Part
I
Corporate
History
Victory
Commercial Management Inc. (hereinafter referred to as the “Company”, “VCM”, and where appropriate, the
terms “Company”, “we”, “us” or “our” are also referred to VCM and its wholly owned
and majority owned subsidiaries as a whole) was incorporated on July 5, 2017 under the laws of Nevada.
On
July 13, 2017, VCM formed a wholly owned subsidiary, Victory Commercial Investment Ltd. (“VCI”) under the laws
of British Virgin Islands.
Sino
Pride Development Limited (“Sino Pride”) is a Hong Kong company, incorporated on May 26, 1989. Sino Pride is a holding
company who directly owns an 80% equity interest of Dalian Victory Plaza Development Co., Ltd. (“DVPD”), directly
owns a 95% equity interest in Dalian Victory Business Management Co., Ltd. (“DVBM”), and directly owns 100% of DVPM.
DVPD
was incorporated as a Sino-foreign cooperative joint venture on March 29, 1993 under the laws of the People’s Republic of
China (“PRC” or “China”). Sino Pride owns 80% equity interest of DVPD while Dalian Victory Development
Co., Limited (“DVDC”), a stated owned enterprise in China, owns a 20% equity interest of DVPD.
DVBM
was incorporated as a joint venture on September 12, 2000 under the laws of PRC. Sino Pride owns a 95% equity interest of DVBM
and DVPD owns a 5% equity interest of DVBM.
DVPM
was incorporated on June 6, 2018 as limited liability company under the laws of PRC. Sino Pride owns 100% of the equity of DVPM.
DVPM was formed as a property management company and will play a similar role as DVBM to improve the management of Victory Plaza.
DVPM did not have any business activities as of the issuance date of this report.
Iven
International Group Limited, is a company registered in Hong Kong (“Iven”). From October 31, 2016 to June 30, 2017,
Alex Brown beneficially owned 100% of Iven, among which, a 70% equity interest was held directly, and a 30% equity interest was
held indirectly through Dalian Yiwen New Materials Technology Development Co., Ltd, a PRC entity 80% owned by Alex Brown and 20%
owned by his spouse. On June 30, 2017, Alex Brown and Dalian Yiwen New Material Technology Development Co., Ltd transferred their
respective ownership of Iven to Winner Ascent Investment Limited, a Hong Kong limited liability company solely owned by Alex Brown.
Victory
Plaza Holding Limited (“VP Holding”), a BVI company, is the original owner of Sino Pride. VP Holding was a shell company
and incurred significant losses from the operations of Sino Pride and its subsidiaries DVPD and DVBM. VP Holding and Sino Pride
had no relationship or affiliation with us or Alex Brown prior to the corporate restructure.
November
30, 2016 Transaction
In
November 2016, Iven entered and executed an agreement of “Assignment of Common Stock and Debt Rights” (“the
Original Agreement”) with VP Holding, the former shareholder of Sino Pride. Pursuant to the Original Agreement, Iven acquired
all 30,000,000 shares of common stock of Sino Pride then outstanding and assumed a shareholder loan and loan interest totaling
$52,750,000 (Sino Pride owed to VP Holding) for a nominal consideration of HK$ 1 (approximately US$0.13) from VP Holding. The
change of ownership in Sino Pride from VP Holding to Iven had no impact on Sino Pride’s ownership in DVPD and DVBM (operating
entities).
Iven
was a private shell company with no operations and with nominal assets, which is 100% directly and indirectly owned by Mr. Brown.
Iven was the legal acquirer in the November 30, 2016 acquisition. At the date of acquisition, Sino Pride was a holding company
of two Chinese operating entities, DVPD and DVBM. The accounting acquirer usually is the combining entity whose relative size
(measured in, for example, assets, revenues, or earnings) is significantly larger than that of the other combining entity or entities
as per ASC 805-10-55-13. Thus, Sino Pride and Subsidiaries were treated as the accounting acquirer in connection with the November
2016 transaction.
The
November 30, 2016 transaction was treated as a reverse acquisition or recapitalization. The accounting is similar to that resulting
from a reverse acquisition, except that no goodwill or other intangible assets are recorded. Accordingly, the historical financial
statements are those of Sino Pride and its Subsidiaries.
September
4, 2017 Transaction
On
September 4, 2017, VCI signed an agreement of “Assignment of All Outstanding Shares and All Debt Rights Agreement”
(“the Agreement”) with Iven. Pursuant to the Agreement, VCI acquired all 30,000,000 shares of common stock of Sino
Pride then outstanding and assumed shareholder debt and loan rights totaling HK$493,807,633 (approximately $64,208,000) (Sino
Pride owed to VP Holding) including an outstanding shareholder loan of HK$408,409,628 (approximately $53,093,000) for a nominal
consideration of HK$1 (approximately US$0.13) from Iven. The change of ownership of Sino Pride from Iven to VCI had no impact
on Sino Pride’s ownership in DVPD and DVBM (operating entities).
Iven
and VCI were under common control of our controlling shareholder. The transfer of ownership in Sino Pride from Iven to VCI is
a part of the corporate restructuring to prepare the Company to list in the U.S. capital markets.
The
Company accounted for the September 2017 transaction as a transaction between entities under common control based on the guidance
provided by ASC 805-50-25. Following the above transactions, VCI obtained control of Sino Pride and its subsidiaries, and, as
a result, VCM control over VCI, Sino Pride and its Subsidiaries.
The
Company together with its wholly-owned subsidiaries, VCI, and Sino Pride and its majority owned subsidiaries, DVBM and DVPM were
effectively controlled by the same shareholder, Mr. Brown before and after the September 2017 corporate restructuring, and is
considered under common control, which has been accounted for similar to the pooling method of accounting. The accompanying consolidated
financial statements have been prepared as if the current corporate structure had been in existence at the beginning of the periods
presented. Accordingly, the historical financial statements are those of Sino Pride and its Subsidiaries.
Recent
Development
Appointment
of Chief Financial Officer
On
September 11, 2019, the Board of the Company appointed Robert Chen as the Chief Financial Officer and the Principal Accounting
Officer of the Company, effective immediately. Conjunction with such appointment, on the same day, Mr. Alex Brown resigned from
his position as the Interim Chief Financial Officer and Principal Accounting Officer of, effective immediately. Mr. Brown’s
resignation was not the result of any disagreement between the Company and him on any matter relating to the Company’s operations,
policies or practices.
Mr.
Robert Chen, age 60, served as the senior director of finance at Wuxi Advanced Therapies from January 2019 to June 2019, where
he managed both the company’s accounting and FP&A functions. Prior to that, Mr. Chen worked for Taiho Oncology Inc.
from September 2014 to October 2018, where he supervised the accounting, financial reporting, and FP&A functions of the company.
In January 2018, due to his outstanding performance, Mr. Chen was promoted to the senior director of finance of Taiho Oncology
Inc. From January 2010 to September 2014, Mr. Chen served as the corporate controller of Medimetriks Pharmaceuticals Inc., where
he devised and established the system flows, internal control, and financial infrastructures for the pharmaceutical startup company.
From November 2007 to October 2009, Mr. Chen worked as vice president for Domestic Operations at Clark Holding Inc., where he
led Clark Holding Inc. to transit from a private entity to a public Nasdaq-listed corporation. From January 2007 to October 2007,
Mr. Chen worked for Novartis Pharmaceuticals Inc. as an associate director. From June 1998 to January 2007, Mr. Chen served as
the corporate controller at Bradley Pharmaceuticals Inc., where he monitored the financial accounting of monthly closings, reporting,
operational results and SG&A analysis. Mr. Chen received his Bachelor of Science in business administration in accounting
in 1987 and his master’s degree of professional accountancy in 1989 from University of Southern Mississippi. Mr. Chen is
a Certified Public Accountant.
Mr.
Chen does not have any family relationships with any director or executive officer of the Company and has not been involved in
any transaction with the Company during the past two years that would require disclosure under Item 404(a) of Regulation S-K.
Surrender
Possession of Company’s New York Office
Due
to the impact of the coronavirus pandemic, the Company has moved out of its New York office located in 424 Madison Avenue, New
York, NY (the “Premise”) on February 28, 2020. The lease between the landlord (the “Landlord”) and the
Company, dated June 12, 2019 (the “Lease”), will expire on August 31, 2022. On February 28, 2020, the Company entered
into a surrender agreement with the Landlord to surrender possession of the Premise prior to the natural expiration of the Lease
term (the “Surrender Agreement”), pursuant to which, the Company shall remain liable for all obligations under the
Lease until the Landlord re-rents the Premises, which the Landlord will attempt to do, in good faith. The Company also represents
that the Landlord may draw down on the security deposit, which totals $85,215, to cover the rent, damages, and any other expenses.
Judging by the current market condition in New York City and the ongoing stay-at-home order issued by the local government, the
Company believes that the Landlord may not be able to re-rent the Premises and in such event, the Company will be liable for the
remaining rent from March 1, 2020 to August 31, 2022, in an estimated amount of $354,000.
Historical
Events
Prior
to our acquisition of Sino Pride in November 2016, the former management sold approximately 14% of the properties with buy-back
options, pursuant to which such purchasers could request us to buy back their units at an agreed-upon price-approximately 20%
(average) higher than the original sale prices. In addition, we have leased back some units and rented to third parties.
As of December 31, 2016, there were approximately 750 store units, 18,828 square meters (202,663 square feet) that had buy-back
options. Total buy-back liability amounted to $68.6 million and total lease back liability amounted to $8.8 million. As many purchasers
have exercised the buy-back options and we do not have enough cash to satisfy a huge demand of the exercise of the options as
well as we failed to pay rent for certain lease-back units; many purchasers have brought litigation against us claiming breach
of contract due to our failure to fulfill our obligations under the buy-back options or lease-back terms.
As
of December 31, 2019, to our knowledge, there were 565 lawsuits in total filed against us 1) for unpaid rent
by the lease-back owners and 2) for the failure to buy-back property from the current owners of properties that exercised
their options. Total claims amounted to $24,820,625. For certain properties, the Company leases back from the owners and rents
to others. The Company has failed to pay the rent under those leases-backs and some owners have brought claims against the Company.
Other claims were brought by owners of certain properties, where the Company granted the owners an option to request
the Company to buy back the properties from the owners and the Company has failed to do so when such owners exercised
the buy-back option. As of December 31, 2019, the Management estimated that current recorded and payable property financing
agreements are in an aggregate amount of $77,464,781. The buy-back payables are $4,152,344, with
the lease-back liabilities payable of $521,264 and expired lease payables of $5,529,680. The total is $92,410,701 with
$4,742,632 accrued liability for litigation included. Should the actual liabilities from these lawsuits exceed the amounts
accrued, the Company will have to accrue the additional estimated liabilities. As of December 31, 2019, the Company accrued $4,742,632
for possible additional litigation charges.
Going
Concern
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern,
which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. As indicated
in the accompanying consolidated financial statements, the Company had a net loss of $11,114,921 and $4,748,769 for the
years ended December 31, 2019 and 2018, respectively; an accumulated deficit of $203,808,349 at December 31, 2019. The Company
has an unrestricted cash balance of $122,884 as of December 31, 2019. The Company believes that if there is no additional investment
or financing, the current cash balance available to the Company or its projected cash balance for the next 18 months will be very
difficult to cover the required payments of the operating expenses arising from normal business operations and to meet the required
payments of buy-backs and lease-backs if settled with the claims filed by the property owners during next 18 months from the issuance
date of this report .
In
light of our current operating state, management cannot provide assurance that the Company will achieve profitable operations
or become cash flow positive in a short period of time. Management believes that with its current capital resources, it will be
very difficult to continue operating and maintaining its business for the next 18 months from the issuance date of this report.
As
of December 31, 2019, we had a total of $67,257,262 outstanding loans payable to Harbin Bank (the “Bank”). As of the
date of this report, we are in default of three loans with the Bank in the aggregate amount of approximately $ 53.1M. These
loans are secured by certain assets of the Company. The Company is currently in discussion with the Bank to convert the existing
loans into a new loan and apply an additional liquidity loan in RMB 50 million (collectively, the “Refinancing Loans”)
and waive the penalty of late payment of related loan interest. However, there is no assurance or certainty that such Refinancing
Loans or Penalty Waiver will be approved by the Bank. In the event that the Bank rejects our Refinancing Loans and/or commence
any legal proceeding against us regarding the Short-term Loans, we may lose our collateralized assets which will cause a material
adverse effect on our results of operations. Furthermore, if the collateral on those loans cannot satisfy our payment obligation,
we may be forced to commence liquidation process if we do not have sufficient liquidity or cannot raise sufficient fund at that
time, if any at all .
As
of December 31, 2019, the Company had property financing agreements payable of $77,464,781, lease liabilities payable of $521,264,
expired lease-back payables of $5,529,680, and buy-back payables of $4,152,344. As of December 31, 2019, there were 565
lawsuits case against the Company in Dalian City, China. Litigants claimed that the Company failed to buy back the property pursuant
to the sales contracts or the Company failed to pay the promised lease-back rent on time. As of December 31, 2019, such claims
amounted to $24,820,625. These payables were included in and reported under the caption of “Property financing agreements
payable”, “Lease liabilities payable” and “Other payables”
These
lawsuits are mostly caused by the failure of DVPD who failed to buy back the properties when requested to or to pay
rents for certain lease-back stores. Subsequently, certain stores owned by DVPD have been frozen from transfer or disposition
by the courts. DVPD has been prohibited from free transfer, disposal, and pledge of its equity interest in DVBM which accounts
for 5% in DVBM from March 2, 2017 to March 1, 2019. The 5% equity interest in DVBM is still restricted currently as of the issuing
date of this report. In addition, DVPD has been listed as a “dishonest debtor” by the local courts in the PRC. Once
listed as a dishonest debtor, DVPD can be subject to certain restrictions in connection with commercial loans at the banks’
discretion; the purchase or transfer of properties and land use rights; and upgrade or renovation of properties. In addition,
the bank accounts of DVPD are frozen by the courts which allow the inflow of cash to its bank accounts but prohibit the outflow
of cash. The Company has been working actively to resolve these lawsuits since we acquired Sino Pride in November 2016. However,
the company cannot guarantee that all litigation cases can be solved in the future or no new litigation cases will be generated.
Management
believes that the recorded total property financing agreements payable, buy-backs payable, lease-back liabilities payable and
expired lease payable liabilities of $92,410,701 is a reasonable estimation.
In
order to continue as a going concern, the Company will need, among other things, an additional capital injection and/or additional
financing and the continued forbearance of its lender not to foreclose on their loans that are in default. Management’s
plans to obtain such fund for the Company include (1) obtaining capital from the sale of its stock (2) short-term and long-term
borrowings from banks and third-parties, and (3) short-term borrowings from stockholders or other related parties when needed.
As
of the date of this Annual Report, the Short-Terms Loans have become due while the Company has not made the corresponding payment.
The Bank has not taken legal action against the Company and the Bank and the Company are currently discussing combining and converting
the principal and interests due into a new loan and borrowing an additional liquidity loans of RMB 50 million (approximately $7.25
million) (collectively, the “Refinancing Loans”). In addition, the Company has been negotiating with the Bank for
a waiver of the penalties for late payment of principal and the related loan interest (the “Penalty Waiver”). The
Company has already submitted the application for the Refinancing Loans at the request of the Bank. It usually takes about 2 to
3 months for the Bank to review and approve the Refinancing Loans and the Penalty Waiver which can be potentially longer as a
result of the outbreak of the COVID-19. However, there is no assurance or certainty that such Refinancing Loans or Penalty
Waiver will be approved by the Bank. In the event that the Bank rejects our Refinancing Loans and/or commence any legal proceeding
against us regarding the Short-term Loans, we may lose our collateralized assets which will cause a material adverse effect on
our results of operations. Furthermore, if the collateral on those loans cannot satisfy our payment obligation, we may be forced
to commence liquidation process if we do not have sufficient liquidity or cannot raise the necessary funds at that time.
As
a result of the coronavirus pandemic, our DVPD operations in Dalian remained closed from January 25, 2020 until March 5, 2020,
which has adversely affected our operating revenues and cash flow in the first quarter of 2020. Moreover, after reopening of the
shopping mall, we have much less shoppers and tenants in the shopping mall due to the continued effect of COVID-19, We cannot
predict the full extent to which the COVID-19 pandemic will impact our business or operating results, which is highly
dependent on inherently uncertain future developments, including the severity of COVID-19 and the actions taken by governments
and private businesses in relation to COVID-19 containment. Additionally, even if the Company does raise sufficient
funds to support its operations and generates adequate revenues, there can be no assurances that the revenue will be sufficient
to a level where it will generate profits and positive cash flows from operations.
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern,
which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The accompanying
consolidated financial statements do not include any adjustments related to the recoverability and or classification of the recorded
asset amounts and or the classification of the liabilities that might be necessary should the Company be unable to continue as
a going concern.
Corporate
Structure
The
following diagram illustrates our corporate structure as of the date of this Annual Report:
The
address of our principal executive offices and corporate offices is 424 Madison Ave, Suite 1002, New York NY 10017. Our telephone
number is 212-922-2199.
Our
Business
General
VCM
is a Nevada corporation that operates through its subsidiaries VCI and Sino Pride to control two joint ventures formed under the
laws of the PRC. DVPD is a joint venture formed under the laws of the PRC (80% equity interest owned by Sino Pride). DVBM is a
joint venture formed under the laws of PRC. DVBM is 95% owned by Sino Pride and 5% owned by DVPD. DVPM is a PRC entity 100% owned
by Sino Pride. The Company primarily engages in the business of commercial real estate lease and management with a multi-functional
shopping center in Dalian, Liaoning Province of China. DVBM focuses on providing day-to-day management operations of Victory Plaza
which is to be renovated pursuant to the Company’s business plan. DVPM is recently formed as a property management company
and will play a similar role as DVBM to improve the management of Victory Plaza. DVPD is focused on rental income.
Ownership
of Retail Shops
As
stated previously, Victory Plaza is approximately 137,554 square meters (1,480,619 square feet), which is owned and occupied
by various retailers (See, “Description of Property – Rental Property”). The ownership of each retailer’s
space falls into one of the four following categories:
Group(1)
|
|
Level
of Ownership of Retail Space
|
|
Percentage
of Victory Plaza
|
A
|
|
Owned
by DVPD
|
|
16%,
or 22,339 square meters (240,455 square feet)
|
|
|
|
|
|
B
|
|
Sold
properties with buy-back options or return is in process without paying off
|
|
9%,
or 12,114 square meters (130,394 square feet)
|
|
|
|
|
|
C(2)
|
|
Properties
with buy-back options transferred to SML in 2017 and 2018(3)
|
|
6%
or 8,013 square meters (86,251 square feet)
|
|
|
|
|
|
D
|
|
Sold
properties without buy-back options
|
|
69%,
or 95,088 square meters (1,023,519 square feet)
|
|
(1)
|
The
categories are broken down for disclosure purposes; the Company does not maintain a similar alphabetical labelling system
on its books.
|
|
|
|
|
(2)
|
In
the filing of Form S-1/A dated February 12, 2019, the Company had a C-2 property group
category, “Third party has title acquired from previous owner”. The purchase
and sale transactions between previous owner and new owner - “third party”
will not remove the burden of the Company to buy back the property per buy-back options.
The nature of C-2 group is the same as Group B. Therefore, we removed Group
C-2 and combined it (approximately 1%) with Group B in current filing.
|
|
|
|
|
(3)
|
On
December 29, 2017, the Company entered and executed the SML Agreement, pursuant to which, SML has bought back certain properties
from the owners (See, “Description of Property - SML Agreement”).
|
Group
A represents property that the Company owns 100%. Group B represents property we sold to individual owners with buy-back options
which are pending. Group C represents property owned by SML, but the Company is still liable for the buy-back options. Pursuant
to the SML Agreement, the Company is obligated to buy back these properties plus accrued interest no later than May 15, 2023.
Group D presents property we sold to various individual owners without additional rights attached.
Temporary
Suspension of the Renovation of Victory Plaza (the “Renovation”)
We
initially planned to renovate and upgrade Victory Plaza to become a large-sized multifunctional shopping center, which would differ
significantly from a traditional retail shopping center. Under the Renovation Plan, the direct renovation cost including the construction,
regulatory approval, labor and administration & miscellaneous was estimated at $11.2 million. We would need an additional
$83.9 million to buy back the properties that we sold to third parties with the buy-back option in order to conduct our Renovation.
The total anticipated cost to complete the buy-backs and renovation was approximately $95.1 million. As of the date hereof, we
have obtained a construction license and fire department permit and completed the Renovation of certain public areas and commenced
renovation for some individual units. As the date hereof, we have not obtained any loans to be used for direct Renovation.
However,
as a result of COVID-19 in China, the local market condition for shopping malls have substantially changed which brings uncertainty
that if such Renovation is completed, we would be able to generate sufficient revenue to pay off the costs and expenses associated
with the Renovation and provide us sustainable income for future development, not to mention the negative impact by COVID-19 to
our current operation and liquidity. For more details of the impact caused by the outbreak of COVID, please refer to risk factor
“The coronavirus breakout has a relatively big impact on the economy and society.” on page 22.
As
the date hereof, management is taking prudent measures to reassess the feasibilities of the Renovation based on current market
conditions, the Company’s liquidity and potential of future financing. Until a determination is made, the Renovation has
been temporarily suspended.
Our
Rental Income and Income from Common Area Management:
Victory
Plaza currently has approximately 3,100 rental units. Among these rental properties, the Company owns approximately 400 units
and 2,700 units were sold. The Company will lease back some of these sold properties at the owner’s will and sublet
out to tenants. Our rent income was approximately $3.0 and $3.8 million for the fiscal years ended December 31, 2019 and
2018, respectively.
We
currently provide common area management services to 1) tenants that lease the properties we own or occupy
the property we do not own and 2) shop owners who purchased the property from us with or without a buy-back option. Common
area management services include utilities, security, cleaning, fire service, landscaping, public facilities maintenance and other
traditional services provided by a property management office. Our management income was approximately $4.5 and $5.7 million for
the year ended December 31, 2019 and 2018, respectively.
The
following is a table of our management fees:
Property location and
class
|
|
RMB
/ per
square foot
|
|
|
US
$ / per
square foot*
|
|
Most
popular location with highest traffic
|
|
|
110
|
|
|
|
16
|
|
second popular location
|
|
|
119
|
|
|
|
17
|
|
third popular location
|
|
|
137
|
|
|
|
20
|
|
the least popular location
|
|
|
133
|
|
|
|
19
|
|
*Exchange
rate for the Chinese Yuan Renminbi (CNY) and the US Dollar (USD) as of December 31, 2019 is 6.9615
Electricity
is charged under three options: a) meter reading – per actual usage; b) electricity card – pay as you go; c) one-time
charge. Due to the price of electricity varying in peak hours plus waste during usage, the electricity price we charge to tenants
will be slightly higher than the price we pay to the electrical supplier. Utility expenses collected from tenants directly will
offset our utility expenses paid to utility companies. We report the net utility charges as other income.
Competition
We
face intense competition in the Dalian retail industry. Our primary competition comes from ecommerce. China’s retail industry
including Dalian is undergoing a major shift as a result of rapidly changing consumer behavior, adoption of technology, the emergence
of local competitors and the surge of ecommerce. Retail ecommerce sales in China reached $1.36 trillion in 2018, compared to $1.1
trillion in 2017, an increase of 24% from 2017. Although retail growth is expected to continue in the healthy double digits over
the next three years, it is primarily driven by ecommerce. By 2020, retail ecommerce is expected to make up more than 37% of total
retail sales in China. In Dalian, we also compete fiercely with local multifunctional shopping centers who offer similar services
such as Olympia 66 Plaza, New Mart Shopping Plaza, Galleria Shopping Plaza, and Dalian Friendship Mall.
Particularly
in the Qingniwa District, we compete with Century City Victory Plaza, Pavilion Victory Plaza, New Mart Shopping Plaza, which all
aspire to be multifunctional shopping centers and to a certain degree offer similar services to ours. However, we believe we compete
favorably with them because of our diverse tenant base, millennial -focused marketing strategy, and experience-oriented shopping
services.
Our
Competitive Strength:
Experienced
Victory Plaza Management Team
We
have a professional team with significant experience in commercial real estate management, particularly in shopping center management.
Members of the Company’s team have had work experience with well-known shopping center management companies in different
cities.
Preferred
Shopping Destination
Strategically
located in Dalian’s most important financial district “Qingniwa”, also known as Dalian’s premier shopping,
dining, and entertainment destination, our Victory Plaza had no problem of attracting a large volume of consumers in the past.
It has easy access to public transportation and is within walking distance to Dalian’s central train station. Qingniwa is
also a popular destination for both domestic and international tourists, which creates the potential for Victory Plaza to become
a tourist landmark.
Government
Regulation
In
addition to U.S. securities laws, banking laws and laws applicable to all companies, such as The Foreign Corrupt Practices Act,
as a China-based entity, we are subject to various Chinese regulations. This section sets forth a summary of the most significant
China regulations or requirements that may affect our business activities operated in China or our shareholders’ right to
receive dividends and other distributions of profits from the PRC subsidiaries.
Regulations
Regarding Foreign Investment
Investment
activities in the PRC by foreign investors are principally governed by the Guidance Catalogue of Industries for Foreign Investment,
or the Catalogue, which was promulgated and is amended from time to time by the Ministry of Commerce and the National Development
and Reform Commission. Industries listed in the Catalogue are divided into three categories: encouraged, restricted and prohibited.
The restricted and prohibited categories combined are also called the negative list for foreign investment entry and will be subject
to special administrative measures. Industries not listed in the Catalogue are generally deemed as constituting a fourth “permitted”
category. Establishment of wholly foreign-owned enterprises is generally allowed in encouraged and permitted industries. Some
restricted industries are limited to equity or contractual joint ventures, while in some cases Chinese partners are required to
hold the majority interests in such joint ventures. Foreign investors are not allowed to invest in industries in the prohibited
category. Industries not listed in the Catalogue are generally open to foreign investment unless specifically restricted by other
PRC regulations.
