The value of our securities could decline as a result of any of these risks. You could lose all or part of your investment in our securities. Some of the statements in “Risk Factors” are forward looking statements.
Risks Related to Our Business
We are transitioning away from our software business, which accounted for approximately 81.9%, 49.4% and 77% of our revenues in fiscal years 2013, 2012 and 2011 to focus on our oilseeds and real estate business. If we are not successful in making this transition, our revenues, results of operation and financial condition will be materially and adversely affected.
Our software business segment accounted for approximately 81.9%, 49.4% and 77% of our revenues in fiscal years 2013, 2012 and 2011, respectively. We are transitioning away from this business segment to focus on our oilseeds and real estate businesses. To date, we have consummated the acquisition of two commercial buildings, two parcels of vacant land for development, and our primary oilseeds asset, a mature palm oil plantation. We are in the planning stages of developing our vacant land and our first parcel planned for development is under a development freeze issued by the government authority. In addition, our castor related operations in the PRC are currently unable to effectively compete, and if we are unable to adapt by the second calendar quarter of 2014, we may suspend our castor plant operations. If we are unable to develop and sell our real estate, operate our commercial buildings or are not able to effectively compete in the palm oil and cast plant business segments, our revenues, results of operation and financial condition may be materially adversely affected. Furthermore, it may prove difficult for us to re-enter our software business in the event of a failed transition due to the rapidly changing and converging nature of the technologies, products and services that characterize our software business industry.
Because we have a limited operating history and limited experience in operating oilseeds and real estate development businesses, it may be difficult to evaluate an investment in our stock.
We experienced a change of control in December 2010 and began transitioning to our oilseeds and real estate businesses in calendar year 2012. As a result, we consider ourselves an early stage company and believe that our limited operating history may not be indicative of our future operating results. We face a number of risks encountered by early stage companies, including our need to develop infrastructure, increase revenue and obtain long-term sources of financing. To date, our revenues are not substantial enough to implement our business plan of developing residential projects or to acquire additional commercial properties.
Our management team has limited experience in managing and operating palm oil and castor plantations and developing and selling real estate projects. We acquired our palm oil business in August 2011 and began trading castor seeds and providing oilseeds related advisory services in December 2011. We acquired our first parcel of vacant land in July 2012 and our first commercial building in December 2012. We are in the planning stages of development and expect to commence construction in the first quarter of 2014. We only began generating rental income in our second fiscal quarter of 2013. There is no assurance that our business strategy will be successful or that we will be able to effectively execute our plans. If we are unable to sustain profitable operations, investors may lose their entire investment in us.
We may grow our business through acquisitions in the near future, which may result in operating difficulties, dilution, and other harmful consequences.
We expect to achieve our business plan through organic growth but may consider acquisitions and investments. We periodically evaluate an array of potential strategic transactions and may make one or more acquisitions in the near future. These transactions may span unrelated industries and could be material to our financial condition and results of operations. The process of integrating an acquired company, business, or technology may create unforeseen operating difficulties and expenditures. The areas where we face risks include:
·Implementation or remediation of controls, procedures, and policies at the acquired company;
·Diversion of management time and focus from operating our business to acquisition integration challenges;
·Cultural challenges associated with integrating employees from the acquired company into our organization;
·Retention of employees from the businesses we acquire;
·Integration of the acquired company’s accounting, management information, human resource, and other administrative systems;
·Liability for activities of the acquired company before the acquisition, including patent and trademark infringement claims, violations of laws, commercial disputes, tax liabilities, and other known and unknown liabilities;
·Litigation or other claims in connection with the acquired company, including claims from terminated employees, customers, former stockholders, or other third parties;
·In the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political, and regulatory risks associated with specific countries; and
·Failure to successfully further develop the acquired product, service or technology.
Our failure to address these risks or other problems encountered in connection with future acquisitions and investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments, incur unanticipated liabilities, and harm our business generally.
Future acquisitions may also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities, or amortization expenses, or write-offs of goodwill, any of which could harm our financial condition. Also, the anticipated benefit of many of our acquisitions may not materialize.
If we are unable to successfully manage growth, our business and operating results could be adversely affected.
We expect the growth of our business and operations to place significant demands on our management, operational and financial infrastructure. If we do not effectively manage our growth, the quality of our products and services could suffer, which could negatively affect our reputation and operating results. Our expansion and growth in international markets heighten these risks as a result of the particular challenges of supporting a rapidly growing business in an environment of multiple languages, cultures, customs, legal systems, alternative dispute systems, regulatory systems, and commercial infrastructures. To effectively manage this growth, we will need to develop and improve our operational, financial and management controls, and our reporting systems and procedures. These systems enhancements and improvements may require significant capital expenditures and management resources. Failure to implement these improvements could hurt our ability to manage our growth and our financial position.
We are subject to risks associated with doing business globally including compliance with domestic and foreign laws and regulations, economic downturns, political instability and other risks that could adversely affect our operating results.
We conduct our businesses globally and have assets located in several countries and geographic areas. Our oilseeds operations are in Malaysia and China, and we have acquired commercial real estate in Malaysia. We are required to comply with numerous and broad reaching laws and regulations administered by United States federal, state and local, and foreign governmental authorities. We must also comply with other general business regulations such as those directed toward accounting and income taxes, anti-corruption, anti-bribery, global trade, handling of regulated substances, and other commercial activities, conducted by our employees and third party representatives globally. Any failure to comply with applicable laws and regulations could subject us to administrative penalties and injunctive relief, and civil remedies including fines, injunctions, and recalls of our products. In addition, changes to regulations or implementation of additional regulations may require us to modify existing processing facilities and/or processes, which could significantly increase operating costs and negatively impact operating results.
We operate in both developed and emerging markets which are subject to impacts of economic downturns, including decreased demand for our products, reduced availability of credit, or declining credit quality of our suppliers, customers, and other counterparties. We anticipate that emerging market areas could be subject to more volatile economic, political and market conditions. Economic downturns and volatile conditions may have a negative impact on our operating results and ability to execute its business strategies.
Our operating results may be affected by changes in trade, monetary, fiscal and environmental policies, laws and regulations, and other activities of governments, agencies, and similar organizations. These conditions include but are not limited to changes in a country’s or region’s economic or political conditions, trade regulations affecting production, pricing and marketing of products, local labor conditions and regulations, reduced protection of intellectual property rights, changes in the regulatory or legal environment, restrictions on currency exchange activities, currency exchange fluctuations, burdensome taxes and tariffs, enforceability of legal agreements and judgments, other trade barriers, and regulation or taxation of greenhouse gases. International risks and uncertainties, including changing social and economic conditions as well as terrorism, political hostilities, and war, may limit our ability to transact business in these markets and may adversely affect our revenues and operating results.
Risk Factors Related to Our Oilseeds Business
The availability and prices of the agricultural commodities and agricultural commodity products we procure, transport, store, process and merchandise can be affected by weather conditions, disease, government programs, competition, and various other factors beyond our control and may adversely affect our operating results.
The availability and prices of agricultural commodities are subject to wide fluctuations due to factors such as changes in weather conditions, disease, plantings, government programs and policies, competition, changes in global demand resulting from population growth and changes in standards of living, and global production of similar and competitive crops. These factors have historically caused volatility in agricultural commodity prices which affects our operating results. Reduced supply of agricultural commodities due to weather-related factors or other reasons could adversely affect our profitability by increasing the cost of raw materials and/or limit our ability to procure, transport, store, process, and merchandise agricultural commodities in an efficient manner.
Fluctuations in energy prices could adversely affect our operating results.
Our operating costs and the selling prices are sensitive to changes in energy prices. Our farms are powered principally by electricity, natural gas, and coal. Our transportation costs are dependent upon diesel fuel and other petroleum-based products. Significant increases in the cost of these items may adversely affect our production costs and operating results.
Government policies and regulations, in general, and specifically affecting the agricultural sector and related industries, could adversely affect our operating results.
Agricultural production and trade flows are subject to government policies and regulations. Governmental policies affecting the agricultural industry, such as taxes, tariffs, duties, subsidies, incentives, and import and export restrictions on agricultural commodities and commodity products, including policies related to genetically modified organisms, renewable fuel, and low carbon fuel mandates, can influence the planting of certain crops, the location and size of crop production, whether unprocessed or processed commodity products are traded, the volume and types of imports and exports, the viability and volume of production of certain of our products, and industry profitability. In addition, international trade disputes can adversely affect agricultural commodity trade flows by limiting or disrupting trade between countries or regions. Future government policies may adversely affect the supply of, demand for, and prices of our products, restrict our ability to do business in its existing and target markets, and could negatively impact our revenues and operating results.
We are subject to industry-specific risk which could adversely affect our operating results.
We are subject to risks which include, but are not limited to, product quality or contamination; shifting consumer preferences; federal, state, and local food processing regulations; socially unacceptable farming practices; labor issues; environmental, health and safety regulations; and customer product liability claims. The liability that could result from certain of these risks may not always be covered by, or could exceed liability insurance related to product liability and food safety matters maintained by us. The occurrence of any of the matters described above could adversely affect our revenues and operating results.
We are exposed to potential business disruption, including but not limited to disruption of transportation services, supply of non-commodity raw materials used in its processing operations, and other impacts resulting from acts of terrorism or war, natural disasters, severe weather conditions, and accidents which could adversely affect our operating results.
Our operations rely on dependable and efficient transportation services. A disruption in transportation services could result in difficulties supplying materials to our facilities and impair our ability to deliver products to our customers in a timely manner. Certain factors which may impact the availability of non-agricultural commodity raw materials are out of our control including but not limited to disruptions resulting from economic conditions, manufacturing delays or disruptions at suppliers, shortage of materials, and unavailable or poor supplier credit conditions.
Our assets and operations could be subject to extensive property damage and business disruption from various events which include, but are not limited to, acts of terrorism or war, natural disasters and severe weather conditions, accidents, explosions, and fires. The potential effects of these conditions could impact our revenues and operating results.
Our business is capital intensive in nature and we rely on cash generated from our operations and external financing to fund our growth and ongoing capital needs. Limitations on access to external financing could adversely affect our operating results.
We require significant capital to operate our current business and fund our growth strategy. Our working capital requirements are directly affected by the price of agricultural commodities, which may fluctuate significantly and change quickly. We also require substantial capital to maintain and upgrade our facilities, transportation assets and other facilities to keep pace with competitive developments, technological advances, regulations and changing safety standards in the industry. Moreover, the expansion of our business and pursuit of acquisitions or other business opportunities may require significant amounts of capital. If we are unable to generate sufficient cash flows or raise adequate external financing, it may restrict our current operations and our growth opportunities which could adversely affect our operating results.
Our risk management strategies may not be effective.
Our business is affected by fluctuations in agricultural commodity prices, transportation costs, energy prices, interest rates, and foreign currency exchange rates. We do not currently engage in hedging strategies to manage these risks but may do so in the future. There can be no assurance that our hedging strategies will be successful in mitigating our exposure to these fluctuations.
We have limited control over and may not realize the expected benefits of our equity investments and joint ventures.
We may enter into joint ventures and investments over which we may have limited control as to the governance and management. We expect to benefit from these investments, which typically aim to expand or enhance the market for our products or offer other benefits including but not limited to geographic or product line expansion. We may encounter unanticipated operating issues or financial results related to these investments that may impact our revenues and operating results.
Risks Related to Our Real Estate Business
We may not be able to develop our Shah Alam 2 Eco Residential Project.
The Selangor state government has imposed a freeze on development approvals affecting the land on which our Shah Alam 2 Eco Residential project will be situated in connection with a legal dispute with a township developer. We have made an appeal to the state government to approve our development order based upon the fact that we are the rightful landowner and should not be affected by the legal dispute between the state government and the township developer. While we hope to secure such approval by the second quarter of 2014, there can be no assurance that we will be able to timely secure such approval or to secure an approval at all. We cannot begin development until we have secured such approval. If we are unable to develop our project, our business plan and financial condition may be materially and adversely affected.
We may not be able to acquire properties and or develop, sell or lease them successfully.
The success of our real estate business will depend in large part upon our ability to acquire additional properties on satisfactory terms and to develop, sell or lease them successfully. If we are unable to do so, our results of operations could be adversely affected.
The acquisition, ownership and development of real estate is subject to many risks that may adversely affect our results of operations, including risks that:
·we may not be able to acquire a desired property because of competition from other real estate developers or investors who may have greater capital or better access to cash than us;
·we may not be able to obtain or renew financing on acceptable terms, or at all;
·an adverse change in market conditions during the interval between acquisition and sale of a property may result in a lower than originally anticipated profit;
·we may underestimate the cost of development required to bring an acquired property up to standards established for the market position intended for that property;
·the costs of developing or holding properties may increase, such as inconsistent supply and high cost of labor, increased costs of building materials (such as cement and steel bars) and general increased costs of doing business;
·acquired properties may be located in new markets where we may face risks associated with a lack of market knowledge or understanding of the local economy, a lack of business relationships in the area or unfamiliarity with local governmental and permitting procedures; or
·we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations.
There is a risk that the Malaysian government will adopt proposals to limit the growth of the real estate market, which if successful, may adversely affect our real estate business.
Malaysian policy makers have indicated concern regarding the rapid rise in property prices in the middle and higher sectors of the market in which we intend to operate. From time to time, policy makers have introduced proposals to regulate the growth of the real estate industry. There is a risk that policy makers may adopt proposals that may limit, delay or otherwise hamper our ability to pursue our plans to acquire, develop and sell real estate. In such event, our results of operation and financial condition may be adversely affected.
We are vulnerable to concentration risks because our operations are almost exclusive to the Malaysian markets located in Kuala Lumpur and Selangor.
Our real estate activities will almost be entirely located in Selangor, Malaysia and Kuala Lumpur. Because of our geographic concentration and limited number of projects, our operations are more vulnerable to local economic downturns and adverse project-specific risks than those of larger, more diversified companies. The performance of the local economy will greatly affect our sales and consequently the underlying values of our properties. Our geographic concentration may create increased vulnerability during regional economic downturns, which can significantly affect our financial condition and results of operations.
Mortgage financing issues, including lack of supply of mortgage loans and tightened lending requirements, and adverse changes in the economy may reduce demand for our properties.
We expect that, in the future, a significant percentage of our real estate revenues will be derived from retail sales of residential properties developed by us. Home buying customers are particularly dependent upon the availability and cost of mortgage financing to the extent they finance their purchases. A weakness in the mortgage lending industry may adversely affect potential purchasers of our properties thus negatively affecting demand for our properties. As a result, government or bank policies that result in increased interest rates and or stricter lending requirements may adversely affect the sales of our developed properties. These customers are also sensitive to changes in economic conditions and factors such as the level of employment, consumer confidence and consumer income. Adverse changes in these conditions may decrease demand for homes generally, thus adversely affecting the pricing of homes and in turn the price of land sold to developers. Such developments could adversely affect our results of operations and financial condition.
Unfavorable changes in market and economic conditions may negatively impact occupancy or rental rates of our future commercial properties and the value of our land and developments, which may negatively affect our financial condition and results of operations.
A decline in the real estate market and economic conditions could significantly affect rental rates for the commercial properties that we have agreed to acquire. Occupancy and rental rates in our market, in turn, may significantly affect our profitability and our ability to satisfy our financial obligations. The risks that could affect conditions in our market include the following:
·a deterioration in economic conditions;
·local conditions, such as oversupply of office space, a decline in the demand for office space or increased competition from other available office buildings;
·the inability or unwillingness of tenants to pay their current rent or rent increases; and
·declines in market rental rates.
We cannot predict with certainty whether any of these conditions will occur or whether, and to what extent, they will have an adverse effect on our operations.
The market value of our land and our future developments also depend on market conditions. If real estate demand decreases below what we anticipated when we acquired our properties, we may not be able to recover our investment in such property through sales or leasing, and our profitability may be adversely affected. If there is another economic downturn, we may have write-downs to the carrying values of our properties and/or be required to sell properties at a loss.
Our operations are subject to an intensive regulatory approval process that could cause delays and increase the costs of our development efforts or preclude such developments entirely.
Before we can develop a property, we must obtain a variety of approvals from local and state governments with respect to such matters as zoning, and other land use issues, subdivision, site planning and environmental issues under applicable regulations. Some of these approvals are discretionary. As such, our ability to develop these properties and realize future income from our properties could be delayed, reduced, prevented or made more expensive.
Our operations are subject to governmental environmental regulation, which can change at any time or may increase our costs.
Real estate development is subject to possible interruption or termination due to environmental considerations, including, without limitation, air and water quality and protection of endangered species and their habitats. Because our project will have an eco-friendly focus, we expect to make expenditures with respect to our real estate development for the protection of the environment. Emphasis on environmental matters will result in additional costs in the future. New environmental regulations or changes in existing regulations or their enforcement may be enacted and such new regulations or changes may require significant expenditures by us. The recent trend toward stricter standards in environmental legislation and regulations is likely to continue and may have an additional impact on our operating costs.
Various laws and regulations impose liability on real property owners and operators for the costs of investigating, cleaning up and removing contamination caused by hazardous or toxic substances at a property. In our role as a property owner or developer, we could be held liable for such costs. This liability may be imposed without regard to the legality of the original actions and without regard to whether we knew of, or was responsible for, the presence of the hazardous or toxic substances. If we fail to disclose environmental issues, we could also be liable to a buyer or lessee of the property. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs incurred by the government in connection with the contamination. If we incur any such liability that is material, our results of operations would be adversely affected.
The real estate business is very competitive and many of our competitors are larger and financially stronger than we are and more experienced in operating in multiple markets.
The real estate business is highly competitive. We compete with a large number of companies and individuals that have significantly greater financial, sales, marketing and other resources than we have. Our competitors include local developers who are committed primarily to particular markets, national developers who acquire properties throughout Malaysia, insurance companies, pension and investment funds, partnerships, real estate or housing developers, investment companies, real estate investment trusts and owner/occupants.
Since our real estate acquisition and development activities will be primarily limited to Selangor and Kuala Lumpur, we do not have extensive experience in acquiring real estate in other markets or engaging in development activities in multiple markets simultaneously. Our competitors may have substantially greater experience than we have in identifying, acquiring and developing real estate opportunities in other markets and in managing real estate developments in multiple markets. These entities may also have greater financial resources and may be able to pay more than we can or accept more risk than we are willing to accept to acquire real estate. They also may be less sensitive to risks with respect to the costs or the geographic concentration of their investments.
A downturn in the real estate industry may significantly increase competition among developers. Increased competition may cause us to increase our selling incentives and/or reduce our prices. An oversupply of real estate properties available for sale or lease, as well as the potential significant discounting of prices by some of our competitors, may adversely affect the results of our operations.
Land investments are generally illiquid, and we may not be able to sell our properties when it is economically or otherwise important to do so.
Land investments generally cannot be sold quickly, and our ability to sell properties may to be affected by market conditions. We may not be able to diversify or vary our portfolio promptly in accordance with our strategies or in response to economic or other conditions. Our ability to assume and pay down future debt, reduce interest costs and acquire properties is dependent upon our ability to sell our properties at the prices and within the deadlines we establish for each property.
Risks Related to our Operations in Malaysia
We are susceptible to economic conditions in Malaysia where our principal business, assets, suppliers, merchants and customers are located.
Our business and assets are primarily located in Malaysia. During the fiscal year ended October 31, 2013, 100% of our sales revenue was generated from customers located in Malaysia. Our results of operations, financial state of affairs and future growth are, to a significant degree, subject to Malaysia’s economic, political and legal development and related uncertainties. Our operations and results could be materially affected by a number of factors, including, but not limited to:
·Changes in policies by the Malaysian government resulting in changes in laws or regulations or the interpretation of laws or regulations; changes in taxation,
·changes in employment restrictions;
·import duties, and
·currency revaluation.
We expect our revenues to be paid in non-U.S. currencies, and if currency exchange rates become unfavorable, we may lose some of the economic value of the revenues in U.S. dollar terms.
Our oilseeds and real estate operations are conducted in Malaysia and China and our operating currency is the Malaysian Ringgit and the Renminbi. Since we conduct business in currencies other than U.S. dollars but report our financial results in U.S. dollars, we face exposure to fluctuations in currency exchange rates. For instance, if currency exchange rates were to change unfavorably, the U.S. dollar equivalent of our operating income recorded in foreign currencies would be diminished.