Regulations
Regarding Sino-foreign Cooperative Joint Ventures
Sino-foreign
cooperative joint ventures are mainly governed by the Sino-foreign Cooperative Joint Ventures Law of the PRC promulgated by the
PRC National People’s Congress on 13 April 1988 and amended on 31 October 2000, September 3, 2016, November 7, 2016 and
November 4, 2017 and the Implementation Rules of the Sino-foreign Cooperative Joint Ventures Law of the PRC promulgated by the
Ministry of Foreign Trade and Economic Cooperation, the predecessor of the Ministry of Commerce, on 4 September 1995 and amended
on February 19, 2014 and March 1, 2017.
The
establishment of a Sino-foreign cooperative joint venture
The
establishment of a Sino-foreign cooperative joint venture requires the approval of the Ministry of Commerce or such departments
and local governments as authorized by the State Council with certain requisite documents to be submitted for approvals before
October 1, 2016. On September 3, 2016, the National People’s Congress Standing Committee adopted a decision on amending
the relevant laws in relation to foreign invested companies, which took effect on October 1, 2016. Upon the effectiveness of the
decision, the establishment of the foreign invested enterprise (including the Sino-foreign cooperative joint venture) and its
subsequent changes are required to file with relevant commerce authorities instead of obtaining approvals from relevant commerce
authorities, except for the foreign invested enterprises which are subject to special administrative measures regarding foreign
investment entry in the PRC.
Prior
to filing with relevant commerce authorities or within 30 days upon filing with relevant commerce authorities, the applicant is
required to apply to the State Administration for Industry & Commerce or its local branches for the issue of a business license.
A Sino-foreign cooperative joint venture is formally established on the date its business license is issued.
Profits
and losses of Sino-foreign cooperative joint ventures may be distributed to and shared by the joint venture partners in such manner
as those partners may agree to. A Sino-foreign cooperative joint venture should set aside a portion of its profits after tax as
certain reserve funds.
Taxation
PRC
Enterprise Income Tax
The
PRC Enterprise Income Tax Law, or EIT Law, and its implementation rules provide that from January 1, 2008, a uniform income tax
rate of 25% is applied equally to domestic enterprises as well as foreign investment enterprises.
The
EIT Law and its implementation rules provide that a withholding tax at the rate of 10% is applicable to dividends and other distributions
payable by a PRC resident enterprise to investors who are “non-resident enterprises” (that do not have an establishment
or place of business in the PRC, or that have such establishment or place of business but the relevant dividend or other distribution
is not effectively connected with the establishment or place of business). However, pursuant to the Arrangement between the Mainland
and Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect
to Taxes on Income effective on December 8, 2006, the withholding tax rate for dividends paid by a PRC resident enterprise is
5% if the Hong Kong enterprise owns at least 25% of the capital of the PRC enterprise; otherwise, the dividend withholding tax
rate is 10%. According to the Notice of the PRC State Administration of Taxation on Issues relating to the Administration of the
Dividend Provision in Tax Treaties promulgated on February 20, 2009 and effective on the same day, the corporate recipient of
dividends distributed by PRC enterprises must satisfy the direct ownership thresholds at all times during the 12 consecutive months
preceding the receipt of the dividends. However, if a company is deemed to be a pass-through entity rather than a qualified owner
of benefits, it cannot enjoy the favorable tax treatments provided in the tax arrangement. In addition, if transactions or arrangements
are deemed by the relevant tax authorities to be entered into mainly for the purpose of enjoying favorable tax treatments under
the tax arrangement, such favorable tax treatments may be subject to adjustment by the relevant tax authorities in the future.
Business
Tax and Value-added Tax
Pursuant
to the Temporary Regulations on Business Tax, which were promulgated by the State Council on December 13, 1993 and effective on
January 1, 1994, as amended on November 10, 2008 and effective January 1, 2009, any entity or individual conducting business in
a service industry is generally required to pay business tax at the rate of 5% on the revenues generated from providing such services.
In
March 2016, the Ministry of Finance and SAT jointly issued the Pilot Program of Replacing Business Tax with Value-Added Tax (“VAT”)
in an All-round Manner, or Circular 36, effective from May 2016, according to which PRC tax authorities have started imposing
VAT on revenues from various service sectors, including real estate, construction, financial services and insurance, as well as
other lifestyle service sectors, replacing the business tax that co-existed with VAT for over 20 years. The VAT rates applicable
to us may be generally higher than the business tax rate we were subject to prior to the implementation of Circular 36. For example,
the VAT rate for sale and leasing of self-developed real estate will be increased from 5% (business rate) to 11%. However, VAT
rate for leasing of real estate, which was owned by the general taxpayer before April 30, 2016, will be reduced to 5%.
The PRC Enterprise Income Tax Law, or EIT Law, and its implementation rules provide that from January 1, 2008, a uniform income
tax rate of 25% is applied equally to domestic enterprises as well as foreign investment enterprises.
Regulations
Regarding Foreign Exchange
The
principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, which
were most recently amended in August 2008. Payments of current transactions, such as profit distributions and trade and service-related
foreign exchange transactions, can usually be made in foreign currencies without prior approval from SAFE by complying with certain
procedural requirements. By contrast, approval from or registration with appropriate PRC authorities or banks authorized by appropriate
PRC authorities is required where RMB capital is to be converted into foreign currency and remitted out of China to pay capital
expenses.
SAFE
promulgated the Notice of the State Administration of Foreign Exchange on Reforming the Administration of Foreign Exchange Settlement
of Capital of Foreign-invested Enterprises (the “Circular 19”), effective on June 1, 2015, in replacement of
SAFE Circular 142 (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. According to Circular 19, the flow and use of the
RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company is regulated such that
RMB capital may not be used for the issuance of RMB entrusted loans or the repayment of inter-enterprise loans or the repayment
of banks loans that have been transferred to a third party. Although Circular 19 allows RMB capital converted from foreign currency-denominated
registered capital of a foreign-invested enterprise to be used for equity investments within the PRC, it also reiterates the principle
that RMB converted from the foreign currency-denominated capital of a foreign-invested company may not be directly or indirectly
used for purposes beyond its business scope. Thus, it is unclear whether SAFE will permit such capital to be used for equity investments
in the PRC in actual practice. SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing
the Foreign Exchange Settlement Management Policy of Capital Account (the “Circular 16”), effective on June
9, 2016, which reiterates some of the rules set forth in Circular 19, but changes the prohibition against using RMB capital converted
from foreign currency-denominated registered capital of a foreign-invested company to issue RMB entrusted loans to a prohibition
against using such capital to issue loans to non-associated enterprises. Violations of SAFE Circular 19 or Circular 16 could result
in administrative penalties.
From
2012, SAFE has promulgated several circulars to substantially amend and simplify the current foreign exchange procedure. Pursuant
to these circulars, the opening of various special purpose foreign exchange accounts, the reinvestment of RMB proceeds by foreign
investors in the PRC, and remittance of foreign exchange profits and dividends by a foreign-invested enterprise to its foreign
shareholders no longer require the approval or verification of SAFE. In addition, domestic companies are no longer limited to
extend cross-border loans to their offshore subsidiaries but are also allowed to provide loans to their offshore parents and affiliates
and multiple capital accounts for the same entity may be opened in different provinces. SAFE also promulgated the Circular on
Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic Direct Investment by Foreign Investors
and the Supporting Documents in May 2013, which specifies that the administration by SAFE or its local branches over direct investment
by foreign investors in the PRC shall be conducted by way of registration and banks shall process foreign exchange business relating
to the direct investment in the PRC based on the registration information provided by SAFE and its branches. In February 2015,
SAFE promulgated SAFE Circular 13, which took effect on June 1, 2015. SAFE Circular 13 delegates the power to enforce the foreign
exchange registration in connection with inbound and outbound direct investments under relevant SAFE rules from local branches
of SAFE to banks, thereby further simplifying the foreign exchange registration procedures for inbound and outbound direct investments.
On
January 26, 2017, SAFE issued the Notice of State Administration of Foreign Exchange on Improving the Check of Authenticity and
Compliance to Further Promote Foreign Exchange Control (the “SAFE Circular 3”), which stipulates several capital
control measures with respect to the outbound remittance of profit from domestic entities to offshore entities, including (i)
under the principle of genuine transaction, banks shall check board resolutions regarding profit distribution, the original version
of tax filing records and audited financial statements; and (ii) domestic entities shall hold income to account for previous years’
losses before remitting the profits. Moreover, pursuant to SAFE Circular 3, domestic entities shall make detailed explanations
of the sources of capital and utilization arrangements, and provide board resolutions, contracts and other proof when completing
the registration procedures in connection with an outbound investment.
Regulations
Regarding Foreign Exchange Registration of Offshore Investments by PRC Entities
SAFE
promulgated the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment
through Special Purpose Vehicles (the “SAFE Circular 37”) in July 2014 that requires PRC residents or entities
to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established
for the purpose of overseas investment or financing. In addition, such PRC residents or entities must update their SAFE registrations
when the offshore special purpose vehicle undergoes material events relating to any change of basic information (including change
of such PRC citizens or residents, name and operation term), increases or decreases in investment amount, transfers or exchanges
of shares, or mergers or divisions.
SAFE
Circular 37 was issued to replace SAFE Circular 75 (the Notice on Relevant Issues Concerning Foreign Exchange Administration for
PRC Residents Engaging in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles. SAFE further enacted the
Notice on Further Simplifying and Improving the Foreign Exchange Management Policies for Direct Investment (the “SAFE
Circular 13”) effective from June 1, 2015, which allows PRC residents or entities to register with qualified banks in
connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing.
However, remedial registration applications made by PRC residents that previously failed to comply with the SAFE Circular 37 continue
to fall under the jurisdiction of the relevant local branch of SAFE. In the event that a PRC shareholder holding interests in
a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle
may be prohibited from distributing profits to the offshore parent and from carrying out subsequent cross-border foreign exchange
activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary.
Moreover, failure to comply with the various SAFE registration requirements described above could result in liability under PRC
law for evasion of foreign exchange controls.
Residents
Circular
on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip
Investment Through Special Purpose Vehicles, or Circular 37, issued by SAFE and effective in July 4, 2014, regulates foreign exchange
matters in relation to the use of special purpose vehicles, or SPVs, by PRC residents or entities to seek offshore investment
and financing and conduct round trip investment in China.
Circular
37 and other SAFE rules require PRC residents, including both legal and natural persons, to register with the local banks before
making capital contribution to any company outside of China (an “offshore SPV”) with onshore or offshore assets and
equity interests legally owned by PRC residents. In addition, any PRC individual resident who is the shareholder of an offshore
SPV is required to update its registration with the local banks with respect to that offshore SPV in connection with change of
basic information of the offshore SPV such as its company name, business term, the shareholding by individual PRC resident, merger,
division and with respect to the individual PRC resident in case of any increase or decrease of capital in the offshore SPV, transfer
of shares or swap of shares by the individual PRC resident. Failure to comply with the required SAFE registration and updating
requirements described above may result in restrictions being imposed on the foreign exchange activities of the PRC subsidiaries
of such offshore SPV, including increasing the registered capital of, payment of dividends and other distributions to, and receiving
capital injections from the offshore SPV. Failure to comply with Circular 37 may also subject the relevant PRC residents or the
PRC subsidiaries of such offshore SPV to penalties under PRC foreign exchange administration regulations for evasion of applicable
foreign exchange restrictions.
Regulation
Regarding Labor and Social Insurance
Pursuant
to the PRC Labor Law and the PRC Labor Contract Law, employers must execute written labor contracts with full-time employees.
All employers must comply with local minimum wage standards. Violations of the PRC Labor Contract Law and the PRC Labor Law may
result in the imposition of fines and other administrative and criminal liability in the case of serious violations.
In
addition, according to the PRC Social Insurance Law and Administration Measures on Housing Fund, employers like our PRC subsidiaries
in China must provide employees with welfare schemes covering pension insurance, unemployment insurance, maternity insurance,
work-related injury insurance, medical insurance, and housing funds.
Employees
As
of the filing date hereof, the Company has a total of 187 employees, including our executive officers.
Our
employees are not represented by any collective bargaining agreement, and we have never experienced a work stoppage.
We
believe we have good relations with our employees.
Intellectual
Property
We
do not have any intellectual property.
RISKS
RELATING TO OUR BUSINESS
Our
independent registered public accounting firm added an emphasis paragraph to its audit report describing an uncertainty related
to our ability to continue as a going concern.
Due
to our significant accumulated deficit, recurring losses and limited capital resources, our independent registered public accounting
firm has issued a report that describes an uncertainty related to our ability to continue as a going concern. Our financial
statement disclose that we had a net loss of $11,114,921 and $4,748,769 for the years ended December 31, 2019 and 2018, respectively;
an accumulated deficit of $203,808,349 at December 31, 2019 and net cash used in operations of $413,257 for the year ended December
31, 2019. Additionally, total revenues for the year ended December 31, 2019 was $8,191,130, which decrease by approximately
18% or $1,797,909 as compared to $9,989,039, the total revenue for the year ended December 31, 2018. As of December
31, 2019, to our knowledge, there were total of 565 lawsuits against us for unpaid rent from lease-back owners and for
the past due buy-backs of property from current owners of properties. Total claims amounted approximately $24,821,000.
In addition, the Company is currently in default of certain outstanding bank loans, the aggregate amount of which, in addition
to the corresponding interests, is approximately $66.9 million as of December 31, 2019. These conditions raise substantial
doubt about our ability to continue as a going concern. These conditions may make it difficult for us to raise additional
capital or obtain financing. The consolidated financial statements do not include any adjustments that might result
from the outcome of this uncertainty. We may be unable to continue operations if we cannot generate revenues in excess of our
expenses and raise additional capital or obtain financing. In addition, we are dependent on the continued forbearance of our
lender not to foreclose on our property.
Majority
of our business, assets and operations are located in the People’s Republic of China.
The
majority of our business, assets and operations are located in the People’s Republic of China. The economy of the PRC differs
from the economies of most developed countries in many aspects. The economy of the PRC has been transitioning from a planned economy
to a market-oriented economy. Although in recent years the PRC’s government has 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 productive assets in the PRC is still owned by the PRC’s government.
In addition, the PRC’s government continues to play a significant role in regulating industry by imposing industrial policies.
The PRC’s government exercises significant control over the PRC’s economic growth through the allocation of resources,
controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment
to particular industries or companies. Some of these measures benefit the overall economy of the PRC but may have a negative effect
on us.
Actions
of government or change of policies may adversely affect our business, financial condition and results of operations.
We
are at risk from significant and rapid change in the legal systems, regulatory controls, and practices in areas in which we operate.
These affect a wide range of areas including the real estate development approval system, employment practices, financing and
sale of the buildings; our property rights; data protection; environment, health and safety issues; macro-economic policies and
accounting, taxation and stock exchange regulation. Accordingly, changes to, or violation of, these systems, controls or practices
could increase costs and have material and adverse impact on the reputation, performance and financial condition of our development
and operations.
We
may not be able to obtain sufficient capital and/or loans may be forced to limit the scope of our operations.
We
have sustained recurring losses and experienced negative cash flow from operations in recent years. As of December 31,
2019, we have generated cumulative losses of approximately $203,156,000 and; and we expect to continue to incur
losses and have temporarily suspended our Renovation. In addition, these factors will be further affected by the COVID
19 conditions. We believe that our existing cash resources will not be sufficient to sustain operations during the next twelve
months. We need to generate revenue and raise funding in order to sustain our operations and continue to implement our business
plan. If adequate additional financing is not available on reasonable terms, if at all. We may not be able to resume
the Renovation or continue to develop and expand the services of our Victory Plaza. There is no assurance that additional
financing will be available to us if at all. As explained below, DVPD has been listed as a “dishonest debtor” by the
courts and such designation may negatively impact our ability to obtain additional financing.
In
connection with our growth strategies, we may experience increased capital needs and accordingly, we currently do not have
sufficient capital to fund our future operations without additional capital investments or financing. Our capital needs
will depend on numerous factors, including (i) our profitability; (ii) the development projects undertaken by our competitors;
(iii) the level of our investment in operations and (vi) the continuing effect of the COVID 19 virus.We cannot assure you
that we will be able to obtain capital in the future to meet our needs.
If
we cannot obtain additional funding, we may be required to: (i) abandon the renovation plan; (ii) limit our operations and expansion;
(iii) limit our marketing efforts; and (iv) decrease or eliminate capital expenditures. Such reductions could have a materially
adverse effect on our business and our ability to complete the renovation or alternative business plan.
Even
if we do find a source of additional capital, we may not be able to negotiate terms and conditions for receiving such additional
capital that are favorable to us. Any future capital investments could dilute or otherwise materially and adversely affect the
holdings or rights of our existing shareholders. In addition, new equity or convertible debt securities issued by us to obtain
financing could have rights, preferences and privileges senior to our Common Stock. We cannot give you any assurances that any
additional financing will be available to us, or if available, will be on terms favorable to us.
We
derive the majority of our revenues from the real estate rental and related management business in the PRC and any downturn in
the Chinese economy could have a material adverse effect on our business and financial condition.
The
majority of our revenues are generated from rentals and management fees of our Victory Plaza in the PRC and we anticipate
that revenues from such rentals and management fees will continue to represent the substantial portion of our total revenues in
the near future. Our revenues can also be affected by changes in the general economy and the effects of the COVID 19 virus.
Our business is influenced by a number of economic factors which affect retail business and commercial real estate,
such as employment levels, business conditions, interest rates and taxation rates. Adverse changes in these economic factors,
among others, may restrict consumer spending, thereby negatively affecting our profitability.
Since
the Company primarily engages in the business of the multi-functional shopping center located in Dalian, Liaoning, China, the
outbreak of COVID-19 has had a significant impact on our business operations. In late January 2020, the Dalian government
released a stop order on all activities that involved gathering, including a temporary suspension of shopping malls. As a result,
all retailors and service providers of our shopping center were shut down until further notice, subject to the containment of
COVID-19. Given that the outbreak has been gradually controlled in China, the Company’s Dalian office
has resumed business since March 5, 2020. However, our business was and has continued being adversely impacted by
the COVID-19 virus. We have much less traffic in our shopping mall and less tenants after the reopening due to the
concerns of the virus.
We
are subject to extensive government regulation that could cause us to incur significant liabilities or restrict our business activities.
Regulatory
requirements could cause us to incur significant liabilities and operating expenses and could restrict our business activities.
We are subject to statutes and rules regulating, among other things, property management, fire safety in public places, certain
developmental matters, building and site design, and matters concerning the protection of health and the environment. Our operating
expenses may be increased by governmental regulations, such as fees and taxes that may be imposed. Any delay or refusal from government
agencies to grant us necessary licenses, permits, and approvals could have an adverse effect on our operations, particularly,
our renovation plan or any alternative plan.
We
may be unable to compete effectively in the local shopping center and retail industry.
The
Dalian local retail industry is fragmented and intensely competitive. We compete with several reputable multifunctional local
shopping centers on the basis of price, variety of services, perceived value, customer service, atmosphere, location and overall
shopping experience. We also compete with other restaurants and retail establishments for qualified franchisees, site locations
and employees to work in a shopping center.
Many
of our competitors have significantly greater financial and other resources than we do. Many of our competitors also have greater
influence over their respective retail systems than we do because of their significantly higher percentage of company-owned shopping
centers and/or ownership of franchise real estate, giving them a greater ability to implement operational initiatives and business
strategies. Some of our competitors are local shopping centers that, in some cases, have a loyal customer base and strong brand
recognition because of its long history. As our competitors expand their operations and as new competitors enter the industry,
we expect competition to be more intensive. Increased competition could result in price reductions, decreases in profitability
and loss of market share by us. In the event we are unable to compete effectively against other local competitors, our business,
financial condition and results of operations could be materially and adversely affected.
A
majority of our leases will expire within one year, and we may be unable to renew these leases or find new tenants on a timely
basis, or at all.
A
majority of the lease agreements with our tenants have a term of one year. As a result, we experience lease cycles in which a
significant number of tenancies expire each year. These relatively short lease cycles expose us to rental market fluctuations.
We may not be able to renew the lease agreements or find new tenants at rates equal to or higher than those of the expiring leases,
or to find replacement tenants in time so as to minimize periods between leases. If the rental price for our underground shopping
center decreases, or our existing tenants do not renew their lease agreements, or we are unable to find replacement tenants in
time after the expiration of existing tenancies, our business, financial condition, results of operations and prospects could
be materially and adversely affected.
As
of December 31, 2019, the Company has 3 leases outstanding which will expire in one year. These leases are for approximately 431
square feet in rental space and represent annual rental income of approximately $123,000.
Bank
loans in default could have a material
adverse effect on our results of operations
As
of December 31, 2019, we had a total of $67,257,262 outstanding loans payable to Harbin Bank (the “Bank”). The agreement
with the Bank contains certain protective contractual provisions that limit our activities in order to protect the Bank. We are
currently in default of 3 of our loans with the Bank (the “Short-Terms Loans”) in the aggregate amount of approximately
$ 53.1M. We have guarantee and security agreements with the bank in connection with these bank loans, pursuant to which we
have guaranteed or provided security including property mortgages, pledge of accounts receivable (including property management
fees and rentals) and 80% equity interest of DVPD held by Sino Pride was pledged for all liabilities under the bank loans, as
applicable.
As
of the date of this Annual Report, the Short-Terms Loans have become due while the Company has not made the corresponding payment.
The Bank has not taken legal action against the Company and the Bank and the Company are currently discussing combining the principal
and interests due into a new loan and an additional loans in an amount of RMB 50 million (approximately $7.25 million) (collectively,
the “Refinancing Loans”). In addition, the Company has been negotiating with the Bank for a waiver of the penalty
for late payment of principal and the related loan interest (the “Penalty Waiver”). The Company has already submitted
the application for the Refinancing Loans at the request of the Bank. It usually takes about 2 to 3 months for the Bank to review
and approve the Refinancing Loans and the Penalty Waiver which can be potentially longer as a result of the outbreak of the COVID-19.
However, there is no assurance or certainty that such Refinancing Loans or Penalty Waiver will be approved by the Bank. In
the event that the Bank rejects our Refinancing Loans and/or commence any legal proceeding against us regarding the Short-term
Loans, we may lose our collateralized assets which will cause a material adverse effect on our results of operations. Furthermore,
if the collateral on those loans cannot satisfy our payment obligation, we may be forced to commence liquidation process if we
do not have sufficient liquidity or cannot raise sufficient fund at that time.
Our
operating companies must comply with environmental protection laws that could adversely affect our profitability.
We
are required to comply with the environmental protection laws and regulations promulgated by the national and local governments
of the PRC. Some of these regulations govern the level of fees payable to government entities providing environmental protection
services and the prescribed standards relating to construction. During the renovation and daily operation of our Victory Plaza,
waste is unavoidably generated. If we fail to comply with any of the environmental laws and regulations of the PRC, depending
on the type and severity of the violation, we may be subject to, among other things, warnings from relevant authorities, imposition
of fines, specific performance and/or criminal liability, forfeiture of profits made, or an order to close down our business operations
and suspension of relevant permits. As of the date of reporting, the Company has no violation or noncompliance with the environment
rules of China.
The
operating histories of our operating companies may not serve as an adequate basis to judge our future prospects and results of
operations.
The
operating histories of DVPD and DVBM may not provide a meaningful basis for evaluating our business as we plan to renovate the
Victory Plaza into a multifunctional shopping plaza to attract a more diversified group of customers. We cannot guarantee that
we can achieve profitability or that we will have net profit in the future. We will encounter risks and difficulties that companies
who substantially adjust or expand their business frequently experience, including the potential failure to:
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Obtain
sufficient working capital to support our operation and carry out our business plan;
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Manage
our expanding operations and continue to meet customers’ demands;
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Maintain
adequate control of our expenses allowing us to realize anticipated income growth;
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Implement,
adapt and modify our business strategies as needed;
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Anticipate
and adapt to changing conditions in the commercial real estate rental and management industry resulting from changes in government
regulations, mergers and acquisitions involving our competitors, technological developments and other significant competitive
and market dynamics.
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If
we are not successful in addressing any or all of the foregoing risks, our business may be materially and adversely affected.
Our
failure to effectively manage growth may cause a disruption of our operations resulting in the failure to generate revenue at
the levels we expect.
In
order to maximize potential growth in our current and potential markets, we believe that we must be able to attract new renters
and customers to use the services provided by our shopping center to ensure the sustainable development capability of the Company
and to maintain our operations. This strategy may place a significant strain on our management and our operational, accounting,
and information systems. We expect that we will need to continue to improve our financial controls, operating procedures, and
management information systems. We will also need to effectively train, motivate, and manage our employees. Our failure to effectively
manage our operations could prevent us from generating the revenues we expect and therefore have a material adverse effect on
the results of our operations.
Our
future success depends on our ability to retain key executives and to attract, retain, and motivate qualified personnel.
We
are highly dependent on the business development expertise of Alex Brown, our Chairman, Chief Executive Officer, and President;
as well as the other principal members of our management team. We do not currently have employment agreements with any of the
named executive’ officers but plan to enter into employment agreements with certain executive officers, as deemed appropriate
by the Company. Each of the named executive officers has a full-time position with the Company and performs their duties and services
customary and appropriate to their position and as the Company may from time-to-time assign. We do not maintain key person insurance
for any of our executives or other employees. If we are unable to continue to attract and retain high-quality personnel, our ability
to pursue our growth strategy will be limited. While we are working on rectifying its failure to put proper employment arrangements
in place, it is uncertain that such failure could be retroactively rectified completely.
Recruiting
and retaining qualified management, and sales and marketing personnel will also be critical to our success. The loss of the services
of our executive officers or other key employees could impede the achievement of our development of business and seriously harm
our ability to successfully implement its business strategy. Furthermore, replacing executive officers and key employees may be
difficult and may take an extended period of time. We may be unable to hire, train, retain, or motivate these key personnel on
acceptable terms given the competition among numerous competitor companies for similar personnel.
We
will incur significant costs as a public company in the United States.
We
will incur significant costs associated with our public company reporting requirements, costs associated with newly applicable
corporate governance requirements, including requirements under the Sarbanes-Oxley act of 2002 and other rules implemented by
the SEC. We expect all of these applicable rules and regulations to significantly increase our legal and financial compliance
costs and to make some activities more time consuming and costly. We also expect that these applicable rules and regulations may
make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to
accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result,
it may be more difficult for us to attract or retain qualified individuals to serve on our board of directors or as executive
officers. We cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
Our
certificates, permits, and licenses related to our operations are subject to governmental control and renewal, and failure to
obtain or renew such certificates, permits, and licenses will cause all or part of our operations to be terminated.
Our
operations require licenses, permits and, in some cases, renewals of these licenses and permits from various governmental authorities
in the PRC. Our ability to obtain, maintain, or renew such licenses and permits on acceptable terms is subject to change, as are,
among other things, the regulations and policies of applicable governmental authorities.
If
our qualification certificate of property management enterprise or our land use rights certificates are revoked or suspended or
we are unable to renew the permits for any reason, we cannot assure you that our business operations will not be stopped and,
accordingly, our financial performance would be adversely affected.
Our
shopping center may be affected by fire or natural calamities. Our operations are also subject to the risk of power outages, equipment
failures or labor disturbances and other business interruptions. We have limited insurance coverage and do not carry any business
interruption insurance.
Our
Shopping Center is currently underground. A fire, floods or other natural calamities may result in significant damage to our shopping
center. Our operations are subject to risks of various business interruptions, including power outages, equipment failures or
disturbances from labor unrest. If we are unable to obtain timely replacements of damaged equipment, or if we are unable to find
an acceptable contractor in the event our shopping center is damaged by a catastrophic event, then major disruptions to our operations
would result, which would have significant adverse effect on our financial results. Our property insurance may not be sufficient
to cover damages to our Shopping Center, and we do not carry any business interruption insurance covering lost profits as a result
of the disruption to our operations.
We
are subject to certain risks related to litigation filed by or against us, and adverse results may harm our business and operations.
We
are currently involved in, and may in the future be subject to, claims, suits, government investigations, and proceedings arising
from our business. As of December 31, 2019, to our knowledge, there were total of 565 lawsuits against us for unpaid rent
by the lease-back owners and for the past due buy-back of property from current owners of the properties. Total claims amounted
to $24,820,625. Historically, when DVPD sold property, it granted a buy-back option to certain purchasers pursuant to which,
they could request DVPD to buy back their properties at the original purchase prices during certain time frames. DVPD also leased
back certain sold units and then sub-leased to third parties. These lawsuits are caused by our failure to buy back the properties
when required to or our failure to pay rents for certain lease-back units. Subsequently, certain units owned by DVPD have been
frozen from transfer or disposition by the courts. DVPD has been restricted from free transfer, disposition, pledge of
its 5% equity interest in DVBM from March 2, 2017 to March 1, 2019. The 5% equity interest in DVBM is still restricted currently.
In addition, DVPD has been listed as a “dishonest debtor” by the PRC courts. Once listed as a dishonest debtor, DVPD
may be imposed with certain restrictions in connection with the commercial loans at the banks’ discretion; purchase or transfer
of properties and land use rights; and renovation, upgrade or renovation of properties. In addition, the bank accounts of DVPD
are frozen by the courts which allows the inflow of cash to the bank accounts but prohibits the outflow of cash. The management
is negotiating with these claimants actively and attempting to settle these cases with a discounted payment amount. However, we
cannot predict with certainty the cost of defense, the cost of prosecution, or the ultimate outcome of these lawsuits and other
proceedings filed by or against us, including remedies, damage awards, and penalties. Regardless of the outcome, any such claims
or actions require significant time, money, managerial and other resources, result in negative publicity, and harm our business
and financial condition and future prospects.
One
of our operating subsidiaries has been listed as a “dishonest debtor” by PRC courts due to the lawsuits filed against
us. Until such subsidiary has been cleared by PRC courts, that designation may materially adversely affect our ability to obtain
financing, thus affecting our operations.
As
of December 31, 2019, to our knowledge, there were total of 565 lawsuits against us for unpaid rent by the lease-back owners
and for the past due buy-back of property from current owner of properties. Total claims amounted to $24,820,625. Subsequently,
DVPD has been listed as a “dishonest debtor” by the courts. In accordance with the Regulation of the Supreme People’s
Court on the Publication of Information on the List of Dishonest Debtor, the courts have announced such listing to
the public through the list database and informed the relevant government departments, financial regulatory agencies, financial
institutions, institutions that undertake administrative functions and industry associations of such information of a dishonest
debtor, so that the relevant parties can take credit disciplinary actions against the dishonest debtor. As such, DVPD may suffer
certain restrictions in connection with commercial loans at banks’ discretion, purchase or transfer of properties and land
use rights, and renovation, upgrade or renovation of properties. Additionally, certain properties of DVPD have been frozen from
transfer or disposition and its bank accounts are frozen. Until we are able to settle the judgments against us and DVPD
is removed from the Dishonest Debtor list, it will be very difficult for us to obtain additional loans from banks. Accordingly,
unless we can successfully raise sufficient capital from other sources, which we cannot assure, the Dishonest Debtor designation
will materially adversely affect our ability to carry our operations and business plan.
We
provided properties as collateral to help individuals acquire bank loans which imposes substantial risks to a substantial loss
in our assets.
On
May 18, 2017, the Company provided 14 units of rental properties, totaling 293 square meters (3,153 square feet), owned by the
Company as collateral to help three individuals, among which, a board member of DVPD, an employee of DVPD (now a former employee)
and one individual, to acquire one year bank loans in the aggregate amount of RMB 15,000,000, or approximately USD$2,160,450
(the “the 15M Loan”). There was no gain or profit for the Company to provide such collateral.
These
three individuals have not yet repaid the loans to the Harbin Bank, which exposes the Company to a loss of properties if the individuals
are insolvent and fail to repay the bank loans. On December 30, 2019, the Company entered into three separate repayment agreements
with such individuals (the “Repayment Agreements”), pursuant to which, the parties agree that the Company’s
guarantee period for the 15M Loan shall be extended to December 31, 2020 (the “Expiration Date”). After the Expiration
Date, the three individuals shall replace the Company’s collateral or repay the 15M Loan to release the Company’s
assets. Otherwise, the three individuals shall pay the Company a penalty of 1% of the 15M Loan. The three individuals also agreed
to provide the Company 1% of the 15M Loan as compensation (the “Compensation”) in a one-time payment on May 30, 2020.
An overdue payment of such Compensation will subject to daily late fees of 0.5% of such Compensation.
We
have identified multiple material weaknesses in our internal control over financial reporting which could, if not remediated,
result in material misstatements in our financial statements.
Our
management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined
in Rule 13a-15(f) under the Securities Exchange Act. As disclosed elsewhere in this report, we identified material weaknesses
in our internal control over financial reporting primarily as a result of lack of accounting staffing, insufficient policies and
procedures to ensure the correct application of accounting and financial reporting with respect to the current requirements of
GAAP and SEC disclosure requirements, lack of segregation of duties, no independent audit committee and no effective control procedures
as to the use of the Company’s assets, and concluded that neither our disclosure controls and procedures nor our internal
control over financial reporting were effective as of December 31, 2019. A material weakness is defined as a deficiency, or combination
of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement
of our annual or interim financial statements will not be prevented or detected and corrected on a timely basis. As a result
of these material weaknesses, our management concluded that our internal control over financial reporting was not effective based
on criteria set forth by the Committee of Sponsoring Organization of the Treadway Commission in Internal Control-An Integrated
Framework (2013). We are actively engaged in developing a remediation plan designed to address these material weaknesses. If our
remedial measures are insufficient to address these material weaknesses, or if additional material weaknesses or significant deficiencies
in our internal control are discovered or occur in the future, our consolidated financial statements may contain material misstatements
and we could be required to restate our financial results.
RISKS
RELATING TO DOING BUSINESS IN CHINA
The
coronavirus outbreak has had a big impact on the economy and society.
The
outbreak of the COVID-19 was first reported on December 31, 2019 in the City of Wuhan, Hubei, China and was recognized as a pandemic
by the World Health Organization (WHO) on March 11, 2020. Efforts to prevent the virus spreading include travel restrictions,
quarantines, curfews, event postponements and cancellations, and facility closures. These include a quarantine of Hubei, curfew
measures elsewhere in China, and national travel restrictions. In late March, Chinese Premier Li Keqiang reported that spread
of epidemic has been basically blocked and the outbreak has been controlled in China. As a result, some of the government restrictions
and quarantines abovementioned have relaxed in certain areas.
On
January 31, 2020, a public health emergency was declared in the United States with travel restrictions placed on entry for travelers
from China. On March 13, 2020, a national emergency was further declared in the United States. On March 20, 2020, the governor
of New York issued a statewide stay-at-home order to help combat the spread of the COVID-19 virus. New York City has been deemed
as the new coronavirus epicenter as it accounts for roughly a third of all the coronavirus cases in the United States. As of mid-April
2020, more than 2.11 million cases have been reported across 210 countries and territories.
The
Company’s business operations could be adversely affected by the effects of a widespread outbreak of contagious disease,
including the recent outbreak of coronavirus known as COVID-19. The Company’s corporate headquarters and operations are
located in Dalian, Liaoning, China and New York City, New York, U.S., where any outbreak of contagious diseases and other adverse
public health developments could be materially adverse to the Company’s business operations. In response to the highly
contagious and sometimes fatal coronavirus inflicting thousands of people in China and the United States, the local government
has imposed travel restrictions and quarantines/stay-at-home order to help control the spread of COVID-19.
Since
the Company primarily engages in the business of the multi-functional shopping center are located in Dalian, Liaoning, China,
the outbreak of COVID-19 has significantly impact on our business operations. In late January 2020, the Dalian government released
a stop order on all activities that involved gathering, including a temporary suspension of shopping malls. As a result, all retailors
and service providers of our shopping center were shut down until further notice, subject to the containment of the COVID-19 virus.
Given that the outbreak has been gradually controlled in China, the Company’s Dalian office has resumed
business since March 5, 2020. However, our business was and has continued to be adversely impacted by the
outbreak of the COVID-19 virus. We have much less traffic in our shopping mall and less tenants after the
reopening due to the concern of the virus. In wake of the impact on market conditions and economic environment, the Company
temporarily suspended its original Renovation. Consequently, the coronavirus pandemic has negatively impacted our operating
revenue during the first quarter of 2020, and the Company believes the negative impact on revenue will continue throughout
year 2020.
Our
office located in New York City is facing the same situation. If the COVID-19 continues to spread in the United States,
the federal and state governments may impose additional measures further restricting travel within and outside of the United States
and also impose the regions under mandatory quarantine. Similarly, the continued spread of COVID-19 globally could further adversely
impact the Company’s operations and could have an adverse impact on the Company’s business and financial results.
Labor
laws in the PRC may adversely affect our results of operations.
On
June 29, 2007, the PRC’s government promulgated the labor contract law of the PRC, which became effective on January 1,
2008 and was subsequently amended on December 28, 2012. The labor contract law imposes greater liabilities on employers and significantly
affects the cost of an employer’s decision to reduce its workforce. Further, the law requires certain terminations be based
upon seniority and not merit. In the event that we decide to significantly change or decrease our workforce, the labor contract
law could adversely affect our ability to enact such changes in a manner that is most advantageous to our business or in a timely
and cost-effective manner, thus materially and adversely affecting our financial condition and results of operations.
We
may be exposed to liabilities under the foreign corrupt practices act and Chinese anti-corruption law.
We
are subject to the U.S. foreign corrupt practices act (“FCPA”), and other laws that prohibit improper payments or
offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by
the statute for the purpose of obtaining or retaining business. We are also subject to Chinese anti-corruption laws, which strictly
prohibit the payment of bribes to government officials. We have operations, agreements with third parties, and earn revenues
in China, and could be exposed to corruption. Our activities in China create the risk of unauthorized payments or offers
of payments by one of the employees, consultants of our Company, because these parties are not always subject to our control.
Our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants of our
company may engage in conduct for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption laws may
result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business,
operating results and financial condition. In addition, the government may seek to hold our company liable for successor liability
FCPA violations committed by companies in which we invest or that we acquire.
The
government in China has the right to take over part or all of our underground properties during times of war.
Among
the approximately 137,554 square meters (1,480,619 square feet) of the total rental area of Victory Plaza, approximately 59,000
square meters (635,071 square feet) was designed for use as an underground civil air defense shelter (the “Civil Air Defense
Shelter”). The Civil Air Defense Shelter is allowed to be used for a shopping place or garage during peace time as set forth
in approvals by the local air defense authority. However, the primary use of any civil air defense shelter is to protect civilians
during times of war. In order to serve this purpose, the PRC government authorities, by law and regulation, reserve the right
to take over the Civil Air Defense Shelter during times of war. If any military conflict or a war breaks out between China and
other countries or regions, it is likely that the Civil Air Defense Shelter or other part of our underground Victory Plaza will
be seized by the government in China as underground civil air defense shelters. Although the seizure of civil air defense shelters
by the government authorities in China for use during times of war does not mean the government authorities permanently revoke
our right to use, operate and profit from the facilities and we may continue the use and operation of our the Civil Air Defense
Shelter after the war, our business would still be interrupted.
Uncertainties
with respect to the PRC’s legal system could adversely affect us.
We
conduct a substantial amount of our business through our subsidiaries in China. Our operations in China are governed by PRC laws
and regulations. Our PRC subsidiaries are generally subject to laws and regulations applicable to foreign investments in China
and, in particular, laws and regulations applicable to the operative joint venture enterprises. The PRC legal system is based
on statutes. Prior court decisions may be cited for reference but have limited precedential value.
Since
1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments
in China. 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 some of 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 sometime after the violation. In addition, any litigation in China
may be protracted and result in substantial costs and diversion of resources and management attention.
We
are a holding company and we rely on funding for dividend payments from our subsidiaries, which are subject to restrictions under
PRC laws.
We
are a holding company incorporated in Nevada and we operate our core businesses through our subsidiaries in the PRC. Therefore,
the availability of funds for us to pay dividends to our shareholders and to service our indebtedness depends upon dividends received
from such PRC subsidiaries. The ability of our subsidiaries to pay dividends and make payments on intercompany loans or advances
to their shareholders is subject to, among other things, distributable earnings, cash flow conditions, restrictions contained
in the articles of association of our subsidiaries, joint-venture contracts, applicable laws and restrictions contained in the
debt instruments of such subsidiaries. If our subsidiaries incur debt or losses, their ability to pay dividends or other distributions
to us may be impaired. As a result, our ability to pay dividends and to repay our indebtedness will be restricted. PRC laws require
that dividends be paid only out of the after-tax profit of our PRC subsidiaries calculated according to PRC accounting principles,
which differ in many aspects from generally accepted accounting principles in other jurisdictions. PRC laws also require enterprises
established in the PRC to set aside part of their after-tax profits as statutory reserves. These statutory reserves are not available
for distribution as cash dividends. In addition, restrictive covenants in bank credit facilities or other agreements that we or
our subsidiaries entered into or may enter into in the future may also restrict the ability of our subsidiaries to pay dividends
to us. Further, starting from January 1, 2008, dividends paid by our PRC subsidiaries to their non-PRC parent companies will be
subject to a 10% withholding tax, unless there is a tax treaty between the PRC and the jurisdiction in which the overseas parent
company is incorporated, which specifically exempts or reduces such withholding tax. Pursuant to a double tax treaty between Hong
Kong and the PRC, if the non-PRC parent company is a Hong Kong resident and directly holds a 25% or more interest in the PRC enterprise,
such withholding tax rate may be lowered to 5%. These restrictions on the availability of our funding may impact our ability to
pay dividends to our shareholders and to service our indebtedness.
In
addition, the PRC government imposes controls on the convertibility of the renminbi, or “RMB” into foreign currencies
and, in certain cases, the remittance of currency out of China. Shortages in the availability of foreign currency may restrict
the ability of our PRC subsidiaries to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise
satisfy their foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account
items, including profit distributions, interest payments and expenditures from trade-related transactions can be made in foreign
currencies without prior approval from the State Administration of Foreign Exchange (“SAFE”) by complying with
certain procedural requirements. However, approval from appropriate government authorities is required where RMB is to be converted
into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign
currencies. The PRC government may also, at its discretion, restrict access in the future to foreign currencies for current account
transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency
demands, we may not be able to pay dividends in foreign currencies to our security-holders.
Our
business may be materially and adversely affected if any of our PRC subsidiaries declares bankruptcy or becomes subject to a foreclosure,
dissolution or liquidation proceeding.
The
enterprise bankruptcy law of the PRC, or the bankruptcy law, came into effect on June 1, 2007. The bankruptcy law provides that
an enterprise will be liquidated if the enterprise fails to settle its debts as and when they fall due and if the enterprise’s
assets are, or are demonstrably, insufficient to clear such debts.
Our
PRC subsidiaries hold assets that are important to our business operations. If our PRC subsidiaries undergo a voluntary or involuntary
liquidation proceeding, Harbin Bank, the holder of our debt which is currently in default or unrelated third-party creditors
may claim rights to some or all of our assets, thereby hindering our ability to operate our business, which would
materially and adversely affect our business, financial condition and results of operations.
According
to SAFE’s provisions for administration of foreign exchange relating to inbound direct investment by foreign investors,
effective on June 10, 2015, if our PRC subsidiaries undergo a voluntary or involuntary liquidation proceeding, prior approval
from the safe for remittance of foreign exchange to our shareholders abroad is no longer required, but we still need to conduct
a registration process with the SAFE designated commercial bank. It is not clear whether “registration” is a mere
formality or involves the kind of substantive review process undertaken by SAFE designated commercial bank.
Fluctuations
in exchange rates could adversely affect our business and the value of our securities.
Changes
in the value of the RMB against the U.S. dollar and other foreign currencies are affected by, among other things, changes in China’s
political and economic conditions. Any significant revaluation of the RMB may have a material adverse effect on our revenues and
financial condition, and the value of, and any dividends payable on our shares in U.S. dollar terms. For example, to the extent
that we need to convert U.S. dollars we receive from our business into RMB for our operations, appreciation of the RMB against
the U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion. Conversely, if we decide
to convert our RMB into U.S. dollars for the purpose of paying dividends on our Common Stock or for other business purposes, appreciation
of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us.
Since
July 2005, the RMB is no longer pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the
foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate
significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future, PRC authorities
may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.
Very
limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not
entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness
of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign
currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign
currencies.
It
may be difficult to effect service of process and enforcement of legal judgments upon our Company and our officers and directors
because they reside outside the United States.
Our
operations are based in China and all of our assets are located in China. In addition, a majority of our directors and officers
reside in China. As a result, service of process on the Company and such foreign directors and officers may be difficult or impossible
to effect within the United States. Moreover, China does not have treaties with the United States or many other countries providing
for the reciprocal recognition and enforcement of the judgment of courts. As a result, recognition and enforcement in China of
judgments of a court in any of these jurisdictions may be difficult or impossible.
PRC
regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident
shareholders to penalties and limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’
ability to distribute profits to us, or otherwise adversely affect us.
The
SAFE promulgated the notice on relevant issues relating to domestic resident’s investment and financing and roundtrip investment
through special purpose vehicles (“SPV(s)”), or Notice 37, in July 2014 that requires PRC residents or entities to
register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for
the purpose of overseas investment or financing. In addition, such PRC residents or entities must update their safe registrations
when the offshore SPV undergoes material events relating to material change of capitalization or structure of the PRC resident
itself (such as capital increase, capital reduction, share transfer or exchange, merger or spin off). On February 28, 2015, SAFE
issued a notice according to which the aforesaid PRC residents or entities are no longer required to register with SAFE or its
local branch, instead the aforesaid PRC residents or entities need to register with local banks. Failure by an individual to comply
with the required SAFE registration and updating requirements described above may result in penalties up to RMB50,000 imposed
on such individual and restrictions being imposed on the foreign exchange activities of the PRC subsidiaries of such offshore
SPV, including increasing the registered capital of, payment of dividends and other distributions to, and receiving capital injections
for the offshore SPV. Failure to comply with Notice 37 may also subject relevant PRC residents or the PRC subsidiaries of such
offshore SPV to penalties under PRC foreign exchange administration regulations for evasion of applicable foreign exchange restrictions.
Our controlling shareholder, Alex Brown (a.k.a “You Chang”) did not register with local SAFE branch or its delegated
commercial bank when he acquired ownership of Sino Pride through his indirect holding of Victory Commercial Investment Ltd. in
November 2016. Although Alex Brown was no longer a PRC nationality afterwards, we cannot assure you that our controlling shareholder
will not be required under Notice 37 to register with local SAFE branch or its delegated commercial bank. These risks could in
the future have a material adverse effect on our business, financial condition and results of operations.
Failure
to comply with the individual foreign exchange rules relating to the overseas direct investment or the engagement in the issuance
or trading of securities overseas by our PRC resident stockholders may subject such stockholders to fines or other liabilities.
Other
than Notice 37, our ability to conduct foreign exchange activities in the PRC may be subject to the interpretation and enforcement
of the implementation rules of the administrative measures for individual foreign exchange promulgated by SAFE in January 2007
(as amended and supplemented, the “Individual Foreign Exchange Rules”). Under the individual foreign exchange rules,
any PRC individual seeking to make a direct investment overseas or engage in the issuance or trading of negotiable securities
or derivatives overseas must make the appropriate registrations in accordance with the SAFE provisions. PRC individuals
who fail to make such registrations may be subject to warnings, fines or other liabilities.
We
may not be fully informed of the identities of all our beneficial owners who are PRC residents. For example, because the investment
in or trading of our shares will happen in an overseas public or secondary market where shares are often held with brokers in
brokerage accounts, it is unlikely that we will know the identity of all of our beneficial owners who are PRC residents. Furthermore,
we have no control over any of our future beneficial owners and we cannot assure you that such PRC residents will be able to complete
the necessary approval and registration procedures required by the individual foreign exchange rules.
It
is uncertain how the individual foreign exchange rules will be interpreted or enforced and whether such interpretation or enforcement
will affect our ability to conduct foreign exchange transactions. Because of this uncertainty, we cannot be sure whether the failure
by any of our PRC resident stockholders to make the required registration will subject our PRC subsidiaries to fines or legal
sanctions on their operations, delay or restriction on repatriation of proceeds of this offering into the PRC, restriction on
remittance of dividends or other punitive actions that would have a material adverse effect on our business, results of operations
and financial condition.
If
we are unable to obtain business insurance in the PRC, we may not be protected from risks that are customarily covered by insurance
in the United States.
Business
insurance is not readily available to fit our business needs in the PRC. To the extent that we suffer a loss of a type that would
normally be covered by insurance in the United States, such as product liability and general liability insurance, we would incur
significant expenses in both defending any action and in paying any claims that result from a settlement or judgment. We have
not obtained fire, casualty and theft insurance, and there is no insurance coverage for our raw materials, goods and merchandise,
furniture or buildings in China. Any losses incurred by us will have to be borne by us without any assistance, and we may not
have sufficient capital to cover material damage to, or the loss of, our Victory Plaza due to fire, severe weather, flood or other
causes, and such damage or loss may have a material adverse effect on our financial condition, business and prospects.
Under
the new enterprise income tax law, we may be classified as a “resident enterprise” of China. Such classification may
result in unfavorable tax consequences to us and our non-PRC shareholders.
China
passed an enterprise income tax law, or the EIT law, which became effective on January 1, 2008. Under the EIT law, 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 as “substantial and overall management and control over the production and operations, personnel,
accounting, and properties” of the enterprise. In addition, a circular issued by the state administration of taxation on
April 22, 2009 clarified that dividends and other income paid by such resident enterprises will be considered to be the PRC’s
source income and subject to the PRC’s withholding tax. This circular also subjects such resident enterprises to various
reporting requirements with the PRC’s tax authorities.
Although
substantially all of our management is currently located in the PRC, it remains unclear whether the PRC’s tax authorities
would require or permit our overseas registered entities to be treated as PRC resident enterprises. We do not currently consider
our Company to be a PRC resident enterprise. However, if the PRC’s tax authorities determine that we are a resident
enterprise for the PRC’s enterprise income tax purposes, a number of unfavorable PRC tax consequences may follow. First,
we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as the PRC’s enterprise
income tax reporting obligations. This would also mean that income such as interest on offering proceeds and non-China source
income would be subject to the PRC’s enterprise income tax at a rate of 25%. Second, although under the EIT law and its
rules, dividends paid to us from our PRC subsidiaries would qualify as tax-exempt income, we cannot guarantee that such dividends
will not be subject to a 10% withholding tax, as the PRC authorities responsible for enforcing the withholding tax have not yet
issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for
the PRC’s enterprise income tax purposes. Finally, dividends paid to stockholders with respect to their shares of our Common
Stock or any gains realized from transfer of such shares may generally be subject to the PRC’s withholding taxes on such
dividends or gains at a rate of 10% if the shareholders are deemed to be non-resident enterprises or at a rate of 20% if the shareholders
are deemed to be non-resident individuals. In addition, any gain realized on the transfer of shares of our common stock by such
investors is also subject to PRC tax at a current rate of 10%, subject to any reduction or exemption set forth in relevant tax
treaties, if such gain is regarded as income derived from sources within the PRC. If dividends payable to our non-PRC investors
or gains from the transfer of our common stock by such investors are subject to PRC tax, the value of your investment in our common
stock may decline significantly.
We
and our shareholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises by
their non-PRC holding companies.
Pursuant
to a notice, or Circular 698, issued by the State Administration of Taxation, where a non-resident enterprise conducts an “indirect
transfer” by transferring the equity interests of a PRC resident enterprise indirectly via disposing of the equity interests
of an overseas holding company, and such overseas holding company is located in a tax jurisdiction that: (1) has an effective
tax rate less than 12.5%; or (2) does not tax foreign income of its residents, the non-resident enterprise, being the transferor,
shall report to the relevant tax authority of the PRC resident enterprise such indirect transfer. Using a “substance over
form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable
commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived
from such indirect transfer may be subject to PRC enterprise income tax, currently at a rate of 10%. In 2015, the State Administration
of Taxation issued a circular, known as Circular 7, which replaced or supplemented certain previous rules under Circular 698.