We currently do not, but may in the future, implement hedging strategies, such as forward contracts, options, and foreign exchange swaps to mitigate this risk. There is no assurance that our efforts will successfully reduce or offset our exposure to foreign exchange fluctuations. Additionally, hedging programs expose us to risks that could adversely affect our financial results, including the following:
·We have limited experience in implementing or operating hedging programs. Hedging programs are inherently risky and we could lose money as a result of poor trades;
·We may be unable to hedge currency risk for some transactions or match the accounting for the hedge with the exposure because of a high level of uncertainty or the inability to reasonably estimate our foreign exchange exposures;
·We may be unable to acquire foreign exchange hedging instruments in some of the geographic areas where we do business, or, where these derivatives are available, we may not be able to acquire enough of them to fully offset our exposure;
·We may determine that the cost of acquiring a foreign exchange hedging instrument outweighs the benefit we expect to derive from the derivative, in which case we would not purchase the derivative and would be exposed to unfavorable changes in currency exchange rates;
·To the extent we recognize a gain on a hedge transaction in one of our subsidiaries that is subject to a high statutory tax rate, and a loss on the related hedged transaction that is subject to a lower rate, our effective tax rate would be higher; and
·Significant fluctuations in foreign exchange rates could greatly increase our hedging costs.
We anticipate increased exposure to exchange rate fluctuations as we expand the breadth and depth of our international sales.
In our financial statements, we translate our local currency financial results into U.S. dollars based on average exchange rates prevailing during a reporting period or the exchange rate at the end of that period. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency denominated transactions could result in reduced revenue, operating expenses and net income for our international operations. Similarly, to the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions could result in increased revenue, operating expenses and net income for our international operations.
Because our holding company structure creates restrictions on the payment of dividends, our ability to pay dividends is limited.
We are a holding company whose primary assets are our ownership of the equity interests in our subsidiaries. We conduct no other business and, as a result, we depend entirely upon our subsidiaries’ earnings and cash flow. If we decide in the future to pay dividends, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiaries. Our subsidiaries and projects may be restricted in their ability to pay dividends, make distributions or otherwise transfer funds to us prior to the satisfaction of other obligations, including the payment of operating expenses or debt service, restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions. If future dividends are paid in the Malaysian Ringgit, fluctuations in the exchange rate for the conversion of the Ringgit into U.S. dollars may adversely affect the amount received by U.S. stockholders upon conversion of the dividend payment into U.S. dollars. We do not presently have any intention to declare or pay dividends in the future. You should not purchase shares of our common stock in anticipation of receiving dividends in future periods.
It may be difficult for stockholders to enforce any judgment obtained in the United States against us, which may limit the remedies otherwise available to our stockholders.
Substantially all of our assets are located in Malaysia. Moreover, a majority of our directors and officers are nationals or residents of Malaysia. All or a substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult for our stockholders to effect service of process within the United States upon these persons. In addition, there is uncertainty as to whether the courts of Malaysia would recognize or enforce judgments of U.S. courts obtained against us or such officers and/or directors predicated upon the civil liability provisions of the securities law of the United States or any state thereof, or be competent to hear original actions brought in Malaysia against us or such persons predicated upon the securities laws of the United States or any state thereof.
Risks Related to our Operations in China
Contract drafting, interpretation and enforcement in China involve significant uncertainty.
We expect to enter into material contracts governed by PRC law in connection with our castor oil operations. As compared with contracts in the United States, contracts governed by PRC law tend to contain less detail and are not as comprehensive in defining contracting parties’ rights and obligations. As a result, contracts in China are more vulnerable to disputes and legal challenges. In addition, contract interpretation and enforcement in China is not as developed as in the United States, and the result of any contract dispute is subject to significant uncertainties. Therefore, we cannot assure you that we will not be subject to disputes under our material contracts, and if such disputes arise, we cannot assure you that we will prevail. Any dispute involving such contracts, even without merit, may materially and adversely affect our reputation and our business operations, and may cause the price of our securities to decline.
Under the EIT Law, we and/or Max Trend HK may be classified as a “resident enterprise” of the PRC. Such classification could result in tax consequences to us, our non-PRC resident enterprise shareholders and Max Trend HK.
On March 16, 2007, the National People’s Congress approved and promulgated a new tax law, the PRC Enterprise Income Tax Law, or “EIT Law,” which took effect on January 1, 2008. Under the EIT Law, enterprises are classified as resident enterprises and non-resident enterprises. An enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define “de facto management bodies” as a managing body that in practice exercises “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise; however, it remains unclear whether the PRC tax authorities would deem our managing body as being located within China. Due to the short history of the EIT Law and lack of applicable legal precedents, the PRC tax authorities determine the PRC tax resident treatment of a foreign (non-PRC) company on a case-by-case basis.
If the PRC tax authorities determine that we are and/or Max Trend HK is a “resident enterprise” for PRC enterprise income tax purposes, a number of PRC tax consequences could follow. First, we and/or Max Trend HK may be subject to enterprise income tax at a rate of 25% on our and/or Max Trend HK’s worldwide taxable income, as well as PRC enterprise income tax reporting obligations. Second, under the EIT Law and its implementing rules, dividends paid between “qualified resident enterprises” are exempt from the enterprise income tax. As a result, if we and Max Trend HK are treated as PRC “qualified resident enterprises,” all dividends paid from Max Trend WFOE to Max Trend HK and from Max Trend HK to us should be exempt from the PRC enterprise income tax.
If Max Trend HK were treated as a PRC “non-resident enterprise” under the EIT Law, then dividends that Max Trend HK receives from Max Trend WFOE (assuming such dividends were considered sourced within the PRC) (i) may be subject to a 5% PRC withholding tax, provided that Max Trend HK owns more than 25% of the registered capital of Max Trend WFOE continuously within 12 months immediately prior to obtaining such dividend from Max Trend WFOE, and the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (the “PRC-Hong Kong Tax Treaty”) were otherwise applicable, or (ii) if such treaty does not apply (i.e., because the PRC tax authorities may deem Max Trend HK to be a conduit not entitled to treaty benefits), may be subject to a 10% PRC withholding tax. Similarly, if we were treated as a “non-resident enterprise” under the EIT Law, and Max Trend HK were treated as a “resident enterprise” under the EIT Law, then dividends that we receive from Max Trend HK (assuming such dividends were considered sourced within the PRC) may be subject to a 10% PRC withholding tax. Any such taxes on dividends could materially reduce the amount of dividends, if any, we could pay to our shareholders.
Finally, if we are determined to be a “resident enterprise” under the EIT Law, this could result in a 10% PRC tax being imposed on dividends we pay to our investors that are not tax residents of the PRC (“non-resident investors”) and that are enterprises (but not individuals) and gains derived by them from transferring our securities, if such income or gain is considered PRC-sourced income by the relevant PRC tax authorities. In such event, we may be required to withhold the applicable PRC tax on any dividends paid to such non-resident investors. Such non-resident investors also may be responsible for paying the applicable PRC tax on any gain realized by them from the sale or transfer of our ADSs or ordinary shares in certain circumstances. We would not, however, have an obligation to withhold PRC tax with respect to such gain under the PRC tax laws.
On December 10, 2009, the State Administration of Taxation (“SAT”) released Circular Guoshuihan No. 698 (“Circular 698”) that reinforces the taxation of certain equity transfers by non-resident investors through overseas holding vehicles. Circular 698 is retroactively effective from January 1, 2008. Circular 698 addresses indirect equity transfers as well as other issues. According to Circular 698, where a non-resident investor who indirectly holds an equity interest in a PRC resident enterprise through a non-PRC offshore holding company indirectly transfers an equity interest in a PRC resident enterprise by selling an equity interest in the offshore holding company, and the latter is located in a country or jurisdiction where the actual tax burden is less than 12.5% or where the offshore income of its residents is not taxable, the non-resident investor is required to provide the PRC tax authority in charge of that PRC resident enterprise with certain relevant information within 30 days of the execution of the equity transfer agreement. The tax authorities in charge will evaluate the offshore transaction for tax purposes. In the event that the tax authorities determine that such transfer is abusing forms of business organization and a reasonable commercial purpose for the offshore holding company other than the avoidance of PRC income tax liability is lacking, the PRC tax authorities will have the power to re-assess the nature of the equity transfer under the doctrine of substance over form. A reasonable commercial purpose may be established when the overall international (including U.S.) offshore structure is set up to comply with the requirements of supervising authorities of international (including U.S.) capital markets. If the SAT’s challenge of a transfer is successful, it may deny the existence of the offshore holding company that is used for tax planning purposes and subject the seller to PRC tax on the capital gain from such transfer. Since Circular 698 has a short history, there is uncertainty as to its application. We (or a non-resident investor) may become at risk of being taxed under Circular 698 and may be required to expend valuable resources to comply with Circular 698 or to establish that we (or such non-resident investor) should not be taxed under Circular 698, which could have a material adverse effect on our financial condition and results of operations (or such non-resident investor’s investment in us).
If any PRC tax applies to a non-resident investor, the non-resident investor may be entitled to a reduced rate of PRC tax under an applicable income tax treaty and/or a deduction for such PRC tax against such investor’s domestic taxable income or a foreign tax credit in respect of such PRC tax against such investor’s domestic income tax liability (subject to applicable conditions and limitations). Prospective investors should consult with their own tax advisors regarding the applicability of any such taxes, the effects of any applicable income tax treaties, and any available deductions or foreign tax credits.
Adverse changes in political and economic policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could materially adversely affect our business.
Our business, financial condition, results of operations and prospects may be affected by economic, political and legal developments in China. The PRC economy differs from the economies of most developed countries in many respects, including:
·the amount of government involvement;
·the level of development;
·the growth rate;
·the foreign exchange; and
·the allocation of resources.
While the PRC economy has grown significantly since the late 1970s, the growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall PRC economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.
The PRC economy has been transitioning from a planned economy to a more market-oriented economy. Although the PRC government has in recent years implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of the productive assets in China is still owned by the PRC government. The continued control of these assets and other aspects of the national economy by the PRC government could materially and adversely affect our business. The PRC government also exercises significant control over economic growth in China through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Efforts by the PRC government to slow the pace of growth of the PRC economy could reduce demand for our products.
Any adverse change in the economic conditions or government policies in China could have a material adverse effect on the overall economic growth in China, which in turn could lead to a reduction in demand for our products and consequently have a material adverse effect on our business and prospects.
To fund any cash requirements we may have, we may need to rely on dividends, loans or advances made by our PRC subsidiary, Max Trend WFOE, which are subject to limitations and possible taxation under applicable PRC laws and regulations.
We may rely on dividends and other distributions on equity, or loans and advances made by our Chinese subsidiary, Max Trend WFOE, to fund any cash requirements we may have, including the funds necessary to pay dividends and other cash distributions, if any, to our shareholders, and to service any debt we may incur. The distribution of dividends and the making of loans and advances by entities organized in China are subject to limitations. Regulations in the PRC currently permit payment of dividends only out of unrestricted retained earnings as determined in accordance with accounting standards and regulations in China. Max Trend WFOE is also required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves until the cumulative amount of such reserves reaches 50% of its registered capital. These reserves are not distributable as cash dividends, loans or advances. Max Trend WFOE may also allocate a portion of its after-tax profits, as determined by its board of directors, to its staff welfare and bonus funds, which may not be distributed to us. In addition, if Max Trend WFOE incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us.
Furthermore, under regulations of the State Administration of Foreign Exchange, or the SAFE, the Renminbi is not convertible into foreign currencies for capital account items, such as loans, repatriation of investments and investments outside of China, unless the prior approval of the SAFE is obtained and prior registration with the SAFE is made.
Uncertainties with respect to the PRC legal system could adversely affect us.
A portion of our oilseeds operations is located in China and subject to PRC laws and regulations. We are generally subject to laws and regulations in China, in particular, laws applicable to foreign-invested enterprises. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. However, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until some time after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.
In particular, among other uncertainties regarding PRC laws and regulations that could affect us, the following uncertainties may have a significant adverse impact on our business and operations: (1) the uncertainties related to Contract Law of the PRC and relevant regulations may impede our ability to enforce contracts we have entered into with our business partners, customers and suppliers; (2) the uncertainties related to the Civil Procedure Law and relevant regulations may impede our ability to enforce our contracts and result in substantial costs and diversion of our resources and management attention; (3) the uncertainties related to Circular 75, Circular 142 released by the Administration of Foreign Exchange on August 29, 2008 and other foreign exchange regulations might limit our ability to convert foreign currency into Renminbi, acquire any other PRC companies, establish VIEs in the PRC, or make dividend payments from Max Trend WFOE; (4) the uncertainties related to the New M&A Rules may require us to obtain prior approval of the China Securities Regulatory Commission, or CSRC, for the listing and trading of our securities on a senior exchange in the future; and (5) the uncertainties related to the new Enterprise Income Tax Law, or the EIT law, may result in tax consequence to us and our investors as we and/or Max Trend HK may be classified as a “resident enterprise” of the PRC.
We also 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 preemption of local regulations by national laws. These uncertainties could limit the legal protections available to us and our foreign investors, including you.
Fluctuation in the value of the Renminbi may have a material adverse effect on your investment.
The change in value of the Renminbi against the U.S. dollar, Ringgit, Euro and other currencies is affected by, among other things, changes in China’s political and economic conditions. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under the policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an appreciation of the Renminbi against the U.S. dollar between July 21, 2005 and March 31, 2011. Provisions on Administration of Foreign Exchange, as amended in August 2008, further changed China’s exchange regime to a managed floating exchange rate regime based on market supply and demand. While the international reaction to the Renminbi revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the Renminbi against the U.S. dollar. To the extent our costs and expenses are denominated in Renminbi, future revisions in the exchange rate policy could increase our costs and expenses in U.S. dollar terms. There is a risk that proceeds from future financing will decrease in value if we choose not to or are unable to convert such proceeds into Renminbi and the Renminbi appreciates against the currency of such financing, which may reduce the value of your investment.
Recent regulations relating to offshore investment activities by PRC residents may limit our ability to acquire PRC companies and could adversely affect our business.
Circular 75 states that if PRC residents use assets or equity interests in their PRC entities as capital contributions to establish offshore companies or inject assets or equity interests of their PRC entities into offshore companies to raise capital overseas, they must register with local SAFE branches with respect to their overseas investments in offshore companies. They must also file amendments to their registrations if their offshore companies experience material events involving capital variation, such as changes in share capital, share transfers, mergers and acquisitions, spin-off transactions, long-term equity or debt investments or uses of assets in China to guarantee offshore obligations. Under this regulation, their failure to comply with the registration procedures set forth in such regulation may result in restrictions being imposed on the foreign exchange activities of the relevant PRC entity, including the payment of dividends and other distributions to its offshore parent, as well as restrictions on the capital inflow from the offshore entity to the PRC entity.
We attempt to comply, and attempt to ensure that our shareholders who are subject to these rules comply, with the relevant requirements. However, we cannot provide any assurances that all of our shareholders who are PRC residents will comply with our request to make or obtain any applicable registrations or comply with other requirements required by Circular 75 or other related rules. Any future failure by any of our shareholders who is a PRC resident, or controlled by a PRC resident, to comply with relevant requirements under this regulation could subject us to fines or sanctions imposed by the PRC government, including restrictions on Max Trend WFOE’s ability to pay dividends or make distributions to us and our ability to increase our investment in Max Trend WFOE.
SAFE rules and regulations may limit our ability to convert foreign funds into Renminbi, to invest in or acquire any other PRC companies, or establish VIEs in the PRC.
On August 29, 2008, SAFE promulgated Circular 142, a notice regulating the conversion by a foreign- invested company of foreign currency into Renminbi by restricting how the converted Renminbi may be used. The notice requires that the registered capital of a foreign-invested company settled in Renminbi converted from foreign currencies may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the registered capital of a foreign-invested company settled in Renminbi converted from foreign currencies. The use of such Renminbi capital may not be changed without SAFE’s approval, and may not in any case be used to repay Renminbi loans if the proceeds of such loans have not been used. Violations of Circular 142 will result in severe penalties, such as heavy fines. As a result, Circular 142 may significantly limit our ability to convert the foreign funds into Renminbi to invest in or acquire any other PRC companies, or establish VIEs in the PRC.
We have procedures in place to ensure the safekeeping and use of our corporate chop. If our corporate chop is lost or stolen and we do not comply with PRC laws requiring the announcement of such loss or theft, we will be unable to enter into new business contracts, which could hinder our operations and we could become liable for the fraudulent use of our corporate chop by others.
The regulation of the Official Chop Management of the Government Institute, Enterprise and other Social Entity [Guofa (25) 1999] released by the State Council requires that each company must maintain a corporate chop, which is made by an authorized entity assigned by the local public security bureau. Once the corporate chop is made, it is recorded in the local office of the State of Administration for Industry and Commerce. Under the PRC law, the parties to a contract can choose to use the signature of an authorized legal representative or the corporate chop as a pre-condition to the effectiveness of a contract. In business, when a company affixes its corporate chop to agreements or other documentation, it reflects that the contract is effective and the company is obligated to perform under the agreements. Each company should have a procedure in place to safe keep and maintain its corporate chop to ensure that only authorized persons have access and use it, and to prevent loss or theft.
Max Trend WOFE takes precautions with respect to the safekeeping and authorized use of the corporate chop. Max Trend entrusted SBA Stone Forest Advisory (Shanghai) Co., Ltd. Shenzhen Branch ("SBASF") to maintain and safe keep the corporate chop safely in cabinet. SBASF is SSAE16 certified corporate secretary with strict custody rules. The custodian staff of SBASF releases the corporate chops after receiving approval via email from Mr. Teh, our Chief Financial Officer, and from a team leader/manager. SBASF also manages the approval process through an online system called CRMS, which records every instance of usage. Through the SBASF, we are able to monitor and record all instances under which our corporate chops are released.
Under the PRC law, if a company loses its corporate chop, it needs to make a public announcement in the local newspaper, report the loss or theft to the local public security bureau and apply for a new corporate chop. If the company does not take the necessary steps above, the company is at risk that a third party who gets the corporate chop could use it to fraudulently represent the company in business transactions. Claims could be brought against the company and it could be held liable and accountable for these business transactions, even if the company did not authorize use of the corporate chop. As a result of the fraudulent use of the corporate chop, the company could have to pay damages to a third party who brings a claim, which depending on the nature of these contracts and the obligations fraudulently assumed by the company, could result in significant monetary losses. If the company does timely make the public announcement, report it to the local public security bureau and apply for a new Corporate Chop, then it will not assume liability in the event the corporate chop lost or stolen and is fraudulently used.
Risks Related to Management, Stockholder Control and Our Securities
We depend heavily on key personnel, and the loss of such key personnel could harm our business.
Our future success depends in significant part upon the continued contributions of key members of our senior management team. In particular, Weng Kung Wong, our Chief Executive Officer, and Liong Tat Teh, our Chief Financial Officer, are critical to our overall management and the continued development of our technology and strategic direction. The loss of any of their services could have a material adverse effect on us. We do not carry key-person life insurance on either of them.
We rely on highly skilled personnel and, if we are unable to retain or motivate key personnel or hire qualified personnel, we may not be able to grow effectively.
Our performance largely depends on the talents and efforts of highly skilled individuals. Our future success depends on our continuing ability to identify, hire, develop, motivate, and retain highly skilled personnel for all areas of our organization. Competition in our industry for qualified employees is intense, and our compensation arrangements may not always be successful in attracting new employees and retaining and motivating our existing employees. Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate our existing employees.
There may not be sufficient liquidity in the market for our securities in order for investors to sell their securities.
There is currently only a limited public market for our common stock and there can be no assurance that an active trading market will ever develop or be sustained in the future.
The market price of our Common Stock may be volatile.
The market price of our common stock may be highly volatile, as is the stock market in general, and the market for OTC Bulletin Board quoted stocks in particular. Some of the factors that may materially affect the market price of our common stock are beyond our control, such as changes in financial estimates by industry and securities analysts, conditions or trends in the industry in which we operate or sales of our common stock. These factors may materially adversely affect the market price of our common stock, regardless of our performance. In addition, the public stock markets have experienced extreme price and trading volume volatility. This volatility has significantly affected the market prices of securities of many companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock.
Any market that develops in shares of our common stock will be subject to the penny stock regulations and restrictions, which could impair liquidity and make trading difficult.
SEC Rule 15g-9, as amended, establishes the definition of a “penny stock” as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to a limited number of exceptions. The market price of the Common Stock is currently less than $5.00 per share and therefore may be a “penny stock.” This classification severely and adversely affects the market liquidity for our common stock.
For any transaction involving a penny stock, unless exempt, the penny stock rules require that a broker or dealer approve a person’s account for transactions in penny stocks and the broker or dealer receive from the investor a written agreement to the transaction setting forth the identity and quantity of the penny stock to be purchased. To approve a person’s account for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience and objectives of the person and make a reasonable determination that the transactions in penny stocks are suitable for that person and that that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the SEC relating to the penny stock market which, in highlight form, sets forth:
·the basis on which the broker or dealer made the suitability determination; and
·that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
Disclosure also has to be made about the risks of investing in penny stock in both public offerings and in secondary trading and commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
Because of these regulations, broker-dealers may not wish to engage in the above-referenced necessary paperwork and disclosures and/or may encounter difficulties in their attempt to sell shares of our common stock, which may affect the ability of selling stockholders or other holders to sell their shares in any secondary market and have the effect of reducing the level of trading activity in any secondary market. These additional sales practice and disclosure requirements could impede the sale of our securities. In addition, the liquidity for our securities may decrease, with a corresponding decrease in the price of our securities. Our shares, in all probability, will be subject to such penny stock rules for the foreseeable future and our shareholders will, in all likelihood, find it difficult to sell their securities.