Circular 7 sets out a wider scope of indirect transfer of PRC assets that might be subject to PRC enterprise income tax, and more
detailed guidelines on the circumstances when such indirect transfer is considered to lack a bona fide commercial purpose and
thus regarded as avoiding PRC tax. The conditional reporting obligation of the non-PRC investor under Circular 698 is replaced
by a voluntary reporting by the transferor, the transferee or the underlying PRC resident enterprise being transferred. Furthermore,
if the indirect transfer is subject to PRC enterprise income tax, the transferee has an obligation to withhold tax from the sale
proceeds, unless the transferor reports the transaction to the PRC tax authority under Circular 7. Late payment of applicable
tax will subject the transferor to default interest. Gains derived from the sale of shares by investors through a public stock
exchange are not subject to the PRC enterprise income tax pursuant to Circular 7 where such shares were acquired in a transaction
through a public stock exchange. Circular 698 was abolished by an announcement promulgated by the State Administration of Taxation
in October 2017 and effective from December 1, 2017, or SAT Circular 37, which, among others, provides specific provisions on
matters concerning withholding of income tax of non-resident enterprises at the source.
As
implemented, there is uncertainty as to the application of Circular 7 and SAT Circular 37, both of which may be determined by
the tax authorities to be applicable to our offshore restructuring transactions or sale of the shares of our offshore subsidiaries
where non-resident enterprises, being the transferors, were involved. The PRC tax authorities may pursue such non-resident enterprises
with respect to a filing regarding the transactions and request our PRC subsidiaries to assist in the filing. As a result, we
and our non-resident enterprises in such transactions may become at risk of being subject to filing obligations or being taxed
under Circular 7, and may be required to expend valuable resources to comply with Circular 7 or to establish that we and our non-resident
enterprises should not be taxed under Circular 7, for our previous and future restructuring or disposal of shares of our offshore
subsidiaries, which may have a material adverse effect on our financial condition and results of operations.
The
PRC government may issue further restrictive measures in the future.
We
cannot assure you that the PRC’s government will not issue further restrictive measures in the future. The PRC government’s
restrictive regulations and measures could increase our operating costs in adapting to these regulations and measures, limit our
access to capital resources or even restrict our business operations, which could further adversely affect our business and prospects.
Our
PRC subsidiaries are not in compliance with the taxation and social security rules of China, and they may face penalties imposed
by the PRC government.
As
of December 31, 2019 and 2018, the Company had tax payables and VAT payable (value added tax), real estate tax, land use right
tax, income tax, taxes related to rental and other taxes in the aggregate amount of $0.8 million and $0.6 million, respectively.
As of December 31, 2019, and 2018 the Company accrued tax penalties payable in the amount of $247,732 and $39,497, respectively
in accordance with Chinese tax law including the expected penalties for not being in incompliance with the social security rules
of China. Some of these tax payables were incurred prior to November 2016, when we acquired the ownership of Sino Pride. As of
May 31, 2018, we have paid off 2017 and prior year’s taxes due including penalties. However, we cannot guarantee
that we have sufficient cash to pay all the payables under the settlements or if we can reach a settlement with the tax authorities,
if at all. In addition, our PRC subsidiaries failed to strictly comply with PRC laws and regulations to contribute towards social
insurance premiums and housing funds on behalf of their employees, which are based on the average salary of employees of Dalian
city instead of their employees’ average monthly salary for the preceding year, as required by the applicable laws and regulations.
We may be required by relevant authorities to make up the shortfall of social insurance premiums and housing funds. Even after
we have successfully settled all tax payables, if any PRC government authority takes the position that there is non-compliance
with the taxation, environmental protection, employment and/or social security rules by our PRC subsidiaries, they may be exposed
to penalties from PRC government authorities, in which case the operation of our PRC subsidiaries in question may be adversely
affected.
If
relations between the United States and China worsen, our stock price may decrease, and we may have difficulty accessing the U.S.
capital markets.
At
various times during recent years, the United States and China have had disagreements over political and economic issues. Controversies
may arise in the future between these two countries. Any political or trade conflicts between the United States and China could
adversely affect the market price of our Common Stock and our ability to access U.S. capital markets.
PRC
regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency
conversion may delay or prevent us from using the proceeds of any offering to make loans to or make additional capital contributions
to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
Under
PRC laws and regulations, we are permitted to utilize the proceeds from any offering pursuant to the Registration Statement to
fund our PRC subsidiaries by making loans to or additional capital contributions to our PRC subsidiaries, subject to applicable
government registration and approval requirements.
Any
loans to our PRC subsidiaries, which are treated as foreign-invested enterprises under PRC laws, are subject to PRC regulations
and foreign exchange loan registrations. For example, loans by us to our PRC subsidiaries to finance their activities cannot exceed
statutory limits and must be registered with the local counterpart of the State Administration of Foreign Exchange, or SAFE. The
statutory limit for the total amount of foreign debts of a foreign-invested company is the difference between the amount of total
investment as approved by the MOC or its local counterpart and the amount of registered capital of such foreign-invested company.
We
may also decide to finance our PRC subsidiaries by means of capital contributions. These capital contributions must be approved
by the MOC or its local counterpart. In addition, SAFE issued a circular in September 2008, SAFE Circular 142, regulating the
conversion by a foreign-invested enterprise of foreign currency registered capital into RMB by restricting how the converted RMB
may be used. SAFE Circular 142 provides that the RMB capital converted from foreign currency registered capital of a foreign-invested
enterprise may only be used for purposes within the business scope approved by the applicable government authority and unless
otherwise provided by law, may not be used for equity investments within the PRC. On July 4, 2014, the SAFE issued the Circular
of the SAFE on Relevant Issues Concerning the Pilot Reform in Certain Areas of the Administrative Method of the Conversion of
Foreign Exchange Funds by Foreign-invested Enterprises, or SAFE Circular 36, which launched a pilot reform of the administration
of the settlement of the foreign exchange capital of foreign-invested enterprises in certain designated areas from August 4, 2014
and some of the restrictions under SAFE Circular 142 will not apply to the settlement of the foreign exchange capital of the foreign-invested
enterprises established within the designated areas and such enterprises are allowed to use its RMB capital converted from foreign
exchange capitals to make equity investments. On March 30, 2015, SAFE promulgated Circular 19, to expand the reform nationwide.
Circular 19 came into force and replaced both Circular 142 and Circular 36 on June 1, 2015. Circular 19 allows foreign-invested
enterprises to make equity investments by using RMB funds converted from foreign currencies. However, Circular 19 continues to
prohibit foreign-invested enterprises from, among other things, using RMB funds converted from its foreign exchange capitals for
expenditures beyond its business scope, providing entrusted loans or repaying loans between non-financial enterprises. 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 in any case
be used to repay RMB loans if the proceeds of such loans have not been used. Violations of these Circulars could result in severe
monetary or other penalties. These circulars may significantly limit our ability to use RMB converted from the net proceeds of
an offering to fund the establishment of new entities in China by our PRC subsidiaries, to invest in or acquire any other PRC
companies through our PRC subsidiaries, or to establish new variable interest entities in the PRC.
In
light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding
companies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary
government approvals on a timely basis, if at all, with respect to future loans to our PRC subsidiaries or future capital contributions
by us to our PRC subsidiaries. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds
we expect to receive from any offering and to capitalize or otherwise fund our PRC operations may be negatively affected, which
could materially and adversely affect our liquidity and our ability to fund and expand our business.
Fluctuations
in exchange rates could have a material adverse effect on our results of operations and the value of your investment.
Substantially
all of our revenues and expenditures are denominated in RMB, whereas our reporting currency is the U.S. dollar. As a result, fluctuations
in the exchange rate between the U.S. dollar and RMB will affect the relative purchasing power in RMB terms of our U.S. dollar
assets. Our reporting currency is the U.S. dollar while the functional currency for our PRC subsidiaries and consolidated variable
interest entity is RMB. Gains and losses from the remeasurement of assets and liabilities that are receivable or payable in RMB
are included in our consolidated statements of operations. The remeasurement has caused the U.S. dollar value of our results of
operations to vary with exchange rate fluctuations, and the U.S. dollar value of our results of operations will continue to vary
with exchange rate fluctuations. A fluctuation in the value of RMB relative to the U.S. dollar could reduce our profits from operations
and the translated value of our net assets when reported in U.S. dollars in our financial statements. This could have a negative
impact on our business, financial condition or results of operations as reported in U.S. dollars. If we decide to convert our
RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or for other business purposes,
appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. In addition,
fluctuations in currencies relative to the periods in which the earnings are generated may make it more difficult to perform period-to-period
comparisons of our reported results of operations.
The
value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political
and economic conditions and China’s foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old
policy of pegging the value of the RMB to the U.S. dollar, and the RMB appreciated more than 20% against the U.S. dollar over
the following three years. However, the People’s Bank of China, or the PBOC, regularly intervenes in the foreign exchange
market to limit fluctuations in RMB exchange rates and achieve policy goals. During the period between July 2008 and June 2010,
the exchange rate between the RMB and the U.S. dollar had been stable and traded within a narrow range. However, the RMB fluctuated
significantly during that period against other freely traded currencies, in tandem with the U.S. dollar. Since June 2010, the
RMB has started to slowly appreciate against the U.S. dollar, though there have been periods when the U.S. dollar has appreciated
against the RMB.
There
remains significant international pressure on the PRC government to adopt a flexible currency policy. Any significant appreciation
or depreciation of the RMB may materially and adversely affect our revenues, earnings and financial position, and the value of,
and any dividends payable on, our securities in U.S. dollars. For example, to the extent that we need to convert U.S. dollars
we receive from public a offering into RMB to pay our operating expenses, appreciation of the RMB against the U.S. dollar
would have an adverse effect on the RMB amount we would receive from the conversion. Conversely, a significant depreciation of
the RMB against the U.S. dollar may significantly reduce the U.S. dollar equivalent of our earnings, which in turn could adversely
affect the price of our securities.
Very
limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered
into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter
into hedging transactions in the future, the availability and effectiveness of these hedges may be limited, and we may not be
able to adequately hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control
regulations that restrict our ability to convert RMB into foreign currency. As a result, fluctuations in exchange rates may have
a material adverse effect on your investment.
Governmental
control of currency conversion may limit our ability to utilize our net revenues effectively and affect the value of your investment.
The
PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance
of currency out of China. We receive substantially all of our net revenues in RMB. Under our current corporate structure, we rely
on dividend payments from our PRC subsidiaries to fund any cash and financing requirements we may have. Under existing PRC foreign
exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange
transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements.
Therefore, our PRC subsidiaries are able to pay dividends in foreign currencies to us without prior approval from SAFE, subject
to the condition that the remittance of such dividends outside of the PRC complies with certain procedures under PRC foreign exchange
regulations, such as the overseas investment registrations by the beneficial owners of Company who are PRC residents. But approval
from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and
remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government
may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign
exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may
not be able to pay dividends in foreign currencies to our stockholders.
Interpretation
of PRC laws and regulations involves uncertainty.
Our
core business is conducted within China and is governed by the PRC’s laws and regulations. The PRC’s legal system
is based on written statutes, and prior court decisions can only be used as a reference. Since 1979, the PRC’s government
has promulgated laws and regulations in relation to economic matters such as foreign investment, corporate organization and governance,
commerce, taxation and trade, with a view to developing a comprehensive system of commercial laws, including laws relating to
property ownership and development. However, due to the fact that these laws and regulations have not been fully developed, and
because of the limited volume of published cases and the non-binding nature of prior court decisions, interpretation of PRC laws
and regulations involves a degree of uncertainty. Some of these laws may be changed without immediate publication or may be amended
with retroactive effect. Depending on the government agency or how an application or case is presented to such agency, we may
receive less favorable interpretations of laws and regulations than our competitors, particularly if a competitor has long been
established in the locality of and has developed a relationship with such agency. In addition, any litigation in China may be
protracted and result in substantial costs and a diversion of resources and management attention. All of these uncertainties may
cause difficulties in the enforcement of our land use rights, entitlements under our permits and other statutory and contractual
rights and interests.
RISKS
RELATED TO OWNERSHIP OF OUR COMMON STOCK
If
a more active trading market for our Common Stock develops, the market price of our Common Stock is likely to be highly volatile
and subject to wide fluctuations, and holders of our Common Stock may be unable to sell their shares at or above the price at
which they were acquired.
The
market price of our Common Stock is likely to be highly volatile and could be subject to wide fluctuations in response to a number
of factors that are beyond our control, including:
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Variations
in our quarterly and annual results;
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developments
in the financial markets and worldwide economies;
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announcements
of innovations or services by us or our competitors;
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●
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announcements
by the PRC government relating to regulations that govern our industry;
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●
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significant
sales of our Common Stock or other securities in the open market;
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●
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variations
in interest rates;
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changes
in the market valuations of other comparable companies; and
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changes
in accounting principles.
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We
do not intend to pay dividends for the foreseeable future.
We
currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to
declare or pay any dividends in the foreseeable future. As a result, you may only receive a return on your investment in our Common
Stock if the market price of our Common Stock increases.
Our
majority stockholder may have significant influence over the outcome of matters submitted to our stockholders for approval, which
may prevent us from engaging in certain transactions.
As
the date hereof, one shareholder owns 95% of the Company’s common stock. As a result, this stockholder may
exercise significant influence over all matters requiring stockholder approval, including the appointment of our directors and
the approval of significant corporate transactions. This ownership and control may also have the effect of delaying or preventing
a future change in control, impeding a merger, consolidation, takeover or other business combination that may be in the best interest
of the Company and any other stockholders.
If
we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or
prevent fraud.
The
SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to include a management
report on such company’s internal controls over financial reporting in its Annual Report, which contains management’s
assessment of the effectiveness of internal controls over financial reporting.
Our
reporting obligations as a public company place a significant strain on our management and operational and financial resources
and systems. Effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable
financial reports and are important to prevent fraud. As a result, our failure to achieve and maintain effective internal controls
over financial reporting may result in the loss of investor confidence in the reliability of our financial statements, which in
turn may harm our business and negatively impact the trading price of our stock. Furthermore, we anticipate that we will continue
to incur considerable costs and use significant management time and other resources in an effort to comply with Section 404 and
other requirements of the Sarbanes-Oxley Act.
There
is a limited market for our Common Stock, which may make it difficult for holders of our Common Stock to sell their stock.
We
plan to apply to be listed on OTCQB Market, but there is no assurance that we will be approved for the listing at this point.
There is no trading market for our Common Stock and at times there is no trading in our Common Stock. Accordingly, there can be
no assurance as to the liquidity of any markets that may develop for our Common Stock, the ability of holders of our Common Stock
to sell our Common Stock, or the prices at which holders may be able to sell our Common Stock. Further, many brokerage firms will
not process transactions involving low price stocks, especially those that come within the definition of a “penny stock.”
If no market develops, holders of our Common Stock may find it more difficult to dispose of, or to obtain accurate quotations
as to the market value of our Common Stock, and the market value of our Common Stock would likely decline.
We
may be subject to the penny stock rules which will make shares of our Common Stock more difficult to sell.
We
may be subject now and in the future to the SEC’s “penny stock” rules if our shares of Common Stock sell below
$5.00 per share. Penny stocks generally are equity securities with a price of less than $5.00. The penny stock rules require broker-dealers
to deliver a standardized risk disclosure document prepared by the SEC which provides information about penny stocks and the nature
and level of risks in the penny stock market. The broker-dealer must also provide the customer with current bid and offer quotations
for the penny stock, the compensation of the broker-dealer and its salesperson, and monthly account statements showing the market
value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson
compensation information must be given to the customer orally or in writing prior to completing the transaction and must be given
to the customer in writing before or with the customer’s confirmation.
In
addition, the penny stock rules require that prior to a transaction, the broker dealer must make a special written determination
that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction.
The penny stock rules are burdensome and may reduce purchases of any offerings and reduce the trading activity for shares of our
Common Stock. As long as our shares of Common Stock are subject to the penny stock rules, the holders of such shares of Common
Stock may find it more difficult to sell their securities.
The
rights of the holders of our Common Stock may be impaired by the potential issuance of preferred stock.
Our
Board of Directors has the right to create a new series of preferred stock. As a result, the Board of Directors
may, without stockholder approval, issue preferred stock with voting, dividend, conversion, liquidation or other rights that may
adversely affect the voting power and equity interests of the holders of our Common Stock. Although we have no present
intention to issue any shares of preferred stock or to create any new series of preferred stock, we may issue such shares in the
future.
ITEM
1B.
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UNRESOLVED
STAFF COMMENTS
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Not
applicable.
Our
corporate headquarters are located on 424 Madison Ave, Suite 1002, New York, NY 10017, for which we currently pay rent of $14,202.50
per month for our lease.
Rental
Properties
All
of our rental properties are located in Victory Plaza, located at Dalian, Liaoning Province, PRC. As previously disclosed, Victory
Plaza is approximately 137,554 square meters (1,480,619 square feet), which is owned and occupied by various retailers. We categorize
the various ownership status of such rental space into the following four categories:
Group
A: rental properties 100% owned by us;
Group
B: rental properties that were previously sold to a third-party buyer with a buy-back arrangement;
Group
C: rental properties that were previously sold to a third-party buyer with a buy-back arrangement, which has since been transferred
to SML according to the SML Agreement or other third parties; and
Group
D: rental properties that were previously sold to a third-party buyer without any buy-back arrangements or rights.
The
following table summarizes ownership of Dalian Victory Plaza Shopping Center as of December 31, 2019:
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% of Total
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Square
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% of Total Square
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Group
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Description
of Property
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Units
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Units
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Feet
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Feet
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A
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Properties
100% owned
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433
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|
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14
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%
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240,455
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16
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%
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B
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Sold properties
with buy- back options or return is in process without paying off
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495
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16
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%
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130,394
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9
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%
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C*
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Properties with
buy- back options transferred to SML - 2017 and 2018**
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319
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10
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%
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86,251
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6
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%
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D
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Properties sold
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1,926
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60
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%
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1,023,519
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69
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%
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|
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Total Properties
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3,173
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100
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%
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1,480,619
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100
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%
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SML
Agreement
On
December 29, 2017, the Company entered into the SML Agreement. Pursuant to the SML Agreement, SML will negotiate with each individual
property owner who exercised their option to request that the Company buy back the property on a case by case basis and pay an
agreed price to such owner. SML will subsequently become the owner of the property and the Company has agreed to buy back the
property at the initial price under the buy-back option with the previous owner plus annual interest of 8% commencing on January
1, 2018, no later than May 15, 2020. In addition, SML will settle the lease-back payables under the lease-back agreements with
each individual property owner and the Company agreed to pay SML the initial amount of rent payables under the lease-back
plus annual interest of 8% commencing on January 1, 2018, to be repaid no later than May 15, 2020. The SML Agreement helps
the Company to temporarily relieve part of the pressure from disputes and expedite the settlements which should help Company improve
its credit and financial position so that the Company can focus on its operation and carrying out its business plan. However,
if the Company fails to carry out the Renovation, or the Renovation is not successful, the Company may not have
enough funds to buy back the properties from SML or pay the lease-back amounts owed to SML before May 15, 2020, and the Company
may not able to continue its operation or business. Acknowledging the impact by outbreak of COVID-19, on January 15, 2020,
the Company entered into a supplemental agreement with SML to extend the original repayment date from May 15, 2020 to May 15,
2023.
Buy-Back
Arrangement
When
the Company sold certain properties in the past, the Company granted the buyers a separate option to request the Company to buy
back those sold properties at an agreed buy-back price stated in the agreements. These buy-back options were exercisable principally
during a period from 2014 to 2018 (majority of the transactions). Due to those buy-back arrangements, buyers obtained the legal
title of those properties but would request the Company to buy back their properties at their sole discretion.
Lease-back
As
part of our business operations, the Company may lease-back properties from the owners of the properties and subleases
these properties to un-related third parties with new lease terms. Sales and lease-backs are two separate business transactions.
Lease-backs could happen immediately after the sale of property or at any time after the sale if the owner of the property
wants to do so. A typical lease-back consists of a fixed annual payment amount and duration of lease period.
Rent
Lease
The
Company will rent out rental properties 100% owned by us and the properties leased back (properties not owned by us) to retail
store tenants. A typical rent lease consists of a fixed rent payment amount for the duration of lease period. Normally, an advance
rent payment is required before occupancy.
Collateral
of Property
As
a part of collateral for a of bank loan, 18,650 square meters (200,747 square feet) of rental properties owned by DVPD were pledged
for a long-term bank loan, approximately US$60 million (RMB 390 million). The maturity date of bank loan is July 18, 2027.
The interest rate will float at 120% of the similar benchmark loan rate published by the People’s Bank of China. The current
benchmark rate for a business loan over 5 years is 4.9% per annum adjusted on October 24, 2015. The average interest rates were
5.88% and 5.9% for the year ended December 31, 2019 and 2018, respectively.
On
March 24, 2015, DVPD, as collateral for another bank loan used 2,053 square meters (22,098 square feet) of rental properties pledged
for a long-term bank loan, approximately US$7.7 million (RMB 50 million). The maturity date of bank loan is July 19, 2024.
The loan charges a floating rate of interest at 120% of the loan rate published by the People’s Bank of China. The current
benchmark rate for a business loan over 5 years is 4.9% per annum adjusted on October 24, 2015. The average interest rates were
5.88% and 5.9% for the year ended December 31, 2019 and 2018, respectively.
On
May 18, 2017, totaled 140 square meters (1,507 square feet), owned by the Company as collaterals to help one unrelated individual
to acquire a US$770,000 (RMB5,000,000) 12 months bank loan. The loan requires interest at 8.568% per annum.
In
addition, the Company has 3 short-term outstanding loans with the Bank including RMB 23,000,000, RMB19,900,000, and RMB10,240,000
respectively. As of the date of this Annual Report, the Short-Terms Loans have become due while the Company has not made the corresponding
payment. The Company is not aware that the Bank has taken any legal action against the Company. In the event that the Bank rejects
our Refinancing Loans and/or commence any legal proceeding against us regarding the Short-term Loans, we may lose our collateralized
assets which will cause a material adverse effect on our results of operations. Furthermore, if the collateral on those loans
cannot satisfy our payment obligation, we may be forced to commence liquidation process if we do not have sufficient liquidity
or cannot raise sufficient fund at that time, if any at all.
On
the same day, DVPD allowed one of its board members to use
7 units of its rental properties, totaling 138 square meters (1,485 square feet), as collateral to borrow US$770,000 (RMB
5,000,000), for one year. The loan requires interest at 8.568% per annum. DVPD further provided 2 units of rental properties,
totaling 15 square meters (161 square feet), owned by the Company as collateral to help an employee of DVPD (now a former employee)
to acquire a US$770,000 (RMB 5,000,000) 12 month bank loan. The loan requires interest at 8.568% per annum.
The
aggregate amount of the loan acquired by the three individuals is RMB 15 million (the “15M Loan”). There was no profit
or gain received by for the Company to provide properties as collateral. These three individuals have not yet repaid the loans
to the Harbin Bank, which exposes the Company to a loss of its 293 square meters properties if the individuals are insolvent and
fail to repay the bank loans. On December 30, 2019, the Company entered into three separate repayment agreements with such individuals
(the “Repayment Agreements”), pursuant to which, the parties agree that the Company’s guarantee period for the
15M Loan shall be extended to December 31, 2020 (the “Expiration Date”). After the Expiration Date, the three individuals
shall replace the Company’s collateral or repay the 15M Loan to release the Company’s assets. Otherwise, the three
individuals shall pay the Company a penalty of 1% of the 15M Loan to the Company. The three individuals also agreed to provide
the Company 1% of the 15M Loan as compensation (the “Compensation”) in a one-time payment on May 30, 2020. An overdue
payment of such Compensation will lead to daily late fees of 0.5% of such Compensation.
Vacancy
Rate in Latest 5 Years
In
the month of December
|
|
Total
Available Area for Rent (SQFT)
|
|
|
Total
Rented
Area (SQFT)
|
|
|
Vacancy
(SQFT)
|
|
|
Vacancy
(%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
263,683
|
|
|
|
218,507
|
|
|
|
45,176
|
|
|
|
17.13
|
%
|
2016
|
|
|
202,372
|
|
|
|
170,715
|
|
|
|
31,657
|
|
|
|
15.64
|
%
|
2017
|
|
|
211,758
|
|
|
|
153,235
|
|
|
|
58,523
|
|
|
|
27.64
|
%
|
2018
|
|
|
192,016
|
|
|
|
121,509
|
|
|
|
70,508
|
|
|
|
36.72
|
%
|
2019
|
|
|
200,602
|
|
|
|
97,280
|
|
|
|
103,322
|
|
|
|
51,51
|
%
|
Average
Rent in Recent 5 Years
In
the month of
December
|
|
Average
Rent Per
Month Per SQFT in
US$
|
|
|
|
|
|
2015
|
|
$
|
2.48
|
|
2016
|
|
$
|
1.97
|
|
2017
|
|
$
|
1.83
|
|
2018
|
|
$
|
2.34
|
|
2019
|
|
$
|
2.42
|
|
Tenants
The
Company received its rental income and management fee income from approximately 700 tenants. Revenue from the top ten tenants
accounted for 18.23% and 19.29% of total revenue for the year ended December 31, 2019 and 2018, respectively. No individual tenant’s
revenue accounts for more than 10% of the total revenue in both years.