The market for penny stocks has experienced numerous abuses which could adversely impact investors in our stock.
OTCBB securities are frequent targets of fraud or market manipulation, both because of their generally low prices and because OTCBB reporting requirements are less stringent than those of the stock exchanges or NASDAQ.
Patterns of fraud and abuse include:
·Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
·Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
·“Boiler room” practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons;
·Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and
·Wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.
We do not intend to pay dividends on our common stock.
We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings and do not anticipate paying any cash dividends on our common stock in the foreseeable future.
ITEM 1B.
ITEM 1B. Unresolved Staff Comments.
The staff of the Securities and Exchange Commission (“SEC Staff”) conducted a review of our Annual Report on Form 10-K for the year ended October 31, 2012, and our Quarterly Report on Form 10-Q for the quarter ended April 30, 2013, and issued a letter commenting on certain aspects of our revenue recognition practices with respect to income from our various business segments and the determination of the useful life of our real estate holdings and the requesting additional disclosure regarding our transition from a software company to our oilseeds and real estate businesses, among other matters. We have submitted our responses to the SEC Staff and are awaiting their response. Based on discussions with SEC Staff, we will be required to file an amendment to our Form 10-K for the year ended October 31, 2012, and our Form 10-Q for the quarter ended April 30, 2013, once we receive clearance from the SEC Staff.
ITEM 2.
ITEM 2. Properties.
On October 29, 2010, we leased from Atomic Vision Sdn. Bhd. approximately 1,400 square feet of office space at our headquarters located at 11-2, Jalan 26/70A, Desa Sri Hartamas, 50480 Kuala Lumpur, Malaysia at a monthly rate of MYR 2,500, which is approximately US$817. Our lease was recently renewed and expires November 30, 2014. Weng Kung Wong, our Chief Executive Officer and director, owns 50% of PGCG Properties Sdn. Bhd., the sole shareholder of Atomic Vision Sdn. Bhd. This does not constitute a VIE required to be consolidated due to the ability of Atomic Vision Sdn. Bhd. to stand alone and the rental rate is at a market rate. The foregoing description of the lease is qualified in its entirety by reference thereto, which is filed as Exhibit 10.2 to this Annual Report, and is incorporated herein by reference.
On May 1, 2013, we leased an additional 1,400 square feet of office space located one floor below our headquarters at 11-1, Jalan 26/70A, Desa Sri Hartamas, 50480 Kuala Lumpur, Malaysia at a monthly rate of MYR 2,500, which is approximately US$817. Our lease expires April 30, 2015. The foregoing description of the lease is qualified in its entirety by reference thereto, which is filed as Exhibit 10.3 to this Annual Report, and is incorporated herein by reference.
We believe that our current facilities are adequate for our current needs. We believe that suitable additional space will be available on commercially reasonable terms as needed to accommodate our operations.
We also own the following properties:
Property Location Business Segment
Vacant land (54.1 acres) for development (1) Selangor, Malaysia Real Estate
Vacant land (31 acres) for development Selangor, Malaysia Real Estate
15 Story Commercial Building Kuala Lumpur, Malaysia Real Estate
12 Story Commercial Building Kuala Lumpur, Malaysia Real Estate
Palm Oil Plantation (643 acres) Pahang, Malaysia Oilseeds
(1)The land is subject to a 99-year leasehold, expiring July 30, 2100.
ITEM 3.
ITEM 3. Legal Proceedings.
There are no material pending legal proceedings to which we are a party or to which any of our property is subject, nor are there any such proceedings known to be contemplated by governmental authorities. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES.
None.
PART II
ITEM 5.
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
(a) Market Information
The following table sets forth the high and low closing sale prices for the periods presented as reported on the Over the Counter Bulletin Board. There is no established public trading market for our securities and a regular trading market may not develop, or if developed, may not be sustained.
Our common stock is quoted on the Over the Counter Bulletin Board under the symbol PGCG. As of December 20, 2013, the closing price of our securities was $0.75.
Performance Graph
The performance graph below shows the five-year cumulative total stockholder return on our common stock during the period from December 24, 2009, the date trading of our securities began, through October 31, 2013. This is compared with the cumulative total return of Genpact Limited* and the NASDAQ Index over the same period. The comparison assumes $100 was invested on December 24, 2009, in our common stock and in each of the foregoing indices and assumes reinvestment of dividends, if any. Dollar amounts in the graph are rounded to the nearest whole dollar. The performance shown in the graph represents past performance and should not be considered an indication of future performance.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Prime Global Capital Group Incorporated, Genpact Limited and Nasdaq Composite Index
*GENPACT provides business process management and technology services.
*First day of trading was December 24, 2009.
(b) Approximate Number of Holders of Common Stock
As of December 17, 2013, there were approximately 1939 shareholders of record of our common stock. Such number does not include any shareholders holding shares in nominee or “street name”.
(c) Dividends
Holders of our common stock are entitled to receive such dividends as may be declared by our board of directors. We paid no dividends during the periods reported herein, nor do we anticipate paying any dividends in the foreseeable future.
(d) Equity Compensation Plan Information
There are no options, warrants or convertible securities outstanding.
(e) Recent Sales of Unregistered Securities
The information set forth below describes our issuance of securities without registration under the Securities Act of 1933, as amended, during the year ended October 31, 2013, that were not previously disclosed in a Quarterly Report on Form 10-Q or in a Current Report on Form 8-K: None.
ITEM 6.
ITEM 6. Selected Financial Data.
The following selected financial information has been derived from our historical audited consolidated financial statements and should be read in conjunction with the consolidated financial statements and the accompanying notes for the corresponding fiscal years:
* Denotes less than $0.01 per share
(1)The fiscal year ends 10/31
(2)Represents seven months ended 10/31.
(3)The fiscal year ends 3/31. The Company was formed January 26, 2009.
ITEM 7.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
This discussion summarizes the significant factors affecting the operating results, financial condition, liquidity and cash flows of the Company and its subsidiaries for the fiscal years ended October 31, 2013, 2012 and 2011. The discussion and analysis that follow should be read together with the section entitled “Forward Looking Statements” and our consolidated financial statements and the notes to the consolidated financial statements included elsewhere in this annual report on Form 10-K.
Except for historical information, the matters discussed in this section are forward looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond the Company’s control. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report.
Currency and exchange rate
Unless otherwise noted, all currency figures quoted as “U.S. dollars”, “dollars” or “$” refer to the legal currency of the United States. References to “MYR” are to the Malaysian Ringgit, the legal currency of Malaysia. Throughout this report, assets and liabilities of the Company’s subsidiaries are translated into U.S. dollars using the exchange rate on the balance sheet date. Revenue and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statement of stockholders’ equity.
Overview
During fiscal year 2013, we operated in the following four business segments: (i) the provision of IT consulting, programming and website development services; (ii) our oilseeds business; (iii) our real estate business and (iv) the distribution of consumer products. Our software business accounted for approximately 82% of our revenues for fiscal year 2013. We did not generate any revenues from any of our product distribution business segment during fiscal year ended 2013. Summarized financial information regarding each revenue generating segment and the real estate business segment as of fiscal year end October 31, 2013 is as follows:
Our m-commerce and consumer distribution products businesses are operated through UHT. Our oilseeds business is operated through Virtual Setup Sdn. Bhd., or VSSB, and Max Trend WFOE. Our real estate business is operated through PGCG Assets.
Our initial business plan launched in July 2010 broadly contemplated the development, distribution and operation of mobile and online social networking, ecommerce and search products and services. However, as a result of the challenges we experienced in implementing our m-commerce business plan, we entered the oilseeds and real estate businesses in 2012 and scaled back our software and consumer goods distribution businesses. Since the commencement of our these business segments, we (through our subsidiaries):
·Acquired a palm oil plantation in Malaysia which is operated through VSSB (May 2012);
·Commenced sales of castor seeding and provision of technical know-how under a bundled sales arrangement through our subsidiaries Max Trend International Limited, a Hong Kong limited liability company, or Max Trend HK, which owns Max Trend WFOE (during quarter ended July 31, 2012);
·Became a party to a trial planting arrangement with Srira Cha province, Thailand, for the cultivation of castor plants (indefinitely suspended);
·Acquired 21.8921 hectares (54.10 acres) of vacant development land located in Selangor, Malaysia, which is subject to a 99-year leasehold, expiring July 30, 2100 (July 26, 2012);
·Acquired Dunford Corporation Sdn. Bhd., or Dunford, whose primary assets consist of two parcels of undeveloped land located in Selangor, Malaysia aggregating approximately 31 acres (October 17, 2012);
·Acquired a 15 story commercial building located at Geran 10010, Lot 238 Section 43, Town and District of Kuala Lumpur, Wilayah Persekutuan, Kuala Lumpur, Malaysia (December 2012); and
·Acquired a 12 story commercial building located at Megan Avenue 1, No. 189, Jalan Tun Razak, 50400 Kuala Lumpur, Malaysia (July 2013).
Fluctuating Revenues
In focusing on our real estate and oilseeds business segments, we significantly decreased our investment in our consumer product distribution operations and our software business activities. As a result, we did not generate any revenue from our consumer product business segment during the fiscal years ended October 31, 2013 and 2012 and do not expect this business segment to generate significant revenues in the near future.
We had also expected our software business segment to account for a decreasing share of our net revenue on a going forward basis. However, we find that our software revenue may fluctuate significantly depending upon the availability of immediate sales opportunities thus making it difficult for us to predict future software related revenue. For example, our sales consulting/website development activities did not generate any revenue for each of the three months ended July 31, 2013, and April 30, 2013, but accounted for approximately 96.4% of our net revenue for the three months ended January 31, 2013. Software revenue accounted for approximately 81.9%, 49.4% and 76.9% of our net revenue for the fiscal years ended October 31, 2013, 2012, and 2011 respectively.	
As we transition from an m-commerce to oilseeds and real estate company, we may continue to experience significant fluctuations in revenue which may cause our gross profit to fluctuate. Historically, we experienced higher profit margins with respect to software derived revenue and consulting revenue (arising from consultation to castor farmers) as compared to rental income revenue and oil palm plantation derived revenue. Accordingly, to the extent our revenue composition shifts from software or consulting services to rental income or palm oil plantation revenue, we expect our profit margins to also decrease.
Challenges From Our Oilseeds Operations
The oilseeds business is a highly regulated industry with prices subject to wide fluctuations due to factors beyond our control such as weather conditions, competition, global demand and government policies. Management has limited experience operating in this industry and may not be able to successfully navigate all industry specific factors in addition to any geopolitical factors in Malaysia, Thailand and the PRC. For example, we were forced to suspend our trial planting arrangement in Thailand as a result of unexpected changes in the local political climate. In addition, we have discovered that our castor business operates at a competitive disadvantage due to China’s tax policies, which favor local enterprises. Together with the soft pricing for castor seeds, our ability to effectively compete in the castor industry has been adversely affected. If we are unable to successfully compete by the end of calendar year 2013, there is a great likelihood that we will discontinue the distribution of castor seeds in China. If we are not able to successfully respond to any of these or other factors, our business operations and financial results may be adversely affected. There can be no assurance that we will be able to successfully operate a multi-national oilseeds business in conjunction with our other business segments given management’s limited experience.
Management is focused on the maintenance and operation of its oil palm plantation in Malaysia. Management believes that the value of its oil palm plantation has increased since its acquisition, and while it has not pursued any discussions or received any formal offers regarding the sale of its plantation, it may consider selling sales offers in the future if a sale would maximize return to its investors.
Challenges From Our Real Estate Operations
Commercial Buildings
We expect demand for commercial property to remain steady and positive for calendar 2014. As a result, we do not anticipate significant challenges in leasing out or 12 story and 15 story commercial buildings.
We generate rental income from our 12 story and 15 story commercial properties and anticipate generating income from the sale of developed properties. As October 31, 2013, 9 of the 12 stories of our 12 story building have been leased to tenants at market rates. Most of these tenants are parties to two-year leases. We expect to generate approximately $185,000 of gross rental income on an annualized basis from our 12 story building based upon full occupancy of our 12 story building at prevailing market rates.
On December 18, 2013, we leased the entirety of our 15 story commercial building to a tenant that intends to convert the building and operate it as a business hotel. As part of the lease transaction, we assigned to such tenant all of our rights and benefits as a landlord under a separate Rental Agreement previously made between us and a retailer located on the first floor of such building. The initial term of the lease is twenty (20) years, expiring November 30, 2033, with a one-time option to renew for an additional ten (10) year period. The monthly rental rate is RM550,000 (approximately US$175,543) for the first three years. Thereafter, the rental rate shall be increased to the then prevailing market rate or in increments of 5%-10% every three-year period, whichever is higher. We expect to generate approximately $2,284,000 in rental income from this tenant.
Residential Property Development
The Selangor state government has imposed a freeze on development approvals affecting the land on which our Shah Alam 2 Eco Residential Development project will be situated in connection with a legal dispute with a township developer. We have made an appeal to the state government to approve our development order based upon the fact that we are the rightful landowner and should not be affected by the legal dispute between the state government and the township developer. If the development order can be successfully secured in the first quarter of 2014, we hope to submit building plans in the first calendar quarter of 2014 and commence construction in the third calendar quarter of 2014. We hope to complete construction by the end of calendar 2019. We intend to commence sales activities in the third calendar quarter of 2014. There is no assurance that we will be able to successfully secure a development order by the first quarter of 2014 or at all. If we are unable to secure such an order, we will be unable to develop our Shah Alam 2 Eco Residential Project, which would materially and adversely affect our business plan, results of operations and financial condition.
We believe that we will require approximately $3.5 million to obtain the necessary permits and $3.6 million to commence the first of six phases of construction. We believe that we will require approximately $15 million in the aggregate to market, promote and complete construction of our Shah Alam 2 Eco Residential Development Project. We hope to finance the $15 million through a combination of loans, funds from ongoing building sales and operating capital.
We do not intend to commence development of our Bandar Sungai Long High Grade Villas Community project until we have successfully sold Phase 2 of the Shah Alam 2 Eco Residential Development project. If we are not able to successfully develop, market and sell our Shah Alam 2 Eco Residential Development project, we may not be able to complete all or any portion of our Bandar Sungai Long High Grade Villas Community project.
We believe that the outlook for residential properties will remain positive for the remainder of 2014 based upon Malaysia’s stable employment outlook, growth in household income, formation of new households, and increased demand for affordable residential property from first time home buyers. In addition to our specific challenge arising for the development order freeze imposed by the Selangor government, developers such as us are facing challenges of inconsistent supply and high cost of labor, increased costs of building materials (such as cement and steel bars) and general increased costs of doing business. Our market is also sensitive to changes in lending rates and lending requirements as many homebuyers rely on financing to make purchases. As a result, government or bank policies that result in increased interest rates and or stricter lending requirements may adversely affect the sales of our developed properties.
Approval to Initiate Uplisting Process
On December 12, 2011, our board of directors approved, authorized and directed our officers to initiate the process for listing shares of the Company’s common stock on one or more U.S. national securities exchanges including the NYSE Amex Equities Exchange. We have elected to delay uplisting efforts until the end of calendar year 2014 or 2015 to focus on implementing our business plan.
Results of Operations
As of October 31, 2013, we suffered from significant operating loss and working capital deficit of $1,887,783. Our auditors noted that the continuation of the Company as a going concern through October 31, 2014 is dependent upon improving the profitability and the continuing financial support from its stockholders. Management believes the existing shareholders will provide the additional cash to meet the Company’s obligations as they become due.
These factors raise substantial doubt about the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets and liabilities that may result in the Company not being able to continue as a going concern.
The following table sets forth certain operational data for the periods indicated:
Comparison of the fiscal years ended October 31, 2013 and October 31, 2012
Net Revenue. We generated net revenue of $1,955,282 and $3,046,342 for the fiscal years ended October 31, 2013 and 2012, respectively.
Software sales accounted for approximately 81.9% as compared to 49.4% of our net revenue for the fiscal years ended October 31, 2013 and 2012, respectively, with sales to related parties accounting for $0, or approximately 0%, and $1,820, or approximately 0.12%, of our software sales in fiscal years 2013 and 2012, respectively. We expect our software revenue to continue to fluctuate depending upon the availability of immediate sales opportunities.
Our oilseeds business accounted for approximately 11.3% of our net revenue for fiscal year ended October 31, 2013, compared to 50.6% for fiscal year ended October 31, 2012. The decrease in our oilseeds revenue is attributable to two factors. First, oilseeds revenue generated during the fiscal year October 31, 2012, was primarily derived from consulting services provided to castor farmers. We did not provide such consulting services during the fiscal year ended October 31, 2013, as a result of the competitive challenges we experienced in operating our castor business. Second, while we have increased the output of our oil palm plantation, we were not able to achieve the associated revenue increases due to the recent downturn in oil palm pricing. We have not yet resumed our distribution of castor seeds and are monitoring the market developments to determine whether to continue castor operations in China.
We did not derive any revenue from product sales in fiscal years ended October 31, 2013 and 2012. On a going forward basis, we expect to make product sales only as such opportunities may arise. Accordingly, we do not expect product sales to account for a significant portion of our net revenues.
Cost of Revenue. Cost of revenue as a percentage of revenue was 7.9% for the fiscal year ended October 31, 2013, with software sales and plantation sales accounting for approximately 19% and 81%, respectively. Cost of revenue as a percentage of revenue was 11% for the fiscal year ended October 31, 2012 with software sales and plantation sales accounting for approximately 10.45% and 89.55%, respectively. The decrease is primarily attributable to the decreased revenues generated by our oilseeds business segment. Cost of revenue in 2013 consisted primarily of software purchase costs, costs of labor that are directly attributable to the sale of software and costs related to the palm oil business such as rental of plantation land, material supplies and subcontracting costs incurred for planting, fertilizing and harvesting the palm oil tree. Shipping and handling costs associated with the distribution of fresh fruit bunches to the customers are also included in cost of revenues.
We expect our cost of revenue attributable to our oilseeds and real estate businesses to continue to increase and those attributable to our other segments to decrease as we shift our focus to our oilseeds and real estate businesses.
Gross Profit. We achieved a gross profit of $1,800,793 for the fiscal year ended October 31, 2013, as compared to $2,709,553 for the fiscal year ended October 31, 2012, with software sales, real estate rental income and plantation sales accounting for approximately 87.3%, 7.4% and 5.3%, respectively. The decrease in gross profit is attributable to two factors. First, oilseeds revenue generated during the fiscal year October 31, 2012, was primarily derived from consulting services provided to castor farmers. We did not provide such consulting services during the fiscal year ended October 31, 2013, as a result of the competitive challenges we experienced in operating our castor business. Second, while we have increased the output of our oil palm plantation, we were not able to achieve the associated revenue increases due to the recent downturn in oil palm pricing. We have not yet resumed our distribution of castor seeds and are monitoring the market developments to determine whether to continue castor operations in China.
We expect gross profit derived from our real estate business to gradually increase as we our commercial properties increase their occupancy rates and as we commence sales activities with respect to our developed properties. We expect gross profits attributable to our software business to fluctuate according to the availability of immediate sales opportunities. We do not expect our trading business segment to contribute significantly to our gross profit.
General and Administrative Expenses (“G&A”). We incurred G&A expenses of $1,990,168 for the fiscal year ended October 31, 2013, representing an increase of $462,250, as compared to $1,527,918 for the fiscal year ended October 31, 2012. The increase in G&A is primarily attributable to operating and maintenance costs incurred in connection with the 15 story commercial building and land under development, as well as a potential tax penalty of $50,000. We expect G&A expenses attributable to real estate to continue to increase as we begin development of our real estate with G&A attributable to software sales fluctuating in the near future.
We did not make any significant investments in our consumer goods business and did not generate sales in fiscal years ended October 31, 2013 and 2012. We expect to continue relying on the personal relationships of our executive officers and directors in generating sales on a going forward basis and do not expect our consumer goods business to incur significant G&A expenses.
As a general matter, we expect our G&A to increase in the foreseeable future as we continue reporting as a large accelerated filer and acquire real estate or other businesses and assets. G&A as a percentage of net revenue was approximately 101.78% for the fiscal year ended October 31, 2013.
Other Income, net. We incurred net other expenses of $1,290,120 for the fiscal year ended October 31, 2013, as compared to net other income of $811,252 for the fiscal year ended October 31, 2012. The increase is attributable primarily to a significant increase in interest expense associated with our mortgages of $980,778 and a realized loss from the sale of available-for-sale securities of $355,996 in fiscal year ended October 31, 2013, as compared to interest expense of $1,937 and realized gain from the sale of available-for-sale securities of $639,853 in fiscal year ended October 31, 2012.
Income Tax Expense. We recorded income tax expenses of $163,804 for the fiscal year ended October 31, 2013, as compared to $520,171 for the fiscal year ended October 31, 2012. The decrease is primarily attributable to the decrease in revenues. Tax expense as a percentage of income before income tax was approximately 26.1% for the fiscal year ended October 31, 2012. We recognized a loss before income taxes for the fiscal year ended October 31, 2013.
Comparison of the fiscal years ended October 31, 2012 and October 31, 2011
Net Revenue. We generated net revenue of $3,046,342 and $3,753,063 for the fiscal years ended October 31, 2012 and 2011, respectively.
Software sales accounted for approximately 49.4% as compared to 77% of our net revenue for the fiscal years ended October 31, 2012 and 2011, respectively, with sales to related parties accounting for $1,820, or approximately 0.12%, and $881,567, or approximately 31%, of our software sales in fiscal years 2012 and 2011, respectively. Our oilseeds business accounted for approximately 50.6% of our net revenue for fiscal year ended October 31, 2012, compared to 3% for fiscal year ended October 31, 2011. The decrease of software related revenue and the increase in oilseeds revenue is a direct result of our shift away from our software business to our oilseeds and real estate business segments.
We did not derive any revenue from product sales in fiscal year ended October 31, 2012. Revenue derived from product sales accounted for approximately 20% of our revenues for fiscal year ended October 31, 2011 and were generated from sales to Legend Venture Pte. Ltd., a related party located in Singapore. This decrease is attributable to our shift in focus away from our consumer product sales business segment.
Cost of Revenue. Our cost of revenue as a percentage of revenue was 11% for the fiscal year ended October 31, 2012 with software sales and plantation sales accounting for approximately 10.45% and 89.55%, respectively. Cost of revenue as a percentage of revenue was 22% for the fiscal year ended October 31, 2011, with software sales, product sales and plantation sales accounting for approximately 17.81%, 72.05% and 10.14%, respectively. The decrease is primarily attributable to the lower cost of revenue associated with the software and oilseeds derived revenue as compared to the cost of revenue associated with product sales. Cost of revenue in 2012 consisted primarily of software purchase costs, costs of labor that are directly attributable to the sale of software and costs related to the palm oil business such as rental of plantation land, material supplies and subcontracting costs incurred for planting, fertilizing and harvesting the palm oil tree. Shipping and handling costs associated with the distribution of fresh fruit bunches to the customers are also included in cost of revenues.
Gross Profit. We achieved a gross profit of $2,709,553 for the fiscal year ended October 31, 2012, as compared to $2,925,730 for the fiscal year ended October 31, 2011, with software sales and plantation sales accounting for approximately 54.27% and 45.73%, respectively. The decrease is attributable to our transition away from our software business to focus on our oilseeds and real estate businesses.
General and Administrative Expenses (“G&A”). We incurred G&A expenses of $1,527,918 for the fiscal year ended October 31, 2012, representing an increase of $778,626, as compared to $749,292 for the fiscal year ended October 31, 2011. The increase in G&A is primarily attributable to the commencement of our oilseeds business operations.
We did not make any significant investments in our consumer goods business and did not generate sales in fiscal year ended October 31, 2012. We expect to continue relying on the personal relationships of our executive officers and directors in generating sales on a going forward basis and do not expect our consumer goods business to incur significant G&A expenses.
As a general matter, we expect our G&A to increase in the foreseeable future as we continue reporting as a large accelerated filer and acquire real estate or other businesses and assets. G&A as a percentage of net revenue was approximately 50.16% for the fiscal year ended October 31, 2012.
Other Income, net. We incurred net other income of $811,252 for the fiscal year ended October 31, 2012, as compared to $24,359 for the fiscal year ended October 31, 2011. The increase is attributable primarily to stock dividend income of $177,400, realized gain from sale of available-for-sale securities of $639,853 and interest expense of $1,937 incurred in connection with financing the purchase of a motor vehicle on or about the commencement of our business operations.
Income Tax Expense. We recorded income tax expenses of $520,171 for the fiscal year ended October 31, 2012, as compared to $655,860 for the fiscal year ended October 31, 2011. The decrease is primarily attributable to the decrease in revenues resulting from our shift in focus away from software sales to focus on our oilseeds and real estate business operations. Tax expense as a percentage of income before income tax was approximately 26.1% for the fiscal year ended October 31, 2012, as compared to 29.8% for the fiscal year ended October 31, 2011.
Liquidity and Capital Resources
As of October 31, 2013, we had cash and cash equivalents of $659,647 and a net loss of $2,090,769. We consummated the purchase of a commercial building in July 31, 2013, financing the acquisition through a combination of cash and a bank loan.
As of October 31, 2012, we had cash and cash equivalents of $1,336,849, marketable available-for-sale securities of $6,473,773, net income of $1,472,716 and payment obligations of $27.6 million related to the purchase of two commercial buildings in Malaysia. We consummated the purchase of one of the commercial buildings in December 2012, financing the acquisition through a combination of cash and a bank loan.
Our ratio of current assets to current liabilities was 1:2.61 as of October 31, 2013 compared to 2.73:1 as of October 31, 2012.
As of October 31, 2011, we had cash and cash equivalents of $2,592,687 and net income of $1,544,937. Our ratio of current assets to current liabilities was 6.58:1 as of October 31, 2011.
We expect to incur significantly greater expenses in the near future, including the contractual obligations that we have assumed discussed below, to begin development activities. We also expect our general and administrative expenses to increase as we expand our finance and administrative staff, add infrastructure, and incur additional costs related to being a large accelerated filer, including directors’ and officers’ insurance and increased professional fees.
Our PRC Subsidiary
Max Trend WFOE, as a wholly foreign-owned enterprise in the PRC, is subject to PRC laws governing dividend distributions and foreign exchange control and administration which are more fully described in the section entitled “Government Regulation.” Max Trend WFOE may pay dividends only out of its accumulated profits as determined in accordance with PRC accounting standards and regulations. In addition, it is required to set aside at least 10% of its accumulated after-tax profits each year, if any, to fund certain statutory reserve funds, until the aggregate amount of such a fund reaches 50% of its respective registered capital. At its discretion, it may allocate a portion of its after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends.
As of October 31, 2013, the registered capital of Max Trend WFOE was approximately US$158,000, and it had retained earnings of approximately US$247,000. Our PRC subsidiary will be able to pay dividends to our offshore entities when it has generated accumulated profits and meet the requirements for statutory reserve funds.
As of October 31, 2013, the amount of cash held by our PRC subsidiary was $132,231, all of which is restricted , and the amount of net assets held by our PRC subsidiary was $426,531, of which approximately $384,000 is free of restriction and $42,531 is restricted.
As of October 31, 2012, the registered capital of Max Trend WFOE was approximately US$158,000 and the retained earnings was approximately US$761,000. As of October 31, 2012, the amount of cash held by our PRC subsidiary was $991,312, of which $831,000 is free of restriction and $160,312 is restricted . As of October 31, 2012, the amount of net assets held by our PRC subsidiary was $924,028, of which approximately $831,000 is free of restriction and $93,028 is restricted.
To date, we have not yet transferred any cash out of the PRC. We currently have no intention to pay dividends and expect to reinvest earnings in other business opportunities in China. We are seeking business opportunities in China but have not yet identified any such opportunities in China. If we elect to move our cash outside of the PRC, we will be subject to withholding taxes of approximately 5%.
The amount of cash and net assets located outside of PRC as of October 31, 2012 was $345,537 and $37,709,889, respectively
We have never paid dividends on our Common Stock. Our present policy is to apply cash to investments in product development, acquisitions or expansion; consequently, we do not expect to pay dividends on Common Stock in the foreseeable future.
Going Concern Uncertainties
Our auditor has noted that the continuation of the Company as a going concern will be dependent upon improving our profitability and the continuing financial support from our stockholders. Our sources of capital in the past have included the sale of equity securities, which include common and preferred stock sold in private transactions and public offerings, capital leases and long-term debt. In fiscal year 2012, we raised $30.4 million from sales of our securities to existing shareholders including $20,890,272 from Weng Kung Wong, our Chief Executive Officer. While we believe that the existing shareholders will continue to provide the additional cash to meet the Company’s obligations as they become due, there can be no assurance that we will be able to raise such additional capital resources on satisfactory terms. We believe that our current cash and other sources of liquidity discussed below are adequate to support operations for at least the next 12 months.
Net Cash Provided By Operating Activities.
For the fiscal year ended October 31, 2013, net cash used in operating activities was $345,243, which consisted primarily of advances from third parties of $622,381, depreciation of $545,388, impairment los on advances to suppliers of $441,953, realized loss from the sale of available-for-sale-securities of $355,996 and an increase in accrued liabilities and other payable of $512,869, offset by a net loss of $2,090,769 and an increase in advances to suppliers of $803,142.
For the fiscal year ended October 31, 2012, net cash provided by operating activities was $875,756, which consisted primarily of net income of $1,472,716, depreciation of $56,541, net loss on acquisition of $53,595, an decrease in deposits and other receivables of $9,498, and an increase in income tax payables of $154,923, offset by gain on disposal of plant and equipment of $1,437, realized gain from sale of available-for-sale securities of $639,853, an increase in accounts receivable of $35,191, a decrease in accounts payable of $3,900, an decrease in accrued liabilities and other payables of $191,136.
For the fiscal year ended October 31, 2011, net cash provided by operating activities was $2,256,822, which consisted primarily of net income of $1,544,937, depreciation of $38,036, shares issued to officers for service of $70,000, realized loss from sale of available-for-sale securities of $11,329, a decrease in accounts receivable of $79,507, an increase in accrued liabilities and other payables of $57,572 and an increase in income tax payables of $656,057, offset by stock dividend income of $37,660, an increase in deposits and other receivables of $54,180 and a decrease in accounts payable of $108,318.
As we shift away from our product sales businesses, we expect cash derived from this segment to decrease. We expect software-derived revenue to continue to fluctuate based upon the availability of immediate sales opportunities. We anticipate cash from our oilseeds operating activities to increase as we focus on our oilseeds operations. We expect rental income from our real estate operations to increase as we increase the occupancy rates of our commercial buildings, which will be offset by the increased expenses associated with developing our residential projects. We expect to continue to rely on cash generated through private placements of our securities, however, to finance our operations and future acquisitions.
Net Cash Used in Investing Activities.
For the fiscal year ended October 31, 2013, net cash used in investing activities was $21,893,841, which is primarily attributable to payments made in connection with the purchase of our commercial buildings and plantation of $28,124,383, offset by proceeds from the sale of marketable securities of $6,230,542.
For the fiscal year ended October 31, 2012, net cash used in investing activities was $33,710,175, which primarily attributable to purchase of marketable securities of $11,556,834, properties, plant and equipment purchases of $29,045,186, deposits on purchase of commercial buildings of $3,012,967, offset by proceeds from sale of marketable securities of $9,720,786 and acquisition of a subsidiary of $175,032.
For the fiscal year ended October 31, 2011, net cash used in investing activities was $4,964,998, which primarily attributable to purchase of marketable securities of $4,007,496, deposit payment on plantation purchase of $798,696 and plant and equipment purchases of $158,806.
Net Cash Provided By Financing Activities.
For the fiscal year ended October 31, 2013, net cash provided by financing activities was $21,535,798, consisting primarily of proceeds from bank loans of $16,226,585 and advances from a director of $5,667,510, offset by repayments of $6,225 on a finance lease and repayments of $352,072 on bank loans.
For the fiscal year ended October 31, 2012, net cash provided by financing activities was $31,942,366, consisting primarily of $30,391,100 in sale of common stock to various investors, advances from a director of $1,597,746 offset by repayments of $8,263 on a finance lease and advance to a related party of $38,217.
For the fiscal year ended October 31, 2011, net cash provided by financing activities was $4,785,361, consisting primarily of $4,800,000 in sale of common stock to various investors, offset by repayments of $8,570 on a finance lease and repayment of $6,069 to Mr. Wong, our Chief Executive Officer and director.
Off-Balance Sheet Arrangements
We have no outstanding off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts.
Contractual Obligations and Commercial Commitments
We had the following contractual obligations and commercial commitments as of October 31, 2013:
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operations. Critical accounting policies are those that are most important to the presentation of our financial condition and results of operations and require management's subjective or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management's current judgments. We believe the following accounting policies are critical in the preparation of our financial statements.
lAccounts receivable
Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and determined based on managements’ assessment of known requirements, aging of receivables, payment history, the customer’s current credit worthiness and the economic environment. The Company will consider the allowance for doubtful accounts for any estimated losses resulting from the inability of its customers to make required payments. For the receivables that are past due or not being paid according to payment terms, the appropriate actions are taken to exhaust all means of collection, including seeking legal resolution in a court of law. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers.
Based upon the aforementioned criteria, the Company wrote off $5,517 accounts receivable on uncollectible rental receivable for the year ended October 31, 2013.
lAdvances to suppliers
The Company generally makes advanced payments to suppliers for the purchase of its castor oil seeding in the normal course of business. Advances to suppliers are recorded when payment is made by the Company and relieved against inventory when goods are received. The advance payments to suppliers may include provisions that set the purchase price and delivery date of raw materials. Advances to suppliers are interest free and unsecured.
To date, all castor oil seeding relating to these advances have not delivered and the Company has considered for any estimated losses resulting from such non-delivery. The Company will take further actions and exhaust all means of collection of such advances, including seeking legal resolution in a court of law. The Company recognized $441,953 impairment loss on such advances for the year ended October 31, 2013. At October 31, 2013 and 2012, the allowance for doubtful accounts totaled $441,953 and $0, respectively.
lProperties, plant and equipment
Properties and plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line basis over the following expected useful lives from the date on which they become fully operational:
Categories
Location of properties
Expected useful life
Freehold plantation land
Palm oil plantation in Malaysia
Indefinite, as per land titles
Leasehold land under development
Leasehold land in Puncak Alam, Malaysia
Remaining lease life of 88 years, as per land titles
Freehold land under development
Freehold land in Sungai Long, Cheras, Selangor, Malaysia
Indefinite, as per land titles
Freehold land and land improvement for rental purpose commercial building
Land portion of 15 story buildings “Menara CMY” in Kuala Lumpar, Malaysia
Indefinite, as per property titles
Building structure and improvements
Building structure of commercial buildings in Kuala Lumpar, Malaysia, including: 12 story building “Megan Avenue” and 15 story building “Menara CMY”
33 years
Office furniture and equipment
3-10 years
Motor vehicle
5 years
Expenditure for maintenance and repairs is expensed as incurred. The gain or loss on the disposal of property, plant and equipment is the difference between the net sales proceeds and the carrying amount of the relevant assets and is recognized in the statement of operations.
Long-lived assets primarily include freehold plantation land, leasehold land held for development, freehold land and land improvement for rental purpose and building structure and improvements. In accordance with the provision of ASC Topic 360, “Impairment or Disposal of Long-Lived Assets”, the Company generally conducts its annual impairment evaluation to its long-lived assets, usually in the fourth quarter of each year, or more frequently if indicators of impairment exist, such as a significant sustained change in the business climate. The recoverability of long-lived assets is measured at the reporting unit level. If the total of the expected undiscounted future net cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying amount of the asset. There has been no impairment charge for the years presented.
The Company has separately identified the portion of freehold land and building structure, in which freehold land is not subject to amortization and buildings are to be amortized over 50 years on a straight-line method, based on applicable local laws and practice.
lRevenue recognition
The Company recognizes its revenue in accordance with ASC 985-20 with respect to revenue generated in connection with software sales and ASC Topic 605, “Revenue Recognition”, upon the delivery of its plantation products when: (1) title and risk of loss are transferred; (2) persuasive evidence of an arrangement exists; (3) there are no continuing obligations to the customer; and (4) the collection of related accounts receivable is probable. The Company’s sale arrangements do not contain general rights of return.
(a)	Software sales
The Company generally sells the software products in an arrangement that is bundled with maintenance and support service and/or website development service, based upon the customers’ specification or modification.
The Company adopts ASC 985-20 and allocates the total arrangement fee among each element based on vendor-specific objective evidence of the relative fair value of each of the elements. The Company limits its assessment of fair value of each element to the price charged when the same element is sold separately. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue, assuming collection is probable. For the billed software product sales, the revenue from the undelivered element is included in deferred revenue and amortized ratably to revenue over its contractual term, typically one year.
Revenues from the sale of software products are recognized and completely earned upon shipment or electronic delivery of the product provided that persuasive evidence of an arrangement exists, collection is probable, payment terms are fixed and determinable and no significant obligations remain.
Revenues from the provision of website development service including website design and development are recognized upon the ownership and operating rights of website domain are transferred to the customers.
Revenues from the provision of maintenance and support service are recognized when service rendered, which consist of technical support and software upgrades and enhancements. The Company generally offers maintenance and support service to its customers for a period of twelve months, free of charge or at a monthly fixed fee. Amounts invoiced or collected in advance from the customers of delivering maintenance and support service is recorded as deferred revenue. Revenue is recognized when the related service is rendered.
(b)	Luxury consumer products
The Company earns the revenue from trading of luxury consumer products. Revenue is recognized when title passes to the customer, which is generally when the product is shipped and delivered to the customers, assuming no significant the Company’s obligations remain and the collection of relevant receivables is probable.
(c)	Plantation sales
The Company offers two types of plantation products comprising of palm oil products and castor products.
Revenue from the sale of palm oil product is recognized upon confirmation of the weight of fresh fruit bunches and shipment to the customer, when there is persuasive evidence of an arrangement, delivery has occurred and risk of loss has passed, the sales price is fixed or determinable at the date of sale, and collectibility is reasonably assured.
Revenue from castor products includes sale of seeding and rendering of technical know-how under a bundled sales arrangement. The Company adopts ASC 605-25, “Multiple-Element Arrangements” and recognizes revenue as services are performed when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service offering has been delivered to the client; (3) the collection of fees is probable; and (4) the amount of fees to be paid by the client is fixed or determinable.
A bundled sale arrangement involves multiple deliverables provided by the Company, where bundled service deliverables are accounted for in accordance with ASC 605-25.
The Company’s multi-element arrangements generally include two deliverables. The first deliverable is castor oilseeds delivered at the time of sale. The second deliverable is rendering of technical know-how service to plant the castor oilseeds when the principal terms of the service agreement are fulfilled and the certificate of satisfaction is confirmed by the customers.
The Company uses a hierarchy to determine the allocation of revenues to the deliverables. The hierarchy is as follows: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”), and (iii) best estimate of the selling price (“BESP”).
(i) VSOE generally exists only when a company sells the deliverable separately and is the price actually charged by the Company for that deliverable. Generally the Company does not sell the deliverables separately and, as such, does not have VSOE.
(ii) TPE can be substantiated by determining the price that other parties sell similar or substantially similar offerings. The Company does not believe that there is accessible TPE evidence for similar deliverables.
(iii) BESP reflects the Company’s best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis. The Company believes that BESP is the most appropriate methodology for determining the allocation of revenue among the multiple elements.
The Company has allocated revenues between these two deliverables using the relative selling price method which is based on the estimated selling price for all deliverables. Revenues allocated to the delivered castor oilseeds and are recognized at the time of sale provided the other conditions for recognition of revenues have been met. Revenues allocated to the rendering of technical know-how service are deferred and recognized on a straight-line basis over the estimated life of the service, which currently is 6-12 months.
(d)	Rental income
The Company generally leases the units under operating leases with terms of two years or less. However, the Company expects to sign a ten year lease covering the majority of its 15 story building in the next twelve months. For the year ended October 31, 2013, we have recorded $132,760 in lease revenue, based upon its annual rental over the life of the lease under operating lease, using the straight-line method in accordance with ASC Topic 970-605, “Real Estate - General - Revenue Recognition” (“ASC Topic 970-605”).
As of October 31, 2013, the commercial buildings for lease are as follows:
Name of Commercial building
Number of units
(by floor)
Footage area
(square feet)
Vacancy percentage
Megan Avenue 19,987 33%
Menara CMY 91,848 93%
We expect to record $320,336 in annual lease revenue under the operating lease arrangements in the next twelve months, through October 31, 2014.
The Company leases store location and office spaces to the tenants under operating lease arrangements. The Company receives rental income from the real estates it owns for a stated period of times. Rental income is recognized over the life of the operating lease agreement as it is earned in the period under ASC Topic 970-605. The typical leases contain initial terms of two years with renewal options and do not contain escalating rent amounts. Rent concessions are recognized as an offset to revenues collected over the term of the underlying lease.
The Company also records operating costs directly attributable to the leasing properties, such as real estate taxes, depreciation of the leased properties and property management fees, which are charged to expense when incurred.