Top
10 Tenants in the year ended December 31, 2019
Top
10
|
|
Revenue
in US$
|
|
|
%
of Total Revenue
|
|
1
|
|
$
|
578,499
|
|
|
|
7.06
|
%
|
2
|
|
|
394,444
|
|
|
|
4.82
|
%
|
3
|
|
|
198,118
|
|
|
|
2.42
|
%
|
4
|
|
|
130,220
|
|
|
|
1.59
|
%
|
5
|
|
|
36,006
|
|
|
|
0.44
|
%
|
6
|
|
|
35,905
|
|
|
|
0.44
|
%
|
7
|
|
|
32,073
|
|
|
|
0.39
|
%
|
8
|
|
|
30,186
|
|
|
|
0.37
|
%
|
9
|
|
|
30,146
|
|
|
|
0.37
|
%
|
10
|
|
|
27,292
|
|
|
|
0.33
|
%
|
Total top 10
|
|
$
|
1,492,889
|
|
|
|
18.23
|
%
|
|
|
|
|
|
|
|
|
|
Total Revenue
for the year ended December 31, 2019
|
|
$
|
8,191,130
|
|
|
|
|
|
Top
10 Tenants in the year ended December 31, 2018
Top
10
|
|
Revenue
in US$
|
|
|
%
of Total Revenue
|
|
1
|
|
$
|
592,333
|
|
|
|
5.93
|
%
|
2
|
|
|
498,587
|
|
|
|
4.99
|
%
|
3
|
|
|
273,950
|
|
|
|
2.74
|
%
|
4
|
|
|
181,002
|
|
|
|
1.81
|
%
|
5
|
|
|
121,122
|
|
|
|
1.21
|
%
|
6
|
|
|
90,652
|
|
|
|
0.91
|
%
|
7
|
|
|
58,924
|
|
|
|
0.59
|
%
|
8
|
|
|
40,794
|
|
|
|
0.41
|
%
|
9
|
|
|
37,335
|
|
|
|
0.37
|
%
|
10
|
|
|
31,819
|
|
|
|
0.32
|
%
|
Total top 10
|
|
$
|
1,926,518
|
|
|
|
19.29
|
%
|
|
|
|
|
|
|
|
|
|
Total Revenue
for the year ended December 31, 2018
|
|
$
|
9,989,039
|
|
|
|
|
|
ITEM
3. LEGAL PROCEEDINGS
As
of December 31, 2019, to our knowledge, there were 565 lawsuits in total filed against us 1) for unpaid rent by the lease-back
owners and 2) for the failure to buy-back property from the current owners of properties that exercised their options. Total claims
amounted to approximately $24,821,000. Management believes
that the amount claimed by these litigants approximates the amount that the Company has already recorded under the caption of
“Property financing agreements payable”, Lease liabilities payable” and “Other payables” in the
accompanying consolidated financial statements.
We
may be party from time to time to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our
business. There can be no assurance that these matters that arise in the future, individually or in aggregate, will not have a
material adverse effect on our financial condition or results of operations in any future period.
ITEM
4. MINE SAFETY DISCLOSURE.
As
the Company is a smaller reporting company, this item is not applicable.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2019
AND
2018
NOTE
1 – ORGANIZATION AND SEGMENT INFORMATION
Organization
Victory
Commercial Management Inc. (hereinafter referred to as “VCM”, and where appropriate, the terms “Company”,
“we”, “us” or “our” are also referred to VCM and its wholly owned and majority owned subsidiaries)
was incorporated on July 5, 2017 under the laws of Nevada.
On
July 13, 2017, VCM formed a wholly-owned subsidiary, Victory Commercial Investment Ltd. (“VCI”) under the laws of
British Virgin Islands.
Sino
Pride Development Limited (“Sino Pride”) is a Hong Kong company, incorporated on May 26, 1989. Sino Pride is a holding
company that directly owns an 80% equity interest in Dalian Victory Plaza Development Co., Ltd. (“DVPD”) and directly
owns a 95% equity interest in Dalian Victory Business Management Co., Ltd. (“DVBM”).
DVPD
was incorporated as a Sino-foreign cooperative joint venture on March 29, 1993 under the laws of the People’s Republic of
China (“PRC” or “China”). Sino Pride owns 80% equity interest of DVPD while Dalian Victory Development
Co., Limited (“DVDC”), a state-owned enterprise in China, owns a 20% equity interest in DVPD.
DVBM
was incorporated as a joint venture on September 12, 2000 under the laws of the PRC. Sino Pride owns a 95% equity interest in
DVBM and DVPD owns a 5% equity interest in DVBM.
Dalian Victory
Property Management Co., Ltd. (“DVPM”) was incorporated
on June 6, 2018 as limited liability company under the laws of the PRC. Sino Pride owns 100% of the equity of DVPM. DVPM was formed
as a property management company and will play a similar role as DVBM to improve the management of Victory Plaza. DVPM has
not commenced operations.
Iven
International Group Limited, is a company registered in Hong Kong (“Iven”). From October 31, 2016 to June 30, 2017,
Alex Brown beneficially owned 100% of Iven, among which, a 70% equity interest was held directly, and a 30% equity interest was
held indirectly through Dalian Yiwen New Materials Technology Development Co., Ltd, a PRC entity 80% owned by Alex Brown and 20%
owned by his spouse. On June 30, 2017, Alex Brown and Dalian Yiwen New Material Technology Development Co., Ltd transferred their
respective ownership of Iven to Winner Ascent Investment Limited, a Hong Kong limited liability company solely owned by Alex Brown.
Victory
Plaza Holding Limited, (“VP Holding”) a BVI company, is the original owner of Sino Pride. VP Holding incurred significant
losses from the operations of Sino Pride and its subsidiaries DVPD and DVBM. VP Holding and Sino Pride had no relationship or
affiliation with us or Alex Brown prior to the corporate restructuring.
November
30, 2016 Transaction
In
November 2016, Iven entered and executed an agreement of “Assignment of Common Stock and Debt Rights” (“the
Original Agreement”) with VP Holding, the former shareholder of Sino pride. Pursuant to the Original Agreement, Iven acquired
all 30,000,000 shares of common stock of Sino Pride then outstanding and assumed a shareholder loan and loan interest totaling
$52,750,000 (Sino Pride owed to VP Holding) for a nominal consideration of HK$ 1 (approximately US$0.13) from VP Holding. Change
of ownership in Sino Pride from VP Holding to Iven had no impact on Sino Pride’s ownership in DVPD and DVBM (operating entities).
Iven
was a private shell company with no operations and with nominal assets, which is 100% directly and indirectly owned by Mr. Brown.
Iven was the legal acquirer in the November 30, 2016 acquisition. At the date of acquisition, Sino Pride was a holding company
of two Chinese base operating entities, DVPD and DVBM. The accounting acquirer usually is the combining entity whose relative
size (measured in, for example, assets, revenues, or earnings) is significantly larger than that of the other combining entity
or entities as per Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
Section 805-10-55-13. Thus, Sino Pride and Subsidiaries were treated as the accounting acquirer in connection with the November
2016 transaction.
The
November 2016 transaction was treated as a reverse acquisition or recapitalization. The accounting is similar to that resulting
from a reverse acquisition, except that no goodwill or other intangible assets should be recorded. Accordingly, the historical
financial statements are those of Sino Pride and its Subsidiaries.
September
4, 2017 Transaction
On
September 4, 2017, VCI signed an agreement of “Assignment of All Outstanding Shares and All Debt Rights Agreement”
(“the Agreement”) with Iven. Pursuant to the Agreement, VCI acquired all 30,000,000 shares of common stock of Sino
Pride then outstanding and assumed shareholder debt and loan rights totaling HK$ 493,807,633 (approximately US$64,208,000)
(Sino Pride owed to VP Holding) including an outstanding shareholder loan of HK$ 408,409,628 (approximately US$53,093,000)
for a nominal consideration of HK$ 1 (approximately US$0.13) from Iven. The change of ownership in Sino Pride from Iven to
VCI had no impact on Sino Pride’s ownership in DVPD and DVBM (operating entities).
Iven
and VCI were under common control of our controlling shareholder. The transfer of ownership in Sino Pride from Iven to VCI is
a part of the corporate restructuring to prepare the Company to list in the U.S. capital markets.
The
Company accounted for the September 2017 transaction as a transaction between entities under common control based on guidance
provided by FASB ASC 805-50-25. Following the above transactions, VCI gained control over Sino Pride and its subsidiaries,
and, as a result, VCM gained control over VCI, Sino Pride and its Subsidiaries.
The
Company together with its wholly-owned subsidiaries, VCI, Sino Pride and majority owned subsidiaries, DVBM and DVPM were effectively
controlled by the same shareholder, Mr. Brown before and after the September 2017 corporate restructuring, and is considered under
common control, which has been accounted for similar to the pooling method of accounting. The accompanying consolidated financial
statements have been prepared as if the current corporate structure had been in existence at the beginning of the periods presented.
Accordingly, the historical financial statements are those of Sino Pride and its Subsidiaries.
Segment
Information
The
Company and its subsidiaries generate most of the income from rental and building management services. The Company manages one
shopping center currently. Geographically, all income is generated from Dalian, China.
NOTE
2 – GOING CONCERN
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern,
which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. As
indicated in the accompanying consolidated financial statements, the Company had a net loss of $11,114,921 and $4,748,769 for
the years ended December 31, 2019 and 2018, respectively; an accumulated deficit of $203,808,349 at December 31, 2019. The
Company has an unrestricted cash balance of $122,884 as of December 31, 2019. The Company believes that if there is no
additional investment or financing, the current cash balance available to the Company or its projected cash balance for the
next 18 months will be very difficult to cover the required payments of the operating expenses arising from normal business
operations and to meet the required payments of buy-backs and lease-backs if settled with the claims filed by the property
owners during next 18 months from the issuance date of this report.
In
light of our current operating state, management cannot provide assurance that the Company will achieve profitable operations
or become cash flow positive in a short period of time. Management believes that with its current capital resources, it will be
very difficult to continue operating and maintaining its business for the next 18 months from the issuance date of this report.
As
of December 31, 2019, we had a total of $67,257,262 outstanding loans payable to Harbin Bank (the “Bank”). As of the
date of this report, we are in default of three loans with the Bank in the aggregate amount of approximately $53.1 million. These
loans are secured by certain assets of the Company. The Company is currently in discussion with the Bank to convert the existing
loans into a new loan and apply an additional liquidity loan in RMB 50 million (collectively, the “Refinancing Loans”)
and waive the penalty of late payment of related loan interest. However, there is no assurance or certainty that such Refinancing
Loans or Penalty Waiver will be approved by the Bank. In the event that the Bank rejects our Refinancing Loans and/or commence
any legal proceeding against us regarding the Short-term Loans, we may lose our collateralized assets which will cause a material
adverse effect on our results of operations. Furthermore, if the collateral on those loans cannot satisfy our payment obligation,
we may be forced to commence liquidation process if we do not have sufficient liquidity or cannot raise sufficient fund at that
time, if any at all.
As
of December 31, 2019, the Company had property financing agreements payable of $77,464,781, lease liabilities payable of $521,264,
expired lease-back payables of $5,529,680, and buy-back payables of $4,152,344. As of December 31, 2019, there were 565
lawsuits case against the Company in Dalian
City, China. Litigants claimed that the Company failed to buy back the property pursuant to the sales contracts or the Company
failed to pay the promised lease-back rent on time. As of December 31, 2019, such claims amounted to $24,820,625. These payables
were included in and reported under the caption of “Property financing agreements payable”, “Lease liabilities
payable” and “Other payables”
These
lawsuits are mostly caused by the failure of DVPD
who fails to buy back the properties when
requested to or to pay rents for certain lease-back stores. Subsequently, certain stores owned by DVPD have been frozen from transfer
or disposition by the courts. DVPD has been prohibited from free transfer, disposal, and pledge of its equity interest in DVBM
which accounts for 5% in DVBM from March 2, 2017 to March 1, 2019. The 5% equity interest in DVBM is still restricted currently
as of the issuing date of this report. In addition, DVPD has been listed as a “dishonest debtor” by the local courts
in the PRC. Once listed as a dishonest debtor, DVPD can be subject to certain restrictions in connection with commercial loans
at the banks’ discretion; the purchase or transfer of properties and land use rights; and upgrade or renovation of properties.
In addition, the bank accounts of DVPD are frozen by the courts which allow the inflow of cash to its bank accounts but prohibit
the outflow of cash. The Company has been working actively to resolve these lawsuits since we acquired Sino Pride in November
2016. However, the company cannot guarantee that all litigation cases can be solved in the future or no new litigation cases will
be generated.
Management
believes that the recorded total property financing agreements payable, buy-backs payable, lease-back liabilities payable and
expired lease payable liabilities of $92,410,701 is a reasonable estimation.
In
order to continue as a going concern, the Company will need, among other things, an additional capital injection and/or additional
financing and the continued forbearance of its lender not to foreclose on their loans that are in default. Management’s
plans to obtain such fund for the Company include (1) obtaining capital from the sale of its stock (2) short-term and long-term
borrowings from banks and third-parties, and (3) short-term borrowings from stockholders or other related parties when needed.
As
of the date of this Annual Report, the
Short-Terms Loans have become due while the Company has not made the corresponding payment. The Bank has not taken legal action
against the Company and the Bank and the Company are currently discussing potential grant to convert the principal and interests
due into a new loan and an additional liquidity loans in an amount of RMB 50 million (collectively, the “Refinancing Loans”).
In addition, the Company has been negotiating with the Bank for a waiver of the penalty for late payment of related loan interest
(the “Penalty Waiver”). The Company has already submitted the application for the Refinancing Loans at the request
of the Bank. It usually takes about 2 to 3 months for the Bank to review and approve the Refinancing Loans and the Penalty Waiver
which can be potentially longer as a result of the outbreak of the COVID-19. However, there is no assurance or certainty that
such Refinancing Loans or Penalty Waiver will be approved by the Bank. In the event that the Bank rejects our Refinancing Loans
and/or commence any legal proceeding against us regarding the Short-term Loans, we may lose our collateralized assets which will
cause a material adverse effect on our results of operations. Furthermore, if the collateral on those loans cannot satisfy our
payment obligation, we may be forced to commence liquidation process if we do not have sufficient liquidity or cannot raise sufficient
fund at that time, if any at all.
As
a result of the coronavirus pandemic, our DVPD operations in Dalian remained closed from January 25, 2020 until March 5, 2020,
which has adversely affected our operating revenues and cash flow in the first quarter of 2020. Moreover, after reopening of the
shopping mall, we have much less shoppers and tenants in the shopping mall due to the continued effect of COVID-19, We cannot
predict the full extent to which the COVID-19 pandemic will impact our business or operating results, which is highly dependent
on inherently uncertain future developments, including the severity of COVID-19 and the actions taken by governments and private
businesses in relation to COVID-19 containment. Additionally, even if the Company does raise sufficient capital to support its
operations and generates adequate revenues, there can be no assurances that the revenue will be sufficient to a level where it
will generate profits and positive cash flows from operations.
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern,
which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The accompanying
consolidated financial statements do not include any adjustments related to the recoverability and or classification of the recorded
asset amounts and or the classification of the liabilities that might be necessary should the Company be unable to continue as
a going concern.
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of consolidation
The
accompanying consolidated financial statements present the historical results of operations and cash flows of VCM and its
subsidiaries.
The
Company’s consolidated financial statements include the accounts of VCM, VCI, Sino Pride, DVPD, DVBM, and DVPM. All inter-company
accounts and transactions among the consolidation group have been eliminated in consolidation. Certain
prior year balances have been reclassified to conform to current year’s presentation.
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires
management to makes estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and
the related disclosures at the date of the consolidated financial statements and during the reporting periods. Actual results
could materially differ from these estimates. Significant estimates include the liabilities recorded for financial agreements
payable, buy-backs payable, lease back liabilities payable, expired lease payables and the estimated liability accrued for additional
litigation charges related to the numerous lawsuits. Other estimates include the allowance for doubtful accounts on tenant receivables
and other receivables, recoverability of long-lived assets, the useful life of rental properties, property and equipment and intangible
assets, assumptions used in assessing impairment of long-term assets and the valuation of deferred tax assets.
Foreign
Currency Translation
The
reporting currency of the Company is the U.S. dollar. The functional currency of VCM and VCI is the U.S. dollar. The functional
currency of DVPD, DVBM, and DVPM is the Chinese Renminbi (“RMB”) whereas the functional currency of Sino Pride and
DVPM is the Hong Kong Dollar (“HK$”). The consolidated financial statements of the Company have been translated into
U.S. dollars in accordance with FASB ASC 830-30 “Translation of Financial Statements”. The financial information
is first prepared in RMB or HK$ and then is translated into the U.S. dollar at the period-end exchange rates as to assets and
liabilities and at average exchange rates as to revenue, expenses and cash flows. Equity accounts are translated at their historical
exchange rates when the capital transactions occurred. As a result, amounts relating to assets and liabilities reported on the
statements of cash flows may not necessarily agree with the changes in the corresponding balance sheets. Translation adjustments
resulting from the process of translating the local currency financial statements into the U.S. dollar are included in accumulated
other comprehensive income (loss). The cumulative translation adjustment and effect of exchange rate changes on cash for the years
ended December 31, 2019 and 2018 were $(2,242,729) and $(3,739,981), respectively. Transactions denominated in foreign currencies
are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities
denominated in foreign currencies are translated into the functional currency at the exchange rate prevailing at each balance
sheet date with any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency
other than the functional currency are included in the results of operations as incurred.
Pursuant
to paragraph FASB ASC 830-20-35-1, the intra-entity (intercompany transactions) foreign currency transactions whose terms
are denominated in the currency other than the Company’s functional currency and settlement is anticipated in the foreseeable
future (hence not long-term investment nature), the increases or decreases in expected functional currency cash flows are included
in determining net income (loss) for the period in which the exchange rate changes. The Company has an inter-company loan denominated
in US dollars. The repayment of the loan is required when the Company is profitable. The loan proceeds, repayment and accrued
interest were tracked in US dollars. The Company uses the bank spot exchange rate to record proceeds and repayments in RMB. By
the end of the reporting period, the Company will adjust loan and interest payable balances from US dollars to RMB by using the
period ending exchange rate. Any gain or loss from foreign currency exchange will be recognized in the consolidated statements
of operations. There were $271,447 and $1,220,769 foreign currency transaction losses for the years ended December 31, 2019 and
2018, respectively.
Spot
exchange rates and average exchange rates published by fxtop.com were used in the translation of the consolidated financial statements.
|
|
2019
|
|
2018
|
US Exchange Rate
|
|
|
|
|
|
|
|
|
Year-end RMB
|
|
|
6.9615
|
|
|
|
6.8778
|
|
Year average RMB
|
|
|
6.9114
|
|
|
|
6.6187
|
|
|
|
|
|
|
|
|
|
|
Year-end HK$
|
|
|
7.7865
|
|
|
|
7.8319
|
|
Year average HK$
|
|
|
7.8262
|
|
|
|
7.8377
|
|
All
foreign exchange transactions must take place through authorized institutions of China. Management makes no representation that
the RMB amounts could have been, or could be, converted into U.S. dollars at the rates used in translation.
Revenue
Recognition
Rental
Income-
Our
Victory Plaza currently has 3,173 rental units. Among these rental properties, the Company owned 433 units, 814 units were sold
but with buy-back options, and 1,926 units were sold with no repurchase options. The Company will lease back some of these sold
properties and rent them out to tenants. All contracts include a lease and contain information on rental income and payment term.
Rental income is reported in the gross amount including rent income from our owned properties and lease-back properties. A predominately
majority of the rental income comes from our owned properties and a very limited portion, estimated at less than 3%, from the
lease-back properties. Existing lease-back expenses were recorded as amortization and interest expenses. Expired lease-back expenses
were included in the lease-back expenses.
The
Company recognizes the rental income on a straight-line basis over the terms of the leases. The cumulative differences between
rental income recognized in the Company’s consolidated statements of operations and contractual payment terms have been
recorded as deferred rental income and presented on the accompanying consolidated balance sheets.
Property
Management Fee Income
We
currently provide common area management services to all tenants and shop owners. Common area management services include security,
cleaning, fire service, landscaping, public facilities maintenance and other traditional services provided by a property management
office. The terms of the property management agreements are usually consistent with the tenants’ lease term. Property management
fees are charged based on the area of property ranging from $16 to $20 per square foot per annum.
Since
the performance obligations in the property management agreement are identical with the terms of property management agreement,
the Company recognizes the propriety management income on a straight-line basis over the terms of the management agreement. The
cumulative differences between property management income recognized in the Company’s consolidated statements of operations
and contractual payment terms have been recorded as deferred income and presented on the accompanying consolidated balance sheets.
Expense
Recovery
The
Company will pay utility, repair and insurance expenses to third party vendors in order to fulfill its management obligations.
The Company will charge all or part of these expenses to tenants in addition to property management fees. The charge will depend
on the size of tenant and terms of property management agreement. The Company is acting as an agent to arrange for the provision
of utilities, repairs and other services by third parties. The Company will recognize the fees collected as income after the Company’s
service is provided. The recovered expenses will offset the income the Company is paid and be reported net under the caption of
other income in accompanying consolidated financial statements.
Rental
Properties
Rental
properties are carried at cost less accumulated depreciation and amortization. Betterments, major renovations and certain costs
directly related to the improvements of rental properties are capitalized. Maintenance and repairs are expensed as incurred. Depreciation
is recognized on a straight-line basis over estimated useful lives of the assets. Improvements are capitalized and amortized over
the shorter of their estimated useful lives or the terms of the respective leases, if any. When rental properties are sold or
otherwise disposed of, the cost and related accumulated depreciation are eliminated from the accounts and any resulting gain or
loss is recognized in the results of operations.
The
following table summarized the ownership of rental properties.
|
|
|
|
%
of Total
|
|
Financial
Statement Presentation
|
Group
|
|
Description
of Property
|
|
SQ
Ft
|
|
Assets
|
|
Liabilities
|
A
|
|
Owned with title by DVPD
|
|
|
16
|
%
|
|
Rental properties
|
|
N/A
|
B
|
|
Sold properties with buy- back options
or return is in process without paying off
|
|
|
9
|
%
|
|
Rental properties
|
|
Property financing agreements payable
|
C *
|
|
Properties with buy- back options transferred
to SML in 2017 and 2018
|
|
|
6
|
%
|
|
Rental properties
|
|
Loan payable SML
|
D
|
|
Sold properties
|
|
|
69
|
%
|
|
N/A
|
|
N/A
|
|
|
Total properties
|
|
|
100
|
%
|
|
|
|
|
*
In the filing of Form S-1/A dated February 12, 2019, the Company had a C-2 property group category, “Third party has title
acquired from previous owner”. The purchase and sale transactions between the previous owner and new owner - “third
party” will not remove the burden of the Company to buy back the property per the buy-back options. The nature of C-2 group
is the same as Group B. Therefore, we removed group C-2 (approximately 1%) and combined it with Group B.
Group
A represents property that the Company owns 100%. Group B represents property we sold to individual owners with buy-back options
which are pending. Group C represents property owned by SML, but the Company is still liable for the buy-back options. Pursuant
to the SML Agreement, the Company is obligated to buy back these properties plus accrued interest no later than May 15, 2020.
Group D presents property we sold to various individual owners without additional rights attached.
Sold
Rental Properties with Financing Agreements (Group B and C Properties)
Pursuant
to the sales contracts, the buyers’ obtained legal title to the property and also had an option to sign a separate buy-back
agreement. The purchase agreement granted the buyer an option to request the Company to buy back sold properties at a stated buy-back
price once the option vested and the Company has received the payments for the sold property. As of December 31, 2019, approximately
15% of total rental spaces of Victory Plaza were sold to various unrelated individuals and entities with buy-back options. The
majority of these properties were sold during the period from 1998 to 2014. The vesting dates of the buy-back options ranged from
2014 to 2018.
Pursuant
to FASB ASC 360-20-40-38, if a property seller has an obligation to repurchase the property, or the terms of the transaction
allow the buyer to compel the seller or give an option to request the seller to repurchase the property, the transaction shall
be accounted for as financing, lease, or profit-sharing arrangement rather than as a sale. It is aligned with FASB ASC
842-40-25-3, an option for the seller-lessee to repurchase the asset would preclude accounting for the transfer of the asset as
a sale of the asset. The Company’s accounting policy is to treat this type of sales as a financing agreement. The Company
continues to report its ownership of the property sold as an asset (within Rental Properties) and continues to depreciate the
property based on the estimated useful lives. The Company recorded sales proceeds as “property financing agreements payable”
in the consolidated financial statements and accrues the interest payable during the periods of the vesting. The interest rate
is determined by the price spread of each unit’s sale price and buy-back price, and the time span from the date of sale
to the maturity date (last date to execute the option). The Company will derecognize the liability when the Company purchases
back the properties, or the owners of these properties have settled with the Company or gave up the buy-back options, or upon
the expiration of the option if not exercised. If the settlement is greater than the book amount (including principal and interest),
a loss will be recognized. If the amount of settlement is less than book amount (including principal and interest), a gain will
be recognized. See Note 10, Property Financing Agreement Payable for further information.
Sold
Properties (Group D Properties)
As
of December 31, 2019, approximately 69% of the total space of Victory Plaza was sold and owned by various unrelated individuals
and entities with legal title to the respective properties. Pursuant to the sale contracts, at the date of the sales, buyers obtained
integrated legal ownership to the sold properties and assumed the significant risks and rewards of ownership of the property (had
the ability to rent and sell the property at-will) while the Company received the payments of the purchase price. These sales
are considered final sales.
As
part of our operations, the Company may from time to from lease back properties from the owners of Group D properties
and subleases these properties to un-related third parties with new lease terms. As of December 31, 2019, there was no sublease
from the owner of Group D properties. Sales and lease-back are two separate business transactions. Lease-back is at the owner’s
will and is not a condition of sale. Lease-back could happen immediately after the sale of property or at any time after the sale
if the owner of the property is interested in rental services provided by the Company.
Under
FASB ASC Topic 842, a sale and lease-back arrangement will be accounted for as a sale if all of the following conditions
are met: (i) control of the underlying asset is transferred to the buyer-lessor in accordance with the revenue recognition guidelines
in FASB ASC Topic 606, Revenue from Contracts with Customers, (ii) the classification of the sublease is not a finance
lease from the perspective of the lessee, or a sales-type lease from the perspective of the lessor, and (iii) there is no repurchase
option.
There
were 2 and 4 outstanding leases that the Company leased back from the owners of Group D properties as of
December 31, 2019 and 2018, respectively. All these lease-back arrangements met the above criteria and have been accounted for
as a sale. The allocated net book value and land use rights were derecognized, and a gain or loss was recognized when each of
the sales was completed.
Lessee
Accounting
We
have elected to early adopt FASB ASC Topic 842, the recent accounting update related to leases. FASB ASC 842 requires
us to determine whether a contract is a lease or contains a lease at the inception of the contract, considering all relevant facts
and circumstances. A contract is a lease or contains a lease if the contract conveys the right to control the use of identified
property, plant, or equipment for a period of time in exchange for consideration.