For leases classified as operating, the Company’s lessee records rent expense on a straight-line basis over the lesser of the lease term, including renewal options, taking into consideration of rent holidays or any rent concessions.
lCost of revenues
Cost of revenue on software sales primarily includes the purchase cost of software products and the labor cost incurred in the modifications, customization and enhancement of software products, the development of websites and maintenance and support services. All costs are expensed off when the software products and its related website domain are transferred to the customer.
Cost of revenue on sales of luxury consumer products primarily consists of the purchase cost of luxury consumer products.
Cost of revenue on plantation sales includes rental on plantation land, material supplies and subcontracting costs incurred for planting, fertilizing and harvesting the palm oil tree. Shipping and handling costs associated with the distribution of fresh fruit bunches to the customers are also included in cost of revenues.
Rental expenses shown on the accompanying statements of operations include costs associated with on-site and property management personnel, repairs and maintenance, property insurance, marketing, landscaping and other on-site and related administrative costs. Utility expenses are paid directly by tenants.
lComprehensive income
ASC Topic 220, “Comprehensive Income” establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income as defined includes all changes in equity during a period from non-owner sources. Accumulated comprehensive income, as presented in the accompanying statements of stockholders’ equity consists of changes in unrealized gains and losses on foreign currency translation. This comprehensive income is not included in the computation of income tax expense or benefit.
lIncome taxes
Income taxes are determined in accordance with the provisions of ASC Topic 740, “Income Taxes” (“ASC Topic 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.
The Company conducts major businesses in Malaysia and the PRC and is subject to tax in its own jurisdiction. As a result of its business activities, the Company will file separate tax returns that are subject to examination by the local and foreign tax authorities.
lForeign currencies translation
Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the statement of operations.
The reporting currency of the Company is the United States Dollars (“US$”) and the accompanying financial statements have been expressed in US$. In addition, the Company maintains its books and record in a local currency, Malaysian Ringgit (“MYR”), Hong Kong Dollars (“HK$”) and Renminbi Yuan (“RMB”), which is functional currency as being the primary currency of the economic environment in which the entity operates.
In general, for consolidation purposes, assets and liabilities of its subsidiaries whose functional currency is not US$ are translated into US$, in accordance with ASC Topic 830-30, “Translation of Financial Statement”, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiary are recorded as a separate component of accumulated other comprehensive income within the statement of stockholders’ equity. The gains and losses are recorded as a separate component of accumulated other comprehensive income within the statement of stockholders’ equity.
Translation of amounts from the local currency of the Company into US$1 has been made at the following exchange rates for the respective years:
lRelated parties
Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Companies are also considered to be related if they are subject to common control or common significant influence.
lSegment reporting
ASC Topic 280, “Segment Reporting” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about geographical areas, business segments and major customers in financial statements. The Company operates in four reportable operating segments in Malaysia and China.
lFair value of financial instruments
The carrying value of the Company’s financial instruments (excluding obligation under finance lease): cash and cash equivalents, accounts receivable, deposits and other receivables, deferred revenue, income tax payable, amount due to a director, accrued liabilities and other payables approximate at their fair values because of the short-term nature of these financial instruments.
Management believes, based on the current market prices or interest rates for similar debt instruments, the fair value of its obligation under finance lease approximates the carrying amount.
The Company also follows the guidance of the ASC Topic 820-10, “Fair Value Measurements and Disclosures” ("ASC 820-10"), with respect to financial assets and liabilities that are measured at fair value. ASC 820-10 establishes a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value as follows:
oo Level 1 : Observable inputs such as quoted prices in active markets;
oo Level 2 : Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
oo Level 3 : Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions
The following table summarizes information on the fair value measurement of the Company’s assets as of October 31, 2013 and 2012 grouped by the categories described above:
Marketable securities available-for-sale were valued at the closing prices quoted on the Bursa Malaysia Securities Berhad Main Market which the security is traded.
lReclassifications
Certain comparative figures have been reclassified to conform to the current period financial statement presentation
Recent Accounting Pronouncements
The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and do not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.
ITEM 7A.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
Foreign Exchange Risk
While our reporting currency is the US dollar, almost all of our consolidated revenues and consolidated costs and expenses are denominated in MYR and RMB. All of our assets are denominated in MYR except for some cash and cash equivalents and accounts receivables. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate among US dollar, MYR and RMB. If the MYR/RMB depreciates against the US dollar, the value of our MYR/RMB revenues, earnings and assets as expressed in our US dollar financial statements will decline. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.
Commodity price
Our primary market risk exposure results from the price we receive for our palm oil product and oilseeds. We do not currently engage in any commodity hedging activities, although we may do so in the future. Realized commodity pricing for our operation is primarily driven by the prevailing worldwide price for palm oil product and oilseeds. Pricing for palm oil product and oilseeds has been volatile and unpredictable in recent years, and we expect this volatility to continue in the foreseeable future. The prices we receive for operation depend on many factors outside of our control, including volatility in the differences between product prices at sales points and the applicable commodity index price.
Malaysian real estate market risk
Our real estate business may be affected by market conditions and economic challenges experienced by the economy as a whole in Malaysia, conditions in the credit markets or by local economic conditions in the markets in which its properties are located. Such conditions may impact our results of operations, financial condition or ability to expand its operations.
Market risk related to marketable securities
We are also exposed to the risk of changes in the value of financial instruments, caused by fluctuations in equity prices related to marketable securities. Changes in these factors could cause fluctuations in earnings and cash flows.
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Prime Global Capital Group Incorporated:
We have audited Prime Global Capital Group Incorporated’s internal control over financial reporting as of October 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Prime Global Capital Group Incorporated’s management is responsible for maintaining effective internal control over financial reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Prime Global Capital Group Incorporation maintained, in all material respects, effective internal control over financial reporting as of October 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet and the related statement of income, stockholder equity and comprehensive income, and cash flows of Prime Global Capital Group Incorporated, and our report dated December 23, 2013 expressed an unqualified opinion.
/s/ B F Borgers CPA PC
B F Borgers CPA PC
Denver, CO
December 23, 2013
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Prime Global Capital Group Incorporated:
We have audited Prime Global Capital Group Incorporated’s internal control over financial reporting as of October 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Prime Global Capital Group Incorporated’s management is responsible for maintaining effective internal control over financial reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Prime Global Capital Group Incorporation maintained, in all material respects, effective internal control over financial reporting as of October 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet and the related statement of income, stockholder equity and comprehensive income, and cash flows of Prime Global Capital Group Incorporated, and our report dated December 31, 2012 expressed an unqualified opinion.
/s/ Borgers & Cutler CPA’s PLLC
Borgers & Cutler CPA’s PLLC
Denver, CO
December 31, 2012
PRIME GLOBAL CAPITAL GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Currency expressed in United States Dollars (“US$”), except for number of shares)
See accompanying notes to consolidated financial statements.
PRIME GLOBAL CAPITAL GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Currency expressed in United States Dollars (“US$”), except for number of shares)
See accompanying notes to consolidated financial statements.
PRIME GLOBAL CAPITAL GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Currency expressed in United States Dollars (“US$”))
See accompanying notes to consolidated financial statements.
PRIME GLOBAL CAPITAL GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Currency expressed in United States Dollars (“US$”), except for number of shares)
See accompanying notes to consolidated financial statements.
PRIME GLOBAL CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”), except for number of shares)
1.ORGANIZATION AND BUSINESS BACKGROUND
Prime Global Capital Group Incorporated (formerly Home Touch Holding Company) (“PGCG” or “the Company”) was incorporated in the State of Nevada on January 26, 2009. On January 25, 2011, the Company changed its current name to Prime Global Capital Group Incorporated.
Currently, the Company, through its subsidiaries, is principally engaged in the operation of a palm oil plantation, trading of castor oil seeding, provision of IT consulting and programming services, and acquisition and development of commercial and residential real estate properties in Malaysia.
Corporate history
On July 15, 2010, the Company approved the 1 for 20 reverse split of its common stock. As a result, the total number of issued and outstanding shares was reduced from 40,000,000 to 2,000,003 shares and par value of its common stock was unchanged at $0.001. This is inclusive of issuance of 3 shares of common stocks as fractional shares. All common stock and per share data for all periods presented in these consolidated financial statements have been restated to give effect to the reverse stock split.
On September 21, 2010, the Company consummated the sale to certain accredited investors of an aggregate of 1,500,000 shares of its common stock, par value $0.001, at a per share price of $0.10, or $150,000 in the aggregate, pursuant to certain subscription agreements.
On November 15, 2010, the Company consummated the sale to 18 accredited investors of an aggregate of 80,000,000 shares of its common stock, par value $0.001, at a per share price of $0.01, or $800,000 in the aggregate, pursuant to certain subscription agreements.
Concurrently, on November 15, 2010, the Company appointed three new directors, Mr. Weng Kung Wong, Mr. Liong Tat Teh and Ms. Sek Fong Wong to the Company’s Board of Directors. Furthermore, all of the Company’s former officers resigned from their positions and Mr. Weng Kung Wong was appointed as the new chief executive officer, Mr. Teh Liong Tat as the new chief financial officer.
On December 6, 2010, the Company acquired Union Hub Technology Sdn. Bhd. (“UHT”), a company incorporated under the laws of Malaysia, through a share exchange transaction, or the Share Exchange. Pursuant to the Share Exchange, the Company acquired from the UHT shareholders all of the issued and outstanding shares of UHT in exchange for the issuance of 16,500,000 shares of its common stock. As a result of the Share Exchange, UHT became a wholly owned subsidiary of the Company.
Concurrently, on December 6, 2010, the Company entered into and executed agreement to sell its wholly-owned subsidiary, Home Touch Limited (a corporation organized under the laws of the Hong Kong Special Administrative Region), to the former founders and directors for $20,000. Upon the completion of this sale, Mr. Ng and Ms. Yau, the former founders and executive officers, were resigned from their positions on the board of directors.
The share exchange transaction has been accounted for as a reverse acquisition and recapitalization of the Company whereby UHT is deemed to be the accounting acquirer (legal acquiree) and the Company to be the accounting acquiree (legal acquirer).
On January 25, 2011, the Company changed its fiscal year from March 31 to October 31 and increased its authorized capital to 1,000,000,000 shares of common stock and 100,000,000 shares of preferred stock.
On February 8, 2011, the Company consummated the sale to certain accredited investors of an aggregate of 400,000,000 shares of its common stock, par value $0.001, at a per share price of $0.01, or $4,000,000 in the aggregate, pursuant to certain subscription agreements.
On September 7, 2011, the Company issued 110,610 shares of restricted common stock to the executive officers as services compensation equal to $70,000 at the market price of $1.58 per share.
PRIME GLOBAL CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”), except for number of shares)
On December 8, 2011, the Company entered into a Memorandum of Understanding with Mr. Wichai Samphantharat, Chief District Officer of Srira Cha province, Thailand, pursuant to which the Srira Cha province government agreed to allocate to the Company 20 Rai (approximately 8 acres) of land for trial planting of castor seeds. The Company shall provide castor seeds for cultivation by third party farmers and station a minimum of two personnel at the trial planting site at its expense. The Company intends to purchase the castor beans cultivated at the trial planting site.
On December 12, 2011, the board of directors of the Company approved the initiation of the process for listing shares of the Company’s common stock on one or more U.S. national securities exchanges including the NYSE Amex Equities Exchange.
On February 16, 2012, the Company consummated the sale to Mr. Weng Kung Wong, the director and chief executive officer of the Company, of an aggregate of 667,780 shares of its common stock with par value of $0.001, at the market price of $2.995 per share, or $2,000,000 in the aggregate.
On March 6, 2012, the Company consummated the sale to Mr. Weng Kung Wong, the director and chief executive officer of the Company, and an existing shareholder of the Company, of an aggregate of 1,076,000 shares of its common stock with par value of $0.001, at the market price of $2.984 per share, or approximately $3,210,784 in the aggregate.
On April 3, 2012, the Company consummated the sale to three accredited shareholders of the Company, of an aggregate of 628,000 shares of its common stock with par value of $0.001, at the market price of $2.887 per share, or $1,813,036 in the aggregate.
On May 2, 2012, the Company consummated the sale to Mr. Weng Kung Wong, the director and chief executive officer of the Company, of an aggregate of 540,000 shares of its common stock with par value of $0.001, at the market price of $2.812 per share, or $1,518,480 in the aggregate.
On June 26, 2012, the Company consummated the sale to three accredited shareholders of the Company, of an aggregate of 760,000 shares of its common stock with par value of $0.001, at the market price of $2.7 per share, or $2,052,000 in the aggregate.
On July 16, 2012, the Company consummated the sale to three accredited shareholders of the Company, of an aggregate of 920,000 shares of its common stock with par value of $0.001, at the market price of $2 per share, or $1,840,000 in the aggregate.
On August 6, 2012, the Company consummated the sale to three accredited shareholders of the Company of an aggregate of 2,988,000 shares of its common stock with par value of $0.001, at a price of $2 per share, or $5,976,000 in the aggregate. The Company has received the net proceeds from the sale of the shares and will use it for general corporate purposes. Mr. Weng Kung Wong, the director and chief executive officer of the Company, participated in the sale and purchased 2,038,000 of the 2,988,000 shares of common stock sold on the same terms and conditions as the other investors.
On September 24, 2012, the Company consummated the sale to three accredited shareholders of the Company of an aggregate of 2,652,000 shares of our common stock, par value $0.001, at a price of $2.40, or $6,364,800 in the aggregate. The Company has received the net proceeds from the sale of the shares and will use to fund the real estate acquisitions and for general corporate purposes. Mr. Weng Kung Wong, the director and chief executive officer of the Company, participated in the sale and purchased 2,260,000 of the 2,652,000 shares of common stock sold on the same terms and conditions as the other investors.
On October 18, 2012, the Company consummated the sale to two accredited shareholders of the Company of an aggregate of 2,340,000 shares of our common stock, par value $0.001, at a price of $2.40, or $5,616,000 in the aggregate. The Company has received the net proceeds from the sale of the shares and will use to fund the real estate acquisitions and for general corporate purposes. Mr. Weng Kung Wong, the director and chief executive officer of the Company, participated in the sale and purchased 1,860,000 of the 2,340,000 shares of common stock sold on the same terms and conditions as the other investors.
PRIME GLOBAL CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”), except for number of shares)
Summary of the Company’s subsidiaries
Name of entities
Place of incorporation
Date of incorporation
Issued capital
Nature of business
1.
Union Hub Technology Sdn. Bhd. (“UHT”)
Malaysia
February 22, 2008
1,000,000 issued shares of ordinary shares of MYR 1 each
Provision of IT consulting and programming services and distributing consumer products
2.
Power Green Investments Limited (“PGIL”)
British Virgin Islands
July 13, 2011
1 issued share of US$ 1 each
Inactive operation
3.
PGCG Properties Investment Limited (“PPIL”)
British Virgin Islands
September 1, 2011
1 issued share of US$ 1 each
Inactive operation
4.
Virtual Setup Sdn. Bhd. (“VSSB”)
Malaysia
July 17, 2010
2 issued shares of ordinary shares of MYR 1 each
Operation of Oil Palm plantation
5.
PGCG Assets Holdings Sdn. Bhd. (“PGCG Assets”)
Malaysia
March 21, 2012
1,000,000 issued shares of ordinary shares of MYR 1 each
Investment in land & buildings
6.
PGCG Development Sdn. Bhd. (“PGCG Development”)
Malaysia
March 21, 2012
2 issued shares of ordinary shares of MYR 1 each
Inactive operation
7.
PGCG Plantations Sdn. Bhd. (“PGCG Plantation”)
Malaysia
October 4, 2011
2 issued shares of ordinary shares of MYR 1 each
Holding company of VSSB
8.
Max Trend International Limited (“Max Trend”)
Hong Kong
August 19, 2010
2 issued shares of ordinary shares of HK$ 1 each
Holding company of Max Trend WFOE
9.
Shenzhen Max Trend Green Energy Company Limited (Max Trend WOFE) (“SMTG”)
The People’s republic of china (“PRC”), Shenzhen
July 7, 2011
RMB 1,000,000
Castor cultivation, advisory services, and trading
10.
Dunford Corporation Sdn. Bhd
Malaysia
October 4, 1990
242,000 issued shares of ordinary shares of MYR 1 each
Property holding land
11.
Impiana Maksima Sdn. Bhd.
Malaysia
March 15, 2013
2 issued shares of ordinary shares of MYR 1 each
Property development
12.
PGCG Constructions Sdn. Bhd.
Malaysia
April 16, 2013
2 issued shares of ordinary shares of MYR 1 each
Construction of properties
PRIME GLOBAL CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”), except for number of shares)
PGCG and its subsidiaries are hereinafter referred to as (the “Company”).
2.GOING CONCERN UNCERTAINTIES
The accompanying consolidated financial statements have been prepared using the going concern basis of accounting, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
As of October 31, 2013, the Company suffered from significant operating loss and working capital deficit of $1,887,783. The continuation of the Company as a going concern through October 31, 2014 is dependent upon improving the profitability and the continuing financial support from its stockholders. Management believes the existing shareholders will provide the additional cash to meet the Company’s obligations as they become due.
These factors raise substantial doubt about the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets and liabilities that may result in the Company not being able to continue as a going concern.
3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
lBasis of presentation
These accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”).
lUse of estimates
In preparing these consolidated financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the years reported. Actual results may differ from these estimates.
lBasis of consolidation
The consolidated financial statements include the accounts of PGCG and its subsidiaries. All significant inter-company balances and transactions between the Company and its subsidiaries have been eliminated upon consolidation.
lAcquisition loss
Acquisition loss represents the deficit from the calculation based on assumed net liabilities and the purchase price.
At the date of acquisition, the Company has recognized a net loss on the acquisition of Max Trend.
lCash and cash equivalents
Cash and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less as of the purchase date of such investments.
PRIME GLOBAL CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”), except for number of shares)
As of October 31, 2013, the amount of cash held by our PRC subsidiary in China was $132,231, of which $0 is free of restriction and $132,231 is restricted.
As of October 31, 2012, the amount of cash held by our PRC subsidiary in China was $991,312, of which $831,000 is free of restriction and $160,312 is restricted.
lMarketable securities, available-for-sale
These marketable securities are classified as available-for-sale and are recorded at their fair market values with the corresponding unrealized holding gains or losses, recorded as a separate component of other comprehensive income within stockholders’ equity. The fair value of marketable securities is determined based on quoted market prices at the balance sheet dates. Realized gains and losses are determined by the difference between historical purchase price and gross proceeds received when the marketable securities are sold.
The Company uses quoted prices in active markets for identical assets (consistent with the Level 1 definition in the fair value hierarchy) to measure the fair value of its investments on a recurring basis pursuant to the ASC Topic 820.
lAccounts receivable
Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and determined based on managements’ assessment of known requirements, aging of receivables, payment history, the customer’s current credit worthiness and the economic environment. The Company will consider the allowance for doubtful accounts for any estimated losses resulting from the inability of its customers to make required payments. For the receivables that are past due or not being paid according to payment terms, the appropriate actions are taken to exhaust all means of collection, including seeking legal resolution in a court of law. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers.
Based upon the aforementioned criteria, the Company wrote off $5,517 accounts receivable on uncollectible rental receivable for the year ended October 31, 2013.
lAdvances to suppliers
The Company generally makes advanced payments to suppliers for the purchase of its castor oil seeding in the normal course of business. Advances to suppliers are recorded when payment is made by the Company and relieved against inventory when goods are received. The advance payments to suppliers may include provisions that set the purchase price and delivery date of raw materials. Advances to suppliers are interest free and unsecured.
To date, all castor oil seeding relating to these advances have not delivered and the Company has considered for any estimated losses resulting from such non-delivery. The Company will take further actions and exhaust all means of collection of such advances, including seeking legal resolution in a court of law. The Company recognized $441,953 impairment loss on such advances for the year ended October 31, 2013. At October 31, 2013 and 2012, the allowance for doubtful accounts totaled $441,953 and $0, respectively.
PRIME GLOBAL CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”), except for number of shares)
lProperties, plant and equipment
Properties and plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line basis over the following expected useful lives from the date on which they become fully operational:
Categories
Location of properties
Expected useful life
Freehold plantation land
Palm oil plantation in Malaysia
Indefinite, as per land titles
Leasehold land under development
Leasehold land in Puncak Alam, Malaysia
Remaining lease life of 88 years, as per land titles
Freehold land under development
Freehold land in Sungai Long, Cheras, Selangor, Malaysia
Indefinite, as per land titles
Freehold land and land improvement for rental purpose commercial building
Land portion of 15 story buildings “Menara CMY” in Kuala Lumpar, Malaysia
Indefinite, as per property titles
Building structure and improvements
Building structure of commercial buildings in Kuala Lumpar, Malaysia, including: 12 story building “Megan Avenue” and 15 story building “Menara CMY”
33 years
Office furniture and equipment
3-10 years
Motor vehicle
5 years
Expenditure for maintenance and repairs is expensed as incurred. The gain or loss on the disposal of property, plant and equipment is the difference between the net sales proceeds and the carrying amount of the relevant assets and is recognized in the statement of operations.
Long-lived assets primarily include freehold plantation land, leasehold land held for development, freehold land and land improvement for rental purpose and building structure and improvements. In accordance with the provision of ASC Topic 360, “Impairment or Disposal of Long-Lived Assets”, the Company generally conducts its annual impairment evaluation to its long-lived assets, usually in the fourth quarter of each year, or more frequently if indicators of impairment exist, such as a significant sustained change in the business climate. The recoverability of long-lived assets is measured at the reporting unit level. If the total of the expected undiscounted future net cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying amount of the asset. There has been no impairment charge for the years presented.
The Company has separately identified the portion of freehold land and building structure, in which freehold land is not subject to amortization and buildings are to be amortized over 50 years on a straight-line method, based on applicable local laws and practice.
lFinance leases
Leases that transfer substantially all the rewards and risks of ownership to the lessee, other than legal title, are accounted for as finance leases. Substantially all of the risks or benefits of ownership are deemed to have been transferred if any one of the four criteria is met: (i) transfer of ownership to the lessee at the end of the lease term, (ii) the lease containing a bargain purchase option, (iii) the lease term exceeding 75% of the estimated economic life of the leased asset, (iv) the present value of the minimum lease payments exceeding 90% of the fair value. At the inception of a finance lease, the Company as the lessee records an asset and an obligation at an amount equal to the present value of the minimum lease payments. The leased asset is amortized over the shorter of the lease term or its estimated useful life if title does not transfer to the Company, while the leased asset is depreciated in accordance with the Company’s depreciation policy if the title is to eventually transfer to the Company. The periodic rent payments made during the lease term are allocated between a reduction in the obligation and interest element using the effective interest method in accordance with the provisions of ASC Topic 835-30, “Imputation of Interest”.
lRevenue recognition
The Company recognizes its revenue in accordance with ASC 985-20 with respect to revenue generated in connection with software sales and ASC Topic 605, “Revenue Recognition”, upon the delivery of its plantation products when: (1) title and risk of loss are transferred; (2) persuasive evidence of an arrangement exists; (3) there are no continuing obligations to the customer; and (4) the collection of related accounts receivable is probable. The Company’s sale arrangements do not contain general rights of return.
PRIME GLOBAL CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(a)	Software sales
The Company generally sells the software products in an arrangement that is bundled with maintenance and support service and/or website development service, based upon the customers’ specification or modification.
The Company adopts ASC 985-20 and allocates the total arrangement fee among each element based on vendor-specific objective evidence of the relative fair value of each of the elements. The Company limits its assessment of fair value of each element to the price charged when the same element is sold separately. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue, assuming collection is probable. For the billed software product sales, the revenue from the undelivered element is included in deferred revenue and amortized ratably to revenue over its contractual term, typically one year.
Revenues from the sale of software products are recognized and completely earned upon shipment or electronic delivery of the product provided that persuasive evidence of an arrangement exists, collection is probable, payment terms are fixed and determinable and no significant obligations remain.
Revenues from the provision of website development service including website design and development are recognized upon the ownership and operating rights of website domain are transferred to the customers.
Revenues from the provision of maintenance and support service are recognized when service rendered, which consist of technical support and software upgrades and enhancements. The Company generally offers maintenance and support service to its customers for a period of twelve months, free of charge or at a monthly fixed fee. Amounts invoiced or collected in advance from the customers of delivering maintenance and support service is recorded as deferred revenue. Revenue is recognized when the related service is rendered.
(b)	Luxury consumer products
The Company earns the revenue from trading of luxury consumer products. Revenue is recognized when title passes to the customer, which is generally when the product is shipped and delivered to the customers, assuming no significant the Company’s obligations remain and the collection of relevant receivables is probable.
(c)	Plantation sales
The Company offers two types of plantation products comprising of palm oil products and castor products.
Revenue from the sale of palm oil product is recognized upon confirmation of the weight of fresh fruit bunches and shipment to the customer, when there is persuasive evidence of an arrangement, delivery has occurred and risk of loss has passed, the sales price is fixed or determinable at the date of sale, and collectibility is reasonably assured.
Revenue from castor products includes sale of seeding and rendering of technical know-how under a bundled sales arrangement. The Company adopts ASC 605-25, “Multiple-Element Arrangements” and recognizes revenue as services are performed when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service offering has been delivered to the client; (3) the collection of fees is probable; and (4) the amount of fees to be paid by the client is fixed or determinable.
A bundled sale arrangement involves multiple deliverables provided by the Company, where bundled service deliverables are accounted for in accordance with ASC 605-25.
The Company’s multi-element arrangements generally include two deliverables. The first deliverable is castor oilseeds delivered at the time of sale. The second deliverable is rendering of technical know-how service to plant the castor oilseeds when the principal terms of the service agreement are fulfilled and the certificate of satisfaction is confirmed by the customers.
PRIME GLOBAL CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”), except for number of shares)
The Company uses a hierarchy to determine the allocation of revenues to the deliverables. The hierarchy is as follows: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”), and (iii) best estimate of the selling price (“BESP”).
(i) VSOE generally exists only when a company sells the deliverable separately and is the price actually charged by the Company for that deliverable. Generally the Company does not sell the deliverables separately and, as such, does not have VSOE.
(ii) TPE can be substantiated by determining the price that other parties sell similar or substantially similar offerings. The Company does not believe that there is accessible TPE evidence for similar deliverables.
(iii) BESP reflects the Company’s best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis. The Company believes that BESP is the most appropriate methodology for determining the allocation of revenue among the multiple elements.
The Company has allocated revenues between these two deliverables using the relative selling price method which is based on the estimated selling price for all deliverables. Revenues allocated to the delivered castor oilseeds and are recognized at the time of sale provided the other conditions for recognition of revenues have been met. Revenues allocated to the rendering of technical know-how service are deferred and recognized on a straight-line basis over the estimated life of the service, which currently is 6-12 months.
(d)	Rental income
The Company generally leases the units under operating leases with terms of two years or less. However, the Company expects to sign a ten year lease covering the majority of its 15 story building in the next twelve months. For the year ended October 31, 2013, we have recorded $132,760 in lease revenue, based upon its annual rental over the life of the lease under operating lease, using the straight-line method in accordance with ASC Topic 970-605, “Real Estate - General - Revenue Recognition” (“ASC Topic 970-605”).
As of October 31, 2013, the commercial buildings for lease are as follows:
Name of Commercial building
Number of units
(by floor)
Footage area
(square feet)
Vacancy percentage
Megan Avenue 19,987 33%
Menara CMY 91,848 93%
We expect to record $320,336 in annual lease revenue under the operating lease arrangements in the next twelve months, through October 31, 2014.
The Company leases store location and office spaces to the tenants under operating lease arrangements. The Company receives rental income from the real estates it owns for a stated period of times. Rental income is recognized over the life of the operating lease agreement as it is earned in the period under ASC Topic 970-605. The typical leases contain initial terms of two years with renewal options and do not contain escalating rent amounts. Rent concessions are recognized as an offset to revenues collected over the term of the underlying lease.
The Company also records operating costs directly attributable to the leasing properties, such as real estate taxes, depreciation of the leased properties and property management fees, which are charged to expense when incurred.
For leases classified as operating, the Company’s lessee records rent expense on a straight-line basis over the lesser of the lease term, including renewal options, taking into consideration of rent holidays or any rent concessions.
lCost of revenues
Cost of revenue on software sales primarily includes the purchase cost of software products and the labor cost incurred in the modifications, customization and enhancement of software products, the development of websites and maintenance and support services. All costs are expensed off when the software products and its related website domain are transferred to the customer.
PRIME GLOBAL CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”), except for number of shares)
Cost of revenue on sales of luxury consumer products primarily consists of the purchase cost of luxury consumer products.
Cost of revenue on plantation sales includes rental on plantation land, material supplies and subcontracting costs incurred for planting, fertilizing and harvesting the palm oil tree. Shipping and handling costs associated with the distribution of fresh fruit bunches to the customers are also included in cost of revenues.
Rental expenses shown on the accompanying statements of operations include costs associated with on-site and property management personnel, repairs and maintenance, property insurance, marketing, landscaping and other on-site and related administrative costs. Utility expenses are paid directly by tenants.
lComprehensive income
ASC Topic 220, “Comprehensive Income” establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income as defined includes all changes in equity during a period from non-owner sources. Accumulated comprehensive income, as presented in the accompanying statements of stockholders’ equity consists of changes in unrealized gains and losses on foreign currency translation. This comprehensive income is not included in the computation of income tax expense or benefit.
lIncome taxes
Income taxes are determined in accordance with the provisions of ASC Topic 740, “Income Taxes” (“ASC Topic 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.
The Company conducts major businesses in Malaysia and the PRC and is subject to tax in its own jurisdiction. As a result of its business activities, the Company will file separate tax returns that are subject to examination by the local and foreign tax authorities.
lForeign currencies translation
Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the statement of operations.
The reporting currency of the Company is the United States Dollars (“US$”) and the accompanying financial statements have been expressed in US$. In addition, the Company maintains its books and record in a local currency, Malaysian Ringgit (“MYR”), Hong Kong Dollars (“HK$”) and Renminbi Yuan (“RMB”), which is functional currency as being the primary currency of the economic environment in which the entity operates.
PRIME GLOBAL CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”), except for number of shares)
In general, for consolidation purposes, assets and liabilities of its subsidiaries whose functional currency is not US$ are translated into US$, in accordance with ASC Topic 830-30, “Translation of Financial Statement”, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiary are recorded as a separate component of accumulated other comprehensive income within the statement of stockholders’ equity. The gains and losses are recorded as a separate component of accumulated other comprehensive income within the statement of stockholders’ equity.
Translation of amounts from the local currency of the Company into US$1 has been made at the following exchange rates for the respective years:
lStock based compensation
The Company accounts for employee stock-based compensation in accordance with ASC Topic 718, "Compensation - Stock Compensation" which requires to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services.
For the year ended October 31, 2011, the stock based compensation included in the general and administrative expenses was $70,000. No such transaction was incurred for the years ended October 31, 2013 and 2012.
lRetirement plan costs
Contributions to retirement schemes (which are defined contribution plans) are charged to general and administrative expenses in the statements of operation and comprehensive income as and when the related employee service is provided.
lRelated parties
Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Companies are also considered to be related if they are subject to common control or common significant influence.
lSegment reporting
ASC Topic 280, “Segment Reporting” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about geographical areas, business segments and major customers in financial statements. The Company operates in four reportable operating segments in Malaysia and China.
lFair value of financial instruments
The carrying value of the Company’s financial instruments (excluding obligation under finance lease): cash and cash equivalents, accounts receivable, deposits and other receivables, deferred revenue, income tax payable, amount due to a director, accrued liabilities and other payables approximate at their fair values because of the short-term nature of these financial instruments.
Management believes, based on the current market prices or interest rates for similar debt instruments, the fair value of its obligation under finance lease approximates the carrying amount.
PRIME GLOBAL CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”), except for number of shares)
The Company also follows the guidance of the ASC Topic 820-10, “Fair Value Measurements and Disclosures” ("ASC 820-10"), with respect to financial assets and liabilities that are measured at fair value. ASC 820-10 establishes a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value as follows:
Level 1 : Observable inputs such as quoted prices in active markets;
Level 2 : Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3 : Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions
The following table summarizes information on the fair value measurement of the Company’s assets as of October 31, 2013 and 2012 grouped by the categories described above:
Marketable securities available-for-sale were valued at the closing prices quoted on the Bursa Malaysia Securities Berhad Main Market which the security is traded.
lReclassifications
Certain comparative figures have been reclassified to conform to the current period financial statement presentation.
lRecent accounting pronouncements
The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and do not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.
4.BUSINESS COMBINATION
On April 20, 2012, the Company, through PGIL acquired all of the issued and outstanding securities of Max Trend International Limited, a Hong Kong limited liability company, or Max Trend, for aggregate cash consideration of US $10,000 in accordance with the terms of a Stock Transfer Agreement, or the Stock Transfer Agreement. In connection with the acquisition, the Company assumed a cash balance of approximately US$174,982 and all of Max Trend’s liabilities in the approximate amount of US $218,628, which are loans made by Max Trend’s director and stockholder, Mr. Wooi Khang Pua to organize and finance the company.
Max Trend’s wholly owned subsidiary, Shenzhen Max Trend Green Energy Company Limited, or SMTG, is a wholly foreign-owned enterprise under the laws of the People’s Republic of China. Max Trend and SMTG have not commenced operations and have not generated any revenues since inception. Except for the nominal cash balance, Max Trend holds no real assets on a consolidated basis.
Max Trend is owned in equal parts by its directors, Kok Wai Chai and Wooi Khang Pua, who also serve as directors of Max Trend. Mr. Pua also serves as the legal representative of SMTG. Messrs. Chai and Pua are directors of our wholly owned subsidiary Union Hub Technology Sdn. Bhd., or UHT, and each holds approximately 4.85% of our issued and outstanding common stock. Mr. Chai is also a shareholder of our variable interest entity Virtual Setup Sdn. Bhd., or VSSB.
PRIME GLOBAL CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”), except for number of shares)
Upon the consummation of the acquisition of Max Trend, Messrs. Chai and Pua will remain directors of Max Trend, and Mr. Pua will remain SMTG’s legal representative.
Messrs. Chai and Pua continue to serve as directors of Max Trend, and Mr. Pua will remain as SMTG’s legal representative.
The Company intends to develop the business of cultivation and trading of castor in PRC through the acquisition of Max Trend. SMTG has commenced the business since acquisition and generated revenue and net income for the years ended October 31, 2012 and 2011.
The following table summarizes the fair value of the assets acquired and liabilities assumed at the date of acquisition. The allocation of the purchase price consideration is presented as below:
The Company has recognized a net loss of $53,646 on the acquisition of Max Trend for the year ended October 31, 2012.
5.MARKETABLE SECURITIES, AVAILABLE-FOR-SALE
The fair value of marketable securities is determined based on quoted market prices at the balance sheet dates.
During the year ended October 31, 2013, the Company’s marketable securities traded in Bursa Malaysia Securities Berhad Main Market were fully sold and a realized loss of $355,996 was recorded.
PRIME GLOBAL CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”), except for number of shares)
6.PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consisted of the following:
Depreciation expense for the years ended October 31, 2013, 2012 and 2011 amounted to $545,388, $56,541 and $38,036, respectively.
As of October 31, 2013 and 2012, the Company has two motor vehicles and one motor vehicle, respectively, under finance lease included property, plant and equipment with its carrying value of $58,960 and $72,857, respectively.
Both commercial buildings in Kuala Lumpar, Malaysia are pledged against the bank loans (note 8).
To date, the Company is in the process of preparing the development layout plan for submission to and approval by local authorities. Thereafter, the Company will begin the process of preparing the building plan for submission and approval. The Company anticipates the submission and approval process to conclude on or about the end of the second fiscal quarter of 2014.
Policy for Capitalizing Development Cost
The cost of buildings and improvements includes the purchase price of property, legal fees and other acquisition costs. Costs directly related to planning, developing, initial leasing and constructing a property are capitalized and classified as Real Estate in the consolidated balance sheets. Capitalized development costs include interest, and other direct project costs incurred during the period of development. As of October 31, 2013, there was no such capitalized interest.
A variety of costs are incurred in the acquisition, development and leasing of properties. After determination is made to capitalize a cost, it is allocated to the specific component of a project that is benefited. Determination of when a development project is substantially complete and capitalization must cease involves a degree of judgment. The Company adopts the capitalization policy on development properties, which is guided by ASC Topic 835-20 “Interest - Capitalization of Interest” and ASC Topic 970 “Real Estate - General”. The costs of land and buildings under development include specifically identifiable costs. The capitalized costs include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, salaries and related costs and other costs incurred during the period of development. The Company considers a construction project as substantially completed and held available for occupancy upon the receipt of certificates of occupancy, but no later than one year from cessation of major construction activity. The Company ceases capitalization on the portion (1) substantially completed and (2) occupied or held available for occupancy, and we capitalize only those costs associated with the portion under construction.
PRIME GLOBAL CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”), except for number of shares)
The Company capitalizes leasing costs which include commissions paid to outside brokers, legal costs incurred to negotiate and document a lease agreement and any internal costs that may be applicable. The Company allocates these costs to individual tenant leases and amortizes them over the related lease term.
7.AMOUNT DUE TO RELATED PARTIES
8.ADVANCES FROM THIRD PARTIES
During the year ended October 31, 2013, the Company received an earnest money deposit of $777,013 in connection with a potential tenant about the hotel project of its 15 story commercial building. The deposit was unsecured and interest free. Earnest money deposit is recorded when payment is received by the Company. The earnest money deposit is refundable to a potential tenant upon the termination of lease negotiation.
9.ACCRUED LIABILITIES AND OTHER PAYABLES
Accrued liabilities and other payables consist of the following:
10.BANK LOANS
PRIME GLOBAL CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”), except for number of shares)
15 Story Bank Loan
In December 2012, the Company, through PGCG Assets obtained a loan in the principal amount of RM41,000,000 from Hong Leong Bank Berhad, a financial institution in Malaysia to finance the acquisition of a fifteen story office building property, which bears interest at a rate of 1.75% per annum over the lending rate, variable rate quoted by the bank, with 180 monthly installments over a period of 15 years and will mature on July 31, 2028.
The loan is secured by all assets held by PGCG Assets and is personally guaranteed by the director and chief executive officer of the Company, Mr. Weng Kung Wong and the director of the Company’s subsidiary, Mr. Kok Wai Chai and its subsidiary, UHT.
12 Story Bank Loan
In May 2013, the Company, through PGCG Assets obtained a loan in the aggregate amount of RM9,840,000 from RHB Bank Berhad, a financial institution in Malaysia to finance the acquisition of a twelve story office building property, which bears interest at a rate of 1.90% per annum over the lending rate, variable rate quoted by the bank, with 288 monthly installments over a period of 24 years and will mature in 2037.
The loan is secured by all assets held by PGCG Assets and is personally guaranteed by the director and chief executive officer of the Company, Mr. Weng Kung Wong and the director of the Company’s subsidiary, Mr. Kok Wai Chai and its subsidiary, UHT.
As of October 31, 2013, the minimum future payments of the aggregate bank borrowings in the next five years and thereafter are as follows:
For the year ended October 31, 2013, the lending rate is 6.6% per annum.
11.OBLIGATION UNDER FINANCE LEASE
The Company purchased motor vehicle under a finance lease agreement with the effective interest rate of 6.58% per annum, due through July 21, 2017, with principal and interest payable monthly. The obligation under the finance lease is as follows:
PRIME GLOBAL CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”), except for number of shares)
As of October 31, 2013, the maturities of the finance lease for each of the five years are as follows:
12.STOCKHOLDERS’ EQUITY
On July 15, 2010, the Company approved the 1 for 20 reverse split of its common stock. As a result, the total number of issued and outstanding shares was reduced from 40,000,000 to 2,000,003 shares and par value of its common stock was unchanged at $0.001. This is inclusive of issuance of 3 shares of common stocks as fractional shares. All common stock and per share data for all periods presented in these consolidated financial statements have been restated to give effect to the reverse stock split.
On September 21, 2010, the Company consummated the sale to certain accredited investors of an aggregate of 1,500,000 shares of its common stock, par value $0.001, at a per share price of $0.10, or $150,000 in the aggregate, pursuant to certain subscription agreements.
On September 30, 2010, the Company received the additional capital contribution of approximately $313,027 (equivalent to MYR999,998) from its stockholders.
On November 15, 2010, the Company consummated the sale to 18 accredited investors of an aggregate of 80,000,000 shares of its common stock, par value $0.001, at a per share price of $0.01, or $800,000 in the aggregate, pursuant to certain subscription agreements.
On December 6, 2010, the Company issued 16,500,000 shares of its common stock to the UHT shareholders in connection with the acquisition of UHT through the Share Exchange. The acquisition is a capital transaction in substance and therefore was accounted for as a recapitalization. The 16,500,000 shares issued was restated and adjusted to account for the effects of the Share Exchange.
On January 25, 2011, the Company increased its authorized capital to 1 billion shares of common stock and 100 million shares of preferred stock.
On February 8, 2011, the Company consummated the sale to 19 of its existing accredited stockholders of an aggregate of 400,000,000 shares of its common stock, par value $0.001, at a per share price of $0.01, or $4,000,000 in the aggregate, pursuant to certain subscription agreements. Mr. Weng Kung Wong, the Chief Executive Officer and director of the Company participated in the transaction and purchased 32,300,000 shares of the Company’s common stock on the same terms and conditions as the other stockholders.
On September 7, 2011, the Company issued 110,610 shares of restricted common stock to the executive officers as services compensation of $70,000.