A
lessee should recognize in the balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset
representing its right to use the underlying asset for the lease term. When measuring assets and liabilities arising from a lease,
a lessee should include payments to be made in optional periods only if the lessee is reasonably certain to exercise its option
to extend the lease or not exercise an option to terminate the lease. Similarly, optional payments to purchase the underlying
asset should be included in the measurement of lease assets and lease liabilities only if the lessee is reasonably certain to
exercise that purchase option.
A
lease is classified as a finance lease when the lease meets any of the following criteria: (i) the lease transfers ownership of
the underlying asset to the lessee by the end of the lease term, (ii) the lease grants the lessee an option to purchase the underlying
asset that the lessee is reasonably certain to exercise, (iii) the lease term is for the major part of the remaining economic
life of the underlying asset, (iv) the present value of the sum of the lease payments and any residual value guaranteed by the
lessee that is not already reflected in the lease payments equals or exceeds substantially all (90% or more) of the fair value
of the underlying asset, or (v) the underlying asset is of such a specialized nature that it is expected to have no alternative
use to the lessor at the end of the lease term. A lease not classified as a finance lease is classified as an operating lease.
The
lease liability is initially measured at the present value of lease payments to be paid as of lease commencement. Lease payments
should be discounted at the rate implicit in the lease or lessee’s incremental borrowing rate. The right-of-use asset is
initially measured as: (i) the lease liability determined, (ii) lease payments made to the lessor at or before lease commencement,
minus lease incentives received from the lessor, and (iii) initial direct costs incurred by the lessee.
A
lessee will measure the lease liability by (a) accreting interest expense on the carrying value of the lease liability using the
effective interest rate method, and (b) reducing the carrying value of the lease liability for lease payments made. A lessee will
measure the right-of-use asset by amortizing that asset over the lease term. Amortization is recorded on a straight-line
basis. The right-of-use asset will also be tested for impairment based on the asset impairment rules that apply to property, plant
and equipment in FASB ASC Topic 360.
For
leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying assets
not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such
leases generally on a straight-line basis over the lease term.
Lessor
Accounting
The
Company currently owns 433 rental units and leased these rental properties to various tenants. Pursuant to FASB
ASC 842 – 30, the Company will classify a lease as a sales – type lease if: (i) the lease transfers ownership of the
underlying asset to the lessee by the end of the lease term, (ii) the lease grants the lessee an option to purchase the underlying
asset that the lessee is reasonably certain to exercise, (iii) the lease term is for the major part of the remaining economic
life of the underlying asset, (iv) the present value of the sum of the lease payments and any residual value guaranteed by the
lessee that is not already reflected in the lease payments equals or exceeds substantially all (90% or more) of the fair value
of the underlying asset, or (v) the underlying asset is of such a specialized nature that it is expected to have no alternative
use to the lessor at the end of the lease term. As of December 31, 2019, none of our leases, as a lessor, met the above criteria
to be classified as a sales–type lease.
Pursuant
to FASB ASC 842 – 30, when none of the sales-type lease classification criteria are met, a lessor would classify
the lease as a direct financing lease when both of the following criteria are met: (i) the present value of the sum of the lease
payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments and/or any other
third party unrelated to the lessor equals or exceeds substantially all (90% or more) of the fair value of the underlying asset
and (ii) it is probable that the lessor will collect the lease payments plus any amount necessary to satisfy a residual value
guarantee. As of December 31, 2019, none of our leases, as a lessor, met the above criteria to be classified as a financing lease.
Pursuant
to FASB ASC 842 – 30, a lessor would classify a lease as an operating lease when none of the sales-type lease or
direct financing lease classification criteria are met. As of December 31, 2019, all leases of the Company’s rental properties
were classified as operating leases. The Company will maintain the underlying asset and recognizes lease income over the lease
term.
Disposition
of Real Estate and Real Estate Investments
Sales
of real estate include operating properties and investments in real estate joint ventures. Gains from dispositions are recognized
using the full accrual or partial sale methods, provided that the Company has met various criteria relating to the terms of sale
and any subsequent involvement. If the criteria for sales recognition or gain recognition are not met because of a form of continuing
involvement, the accounting for such transactions is dependent on the nature of the continuing involvement. In certain cases,
a sale might not be recognized, and in others all or a portion of the gain might be deferred.
Real
Estate Held for Sale
The
Company generally considers assets to be held for sale when management believes that a sale is probable within a year. This generally
occurs when a sales contract is executed with no substantive contingencies and the prospective buyer has significant funds at
risk. Assets that are classified as held for sale are recorded at the lower of their carrying amount or fair value, less cost
to sell. The Company evaluated its property portfolio and did not identify any properties that would meet the criteria for held
for sale as of December 31, 2019 and December 31, 2018.
Cash
and Cash Equivalents
Cash
and cash equivalents include cash on hand and demand deposits in accounts maintained with commercial banks within the PRC, Hong
Kong and United States. The Company considers all short-term highly liquid investments with original maturities of three months
or less when purchased to be cash and cash equivalents.
Restricted
Cash
Restricted
cash represents cash deposits required by the bank to be used for interest and loan repayments only.
Tenant
and Sundry Receivables, net of Allowance for Doubtful Accounts
Tenant
receivables are recorded at original invoice amount, less an estimated allowance for doubtful accounts. The allowance for doubtful
accounts represents management’s estimate of the amount of probable credit losses, determined by reviewing past due balances
and other information. The Company makes judgments as to the collectability of tenant receivables based on historical trends and
future expectations. Management estimates an allowance for doubtful accounts and adjusts gross tenant receivables downward based
on their expectation of specific tenant risks and the Company’s tenant receivable aging and collection analysis. Management
considers accounts past due on a tenant-by-tenant basis. Based on its review, management has provided an allowance for doubtful
accounts as of December 31, 2019 and 2018 of $632,768 and $123,467, respectively.
Property
and Equipment
Property
and equipment are carried at cost, less accumulated depreciation. Cost includes any incremental costs that are directly attributable
to the construction or acquisition of the item of property and equipment. Maintenance and repairs are expensed as incurred, while
major maintenance and remodeling costs are capitalized if they extend the useful life of the asset. Depreciation is computed using
the straight-line method over the estimated useful lives.
When
properties and equipment are sold or otherwise disposed of, the costs and related accumulated depreciation are eliminated from
the accounts and any resulting gain or loss is recognized in the results of operations.
Impairment
of Long-Lived Assets
Long-lived
assets, primarily rental properties and machinery and equipment are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment
include a significant decline in the observable market value of an asset, a significant change in the manner in which an asset
is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable.
For long-lived assets to be held and used, the Company recognizes an impairment loss only if its carrying amount is not recoverable
through its estimated undiscounted future cash flows over the anticipated holding period and measures the impairment loss based
on the amount by which the carrying amount of the asset exceeds its estimated fair value. Fair value is determined through various
valuation techniques, including discounted cash flow models, quoted market values or third-party independent appraisals, as considered
necessary. There were no impairment losses recognized during the years ended December 31, 2019 and 2018.
Debt
Issuance Costs
Costs
related to bank loans payable consist of fees and direct costs incurred in obtaining such financings. These costs are presented
as a reduction of bank loans payable and are amortized on a straight-line basis over the terms of the related loan payable which
approximates the effective interest rate method. Such amortization is included in “Interest – loans” in the
accompanying consolidated statements of operations, which amounted to $55,190 and $52,331 for the years ended December 31, 2019
and 2018, respectively.
Per
Share Amounts
The
Company computes per share amounts in accordance with FASB ASC Topic 260 “Earnings per Share” (EPS)
which requires presentation of basic and diluted EPS. Basic EPS is computed by dividing the net income (loss) available to common
stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the earnings of the Company, if any. This is computed by
dividing net earnings by the combination of basic and dilutive common share equivalents. Since the Company is in a net loss position,
all common stock equivalents would be anti-dilutive and are, therefore, not included in the determination of diluted loss per
share. Accordingly, basic and diluted net loss per share are the same. There were no common stock equivalents as of December 31,
2019 and 2018.
Years Ended December
31,
|
|
2019
|
|
2018
|
Numerator for earnings per share:
|
|
|
|
|
|
|
|
|
Net
loss attributable to the Company’s common shareholders
|
|
$
|
(9,619,713
|
)
|
|
$
|
(3,777,399
|
)
|
Denominator for basic and diluted earnings
per share:
|
|
|
|
|
|
|
|
|
Basic weighted average common shares
|
|
|
21,472,792
|
|
|
|
20,700,000
|
|
Diluted weighted
average common shares
|
|
|
21,472,792
|
|
|
|
20,700,000
|
|
Non-Controlling
Interest
Non-controlling
interest is classified as a separate line item in the equity section and disclosures in the Company’s consolidated financial
statements. This amount represents the 20% non-controlling interest in DVPD owned by DVDC.
Comprehensive
Income (Loss)
The
Company follows ASC 220-10, “Reporting Comprehensive Income” FASB ASC 220-10 requires the reporting of
comprehensive income (loss) in addition to net income (loss). Comprehensive income (loss) is a more inclusive financial reporting
methodology that includes disclosure of information that historically has not been recognized in the calculation of net income
(loss). Comprehensive income (loss) generally represents all changes in shareholders’ equity during the period except those
resulting from investments by, or distributions to shareholders. Comprehensive income (loss) reflects the gain (loss) due to foreign
currency translation adjustments.
Fair
Value of Financial Instruments
The
following disclosure of the estimated fair value of financial instruments is made in accordance with the provision of FASB
ASC 825-10-65, “Financial Instruments – Transition and Open Effective Date Information”. Although
the estimated fair value amounts have been determined by the Company using available market information and appropriate valuation
methodologies, the estimates presented are not necessarily indicative of the amounts that the Company could realize in current
market exchanges. The carrying amounts reported in the consolidated balance sheets for cash, accounts receivables and accounts
payable approximate fair value because of the short-term nature of these financial instruments.
Income
Taxes
The
Company is governed by the Income Tax Law of the PRC, the Special Region of Hong Kong and the U.S. Internal Revenue Code of 1986,
as amended. The Company accounts for income taxes using the asset/liability method prescribed by FASB ASC 740, “Accounting
for Income Taxes.” Under this method, deferred tax assets and liabilities are determined based on the difference between
the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in
which the differences are expected to reverse. Deferred tax assets are also provided for net operating loss carryforwards that
can be used to offset taxable income in the future. The Company records a valuation allowance to offset deferred tax assets if,
based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will
not be realized. The effect on deferred taxes of a change in tax rates is recognized in income or loss in the period that includes
the enactment date.
The
Company follows the provisions of ASC 740-10-50, “Accounting for Uncertainty in Income Taxes,” which provides clarification
related to the process associated with accounting for uncertain tax positions recognized in the Company’s financial statements.
Audit periods remain open for review until the statute of limitations has passed. The completion of review or the expiration of
the statute of limitations for a given audit period could result in an adjustment to the Company’s liability for income
taxes. Any such adjustment could be material to the Company’s results of operations for any given quarter or annual period
based, in part, upon the results of operations for the given period. As of December 31, 2019, and 2018, the Company had
no uncertain tax positions, and will continue to evaluate for uncertain positions in the future.
Fair
Value Measurements
The
Company complies with the provisions of FASB ASC 820 “Fair Value Measurements and Disclosure “(ASC 820)
in measuring fair value and in disclosing fair value measurements. FASB ASC 820 defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value measurements required under other accounting pronouncements.
FASB ASC 820-10-35, Fair Value Measurements and Disclosures – Subsequent Measurement (ASC 820-10-35), clarifies that
fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants. Fair value measurement reflects the assumptions market participants would
use in pricing an asset or liability based on the best information available. Assumptions include the risks inherent in a particular
valuation technique and/or the risks inherent in the inputs to the model.
ASC
820-10-35 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present
value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost).
The statement utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into
three broad levels. The following is a brief description of those three levels:
Level
1 Inputs – Level 1 inputs are unadjusted quoted prices in active markets for assets or liabilities identical to those to
be reported at fair value. An active market is a market in which transactions occur for the item to be fair valued with sufficient
frequency and volume to provide pricing information on an ongoing basis.
Level
2 Inputs – Level 2 inputs are inputs other than quoted prices included within level 1. Level 2 inputs are observable either
directly or indirectly. These inputs include: (a) quoted prices for similar assets or liabilities in active markets; (b) quoted
prices for identical or similar assets or liabilities in markets that are not active, such as when there are few transactions
for the asset or liability, the prices are not current, price quotations vary substantially over time or in which little information
is released publicly; (c) Inputs other than quoted prices that are observable for the asset or liability and (d) Inputs that are
derived principally from or corroborated by observable market data by correlation or other means.
Level
3 Inputs – Level 3 inputs are unobservable inputs for an asset or liability. These inputs should be used to determine fair
value only when observable inputs are not available. Unobservable inputs should be developed based on the best information available
in the circumstances, which might include internally generated data and assumptions being used to price the asset or liability.
When
determining the fair value measurements for assets or liabilities required or permitted to be recorded at and/or marked to fair
value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that
market participants would use when pricing the asset or liability. When possible, the Company looks to active and observable markets
to price identical assets. When identical assets are not traded in active markets, the Company looks to market observable data
for similar assets. Nevertheless, certain assets are not actively traded in observable markets and the Company must use alternative
valuation techniques to derive a fair value measurement.
Related
Parties
Parties
are considered to be related to the Company if they, directly or indirectly, through one or more intermediaries, control, are
controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its
management, members of the immediate families of principal owners of the Company and its management and other parties with which
the Company may deal with if one party controls or can significantly influence the management or operating policies of the other
to an extent that one of the transacting parties might be prevented from fully pursuing its separate interests. The Company discloses
all related party transactions.
Deferred
Rental Income
Rental
and management fee income from leases are recognized on a straight-line basis over the term of the relevant leases. The cumulative
difference between the rental income/management fees recognized in the Company’s consolidated statements of operations and
actual annual contractual lease payments are recorded as deferred rental income and presented on the consolidated balance sheets.
Additionally, prepaid lease payments from the tenant is included in deferred income.
Advertising
Advertising
is expensed as incurred and is included in other general and administrative expenses. There were $472 and $680 advertising expenses
for the years ended December 31, 2019 and 2018.
Recently
Issued Accounting Pronouncements
In
February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of
Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this Update affect any entity that is required
to apply the provisions of Topic 220, Income Statement – Reporting Comprehensive Income, and has items of other comprehensive
income for which the related tax effects are presented in other comprehensive income as required by GAAP. The amendments in this
Update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal
years. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, (1) for public
business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities
for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update
should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change
in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The adoption of this ASU did not have
a material effect on the Company’s consolidated financial statements.
In
June 2018, the FASB issued ASU 2018-07 – Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee
Share-Based Payment Accounting, which to include share-based payment transactions for acquiring goods and services from non-employees,
which nonemployee share-based payment awards within the scope of Topic 718 are measured at grant-date fair value of the equity
instruments that an entity is obligated to issue when the goods have been delivered or the service has been rendered and any other
conditions necessary to earn the right to benefit from the instruments have been satisfied. The definition of the term grant date
is amended to generally state the date at which a grantor and a grantee reach a mutual understanding of the key terms and conditions
of a share based payment award. The amendments are effective for public business entities for fiscal years beginning after December
15, 2018, including interim periods within those fiscal years. For all other entities, the amendments in this ASU are effective
for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.
Early adoption is permitted, including adoption in an interim period. The adoption of this ASU did not have a material effect
on the Company’s consolidated financial statements.
In
August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the
Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 removes, modifies and adds
certain disclosure requirements in Topic 820 “Fair Value Measurement”. ASU 2018-13 eliminates certain disclosures
related to transfers and the valuations process, modifies disclosures for investments that are valued based on net asset value,
clarifies the measurement uncertainty disclosure, and requires additional disclosures for Level 3 fair value measurements. ASU
2018-13 is effective for the Company for annual and interim reporting periods beginning July 1, 2020. The Company does not believe
the adoption of this ASU will have a material effect on the Company’s consolidated financial statements.
In
May 2019, the FASB issued ASU 2019-05, which is an update to ASU Update No. 2016-13, Financial Instruments—Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced the expected credit losses methodology for
the measurement of credit losses on financial assets measured at amortized cost basis, replacing the previous incurred loss methodology.
The amendments in Update 2016-13 added Topic 326, Financial Instruments—Credit Losses, and made several consequential amendments
to the Codification. Update 2016-13 also modified the accounting for available-for-sale debt securities, which must be individually
assessed for credit losses when fair value is less than the amortized cost basis, in accordance with Subtopic 326-30, Financial
Instruments— Credit Losses—Available-for-Sale Debt Securities. The amendments in this Update address those stakeholders’
concerns by providing an option to irrevocably elect the fair value option for certain financial assets previously measured at
amortized cost basis. For those entities, the targeted transition relief will increase comparability of financial statement information
by providing an option to align measurement methodologies for similar financial assets. Furthermore, the targeted transition relief
also may reduce the costs for some entities to comply with the amendments in Update 2016-13 while still providing financial statement
users with decision-useful information. ASU 2019-05 is effective for the Company for annual and interim reporting periods beginning
July 1, 2020. The Company is currently evaluating the impact of ASU 2019-05 will have on its consolidated financial statements.
The
Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a
material effect on the Company’s consolidated financial statements.
NOTE
4 – PREPAID EXPENSES AND OTHER ASSETS
Prepaid
expenses and other assets consist of the following:
|
|
2019
|
|
|
2018
|
|
Supplies on hand
|
|
$
|
100,156
|
|
|
$
|
79,478
|
|
Prepaid expenses
|
|
|
331,454
|
|
|
|
498,043
|
|
Deposits
|
|
|
95,224
|
|
|
|
120,235
|
|
Total prepaid
expenses and other assets
|
|
$
|
526,834
|
|
|
$
|
697,756
|
|
NOTE
5 – RENTAL PROPERTIES, NET
Victory
Plaza is located in Dalian City, Liaoning Province of China. It was built by DVPD from 1993 to 1998.
The
Company leases its own properties and lease-backed properties to tenants and manages the Victory Plaza.
The
following table summarized ownership of rental properties.
As
of December 31, 2019
Group
|
|
Description of Property
|
|
Cost
|
|
|
In
Square
Feet
|
|
|
%
of Total
Square Feet
|
|
|
Units
|
|
A
|
|
Owned
by DVPD
|
|
$
|
21,704,162
|
|
|
|
240,455
|
|
|
|
16
|
%
|
|
|
433
|
|
B
|
|
Sold properties
with buy- back options or return is in process without paying off
|
|
|
11,703,248
|
|
|
|
130,394
|
|
|
|
9
|
%
|
|
|
495
|
|
C
|
|
Properties with
buy- back options transferred to SML in 2017 and 2018 *
|
|
|
7,660,568
|
|
|
|
86,251
|
|
|
|
6
|
%
|
|
|
319
|
|
D
|
|
Sold properties
without buy- back options
|
|
|
|
|
|
|
1,023,519
|
|
|
|
69
|
%
|
|
|
1,926
|
|
Rental
properties at cost
|
|
|
41,067,978
|
|
|
|
1,480,618
|
|
|
|
100
|
%
|
|
|
3,173
|
|
Less:
accumulated depreciation
|
|
|
(19,733,963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
properties, net
|
|
$
|
21,334,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2018
Group
|
|
Description of Property
|
|
Cost
in US $
|
|
|
In
Square
Feet
|
|
|
%
of Total
Square Feet
|
|
|
Units
|
|
A
|
|
Owned
by DVPD
|
|
$
|
21,968,292
|
|
|
|
240,799
|
|
|
|
16
|
%
|
|
|
434
|
|
B
|
|
Sold properties
with buy- back options or return is in process without paying off
|
|
|
11,845,672
|
|
|
|
130,049
|
|
|
|
9
|
%
|
|
|
493
|
|
C
|
|
Properties with
buy- back options transferred to SML in 2017 and 2018 *
|
|
|
7,753,794
|
|
|
|
86,251
|
|
|
|
6
|
%
|
|
|
319
|
|
D
|
|
Sold properties
without buy- back options
|
|
|
-
|
|
|
|
1,023,519
|
|
|
|
69
|
%
|
|
|
1,927
|
|
Rental
properties at cost
|
|
|
41,567,758
|
|
|
|
1,480,618
|
|
|
|
100
|
%
|
|
|
3,173
|
|
Less:
accumulated depreciation
|
|
|
(19,048,676
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
properties, net
|
|
$
|
22,519,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*See
Note 10, Property Financing Agreement Payable
Depreciation
expense for the rental properties was
$920,943 and $974,548 for the years ended December 31, 2019 and December 31, 2018 respectively.
As of December 31, 2019 and 2018, 1,023,519 square feet (95,088 square meters) of total rental properties (Group D
property), or 69% of rental properties were sold. These sold properties are owned by various unrelated individuals and entities.
The majority of these properties were sold during the period from 1998 to 2012. Pursuant to the sale contracts, at the date of
the sale, buyers obtained legal ownership to the sold properties and assumed the significant risks and rewards of ownership of
the property (had the ability to rent and sell the property at-will) while the Company received the payments of the purchase prices.
These sales were considered final sales. The allocated carrying cost and land use rights costs were derecognized and gains or
losses were recognized when the sales were completed.
As
of December 31, 2019, DVPD owned 240,455 Square feet (22,339 square meters) of total rental properties (Group A property)
(approximately 16%) with legal title. As of December 31, 2018, DVPD owned 240,799 square feet (22,371 square meters) of total
rental properties (Group A property) (approximately 16%) with legal title. Rental properties are carried at cost, which
includes allocated construction costs and allocated original purchased land use right costs. These properties were recorded under
the caption of “rental properties”.
Among
the properties owned by the Company, 200,747 square feet (18,650 square meters) of properties were used as collateral for a 390M
RMB Loan ($56.2 million) and 22,098 square feet (2,053 square meters) were used as collateral for 50M RMB Loan ($7.2 million)
and 23M RMB Loan ($3.5 million). (see Note 10, Bank Loans Payable)
Group
B and Group C properties were properties sold to various unrelated individuals and entities with a buy-back option. The majority
of these properties were sold during the period from 1998 to 2012. The vesting dates of the buy-back options ranged from 2014
to 2018. The Company has no legal title to these properties until the Company purchases back these properties upon the exercise
of the buy-back option. The Company’s accounting policy is to treat these types of sales as a financing agreement. The cost
of property sold has been measured under the caption of “rental property” in the consolidated financial statements
and continue to be depreciated. The Company recorded the sales proceeds as “property financing agreements payable”
in the consolidated financial statements and accrues the interest expense during the period of the lease. The interest rate is
determined by the price spread of each unit’s sale price and re-purchase price, and the time span from the date of sale
to the maturity date (last date to execute the option). At the date of repurchase, the amount of sales proceeds received plus
interest accrued will be equal to the agreed purchase price. The Company will derecognize the liability at the earlier of (1)
when the Company repurchases the property, (2) when the owner of the property and the Company reaches a settlement and the owner
gives up the buy-back option, or (3) the expiration of the buy-back option. (See Note 10), Property Financing Agreement Payable
for further information.
In
the filing of Form S-1/A dated February 12, 2019, the Company had a C-2 property group category, “Third party has title
acquired from previous owner”. The purchase and sale transactions between the previous owner and new owner - “third
party” will not remove the burden of the Company to buy back the property per the buy-back option. The nature of the C-2
group was the same as Group B. Therefore, we removed group C-2 and combined it (approximately 1%), with Group B.
As
of December 31, 2019, Group B properties had 130,394 square feet (12,114 square meters) 9% of total properties. As of December
31, 2018, Group B properties had 130,049 square feet (12,082 square meters) 9% of total properties.
Pursuant
to the SML financing agreement (see Note 10, Property Financing Agreement Payable), SML will negotiate with each individual property
owner who exercised their option to request the Company to buy back the property on a case by case basis and pay an agreed upon
price to the property owner. SML will acquire the title to the property and settle with the previous owner and extend the buy-back
option to May 15, 2020. The Company will honor the buy-back agreements and agreed to pay the same purchase price stated in the
original buy-back agreements. SML will also negotiate with lease back owners and settle the balance due that the Company owed
to lease owners. The Company will pay interest at 8% per annum of the balance (buy-back price) owed to SML. As of December 31,
2019 and 2018, 86,251 square feet (8,013 square meters) of properties were owned by SML.
There
is no private ownership of land in the PRC. All land in the PRC is owned by the government and cannot be sold to any individual
or company. The government grants a land use right that permits the holder of the land a right to use the land for a specified
period. Our land use rights were granted with a term of 50 years. Any transfer of the land use right requires government approval.
The acquisition cost of the land use right was allocated to each rental property and is amortized with the rental property. The
land use rights expire in May 2043. Properties’ estimated life was determined by the valid life of land use rights. Rental
properties are depreciated over 45 years.
Expected
future minimum rents to be received over the next five years and thereafter from leases in effect as of December 31, 2019 are
as follows:
For the Years Ending December 31,
|
|
Amount
in US$
|
|
2020
|
|
$
|
679,390
|
|
2021
|
|
|
653,146
|
|
2022
|
|
|
63,497
|
|
2023
|
|
|
7,182
|
|
|
|
|
|
|
Total
|
|
$
|
1,403,215
|
|
During
2019, the Company didn’t sell any unit. During 2018, the Company sold 26 units comprised of 7,460 square feet (693 square
meters) to third parties without buy-back options. Those sales were considered as final. The Company realized a gain of $1,340,035
from these sales.
Sales price
|
|
$
|
2,098,071
|
|
Less: carrying costs
|
|
|
(610,365
|
)
|
Add: accumulated depreciation
|
|
|
279,703
|
|
Other cost adjustments
|
|
|
(427,374
|
)
|
Net Gain
|
|
$
|
1,340,035
|
|
NOTE
6 –PROPERTY AND EQUIPMENT
Property
and equipment are composed of the following:
|
|
Estimated
Useful Life
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Rental
Property
|
|
45 years
|
|
$
|
218,482
|
|
|
$
|
221,140
|
|
Office equipment
|
|
3-5 years
|
|
|
319,359
|
|
|
|
324,623
|
|
Business machinery and equipment
|
|
5-10 years
|
|
|
2,944,603
|
|
|
|
2,969,180
|
|
Auto
|
|
5 years
|
|
|
24,574
|
|
|
|
24,873
|
|
Improvements
|
|
5-10 years
|
|
|
9,997,516
|
|
|
|
10,118,913
|
|
Total properties, machinery and equipment
|
|
|
|
|
13,504,534
|
|
|
|
13,658,729
|
|
Less: accumulated
depreciation and amortization
|
|
|
|
|
(13,074,471
|
)
|
|
|
(13,024,140
|
)
|
Property and
equipment, net
|
|
|
|
$
|
430,063
|
|
|
$
|
634,589
|
|
Depreciation
expense was $222,813 and $226,603 for the years ended December 31, 2019 and 2018, respectively.
NOTE
7 - INTANGIBLE ASSETS
Intangible
assets consist of the software used in management. The cost and related amortization are as follows:
|
|
Estimated
Useful Life
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Management software
|
|
5 years
|
|
$
|
25,819
|
|
|
$
|
26,134
|
|
Less: accumulated
amortization
|
|
|
|
|
(8,179
|
)
|
|
|
(3,051
|
)
|
Intangible assets,
net
|
|
|
|
$
|
17,640
|
|
|
$
|
23,083
|
|
Amortization
expense was $5,201 and $3,171 for the years ended December 31, 2019 and 2018, respectively.
NOTE
8 – RIGHT OF USE ASSETS
As
part of its operations, the Company leases back sold properties in Victory Plaza and subleases the properties to un-related third
parties with separate lease terms. Leases related to the property in Group B (see Note 5, Rental Properties, Net) which
were sold with buy-back options are classified as financing leases. Leases related to the property in Group D (see
Note 5) are classified as financing leases if the lease meets any of the following criteria: (i) the lease transfers ownership
of the underlying asset to the lessee by the end of the lease term, (ii) the lease grants the lessee an option to purchase the
underlying asset that the lessee is reasonably certain to exercise, (iii) The lease term is for the major part of the remaining
economic life of the underlying asset, (iv) the present value of the sum of the lease payments and any residual value guaranteed
by the lessee that is not already reflected in the lease payments equals or exceeds substantially all (90% or more) of the fair
value of the underlying asset, or (v) the underlying asset is of such a specialized nature that it is expected to have no alternative
use to the lessor at the end of the lease term. A lease will be classified as an operating lease if it is not classified as a
finance lease.
On
March 27, 2018, Sino Pride leased office space which is to expire on March 26, 2020. Due to the cost consideration, on August
15, 2019, Sino Pride terminated its old lease and moved to a new location. The lease is classified as an operating lease.
At the lease commencement date, the Company recognized a right-of-use asset and a lease liability, which is the present value
of the total lease payments discounted at 5.25% - a premium bank lending rate per annum at the date. The right-of-use asset is
amortized over the term of lease.
Lease Liability maturities as of December 31,
|
|
|
|
|
2020
|
|
$
|
210,946
|
|
2021
|
|
|
191,530
|
|
2022
|
|
|
118,788
|
|
Thereafter
|
|
|
-
|
|
Total Lease Liability maturities
|
|
$
|
521,264
|
|
Right
of use assets consist of the followings as of December 31, 2019 and 2018:
Right
of Use Assets- As of December 31, 2019 in US $
|
Lease Type
|
|
Property
Group
|
|
Lease
Units
|
|
|
ROU
Assets
|
|
|
Accumulated
Amortization
|
|
|
ROU,
Net
|
|
Financing lease
|
|
B
|
|
|
1
|
|
|
$
|
61,261
|
|
|
$
|
(60,166
|
)
|
|
$
|
1,095
|
|
Financing lease
|
|
D
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease
- Rental
|
|
-
|
|
|
2
|
|
|
|
564,865
|
|
|
|
(81,782
|
)
|
|
|
483,083
|
|
Total
|
|
|
|
|
3
|
|
|
$
|
626,126
|
|
|
$
|
(141,948
|
)
|
|
$
|
484,178
|
|
Right of
Use Assets - As of December 31, 2018 in US $
|
Lease Type
|
|
Property
Group
|
|
Lease
Units
|
|
|
ROU
Assets
|
|
|
Accumulated
Amortization
|
|
|
ROU,
Net
|
|
Financing lease
|
|
B
|
|
|
4
|
|
|
$
|
315,067
|
|
|
$
|
(284,848
|
)
|
|
$
|
30,219
|
|
Financing lease
|
|
D
|
|
|
4
|
|
|
|
247,730
|
|
|
|
(237,948
|
)
|
|
|
9,782
|
|
Operating lease
- Rental
|
|
-
|
|
|
1
|
|
|
|
597,889
|
|
|
|
(214,985
|
)
|
|
|
382,904
|
|
Total
|
|
|
|
|
9
|
|
|
$
|
1,160,686
|
|
|
$
|
(737,781
|
)
|
|
$
|
422,905
|
|
There
were 6 and 15 lease-back leases that expired during the twelve months ended December 31, 2019 and December 31, 2018, respectively.
The Company did not renew those leases.
Amortization
of ROU assets were $38,040 and $110,602 for the years ended December 31, 2019 and 2018, respectively.
Operating
lease expense was $291,549 and $235,623 for the years ended December 31, 2019 and 2018, respectively.
The
short-term rent lease expense was also included in operating lease expense. In addition to the above operating lease expense,
short-term rental expense was $307,505 and $268,778 for the year ended December 31, 2019 and 2018, respectively.
NOTE
9 - SHORT-TERM LOAN AND INTEREST RECEIVABLE
On
June 28, 2018, DVBM entered into a loan agreement to lend RMB 50,000,000 or $7,265,647 (the “Principal”) to Zhong
Ke Chuang Zhan Investment, Ltd, an independent third party (“ZKCZ”). The maturity date of the unsecured loan was
June 30, 2019 (the “Maturity Date”). The interest (the “Interest”) shall accrue on the unpaid Principal
amount of the loan from July 1, 2018 to September 30, 2018 at a simple rate of 2% per month and from October 1, 2018 to June 30,
2019 at a simple rate of 0.7% per month. All computations of the Interest rate hereunder shall be made based on the daily balance
of the Principal amount of the loan. Accrued, but unpaid, interest shall be paid on the Maturity Date. The outstanding loan principal
to ZKCZ was approximately $7.5 million at December 31, 2019.
On
June 30, 2019, the Company signed a new loan agreement with ZKCZ to amend the loan amount from $7,182,360 (RMB 50,000,000)
to $10,773,540 (RMB 75,000,000) and extend its Maturity Date to September 30, 2020. At the request of the Company,
ZKCZ has provided to the Company a Promissory Note and payment plan related to the above outstanding loan. As of June 30, 2019,
the Company has recorded a reserve allowance of $2,606,349 (RMB 18,144,100) in the accompanying consolidated financial
statements. From
January 1, 2020 to March 31, 2020, ZKCZ has made payments of approximately RMB 6.2M back to the
Company.
NOTE
10 – BANK LOANS PAYABLE
The
following table sets forth the Company’s loans payable as of December 31, 2019 and December 31, 2018:
|
|
2019
|
|
|
2018
|
|
Harbin Bank Loans
|
|
|
|
|
|
|
|
|
Interest at 5.46% per annum,
payable 07/18/2027
|
|
$
|
55,519,644
|
|
|
$
|
56,267,993
|
|
Interest at 7.08% per annum, payable
07/19/2024
|
|
|
4,104,206
|
|
|
|
4,348,878
|
|
Interest at 6.50% per annum, payable
12/20/2018-In default
|
|
|
3,303,885
|
|
|
|
3,344,093
|
|
Interest at 6.50% per annum, payable
09/27/2019-In default
|
|
|
2,858,579
|
|
|
|
2,893,367
|
|
Interest
at 6.50% per annum, payable 03/11/2020-In default
|
|
|
1,470,948
|
|
|
|
-
|
|
Total principal
|
|
|
67,257,262
|
|
|
|
66,854,331
|
|
Less:
|
|
|
|
|
|
|
|
|
unamortized debt
issuance cost
|
|
|
(335,849
|
)
|
|
|
(395,397
|
)
|
Total bank loans
payable
|
|
$
|
66,921,413
|
|
|
$
|
66,458,934
|
|
On
July 20, 2014, the Company’s subsidiaries, DVPD entered into a 10-year loan agreement (the “RMB 390M Loan”)
US$56,022,409 (RMB 390,000,000 translated at December 31, 2019 exchange rate) long-term borrowing from Harbin Bank (the
“Bank”). The Loan was used for “repayment of other bank loans, repayment of shareholder loans and renovations”.
The Loan charges a floating rate of interest at 120% of the loan rate published by the People’s Bank of China for similar
loans. Current benchmark rate for a business loan over 5 years is 4.9% per annum adjusted on October 24, 2015. The average interest
rates were 5.88% and 5.90% for the years ended December 31, 2019 and 2018, respectively. Originally, Loan was to mature on June
19, 2024. On August 17, 2017, the Bank agreed to the following: (i) to extend the maturity date of the Loan from July 19, 2024
to July 18, 2027; (ii) to extend the initial monthly repayment date from August 20, 2017 to July 20, 2020, however, during the
extended period, the Company has to repay principal of US$72,015 (RMB 500,000) per quarter plus monthly interest; and (iii)
add Mr. Alex Brown, the controlling shareholder and founder of VCI, as a joint and several guarantor. The Loan agreement includes
customary events of default, including DVPD’s failure to pay any principal or interest when due, becoming insolvent, or
ceasing operations, or if there is a material adverse change in the assets, business, commitments, or prospects of DVPD. Upon
the Bank’s declaration of an event of default under the Loan agreement, they can demand payment in full of all outstanding
principal and accrued interest. The RMB 390M Loan balance was US$55,519,644 (RMB 386,500,000) and US$56,267,993
(RMB 387,000,000) as of December 31, 2019 and, 2018, respectively.
The
Loan is secured substantially by 18,650 square meters (200,747 square feet) of rental properties owned by DVPD and guaranteed
jointly by Sino Pride, DVPD, DVBM, and Mr. Alex Brown. If DVPD fails to fulfill the obligations of the relevant provisions of
the RMB 390M Loan agreement, each guarantor shall be liable and pay liquidated damages to the Bank. The damages are 20% of the
principal amount of the loan.
According
to the loan agreement with the Bank dated August 17, 2017, the Company had paid to the Bank the quarterly principal plus
monthly interest through the first quarter of 2019. The Company, however, has not made such payment since April 2019, which can
be considered as an event of default. As of December 31, 2019, accrued principal and interest totaled approximately $2.7 million
(the “RMB 390M Loan Balance Due”).
On
March 24, 2015, DVPD entered into a loan agreement (the “RMB 50M Loan”) for a US$7,182,360 (RMB50,000,000 translated
at December 31, 2019 exchange rate) long-term borrowing from the Bank. The RMB 50M Loan was used for renovations. The RMB
50M Loan charges a floating rate of interest at 120% of the loan rate published by the People’s Bank of China. The current
benchmark rate for a business loan over 5 years is 4.9% per annum adjusted on October 24, 2015. The average interest rates for
the years ended December 31, 2019 and 2018 were 5.89% and 5.88%, respectively. The maturity date of the RMB 50M
Loan is July 19, 2024. The RMB 50M Loan Agreement includes customary events of default, including DVPD’s failure to pay
any principal or interest when due, becoming insolvent, or ceasing operations, or if there is a material adverse change in the
assets, business, commitments, or prospects of DVPD. Upon the Bank’s declaration of an event of default under the loan agreement,
the Bank Loan can demand payment in full of all outstanding principal and accrued interest. The RMB 50M Loan balance was US$4,104,206
(RMB 28,571,429) and US$4,348,878 (RMB 29,910,714) at December 31, 2019 and December 31, 2018, respectively.
The
RMB 50M Loan is secured substantially by 2,053 square meters (22,098 square feet) of rental properties owned by DVPD and guaranteed
jointly by Sino Pride, DVPD and DVBM. If DVPD fails to fulfill the obligations of the relevant provisions of the Loan agreement,
each guarantor shall be liable and pay liquidated damages to the Bank. The damages are 20% of the principal amount of the loan.
The Company is required to make the principal and interest payments from April 20, 2015 through the Maturity Date.
As
of December 31, 2019, the accrued principal and interest totaled approximately $0.8 million (the “RMB 50M Loan Balance Due”).
On
December 21, 2017, DVPD entered into a liquidity loan agreement (the “RMB 23M Loan”) for a principal amount of $3,534,383
(RMB 23,000,000) from Harbin Bank (the “Bank”) with interest at 6.5%, payable monthly. The RMB 23M Loan is used for
short term liquidity needs. On December 28, 2017, DVPD borrowed $1,844,026 (RMB 12,000,000). The term of the loan was one
year and was due on December 20, 2018. On January 19, 2018, DVPD borrowed an additional $1,690,357 (RMB 11,000,000). DVPD
may choose to extend the term of the loan after obtaining prior written consent from the Bank at least 15 days prior to the maturity
date. Currently, The loan agreement includes customary events of default, including DVPD’s failure to pay any principal
or interest when due, becoming insolvent, or ceasing operations, or if there is a material adverse change in the assets, business,
commitments, or prospects of DVPD. Upon the bank’s declaration of an event of default under the loan agreement, the Bank
can demand repayment in full of principal and accrued interest. The Loan also prohibits the payment of dividends. The RMB 23M
loan is secured by the same collateral as the RMB 50M loan and is guaranteed jointly by DVBM and Sino Pride.
As
the date of this Annual Report, the Company has not made the
repayment and the loan is in default.
On
September 27, 2018, DVPD borrowed US$2,891,727 (RMB19,900,000) in a short-term loan from Harbin Bank (the “RMB
19.9M Loan”). The loan requires interest at 6.50% per annum and expired on September 12, 2019. The use of loan
proceeds is restricted to pay principal and interest amounts owed to Harbin Bank.
As
of the date of this Annual Report, the Company has not made
the repayment and the loan is in default.
On
March 26, 2019, DVPD borrowed US$1,433,491 (RMB10,240,000 translated at September 30, 2019 exchange rate) in a short-term
loan from Harbin Bank (the “RMB 10.24M Loan”, together with the RMB 23M Loan and RMB 19.9M Loan, the “Liquidity
Loan Balance Due”). The loan requires interest at 6.50% per annum and expires on March 11, 2020. The use of loan proceeds
is restricted to pay principal and interest amounts owed to Harbin Bank.
As
of the date of this Annual Report, the RMB 10.24M Loan has
been expired while the Company has not made the corresponding repayment.
As
of the date of this Annual Report, the Short-Terms Loans including RMB 23,000,000, RMB19,900,000, and RMB10,240,000 respectively
have become due while the Company has not made the corresponding payment. The Company is not aware that the Bank has taken any
legal action against the Company. In the event that the Bank rejects our Refinancing Loans and/or commence any legal proceeding
against us regarding the Short-term Loans, we may lose our collateralized assets which will cause a material adverse effect on
our results of operations. Furthermore, if the collateral on those loans cannot satisfy our payment obligation, we may be forced
to commence liquidation process if we do not have sufficient liquidity or cannot raise sufficient fund at that time, if any at
all.
The
weighted average short-term loan balance consisting of loans from financial institutions was $7,388,091 and $4,046,028 for the
years ended December 31, 2019 and 2018, respectively. The weighted average interest rate for short term loans was 6.50 per annum
for the years ended December 31, 2019 and 2018.
For
the years ended December 31, 2019 and 2018, interest expense incurred for the above loans, including amortization of debt issuance
costs amounted to $4,147,614 and $4,131,313, respectively.
The
Bank and the Company are currently discussing potential grant to convert the principal and interests due, including the RMB 390M
Loan Balance Due, the RMB 50M Loan Balance Due, and the Liquidity Loan Balance Due into a new loan and an additional liquidity
loans in an amount of RMB 50 million (collectively, the “Refinancing Loans”). The collateral for the potential RMB
50 million loan will be the remaining values of same collateral for the RMB 390M Loan and RMB 50M Loan but ranking junior to the
RMB 390MB Loan and RMB 50M Loan. In addition, the Company has been negotiating with the Bank for a waiver of the penalty for late
payment of related loan interest (the “Penalty Waiver”). The Company has already submitted the application for the
Refinancing Loans at the request of the Bank. It usually takes about 2 to 3 months for the Bank to review and approve the Refinancing
Loans and the Penalty Waiver which can be potentially longer as a result of the outbreak of the COVID-19. However, there
is no assurance or certainty that such Refinancing Loans or Penalty Waiver will be approved by the Bank.
Debt
Maturities
As
of December 31, 2019, scheduled maturities of the Company’s outstanding bank loans were as follows:
Year Ended December 31,
|
|
|
|
2020
|
|
$
|
8,690,244
|
|
2021
|
|
|
1,056,832
|
|
2022
|
|
|
1,056,832
|
|
2023
|
|
|
1,056,834
|
|
2024
|
|
|
1,056,834
|
|
Thereafter
|
|
|
54,339,686
|
|
Total debt maturities
|
|
|
67,257,262
|
|
Less:
unamortized debt issuance costs
|
|
|
(335,849
|
)
|
Total debt obligations
|
|
$
|
66,921,413
|
|
NOTE
11 – PROPERTY FINANCING AGREEMENTS PAYABLE
Property
financing agreements payable consists of the following as of December 31, 2019 and 2018.
|
|
2019
|
|
|
2018
|
|
Buy-back financing agreements
- Group B properties
|
|
$
|
42,680,410
|
|
|
$
|
46,438,364
|
|
SML financing agreements - Group
C properties *
|
|
|
34,802,880
|
|
|
|
33,529,953
|
|
Net unamortized
SML financing cost
|
|
|
(18,509
|
)
|
|
|
(63,697
|
)
|
Total property
financing agreements, net
|
|
$
|
77,464,781
|
|
|
$
|
79,904,620
|
|
*
includes lease-back payables transferred to SML
Buy-back
Financing Agreements
As
of December 31, 2019, 216,230 square feet (20,127 square meters) of total properties (15%) (including Group B and
Group C properties-the properties transferred to SML) were sold to various unrelated individuals and entities with a buy-back
option. The majority of these properties were sold in the period from 1998 to 2012. The date of buy-back options ranged from 2014
to 2018.
The
Company’s accounting policy is to treat these types of sales as financing agreements. The costs of properties sold were
kept under the caption of “rental properties” in the consolidated financial statements and continue to depreciate
the properties over their estimated life. (see Note 5, Rental Properties, Net) The Company recorded sales proceeds as “property
financing agreements payable” in the consolidated financial statements and accrues interest during the period of the buy-back
option. The interest rate is determined by the price spread of each unit’s sale price and buy-back price, and the time span
from the date of sale to the expiration date (last date to execute the option). In the case where the buy-back price is equal
to the sales price, a bank long term lending rated is used. The amount of buy-back financing agreements represents the original
proceeds from the sale of the property plus accrued interest. At the date of expiration, the amount of the buy-back financing
agreements will equal the buy-back price stated in the buy-back contract.
Detailed
information on property buy-back financing agreements payable in Group B as of December 31, 2019 and 2018 as follows.
|
|
Units
|
|
|
Square
Feet
|
|
|
Selling
Price
|
|
|
Buy-Back
Price
|
|
|
Property
Financing Agreements Payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective agreements
|
|
|
5
|
|
|
|
1,948
|
|
|
$
|
533,965
|
|
|
$
|
713,740
|
|
|
$
|
686,960
|
|
Past due agreements
|
|
|
490
|
|
|
|
128,446
|
|
|
|
37,267,543
|
|
|
|
41,996,688
|
|
|
|
41,993,450
|
|
Total financing
agreements
|
|
|
495
|
|
|
|
130,006
|
|
|
$
|
37,801,508
|
|
|
$
|
42,710,428
|
|
|
$
|
42,680,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective agreements
|
|
|
14
|
|
|
|
5,047
|
|
|
$
|
1,765,972
|
|
|
$
|
2,501,614
|
|
|
$
|
2,420,513
|
|
Past due agreements
|
|
|
479
|
|
|
|
124,959
|
|
|
|
36,322,719
|
|
|
|
44,030,955
|
|
|
|
44,017,851
|
|
Total financing
agreements
|
|
|
493
|
|
|
|
130,006
|
|
|
$
|
38,088,691
|
|
|
$
|
46,532,569
|
|
|
$
|
46,438,364
|
|
The
buy-back price is the price that Company has to pay when the owner of property exercises their option to have the Company buy-back
the property. This price is stated in the buy-back agreement. Property financing agreements payable is the amount that the Company
accrued as a liability as of the reporting date. At the date of maturity, property financing agreements payable will equal the
buy-back price. During the twelve months ended December 31, 2019, the Company paid a total of $3,474,503 (RMB 24,197,759)
to the owners of property, which was recorded as a reduction of the Property Financing Agreement Payable in the accompanying consolidated
financial statements.
Property
financing agreements payable will be derecognized when the buy-back amount is fully paid. In the case of settlement, the remaining
unpaid balance will be reclassified from buy-back payable to other payables. The amount recorded as buy-back payables reclassified
to other payables was $4,152,344 and $4,186,382 as of December 31, 2019 and 2018, respectively.
Following
table set forth the expiration of buy-back options (Group B properties) and the buy-back amount.
Future Expiration
|
|
Units
|
|
|
Amount
|
|
Past due as of 12/31/2019
|
|
|
490
|
|
|
$
|
41,996,688
|
|
12/31/2020
|
|
|
3
|
|
|
|
460,576
|
|
12/31/2021
|
|
|
-
|
|
|
|
-
|
|
12/31/2022
|
|
|
2
|
|
|
|
253,164
|
|
12/31/2023
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
495
|
|
|
$
|
42,710,428
|
|
SML
Agreement
On
December 29, 2017, the Company entered into an agreement “Strategy Cooperation Agreement”, as amended on February
22, 2018 (the “SML Agreement”) with Dalian Sheng Ma Lin Trading Ltd. (“SML”). Pursuant to the SML Agreement,
SML will negotiate with each individual property owner who exercised their option to request the Company to buy back the property
on a case by case basis and pay an agreed price to such owner. SML will subsequently become the owner of the property and the
Company had agreed to buy back the property at the initial price under the buy-back option with the previous owner no later
than May 15, 2020. The Company also agreed to pay interest of 8% per annum commencing on January 1, 2018. In addition, SML will
settle the lease-back payables under the lease-back agreements with each individual property owner and the Company agrees to pay
SML the amount of rent payable under the lease-back plus annual interest of 8% commencing on January 1, 2018 no later than May
15, 2020.
The
SML Agreement helped the Company to temporarily relieve part of pressure from disputes and expedite the settlements which
will help Company to improve its credit and financial position so that the Company can focus on the Renovation. However,
as of December 31, 2019, the Company has temporarily suspected it renovation projects due to its inability to raise the needed
fund. SML has no relationship or affiliation with the Company other than the SML agreement. As of December 31, 2019, the properties
with buy-back options totaled 319 units, 86,244 square feet (8,013 meters). Acknowledging the impact of the outbreak of COVID-19,
on January 15, 2020, the Company entered into a supplemental agreement with SML to extend the original repayment date from May
15, 2020 to May 15, 2023.
Amounts
under the SML Agreement as of December 31, 2019 and 2018 consist of following:
|
|
2019
|
|
|
2018
|
|
Buy-back related cases:
including remaining balances
|
|
$
|
25,869,672
|
|
|
$
|
26,995,786
|
|
Lease-back related cases: including
historical remaining balances
|
|
|
4,020,158
|
|
|
|
4,069,082
|
|
Accrued interest
payable to SML
|
|
|
4,913,051
|
|
|
|
2,465,085
|
|
Total SML financing
agreements
|
|
$
|
34,802,881
|
|
|
$
|
33,529,953
|
|
NOTE
12 – Account Payable and accrued liabilities
Accounts
payable and accrued liabilities consist of the following:
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Accounts payable
|
|
$
|
3,461,758
|
|
|
$
|
2,839,967
|
|
Wages and employee benefits payable
|
|
|
679,189
|
|
|
|
370,151
|
|
Taxes payable*
|
|
|
806,380
|
|
|
|
584,693
|
|
Vat payable
|
|
|
745,935
|
|
|
|
455,962
|
|
Bank loan interest
payable
|
|
|
3,245,679
|
|
|
|
496,831
|
|
Total accounts
payable and accrued liabilities
|
|
$
|
8,938,941
|
|
|
$
|
4,747,604
|
|
*
Taxes payable consist of the following:
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Individual income taxes
|
|
|
27,150
|
|
|
|
30,674
|
|
Business taxes
|
|
|
169,336
|
|
|
|
136,725
|
|
Property and land use taxes
|
|
|
269,646
|
|
|
|
253,226
|
|
Tax penalties
|
|
|
247,732
|
|
|
|
90,473
|
|
Other surcharges
and fees
|
|
|
92,516
|
|
|
|
73,595
|
|
Total
|
|
$
|
806,380
|
|
|
$
|
584,693
|
|
As
of December 31, 2019, and 2018, the Company’s taxes payable includes property tax, land use right taxes, income tax,
taxes related to rental and other taxes in the aggregate amount of $0.8 million and $0.6 million, respectively. In accordance
with Chinese tax authorities and tax laws, the Company accrued tax penalties payable of $247,732 and $90,473 as of December
31, 2019 and 2018, respectively.
NOTE
13 – LEASE LIABILITIES PAYABLE
Lease
liabilities payable consisted of following as of December 31, 2019.
Lease Type
|
|
Property
Group
|
|
Lease
Units
|
|
|
Lease
Payable
|
|
Financing lease
|
|
B
|
|
|
1
|
|
|
$
|
1,637
|
|
Financing leases
|
|
D
|
|
|
2
|
|
|
|
21,118
|
|
Operating leases
|
|
Office rent
|
|
|
2
|
|
|
|
498,509
|
|
Total
|
|
|
|
|
5
|
|
|
$
|
521,264
|
|
Leases
liabilities payable consisted of following as of December 31, 2018.