On February 16, 2012, the Company consummated the sale to Mr. Weng Kung Wong, the director and chief executive officer of the Company, of an aggregate of 667,780 shares of its common stock with par value of $0.001, at the market price of $2.995 per share, or $2,000,000 in the aggregate.
On March 6, 2012, the Company consummated the sale to Mr. Weng Kung Wong, the director and chief executive officer of the Company, and an existing shareholder of the Company, of an aggregate of 1,076,000 shares of its common stock with par value of $0.001, at the market price of $2.984 per share, or approximately $3,210,784 in the aggregate.
PRIME GLOBAL CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”), except for number of shares)
On April 3, 2012, the Company consummated the sale to three accredited shareholders of the Company, of an aggregate of 628,000 shares of its common stock with par value of $0.001, at the market price of $2.887 per share, or $1,813,036 in the aggregate.
On May 2, 2012, the Company consummated the sale to Mr. Weng Kung Wong, the director and chief executive officer of the Company, of an aggregate of 540,000 shares of its common stock with par value of $0.001, at the market price of $2.812 per share, or $1,518,480 in the aggregate.
On June 26, 2012, the Company consummated the sale to three accredited shareholders of the Company, of an aggregate of 760,000 shares of its common stock with par value of $0.001, at the market price of $2.7 per share, or $2,052,000 in the aggregate.
On July 16, 2012, the Company consummated the sale to three accredited shareholders of the Company, of an aggregate of 920,000 shares of its common stock with par value of $0.001, at the market price of $2 per share, or $1,840,000 in the aggregate.
On August 6, 2012, the Company consummated the sale to three accredited shareholders of the Company of an aggregate of 2,988,000 shares of its common stock with par value of $0.001, at a price of $2 per share, or $5,976,000 in the aggregate. The Company has received the net proceeds from the sale of the shares and will use it for general corporate purposes. Mr. Weng Kung Wong, the director and chief executive officer of the Company, participated in the sale and purchased 2,038,000 of the 2,988,000 shares of common stock sold on the same terms and conditions as the other investors.
On September 24, 2012, the Company consummated the sale to three accredited shareholders of the Company of an aggregate of 2,652,000 shares of our common stock, par value $0.001, at a price of $2.40, or $6,364,800 in the aggregate. The Company has received the net proceeds from the sale of the shares and will use to fund the real estate acquisitions and for general corporate purposes. Mr. Weng Kung Wong, the director and chief executive officer of the Company, participated in the sale and purchased 2,260,000 of the 2,652,000 shares of common stock sold on the same terms and conditions as the other investors.
On October 18, 2012, the Company consummated the sale to two accredited shareholders of the Company of an aggregate of 2,340,000 shares of our common stock, par value $0.001, at a price of $2.40, or $5,616,000 in the aggregate. The Company has received the net proceeds from the sale of the shares and will use to fund the real estate acquisitions and for general corporate purposes. Mr. Weng Kung Wong, the director and chief executive officer of the Company, participated in the sale and purchase 1,860,000 of 2,340,000 shares of common stock sold on the same terms and conditions as the other investors.
As of October 31, 2013 and 2012, the number of shares of the Company’s common stock issued and outstanding was 512,682,393 and 512,682,393 shares. There are no shares of preferred stock issued and outstanding.
13.NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed using the weighted average number of common stock outstanding during the year. Diluted net income (loss) per share is computed using the weighted average number of common stock outstanding and common stock equivalents during the year.
The following table sets forth the computation of basic and diluted net income (loss) per share:
* Denotes less than $0.01 per share
PRIME GLOBAL CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”), except for number of shares)
14.INCOME TAXES
The local (United States) and foreign components of (loss) income before income taxes were comprised of the following:	
Provision for income taxes consisted of the following:
The effective tax rate in the years presented is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. During the years presented, the Company has a number of subsidiaries that operates in different countries and is subject to tax in the jurisdictions in which it subsidiaries operate, as follows:
United States of America
PGCG is registered in the State of Nevada and is subject to United States of America tax law. As of October 31, 2013, the operations in the United States of America incurred $24,133 of cumulative net operating losses which can be carried forward to offset future taxable income. The net operating loss carryforwards begin to expire in 2031, if unutilized. The Company has provided for a full valuation allowance of $8,446 against the deferred tax assets on the expected future tax benefits from the net operating loss carryforwards as the management believes it is more likely than not that these assets will not be realized in the future.
PRIME GLOBAL CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”), except for number of shares)
The Company has adopted ASC 740-10 “Accounting for Income Taxes” and recorded a liability for an uncertain income tax position, tax penalties and any imputed interest thereon. The amount, recorded as an obligation, is $50,000 at October 31, 2013.
British Virgin Islands
Under the current BVI law, the Company’s subsidiaries are not subject to tax on income. No provision for income tax is required due to operating loss incurred.
Hong Kong
Max Trend is subject to Hong Kong Profits Tax, which is charged at the statutory income rate of 16.5% on its assessable income. No provision for income tax is required due to operating loss incurred. The Company has provided for a full valuation allowance against the deferred tax assets of $865 on the expected future tax benefits from the net operating loss carryforwards as the management believes it is more likely than not that these assets will not be realized in the future.
The PRC
SMTG is subject to the Corporate Income Tax governed by the Income Tax Law of the People’s Republic of China with a unified statutory income tax rate of 25%. A reconciliation of income before income taxes to the effective tax rate as follows:
Malaysia
All of the Company’s subsidiaries operating in Malaysia subject to the Malaysia Corporate Tax Laws at a progressive income tax rate starting from 20% on the assessable income for its tax year. A reconciliation of (loss) income before income taxes to the effective tax rate as follows:
PRIME GLOBAL CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”), except for number of shares)
The following table sets forth the significant components of the aggregate deferred tax assets of the Company as of October 31, 2013 and 2012:
15.PENSION PLAN
The Company is required to make contribution to their employees under a government-mandated defined contribution pension scheme for its eligible full-times employees in Malaysia and the PRC. The Company is required to contribute a specified percentage of the participants’ relevant income based on their ages and wages level. The total contributions made by the Company were $59,957, $58,621 and $30,250 for the years ended October 31, 2013, 2012 and 2011, respectively.
16.RELATED PARTY TRANSACTIONS
Significant transactions with related parties during the years presented were summarized as follows:
Related parties A, B, C, and D are under common control of various shareholders with less than 5% equity interest of the Company individually.
PRIME GLOBAL CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”), except for number of shares)
The former directors of related party E are the shareholders of the Company with less than 5% equity interest individually.
Related parties F, G and H are under common control of Mr. Weng Kung Wong, the director and chief executive officer of the Company.
All of these related party transactions are generally transacted in an arm-length basis at the current market value in the normal course of business.
17.SEGMENT INFORMATION
(a)Business segment reporting
The Company operates four reportable business segments, as defined by ASC Topic 280:
lSoftware business - sale of software products and website development
lTrading business - trading of luxury consumer products
lPlantation business - sale of palm oil products and oilseed
lReal estate business - acquisition and development of commercial and residential real estate properties in Malaysia
The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 3). The Company had no inter-segment sales for the years presented. Summarized financial information concerning the Company’s reportable segments is shown as below:
PRIME GLOBAL CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”), except for number of shares)
All long-lived assets are located in Malaysia.
(b)Geographic segment reporting
In respect of geographical segment reporting, sales are based on the countries in which the customer is located, as follows:
As of October 31, 2013, the amount of net assets held by our PRC subsidiary was $426,531, of which approximately $384,000 is free of restriction and $42,531 is restricted.
As of October 31, 2012, the amount of net assets held by our PRC subsidiary was $924,028, of which approximately $831,000 is free of restriction and $93,028 is restricted.
18.CONCENTRATIONS OF RISK
The Company is exposed to the following concentrations of risk:
(a)	Major customers
For the years ended October 31, 2013, 2012 and 2011, the customer who accounted for 10% or more of the Company’s revenues is presented as follows:
PRIME GLOBAL CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(b)	Major vendors
For the years ended October 31, 2013, 2012 and 2011, the vendor who accounted for 10% or more of the Company’s purchases is presented as follows:
PRIME GLOBAL CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(c) Credit risk
Financial instruments that are potentially subject to credit risk consist principally of trade receivables. The Company believes the concentration of credit risk in its trade receivables is substantially mitigated by its ongoing credit evaluation process and relatively short collection terms. The Company does not generally require collateral from customers. The Company evaluates the need for an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.
(d) Interest rate risk
As the Company has no significant interest-bearing assets, the Company’s income and operating cash flows are substantially independent of changes in market interest rates.
The Company’s interest-rate risk arises from bank loans and finance leases. The Company manages interest rate risk by varying the issuance and maturity dates variable rate debt, limiting the amount of variable rate debt, and continually monitoring the effects of market changes in interest rates. As of October 31, 2013 and 2012, bank loans and finance leases were at fixed rates.
(e)	Exchange rate risk
The reporting currency of the Company is US$, to date the majority of the revenues and costs are denominated in MYR and RMB, and a significant portion of the assets and liabilities are denominated in MYR and RMB. As a result, the Company is exposed to foreign exchange risk as its revenues and results of operations may be affected by fluctuations in the exchange rate between US$, MYR and RMB. If MYR and RMB depreciates against US$, the value of MYR and RMB revenues and assets as expressed in US$ financial statements will decline. The Company does not hold any derivative or other financial instruments that expose to substantial market risk.
(f)	Economic and political risks
Substantially all of the Company’s services are conducted in Malaysia and Asian region. The Company’s operations are subject to various political, economic, and other risks and uncertainties inherent in Malaysia. Among other risks, the Company’s operations are subject to the risks of restrictions on transfer of funds; export duties, quotas, and embargoes; domestic and international customs and tariffs; changing taxation policies; foreign exchange restrictions; and political conditions and governmental regulations in Malaysia.
19.COMMITMENTS AND CONTINGENCIES
(a)	Operating lease commitment
The Company leases certain office premises, staff quarter and palm oil land under operating leases that expire at various dates through 2014. The leases, which cover periods from one to two years, generally provide for renewal options at specified rental amounts.
Aggregate rent expenses for the years ended October 31, 2013, 2012 and 2011 were $70,740, $92,506 and $61,975.
As of October 31, 2013, the Company has future minimum rental payments due under various operating leases in the next two years, as follows:
(b)	Capital commitment
As of October 31, 2013, the Company does not anticipate any significant future contingent payment in the next twelve months.
PRIME GLOBAL CAPITAL GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency expressed in United States Dollars (“US$”), except for number of shares)
20.QUARTERLY FINANCIAL DATA (unaudited)
The following table has been prepared from the financial records of the Company, without audit, and reflects all adjustments that are, in the opinion of management, necessary for a fair presentation of the results of operations for the interim periods presented. The sum of per share amounts may not equal to the annual amounts because of the changes in the weighted average number of shares outstanding during the year.
21.SUBSEQUENT EVENTS
In accordance with ASC Topic 855, “Subsequent Events”, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued, the Company has evaluated all events or transactions that occurred after October 31, 2013 up through the date was the Company issued the audited consolidated financial statements. During the period, the Company did not have any material recognizable subsequent events except as set forth below.
On December 18, 2013, we leased the entirety of our 15 story commercial building to a tenant that intends to convert the building and operate it as a business hotel. As part of the lease transaction, we assigned to such tenant all of our rights and benefits as a landlord under a separate Rental Agreement previously made between us and a retailer located on the first floor of such building. The initial term of the lease is twenty (20) years, expiring November 30, 2033, with a one-time option to renew for an additional ten (10) year period. The monthly rental rate is RM550,000 (approximately US$175,543) for the first three years. Thereafter, the rental rate shall be increased to the then prevailing market rate or in increments of 5%-10% every three-year period, whichever is higher. We expect to generate approximately $2,284,000 in rental income from this tenant.
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None
ITEM 9A.
ITEM 9A. Controls and Procedures.
Disclosure Controls and Procedures
As of the end of the period covered by this report, our management conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the Exchange Act). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report in ensuring that information required to be disclosed was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that information required to be disclosed by Applied in such reports is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in “Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of October 31, 2013.
Borgers & Cutler CPAs PLLC, an independent registered public accounting firm, has audited the consolidated financial statements included in this Form 10-K and, as part of the audit, has issued a report, included herein, on the effectiveness of our internal control over financial reporting as of October 31, 2013.
Changes in Internal Control over Financial Reporting
During the fourth quarter of fiscal 2013, there were no changes in the internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations of Disclosure Controls and Procedures and Internal Control over Financial Reporting
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.
ITEM 9B.
ITEM 9B. Other Information.
None.
PART III
ITEM 10.
ITEM 10. Directors, Executive Officers and Corporate Governance.
Set forth below are the present directors, director nominees and executive officers of the Company. There are no other persons who have been nominated or chosen to become directors nor are there any other persons who have been chosen to become executive officers. There are no arrangements or understandings between any of the directors, officers and other persons pursuant to which such person was selected as a director or an officer. Directors are elected to serve until the next annual meeting of stockholders and until their successors have been elected and have qualified. Officers are appointed to serve until the meeting of the board of directors following the next annual meeting of stockholders and until their successors have been elected and qualified.
Weng Kung Wong, age 41, our Chief Executive Officer and Director since November 15, 2010, founded Mobile Wallet Sdn. Bhd., MWSB, one of the first Malaysian m-commerce companies, in 2004 and currently serves as its Executive Director and Chief Executive Officer. Prior to founding MWSB, Mr. Wong served as an Agency Unit Manager of MAA Insurance from April, 2001 to November, 2003. From January, 2000 to April, 2001, he was the Marketing Director of Spider Holding Sdn. Bhd., an herb products distribution company. Mr. Wong began his professional career in 1995 with Forever Living Products, a health products multilevel marketing company, where he spent four years in positions of accelerating responsibility in the areas of business development and marketing. Mr. Wong obtained a bachelor’s degree in Management Information Systems from the National Central University of Taiwan in 1995. As our Chief Executive Officer, Mr. Wong brings to our Board of Directors knowledge of our operations and history, business leadership, corporate strategy and entrepreneurial expertise.
Liong Tat Teh, age 54, our Chief Financial Officer and Director since November 15, 2010, has more than 27 years of professional accounting and financial experience. Mr. Teh is currently the Financial Controller of MW Group, a now dormant company. Prior to joining MW Group in February, 2008, Mr. Teh served as the Financial Controller of Ikhmas Jaya Sdn. Bhd., a construction and civil engineering company, from February, 1995 to January, 2008. From June, 1993 to February, 1995, Mr. Teh was a Group Accountant of Mitrajaya Holding Bhd., a construction engineering company. Prior to joining Mitrajaya Holding Bhd., Mr. Teh was a Finance Manager for Vorwerk (M) Sdn. Bhd., a Malaysian subsidiary of Vorwerk International based in Germany, a distributor of household appliances, from December, 1992 to June, 1993. From March, 1989 to December, 1992, Mr. Teh worked as Accountant at Tasima Footwear Sdn Bhd. Mr. Teh graduated from Kolej Tunku Abdul Rahman Malaysia in 1983 with a Diploma in Cost and Management Accounting, and attained a fellowship at the Chartered Institute of Management Accountants of United Kingdom. Mr. Teh has been a Chartered Accountant registered with Malaysian Institute of Accountants since 1995. Mr. Teh brings to the Board of Directors business leadership, corporate strategy, accounting and financial expertise.
Sek Fong Wong, age 35, joined us as our Secretary on November 15, 2010. She is also the Assistant Administration Manager of MWPAY Sdn. Bhd., the marketing and distribution arm of Mobile Wallet Group. She served as our director from November 15, 2010 to April 12, 2012. Prior to joining MWPAY, Ms. Wong served as the Personal Assistant of Bioworld Resource Sdn. Bhd., a multilevel marketing arm of CEEBEE Groups of companies, promoting health food from September, 2005 to April, 2008. From August, 2000 to September, 2005, Ms. Wong was actively involved in Gerakan Belia Bersatu Malaysia (GBBM), a youth movement NGO. She is a Central Committee Member of GBBM and represents the country of Malaysia in various conferences and activities located in Malaysia and elsewhere. Miss Wong received a bachelor’s degree in Chemistry and Biology from Kolej Tunku Abdul Rahman Malaysia in 2000.
Amirrudin Bin Che Embi, aged 67, joined our Board of Directors on April 12, 2012. He is the President of the Malaysian Rugby Union and Kedah Rugby Union and the Honorary Secretary of the Royal Kedah Club. Since December 2009, he has served on the board of directors of Etika Kawalan Sdn. Bhd., a security solutions company. From 2005 to 2009, Mr. Embi served on the board of directors of Tahan Insurance Malaysia Berhad. Dato’ Amir led an illustrious career at the Royal Malaysian Police for 37 years before retiring in 2004. He has been recognized with numerous medals, honors and awards for his contributions to the state, including: Pingat Jasa Kebaktian (PJK) (1975); Pingat Cemerlang Kedah (PCK) (1976); Ahli Mangku Negara (AMN) (1978); Bintang Cemerlang Kedah (BCK) (1983); Pingat Kelakuan Terpilih (PKT) (1989); Pingat Setia Kelantan (PSK) (1997); Dato’ Setia Pangkuan Negeri (DSPN) (1998); Dato’ Setia DiRaja Kedah (DSDK) (2000); Pahlawan Setia Pasukan Polls (PSPP) (2001); Dato’ Pahlawan Tamin Sari (DPTS) (2002); and Darjah Gemilang Mahkota Kedah (2008). Dato’ Amir brings to the Board of Directors his deep insight, knowledge and experience in working with numerous governmental agencies and experience and service of serving on other boards.
Peijin Wu Harrison, aged 56, joined our Board of Directors on April 12, 2012. She is a partner and the International Services Group practice leader at Mellen, Smith & Pivoz, an accounting and advisory firm, where she advises Asian cross-border companies on U.S. accounting, auditing, and taxation matters. Ms. Harrison joined Mellen, Smith & Pivoz PLC in 1998 and became a partner in 2007. Ms. Harrison is a member of the Michigan Association of Certified Public Accountants, the American Institute of Certificate Public Accountants and the China General Chamber of Commerce USA - Detroit Auto Committee. Ms. Harrison brings to the Board of Directors accounting, auditing, finance, tax and international business experience.
Poh Chai Ham, 33, joined our Board of Directors on November 1, 2013. He is a partner at Leong & Co., and specializes in contract and banking law. Poh Chai Ham joined Leong & Co. since December 2011. Prior to that time, Poh Chai Ham was in full time study for his law degree. Poh Chai Ham received his L.L.B. law degree (with honors) from Multimedia University, Ayer Keroh Melaka in 2011. Upon graduation, Poh Chai Ham chambered with Leong & Co. Upon completion of his pupilage, Poh Chai Ham was admitted as an Advocate & Solicitor of the High Court of Malaya in 2013. Thereafter he became a partner in Leong & Co. Poh Chai Ham brings to the Board of Directors legal insight and expertise in contract and banking law.
Family Relationships
There are no family relationships between any of our directors or executive officers.
Involvement in Certain Legal Proceedings
No executive officer or director is a party in a legal proceeding adverse to us or any of our subsidiaries or has a material interest adverse to us or any of our subsidiaries.
No executive officer or director has been involved in the last ten years in any of the following:
· Any bankruptcy petition filed by or against any business or property of such person, or of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
· Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
· 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;
· Being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
· Being the subject of or a party to any 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, fraud, wire fraud or fraud in connection with any business entity; 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, any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Board Committees
The members of each of our Compensation, Audit, and Nominations and Corporate Governance committees are comprised of our three independent directors: Dato’ Amiruddin Bin Che Embi, Peijin W. Harrison and Poh Chai Ham. Dato’ Wira Amiruddin, Ms. Harrison and Poh Chai Ham were appointed to serve as the Chairman or Chairperson, as applicable, of the Compensation Committee, the Audit Committee and the Nominations and Corporate Governance Committee, respectively. Peijin W. Harrison serves as the Audit Committee financial expert as defined in Item 407(d)(5) of Regulation S-K promulgated under the Securities Act. Copies of the charters for each of the Compensation, Audit and Nominations and Corporate Governance Committees are filed as Exhibits 99.1, 99.2 and 99.3, respectively.
The Audit Committee has reviewed and discussed the audited financial statements with management. The Audit Committee has discussed with the independent auditors the matters required to be discussed by the statement on Auditing Standards No. 61, as amended and adopted by the Public Company Accounting Oversight Board in Rule 3200T. It has received the written disclosures and the letter from the independent accountant required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the Audit Committee concerning independence and has discussed with the independent accountant the independent accountant’s independence. Based upon the foregoing review and discussions, the Audit Committee recommended to the Board that the audited financial statements be included in the company’s Annual Report on Form 10K.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act requires our executive officers and directors, and persons who own more than 10% of our common stock, to file reports regarding ownership of, and transactions in, our securities with the Securities and Exchange Commission and to provide us with copies of those filings. Based solely on our review of the copies of such forms received by us, or written representations from certain reporting persons, we believe that during fiscal year ended October 31, 2013, and up to the date of this proxy statement, our officers, directors and greater than 10% percent beneficial owners timely filed all reports required by Section 16(a) of the Securities Exchange Act.
Code of Ethics
On February 2, 2012, our Board of Directors adopted a Code of Business Conduct and Ethics applicable to all employees of the Company including the principal executive officer, the principal financial officer and the principal accounting officer. The Board also adopted a separate Code of Ethics for the Chief Executive Officer and Senior Financial Officers, which contains provisions specifically applicable to our Chief Executive Officer and senior financial officers including the Chief Financial Officer. A copy of the Code of Business Conduct and Ethics and Code of Ethics for the Chief Executive Officer and Senior Financial Officers are filed as Exhibit 14 to this Annual Report and are incorporated herein by reference. The Company will provide a copy of its Code of Business Conduct and Ethics and Code of Ethics for the Chief Executive Officer and Senior Financial Officers upon written request addressed to the Secretary of the Company.
ITEM 11.
ITEM 11. Executive Compensation.
Compensation Philosophy and Objectives
Our executive compensation philosophy is to create a long-term direct relationship between pay and our performance. Our executive compensation program is designed to provide a balanced total compensation package over the executive’s career with us. The compensation program objectives are to attract, motivate and retain the qualified executives that help ensure our future success, to provide incentives for increasing our profits by awarding executives when corporate goals are achieved and to align the interests of executives and long-term stockholders. The compensation package of our named executive officers consists of two main elements:
1.base salary for our executives that is competitive relative to the market, and that reflects individual performance, retention and other relevant considerations; and
2.discretionary bonus awards payable in cash and tied to the satisfaction of corporate objectives.
Process for Setting Executive Compensation
Our Compensation Committee is responsible for developing and overseeing the implementation of our philosophy with respect to the compensation of executives and for monitoring the implementation and results of the compensation philosophy to ensure compensation remains competitive, creates proper incentives to enhance stockholder value and rewards superior performance. The Compensation Committee annually reviews and approves for each named executive officer, and particularly with regard to the Chief Executive Officer, all components of the executive’s compensation. The Compensation Committee may award discretionary bonuses to each of the named executives, and reviews and approves the process and factors (including individual and corporate performance measures and actual performance versus such measures) used by the Chief Executive Officer to recommend such awards. Additionally, the Compensation Committee reviews and approves the base salary, equity-incentive awards (if any) and any other special or supplemental benefits of the named executive officers.
The Chief Executive Officer periodically provides the Compensation Committee with an evaluation of each named executive officer’s performance, based on the individual performance goals and objectives developed by the Chief Executive Officer at the beginning of the year, as well as other factors. The Compensation Committee provides an evaluation for the Chief Executive Officer. These evaluations serve as the bases for bonus recommendations and changes in the compensation arrangements of our named executives.
Our Compensation Peer Group
We currently engage in informal market analysis in evaluating our executive compensation arrangements. As the Company and its businesses mature, we may retain compensation consultants that will assist us in developing a formal benchmark and selecting a compensation peer group of companies similar to us in size or business for the purpose of comparing executive compensation levels.
Program Components
Our executive compensation program consists of the following elements:
Base Salary
Our base salary structure is designed to encourage internal growth, attract and retain new talent, and reward strong leadership that will sustain our growth and profitability. The base salary for each named executive officer reflects our past and current operating profits, the named executive officer’s individual contribution to our success throughout his career, internal pay equity and informal market data regarding comparable positions within similarly situated companies. In determining and setting base salary, the Compensation Committee considers all of these factors, though it does not assign specific weights to any factor. The Compensation Committee generally reviews the base salary for each named executive officer on an annual basis. For each of our named executive officers, we review base salary data internally obtained by the Company for comparable executive positions in similarly situated companies to ensure that the base salary rate for each executive is competitive relative to the market.
Discretionary Bonus
The objectives of our bonus awards are to encourage and reward our employees, including the named executive officers, who contribute to and participate in our success by their ability, industry, leadership, loyalty or exceptional service and to recruit additional executives who will contribute to that success.
Each of our named executive officers is eligible for consideration for a discretionary cash bonus. The Chief Executive Officer makes recommendations regarding bonus awards for the named executive officers and the Compensation Committee provides the bonus recommendation for the Chief Executive Officer. However, the Compensation Committee has sole and final authority and discretion in designating to whom awards are made, the size of the award, if any, and its terms and conditions. The bonus recommendation for each of the named executive officers depends on a number of factors, including (i) the performance of the Company for the year, (ii) the satisfaction of certain individual and corporate performance measures, and (iii) other factors which the Compensation Committee may deem relevant. The Company did not award any cash bonuses during fiscal year 2013.
Stock Holdings
The Compensation Committee recognizes the importance of having a portion of the named executive officers’ compensation be paid in the form of equity, to help align the executives’ interests with the interests of the Company’s stockholders. At this point, however, the Compensation Committee has chosen to emphasize the cash-based portion of our compensation program over a stock program because it believes the discretionary nature of the cash-based compensation gives it the needed flexibility to factor in and reward the attainment of longer-term goals for the Company and the executives, as the Compensation Committee deems appropriate.
Accordingly, we encourage, but do not insist on, executive ownership of our common stock. Methods of supporting ownership include turning to executives to support the financing needs of the Company. We have historically allowed our named executives to participate in private placements of the Company’s securities on the same terms and conditions as other investors. During fiscal year 2012, our Chief Executive Officer invested approximately US $20,890,272 into the Company resulting in a beneficial ownership of 54,811,085 shares of common stock, or approximately 10.69% of our issued and outstanding common stock. We believe that this practice achieves the dual goals of meeting the Company’s financing needs and aligning our executives’ interests with the interests of our stockholders.
We have not timed nor do we plan to time our release of material non-public information for the purpose of affecting the value of executive compensation.
Summary Compensation Table
The following summary compensation table sets forth the aggregate compensation we paid or accrued during the fiscal years ended October 31, 2013, 2012 and 2011 to (i) our Chief Executive Officer (principal executive officer), (ii) our Chief Financial Officer (principal financial officer), (iii) our three most highly compensated executive officers other than the principal executive officer and the principal financial officer who were serving as executive officers on October 31, 2013, whose total compensation was in excess of $100,000, and (iii) up to two additional individuals who would have been within the two-other-most-highly compensated but were not serving as executive officers on October 31, 2013.
(1)All cash compensation was paid in Malaysian Ringgit, our functional currency. The Malaysian Ringgit was converted into United States Dollars using the exchange rate prevailing at the dates of payment at an average annualized rate of 3.13313, 3.1132 and 3.0582 for fiscal years ended October 31, 2013, 2012 and 2011, respectively.
(2)Pursuant to the terms of certain employment agreements which were superseded by the current employment agreements, the Company issued to Messrs. Wong and Teh an aggregate of 92,175 shares of our common stock as set forth below in lieu of cash compensation for services rendered during the quarters ended April 30, 2011 and July 31, 2011:
(3)Mr. Wong received MYR 370,000, or approximately US$120,987, in connection with rendering consulting services to Legend Venture Pte. Ltd. on behalf of the Company.
Narrative disclosure to Summary Compensation
Each of our executive officers are parties to an employment agreement with UHT, our subsidiary, dated July 19, 2011, or the Employment Agreements. Pursuant to the terms of the Employment Agreements, the executive officers will receive the annual base salaries set forth below, retroactive July 1, 2011:
Name
Annual Salary
Weng Kun Wong
MYR 340,560 or US$109,392
Liong Tat Teh
MYR 124,800 or US$40,087
Sek Wong Fong
MYR 46,200 or US$14,840
Each executive officer may terminate his or her respective employment agreement by giving two months prior written notice or, in lieu of such notice, electing to immediately terminate and receive a sum equal to two months salary. UHT may terminate each Employment Agreement by giving 24 hours prior written notice in the event of any gross misconduct, criminal activities committed by the employee, or serious default or breach by the employee of any terms of his or her respective employment agreement or the rules and regulations of UHT.
Each executive officer also executed a noncompetition and nondisclosure agreement containing non-solicitation obligations that survive the termination of the agreement for a period of two years, confidentiality obligations and other obligations relating to employee inventions by the executive.
The foregoing descriptions of the Employment Agreements are qualified in their entirety by reference to such agreements which are filed as Exhibits 10.7, 10.8 and 10.9 to this Annual Report, respectively, and are incorporated herein by reference.
Our executive officers are entitled to reimbursement for reasonable travel and other out-of-pocket expenses incurred in connection with their services on our behalf.
Equity Awards
There are no options, warrants or convertible securities outstanding. At no time during the last fiscal year with respect to any of any of our executive officers was there:
● any outstanding option or other equity-based award repriced or otherwise materially modified (such as by extension of exercise periods, the change of vesting or forfeiture conditions, the change or elimination of applicable performance criteria, or the change of the bases upon which returns are determined);
● any waiver or modification of any specified performance target, goal or condition to payout with respect to any amount included in non-stock incentive plan compensation or payouts;
● any option or equity grant;
● any non-equity incentive plan award made to a named executive officer;
● any nonqualified deferred compensation plans including nonqualified defined contribution plans; or
● any payment for any item to be included under All Other Compensation in the Summary Compensation Table.
Compensation of Directors
During our fiscal year ended October 31, 2013, we did not provide compensation to any of our employee directors for serving as our director. We currently have no formal plan for compensating our employee directors for their services in their capacity as directors, although we may elect to issue stock options to such persons from time to time.
Non-Employee Director Fees
Our Compensation Committee and Board determines the form and amount of compensation for our non-employee directors based on informal surveys of similar companies and the amount necessary to attract and retain such directors. For the fiscal year ended October 31, 2013, we paid each of our non-employee directors as follows:
(1)Ms. Yap resigned from her position on our Board of Directors effective November 1, 2013. The vacancy was filled by Poh Chai Ham on November 1, 2013.
* All fees were paid in Malaysian Ringgit, our functional currency. The Malaysian Ringgit was converted into United States Dollars using the exchange rate prevailing at the dates of payment at an average annualized rate of 3.13313 for fiscal year ended October 31, 2013.
Directors who are residents of Malaysia receive a monthly retainer in the amount of RM 3000. Ms. Harrison, our director who is a U.S. resident, receives a monthly retainer in the amount of $2500. All directors are entitled to reimbursement for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at meetings of our Board of Directors. Our Compensation Committee may award special remuneration to any director undertaking any special services on our behalf other than services ordinarily required of a director.
Compensation Risk Management
The Compensation Committee collaborated with our Board of directors and human resources staff to conduct an assessment of potential risks that may arise from our compensation programs. Based on this assessment, the Compensation Committee concluded that our policies and practices do not encourage excessive and unnecessary risk taking that would be reasonably likely to have material adverse effect on the Company. The assessment included our cash incentive programs, which awards non-executives with cash bonuses for punctuality. Our compensation programs are substantially identical among business units, corporate functions and global locations (with modifications to comply with local regulations as appropriate). The risk-mitigating factors considered in this assessment included:
•
the alignment of pay philosophy, peer group companies and compensation amounts relative to local competitive practices to support our business objectives; and
•
effective balance of cash, short- and long-term performance periods, caps on performance-based award schedules and financial metrics with individual factors and Compensation Committee and management discretion.
Compensation Committee Interlocks and Insider Participation
Dato’ Amiruddin Bin Che Embi, Peijin W. Harrison and Ee Ring Yap served on our Compensation Committee during fiscal year ended October 31, 2013. Effective November 1, 2013, Ms. Yap resigned from her positions as a director and member of the Compensation, Audit and Nominations and Corporate Governance Committees. Poh Chai Ham was appointed to fill all vacancies created by her resignation, effective November 1, 2013.
Compensation Committee Report
Our Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis in this report with management. Based on its review and discussion with management, the Board of Directors recommended that the Compensation Discussion and Analysis be included in this Annual Report. The material in this report is not deemed filed with the SEC and is not incorporated by reference in any of our filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made on, before, or after the date of this Annual Report and irrespective of any general incorporation language in such filing.
Submitted by members of the Compensation Committee:
Dato’ Amiruddin Bin Che Embi
Peijin W. Harrison
Poh Chai Ham
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth, as of December 23, 2013, certain information with regard to the record and beneficial ownership of the Company’s common stock by (i) each person known to the Company to be the record or beneficial owner of 5% or more of the Company’s common stock, (ii) each director of the Company, (iii) each of the named executive officers, and (iv) all executive officers and directors of the Company as a group:
* Less than 1%.
(1) Except as otherwise indicated, the address of each beneficial owner is c/o Prime Global Capital Group Incorporated, 11-2, Jalan 26/70A, Desa Sri Hartamas, 50480 Kuala Lumpur, Malaysia.
(2) Applicable percentage ownership is based on 512,682,393 shares of common stock outstanding as of December 23, 2013, together with securities exercisable or convertible into shares of common stock within 60 days of December 23, 2013. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock that a person has the right to acquire beneficial ownership of upon the exercise or conversion of options, convertible stock, warrants or other securities that are currently exercisable or convertible or that will become exercisable or convertible within 60 days of December 23, 2013 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the number of shares beneficially owned and percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence.
Transactions With Weng Kung Wong, Wooi Khang Pua and Kok Wai Chai
As of October 31, 2013, we obtained from Weng Kung Wong, our Chief Executive Officer and director, several unsecured, interest-free advances which, together with prior advances, have an aggregate principal amount of RM 23,824,714, or approximately $7,604,126. The advances are repayable within the next twelve months. We repaid RM 1,055,622, or approximately $336,923 during fiscal year ended October 31, 2013.
As of October 31, 2013, we obtained from Wooi Khang Pua, UHT’s director, several unsecured, interest-free temporary advances made to the Company with the aggregate principal amount of $305,289. The advances are repayable within the next twelve months. We did not make any repayments during fiscal year ended October 31, 2013.
Weng Kung Wong and Kok Wai Chai, UHT’s director, have jointly and severally guaranteed the repayment of the loan made by Hong Leong Bank Berhad to PGCG Assets in the principal amount of RM 41,000,000 and the repayment of all financial commitments of PGCG Assets to such lender. This loan was obtained by PGCG Assets in connection with the acquisition of its fifteen story commercial building in Kuala Lumpur, Malaysia. The terms of this loan are more fully described in the Current Report on Form 8-K filed with the SEC on December 17, 2012.
Weng Kung Wong and Kok Wai Chai also have jointly and severally guaranteed the repayment of the loans made by RHB Bank Berhad to PGCG Assets in the principal amount of RM 9,840,000 in connection with the acquisition of its twelve story commercial building in Kuala Lumpur, Malaysia. The terms of this loan are more fully described in the Current Report on Form 8-K filed with the SEC on April 1, 2013.
Lease From Atomic Vision
On October 29, 2010, we leased from Atomic Vision Sdn. Bhd. approximately 1,400 square feet of office space at our headquarters located at 11-2, Jalan 26/70A, Desa Sri Hartamas, 50480 Kuala Lumpur, Malaysia at a monthly rate of MYR 2,500, which is approximately US$817 and is considered a market rate. The lease expires November 30, 2014.
On May 1, 2013, we leased an additional 1,400 square feet of office space located one floor below our headquarters at 11-1, Jalan 26/70A, Desa Sri Hartamas, 50480 Kuala Lumpur, Malaysia at a monthly rate of MYR 2,500, which is approximately US$817. Our lease expires April 30, 2015.
Weng Kung Wong, our Chief Executive Officer and director, owns 50% of PGCG Properties Sdn. Bhd., which is the parent company of Atomic Vision Sdn. Bhd. and is adequately capitalized. The descriptions of the above described leases are qualified in their entirety by reference thereto, which are filed as Exhibits 10.2 and 10.3, respectively, to this Annual Report, and are incorporated herein by reference.
We have not adopted policies or procedures for approval of related person transactions but review them on a case-by-case basis. We believe that all related party transactions were on terms at least as favorable as we would have secured in arm’s-length transactions with third parties. Except as set forth above, we have not entered into any material transactions with any director, executive officer, and promoter, beneficial owner of five percent or more of our common stock, or family members of such persons.
Director Independence
We have adopted standards for director independence that correspond to NYSE listing standards and SEC rules. An “independent director” means a person who is not an officer or employee of the Company or its subsidiaries, or any other individual having a relationship that, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. To be considered independent, the Board must affirmatively determine that neither the director, nor any member of his or her immediate family, has had any direct or indirect material relationship with the Company within the previous three years. In addition, to be considered “independent” under SEC rules, each member of the Audit Committee may not accept, directly or indirectly, any consulting, advisory, or other compensatory fee from us, other than compensation for his or her services as a director.
The Board considered relationships, transactions and/or arrangements with each of the directors and concluded that none of the non-employee directors, or any of his or her immediate family members, has any relationship with us that would impair his or her independence. The Board has determined that each member of the Board, other than Messrs. Wong and Teh, is an independent director under applicable NYSE listing standards and SEC rules. Messrs. Wong and Teh do not meet the independence standards because they are employees and executive officers of the Company.
ITEM 14.
ITEM 14. Principal AccountING Fees And Services.
All audit work relating to fiscal years ended October 31, 2013 and 2012 were performed by Borgers & Cutler CPAs PLLC.
Our Board of Directors established the Audit Committee on April 19, 2012. Prior to that time, the functions customarily delegated to an audit committee were performed by our full Board of Directors, which approved in advance, all services performed by its auditors. Our Audit Committee has considered whether the provision of non-audit services is compatible with maintaining the principal accountant’s independence, and has approved such services.
The following table sets forth fees billed by our auditors during the last two fiscal years for services rendered for the audit of our annual consolidated financial statements and the review of our quarterly financial statements, services by our auditors that are reasonably related to the performance of the audit or review of our consolidated financial statements and that are not reported as audit fees, services rendered in connection with tax compliance, tax advice and tax planning, and all other fees for services rendered.
(1) Audit Fees represent fees for professional services provided in connection with the audit of our consolidated annual financial statements and review of the quarterly financial statements and internal controls over financial reporting, and audit services in connection with statutory or regulatory filings, consents or other SEC matters.
(2) Audit-Related Fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under “Audit Fees.” In fiscal 2013 and 2012, this category consisted of fees billed by HKCM in connection with compiling the Company’s financial statements for fiscal 2013 and 2012.
PART IV
ITEM 15.
ITEM 15. Exhibits and Financial Statement Schedules.
The following documents are filed as part of this report:
(1)Financial Statements
Financial Statements are included in Part II, Item 8 of this report.
(2) Financial Statement Schedules
No financial statement schedules are included because such schedules are not applicable, are not required, or because required information is included in the consolidated financial statements or notes thereto.
(3) Exhibits
* Filed herewith.
(1) Incorporated by reference from our Quarterly Report on Form 10-Q filed with the Securities and Exchange on February 22, 2011.
(2) Incorporated by reference from Exhibit 2.1 to Current Report on Form 8-K filed with the Securities and Exchange on December 7, 2010.
(3) Incorporated by reference from Amendment No. 2 to our registration statement filed on Form S-1 with the Securities and Exchange Commission on September 2, 2009.
(4) Incorporated by reference from Exhibit 2 to Preliminary Information Statement on Schedule 14C filed with the Securities and Exchange Commission on December 23, 2010.
(5) Incorporated by reference From Exhibit 10.1 to our Current Report on Form 8-K filed with the Securities and Exchange on December 20, 2013.
(6) Incorporated by reference from our Current Report on Form 8-K filed with the Securities and Exchange Commission on December 13, 2011.
(7) Incorporated by reference from our Current Report on Form 8-K filed with the Securities and Exchange Commission on July 19, 2011.
(8) Incorporated by referenced from our Current Report on Form 8-K filed with the Securities and Exchange Commission on December 14, 2012.
(9) Incorporated by reference from our Current Report on Form 8-K filed with the Securities and Exchange Commission on April 1, 2013.
(10) Incorporated by reference from our Current Report on Form 8-K filed with the Securities and Exchange Commission on February 2, 2012.
(11) Incorporated by reference from our Current Report on Form 8-K filed with the Securities and Commission on April 27, 2012.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, 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/ Weng Kung Wong
Chief Executive Officer
Weng Kung Wong
and Director
December 23, 2013
(Principal Executive Officer)
/s/ Liong Tat Teh
Liong Tat Teh
Chief Financial Officer and Director
(Principal Financial Officer and Principal Accounting Officer)
December 23, 2013
/s/ Dato’ Amiruddin Bin Che Embi*
Dato’ Amiruddin Bin Che Embi
Director
December 23, 2013
/s/ Peijin W. Harrison*
Peijin W. Harrison
Director
December 23, 2013
/s/ Ham Poh Chai*
EE Ring Yap
Director
December 23, 2013
Representing all of the members of the Board of Directors.
* By /s/ Liong Tat Teh
Liong Tat Teh
Attorney-in-Fact**
** By authority of the power of attorney filed herewith