Lease Type
|
|
Property
Group
|
|
Lease
Units
|
|
|
Lease
Payable
|
|
Financing lease
|
|
B
|
|
|
4
|
|
|
$
|
176,902
|
|
Financing lease
|
|
D
|
|
|
4
|
|
|
|
38,878
|
|
Operating lease
|
|
D
|
|
|
1
|
|
|
|
396,345
|
|
Total
|
|
|
|
|
9
|
|
|
$
|
612,125
|
|
For
the year ended December 31, 2019, 5 lease-backs expired. For the year ended December 31, 2018, 15 lease-back leases expired.
The Company did not renew those leases. The unpaid lease liability was recorded as “Other payables” in the accompanying
consolidated financial statements. Accumulated unpaid lease-back liabilities were $5,529,680 and $5,456,833 as of December 31,
2019 and 2018, respectively.
For
the financing leases, the Company did not process any cash payments for the periods ended December 31, 2019 and 2018 respectively.
During the same periods, their respective weighted average remaining lease term was about one year whereas the supplemental noncash
on lease liabilities resulting from right-to-use assets were approximately $779,000 and $3,870,804. For the operating leases,
the Company processed cash payments of approximately $70,000 and $227,000 for the periods ended December 31, 2019 and 2018 respectively.
During the same periods, their respective weighted average remaining lease terms were about one year whereas the supplemental
noncash on lease liabilities resulting from right-to-use assets were approximately $566,000 and $598,000.
A
typical lease contract will include the: (i) the lease period – usually around 10 years, (ii) agreed lease payment amount,
(iii) payment terms among others, The Company takes the risk after the lease is signed. The Company is liable for the agreed lease-back
payment amount even if the property is vacant. Lease-back rental properties may be combined with Company owned properties
together for rent depending on the needs of the tenant. The Company did not trace income separately from those lease-back properties.
Rental income is reported gross including rental income from our owned properties and lease-back properties. Lease-back
expenses were recorded as amortization, interest and lease-back expenses separately.
Financing
lease expenses consisted of (i) amortization of the ROU asset; (ii) interest expense of the lease liability and (iii) other one-time
payments including late payment reimbursement. The Company incurred $38,040 and $110,602 of amortization of ROU assets during
years ended December 31, 2019 and 2018, respectively. The Company incurred $1,290 and $6,846 of interest expense in connection
with financing leases for the years ended December 31, 2019 and 2018, respectively. The Company incurred additional expenses of
$2,712 and $2,364,004 in connection with the lease-back operations for the years ended December 31, 2019 and 2018, respectively.
The 2018 expenses are mainly guaranteed rental payments, late payment reimbursements and taxes paid on behalf of the property
owners.
Operating
lease expense including interest and amortization are reported as “operating lease expense” in the accompanying consolidated
financial statements. Operating lease expense was $599,054 and $504,401 for the years ended December 31, 2019 and 2018, respectively,
including the rental expenses from the short-term leases of $307,505 and $268,778 for the years ended December 31, 2019 and 2018,
respectively.
Future
minimum lease-back payables at December 31, 2019 were as follows:
Years
Ended December 31,
|
|
Lease
Units*
|
|
|
Square
Feet
|
|
|
Minimum
Lease Payable
|
|
2020
|
|
|
3
|
|
|
|
431
|
|
|
$
|
4,474
|
|
2021
|
|
|
2
|
|
|
|
108
|
|
|
|
433
|
|
2022
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total future
minimum lease payable
|
|
|
|
|
|
|
|
|
|
$
|
4,907
|
|
*
Lease units represent total leases at the end of period
|
Sino
Pride leases office space under an operating lease agreement which expires on August 31, 2021 and New York’s office lease
expires on August 31, 2022. The future minimum rental payments are as follows:
Years ending December 31,
|
|
|
|
2020
|
|
$
|
209,865
|
|
2021
|
|
|
202,859
|
|
2022
|
|
|
119,372
|
|
|
|
$
|
532,096
|
|
NOTE
14 – OTHER PAYABLES
Other
payables consist of the following:
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Tenants deposits payable
|
|
|
2,624,528
|
|
|
|
2,652,706
|
|
Tenants escrow account
|
|
|
1,694,568
|
|
|
|
1,607,935
|
|
Guaranteed rent payable
|
|
|
282,950
|
|
|
|
286,394
|
|
Expired lease-back payable
|
|
|
5,529,680
|
|
|
|
5,456,883
|
|
Buy-back payable
|
|
|
4,152,344
|
|
|
|
4,186,382
|
|
Accrued liabilities for additional payables
from lawsuits
|
|
|
4,742,632
|
|
|
|
4,800,348
|
|
|
|
|
|
|
|
|
|
|
Union, housing,
heating and others
|
|
|
879,996
|
|
|
|
604,227
|
|
Total Other Payables
|
|
$
|
19,906,698
|
|
|
$
|
19,594,875
|
|
NOTE
15 – RELATED PARTY TRANSACTIONS
The
Company has been financing its operations by borrowing funds from Sino Pride and DVDC, the holder of the 20% equity interest of
DVPD.
Loan
payable to related party consists of following as of December 31, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
Loan payable to DVDC
|
|
$
|
10,594,843
|
|
|
$
|
10,723,778
|
|
Due to related
individual
|
|
|
1,339,948
|
|
|
|
792,502
|
|
Loan payable
to related parties
|
|
$
|
11,934,791
|
|
|
$
|
11,516,280
|
|
Loan
Payable to DVDC
DVDC
contributed land use rights and infrastructures valued at $20,000,000 to DVPD. Among this $20,000,000 contribution, $6,800,000
was recorded as registered capital, $13,200,000 was recorded as a loan payable to DVDC per the December 25, 2000 agreement. The
loan is payable when DVPD is profitable. Loan principal $3,300,000 (25% of $13,200,000) bears interest at 8% per annum. The interest
rate for the remaining balance of principal is equal to the loan rate published by Bank of China.
Loan
payable to DVDC was initiated in US dollars and related interest calculations are based on the principal in US dollars per the
loan agreement. However, the loan agreement did not specify which currency will be used when the loan is repaid. Considering that
DVDC is a Chinese entity and located in China, loan and interest payments must be denominated in RMB, therefore, RMB is the currency
utilized to record the principal and interest payable. Any gain or loss resulting the translation of the financial statements
will be recorded in “accumulated comprehensive income (loss)” section. RMB109,356,000 loan payable to DVDC was translated
from $13,200,000 US dollars at the historical rate.
Loan
payable to DVDC consists of following at December 31, 2019 and 2018.
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Loan principal
|
|
$
|
13,200,000
|
|
|
$
|
13,200,000
|
|
Advance payments for infrastructure
construction
|
|
|
(5,685,747
|
)
|
|
|
(5,685,747
|
)
|
Other payable
to DVDC
|
|
|
215,136
|
|
|
|
215,136
|
|
Net loan payable to DVDC in RMB
|
|
|
7,729,389
|
|
|
|
7,729,389
|
|
Foreign exchange
effect
|
|
|
2,865,454
|
|
|
|
2,994,389
|
|
Net loan payable
to DVDC in US$
|
|
$
|
10,594,843
|
|
|
$
|
10,723,778
|
|
Accrued
interest expense – related parties was $537,210 and $519,970 for the years ended December 31, 2019 and 2018, respectively.
Total accrued interest payable to related parties was $11,520,609 and $11,121,817 at December 31, 2019 and 2018, respectively.
Due
to Related Individual
The
spouse of our major shareholder provided working capital for our US office expenses. As of December 31, 2019, and December 31,
2018, the amount due to this individual was $1,339,948 and $792,502, respectively. The amount due earns no interest and is due
on demand.
Loan
Payable to Sino Pride
Sino
Pride has been a major source of funds for the operations of DVPD and DVBM. In the period from 1996 to 2008, DVPD received loans
of $38,683,297 from Sino Pride and repaid $20,710,919 in the period from 1998 to 2014. In 2015, total repayments were $4,068,630.
Loan payable to Sino Pride bears interest at 8% per annum. Pursuant to FASB ASC 830-20-35-1, the intra-entity (intercompany transactions)
foreign currency transactions whose terms are denominated in the currency other than the entity’s functional currency and
settlement is anticipated in the foreseeable future (hence not long-term investment nature), requires the increases or decreases
in expected functional currency cash flows to be included in determining income (loss) in the periods as gain (loss) from foreign
currency transactions.
The
loan payable to Sino Pride is denominated in US dollars. The loan is designated as funding for working capital and is not an investment.
The repayment is required when the Company is profitable or has funds available to make repayments. The transactions of loan proceeds
and repayments are dominated in US dollars. The Company uses the bank spot exchange rate to record proceeds and repayments in
RMB in the Company’s books. By the end of the year, the US$ loan balance and interest payable will be translated to RMB
and recorded on DVPD and DVBM’s books.
Loans,
repayments and accrued interest payable to Sino Pride as of December 31, 2019 and December 31, 2018 are as followed:
Loan Payable to Sino Pride
|
|
|
|
Loan balance at December 31, 2017
|
|
$
|
13,503,748
|
|
Repayment in
2018
|
|
|
(200,000
|
)
|
Loan balance at December 31, 2018
|
|
|
13,303,748
|
|
Repayment in
2019
|
|
|
-
|
|
Loan balance at December 31, 2019
|
|
$
|
13,303,748
|
|
|
|
|
|
|
Interest Payable to Sino Pride
|
|
|
|
|
Interest payable at 12/31/2017
|
|
$
|
7,451,973
|
|
Accrued interest in 2018
|
|
|
1,079,968
|
|
Repayments in
2018
|
|
|
-
|
|
Interest payable - December 31, 2018
|
|
|
8,531,941
|
|
Accrued interest in 2019
|
|
|
1,079,083
|
|
Repayments in
2019
|
|
|
-
|
|
Interest payable - December 31,
2019
|
|
$
|
9,611,024
|
|
The
above inter-company loan payable of $13,303,748 and $13,303,748, and accrued interest payable of $9,611,024 and $8,531,941
at December 31, 2019 and December 31, 2018, respectively, have been eliminated in the accompanying consolidated financial statements.
The interest expenses of $1,079,083 and $1,079,926 for the years ended December 31, 2019 and 2018, respectively, have been eliminated
in the accompanying consolidated financial statements.
Loan
Payable to Shareholder/Due to Shareholder
Due
to shareholder represents the investment amount that Sino Pride received from its former shareholders, which was assigned to the
Company’s current major shareholder, Mr. Alex Brown. Loan payable to shareholder was $65,931,644 and $64,151,148, respectively
at December 31, 2019 and 2018. During the year ended December 31, 2019 and 2018, Mr. Alex Brown advanced $1,774,621 and $1,362,472
to the Company, respectively. The balance due to shareholder bears no interest. If the interest was calculated at 5% (December
2019 US (Fed) Prime rate) for the loan payable to shareholder, the balance for interest expense would have been approximately
$3.3M and $3.2M for the ended December 31, 2019 and 2018, respectively.
Transfer
of Ownership of Sino Pride
Iven
International Group Limited, is a company registered in Hong Kong (“Iven”). From October 31, 2016 to June 30, 2017,
Alex Brown beneficially owned a 100% equity interest of Iven, among which, a 70% equity interest was held directly and a 30% equity
interest was held indirectly through Dalian Yiwen New Materials Technology Development Co., Ltd, a PRC entity 80% owned by Alex
Brown and 20% owned by his spouse. On June 30, 2017, Alex Brown and Dalian Yiwen New Material Technology Development Co., Ltd
transferred their respective ownership of Iven to Winner Ascent Investment Limited, a Hong Kong limited liability company solely
owned by Alex Brown.
On
November 2016, Iven signed an agreement of “Assignment of Common Stock and Debt Rights” (“the Original Agreement”)
from VP Holding. Pursuant to the Original Agreement, Iven acquired all 30,000,000 shares of common stock of Sino Pride then outstanding
and assumed debt rights (Sino Pride owed to VP Holding) for nominal consideration of HK$ 1 (approximately US$0.13) from VP Holding.
On
September 4, 2017, VCI signed “Assignment of All Outstanding Shares and All Debt Rights Agreement” (“the Agreement”)
with Iven. Pursuant to the Agreement, VCI acquired all 30,000,000 shares of common stock of Sino Pride then outstanding and assumed
shareholder debt and loan rights of HK$493,807,633 (approximately $64,208,000) (Sino Pride owed to VP Holding) including outstanding
shareholder loans of HK$ 408,409,628 (approximately $53,093,000) for nominal consideration of HK$ 1 (approximately US$0.13) from
Iven. The Transfer was part of the restructuring to prepare the Company to list in the U.S. capital markets.
NOTE
16 - INCOME TAXES
The
Company accounts for income taxes pursuant to FASB ASC 740 “Accounting for Income Taxes” which requires the
recognition of deferred tax assets and liabilities for the differences between the financial statements and the tax basis of assets
and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carry forwards. Additionally,
the accounting standards require the establishment of a valuation allowance to reflect the likelihood of realization of deferred
tax assets. Realization of deferred tax assets, including those related to the U.S. net operating loss carry forwards for income
tax purposes as compared to financial statement purposes, are dependent upon future taxable income and timing of reversals of
future taxable differences along with any other positive and negative evidence during the periods in which those temporary differences
become deductible or are utilized.
DVPD
and DVBM are located in China and governed by the Income Tax Law of the PRC. Under the Income Tax Laws of the PRC, Chinese companies
are generally subject to an income tax at an effective rate of 25% on income reported in the statutory financial statements after
appropriate tax adjustments. DVPD and DVBM are subject to these statutory rates. Operating losses can be carried forward for five
years.
Sino
Pride is located in Hong Kong and governed by the Tax Laws of Hong Kong. Assessable profits of corporations are taxed at the corporate
tax rate of 16.5%. Tax losses can be carried forward to offset profits in future years until fully absorbed but cannot be carried
back.
VCM
was incorporated in the U.S. on July 5, 2017 and is governed by the U.S. Federal tax laws and the State of Nevada (Incorporation
State).
On
December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA”), which significantly modified U.S. corporate income tax
law, was signed into law by President Trump. The TCJA contains significant changes to corporate income taxation, including but
not limited to the reduction of the corporate income tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation
of the tax deduction for interest expense to 30% of earnings (except for certain small businesses), limitation of the deduction
for net operating losses to 80% of the current year’s taxable income and generally eliminating net operating loss carrybacks,
allowing net operating losses to be carryforward without expiration, one-time taxation of offshore earnings at reduced rates regardless
of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate
deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many
business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new
federal tax law is uncertain, including to what extent various states will conform to the newly enacted federal tax law.
As
of December 31, 2019, and 2018, DVPD, DVBM and Sino Pride had a combined net foreign operating loss carry forwards of approximately
$54,629,148 and $58,213,409, respectively that may be available to reduce future years’ taxable income. These foreign losses
may not offset US income taxes in the future. Management believes that it appears more likely than not that the Company will not
realize these tax benefits.
As
of December 31, 2019, and 2018, VCM had approximately $2,667,043 and $1,155,570 net operating loss carryforwards, respectively.
In the U.S net operating losses incurred prior to December 31, 2017, can be carried forward 20 years. Under the TCJA, net operating
losses incurred after December 31,2017, can be carried forward indefinitely. The Company has no operating income in the
US. Management believes that it appears more likely than not that the Company will not realize these tax benefits. VCM’s
tax return for the years ended December 31, 2018 and 2017 are open to IRS inspection.
Future
tax benefits which may arise as a result of net operating losses have not been recognized in the accompanying consolidated financial
statements as their realization has not been determined likely to occur. Also, due to the change in control, there are annual
limitations on future net operating loss carryforward deductions. As future earnings are uncertain, the Company has provided a
valuation allowance for the entire amount of the deferred tax asset. The Company is required to evaluate the tax positions taken
in the course of preparing its tax returns to determine whether tax positions are “more likely than not” of being
sustained by the applicable tax authority “More likely than not” is defined as greater than a 50% chance.
At
December 31, 2019 and December 31, 2018, deferred tax assets consisted of:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
Net operating loss carry forwards
|
|
|
|
|
|
|
|
|
Foreign operations
|
|
$
|
13,366,178
|
|
|
$
|
18,153,562
|
|
US Operations
|
|
|
560,079
|
|
|
|
242,670
|
|
Valuation allowance
|
|
|
(13,926,257
|
)
|
|
|
(18,396,232
|
)
|
Deferred tax
assets - net
|
|
$
|
-
|
|
|
$
|
-
|
|
The
valuation allowance decreased by $689,438 for the twelve months ended December 31, 2019.
The
provisions for income taxes for the twelve months ended December 31, 2019 and 2018 are summarized as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
|
|
|
2,500,205
|
|
|
|
753,069
|
|
Change in valuation
allowance
|
|
|
(2,500,205
|
)
|
|
|
(753,069
|
)
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
The
reconciliation of the Company’s effective tax rate as a percentage of income before taxes and Federal statutory rates for
the two years ended December 31, 2019 and 2018, respectively, is as follows:
|
|
2019
|
|
|
2018
|
|
China
|
|
|
|
|
|
|
|
|
US statutory tax rate
|
|
|
21.00
|
%
|
|
|
21.00
|
%
|
Tax rate difference
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
Changes in valuation
allowance
|
|
|
-25.00
|
%
|
|
|
-25.00
|
%
|
Effective rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
NOTE
17– STOCKHOLDERS’ EQUITY
The
Company is authorized to issue up to 600,000,000 shares of common stock, par value $0.0001 per share. On November 13, 2017, the
Company issued 20,700,000 shares of its common stock to Alex Brown, Chairman and Chief Executive Officer of the Company and received
consideration of $2,070 in cash.
Initial
Public Offering
Pursuant
to the Registration Statement on Form S-1 The Company closed its initial public offering on March 28, 2019. The offering
price was $1 US dollar per share. The Company sold 1,011,000 shares and received all proceeds from the investors
of $1,011,000.
NOTE
18 - STATUTORY RESERVE
Pursuant
to the PRC law, entities must make appropriations from after-tax profits to a non-distributable “statutory surplus reserve
fund”. Subject to certain cumulative limits, the “statutory surplus reserve fund” requires annual appropriations
of 10% of after-tax profit until such appropriations reach 50% of the registered capital (as determined under accounting principles
generally accepted in the PRC (“PRC GAAP”) at each yearend). DVPD and DVBM have not made any appropriations to the
statutory reserve as of December 31, 2019 and December 31, 2018, as DVPD and DVBM have not yet generated any after-tax profits.
NOTE
19 – NON-CONTROLLING INTEREST
Non-controlling
interest represents DVDC’s 20% equity ownership interest in DVPD and DVPD’s operating results including its 5% equity
ownership interest in DVBM. Non-controlling interest consisted of the following as of December 31, 2019 and December 31, 2018:
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Non-controlling interest
at beginning of the period
|
|
$
|
(42,242,097
|
)
|
|
$
|
(43,268,669
|
)
|
Net loss
|
|
|
(1,495,207
|
)
|
|
|
(971,370
|
)
|
Change in foreign
currency translation adjustment
|
|
|
436,517
|
|
|
|
1,997,942
|
)
|
Non-controlling
interest at end of the period
|
|
$
|
(43,300,787
|
)
|
|
$
|
(42,242,097
|
)
|
NOTE
20 - COMMITMENTS AND CONTINGENCIES
Country
Risk
Our
PRC subsidiaries are subject to laws and regulations applicable to various laws and regulations generally applicable to companies
in China. As the Company’s principal operations are conducted currently in the PRC, it is subject to contingencies and risks
not typically associated with companies in North America and Western Europe. These risks include, among others, risks associated
with the political, economic and legal environments and foreign currency exchange limitations encountered in the PRC. The Company’s
results of operations may be adversely affected by changes in the political and social conditions in the PRC, and by changes in
governmental policies with respect to laws and regulations, among other things.
In
addition, all the Company’s transactions in the PRC are denominated in RMB, which must be converted into other currencies
before remittance from the PRC. Both conversion of RMB into foreign currencies and remittance of foreign currencies abroad require
approval of the PRC government.
Legal
Proceedings
As
of December 31, 2019, the Company had property financing agreements payable of $77,464,781, lease liabilities payable of $521,264,
expired lease-back payables of $5,529,680, and buy-back payables of $4,152,344. As of December 31, 2019, there were 565
lawsuits case against the Company in Dalian City, China. Litigants claimed that the Company did not buy back the property pursuant
to the sales contract or the Company did not pay the promised lease-back rent on time. These claims amounted to $24,820,625
(RMB172,788,781) translated at the December 31, 2019 exchange rate). These payables were included in and reported under the
caption of “Property financing agreements payable”, “Lease liabilities payable” and “Other payables”.
In connection with the progress of these cases, the Company accrued $4,742,632 for possible extra litigation charges. The Company
will record attorney fees when invoiced. The attorney fees in connection with litigation was $21,859 and $97,071 for the
years ended December 31, 2019 and 2018, respectively.
The
nature of these lawsuits is to demand the Company buy-back property per agreements or to pay unpaid rent per lease-back agreements.
The Company has been accruing the interest and included in property financing agreements payable and lease liabilities payable
based on the lease agreements. The Company records the expired lease-back payables and unpaid buy-back payables in other payables
and accrues additional estimated liabilities. The management believes that current recorded liabilities were reasonable estimates
of the total final buy-back payments and total final lease-back payables. Should the ultimate settlement of these liabilities
to exceed the amount already recognized, the Company will accrue additional estimated liabilities when known.
The
Company has intended to settle the balance due relating to lease-back payables with the owners of the lease-back properties. The
Company has formed a task group and has been negotiating with the plaintiffs and other owners of the lease-back properties.
Collateral
of Company’s Asset to Three Individuals
On
May 18, 2017, 140 square meters (1,507 square feet), owned by the Company was used as collateral to help on unrelated individual
borrow $770,000 (RMB5,000,000) under a one-year bank loan. There was no profit or gain for the Company to provide this collateral.
The one-year period is now past due. The Company is exposed to the loss of this property if the individual is insolvent and fails
to settle the bank loan.
On
May 18, 2017, the Company allowed one of its board members of DVPD to use 7 units of rental properties, totaling 138 square meters
(1,485 square feet), owned by the Company as collateral to borrow $770,000 (RMB5,000,000) under one-year bank loan. There was
no profit or gain for the Company to provide this collateral. The one-year loan is now past due. The Company is exposed to the
loss of this property if the individual is insolvent and fails to repay the bank loan.
On
May 18, 2017, the Company allowed one of its board members of DVPD to use 2 units of rental properties, totaling 15 square meters
(161 square feet), owned by the Company as collateral to borrow $770,000 (RMB 5,000,000) under a one-year bank loan. There was
no profit or gain for the Company to provide this collateral. The one-year period is past due. The Company exposed to the loss
of these properties if the individual is insolvent and fails to settle the bank loan.
These
individuals have not yet returned the loans back to Harbin Bank, which exposes the Company to a
loss if the individuals are insolvent and fail to repay the bank loans. On December 30, 2019, the Company entered into three separate
Repayment Agreements with these individuals. The agreements stipulate that these three individuals have to either pay back the
loan of RMB 5M to the bank or provide their own collaterals so as to release the Company’s property by December 31, 2020.
In addition, the agreements require these three individuals pay RMB 50,000 to the Company by May 31, 2020 along with other penalty
clauses if these three individuals fail to abide by the agreements. The Company has a risk of losing these properties if these
individuals are not able to repay these bank loans.
NOTE
21 – CONCENTRATION OF CREDIT RISK
The
Company maintains cash balances in various banks in China and the Special Region of Hong Kong. Per regulation of PRC, the maximum
insured bank deposit amount is approximately $72,700 (RMB 500,000) for each financial institution. As of December 31, 2019, the
Company’s uninsured cash balance was approximately $50,184.
The
Company receives rental and management fee income from approximately 700 tenants. Revenue from the top ten tenants accounted for
18.23% and 19.29% of total revenue, for the years ended December 31, 2019 and 2018, respectively, no individual tenant’s
revenue accounts for more than 10% of the total revenue in the above periods. Accounts receivable from the top ten tenants
accounts for 12.6% and 13% for the years ended December 31, 2019 and 2018.
NOTE
22 - SUBSEQUENT EVENTS
Lawsuits
Subsequent
to December 31, 2019, 9 new lawsuits with new claims amounting to $365,111 were filed against the Company. As of
the date of this Annual Report, there were a total of 574 lawsuits against the Company in Dalian City, China. Litigants
claimed that the Company did not buy back the properties pursuant to the sales contracts or the Company did not pay the promised
lease-back rental payments on time. These claims amounted to $24,455,514 (RMB173,482,529). Management believes that
the amount claimed by these litigants approximates the amount that the Company has already recorded in and under the caption of
“Property financing agreements payable”,” Lease liabilities payable” and “Other payables”
in the accompanying consolidated financial statements.
Claims of Lawsuits as
of the date of this Annual Report
|
|
Store
Unit
|
|
|
Square
Feet
|
|
|
Claimed
Amount in US$
|
|
Property buy- back related
issues
|
|
|
242
|
|
|
|
51,870
|
|
|
$
|
19,620,632
|
|
Leases and leases back related issues
|
|
|
244
|
|
|
|
47,721
|
|
|
|
2,847,281
|
|
Other issues
|
|
|
88
|
|
|
|
5,348
|
|
|
|
1,987,601
|
|
Total in RMB
|
|
|
574
|
|
|
|
104,939
|
|
|
$
|
24,455,514
|
|
As
of the date of this Annual Report, the Company settled the following cases.
Resolved
cases as of the date of this Annual Report
|
|
Total
Resolved Cases
|
|
|
Cases
Resolved in 2019
|
|
|
Resolved
after December 31, 2019
|
|
Property
buy-back related issues
|
|
|
238
|
|
|
|
184
|
|
|
|
-
|
|
Leases payment related
issues
|
|
|
241
|
|
|
|
139
|
|
|
|
-
|
|
Other
issues
|
|
|
77
|
|
|
|
64
|
|
|
|
1
|
|
Total
resolved cases
|
|
|
556
|
|
|
|
387
|
|
|
|
1
|
|
To
deal with the litigation issues, the Company has formed a task group and have been actively engaged with the plaintiffs and other
owners of the lease-back property. At the same time, SML has helped to resolve the litigation cases. The progress has been slow.
As of the date of this Annual Report, the Company’s task group and SML have collectively resolved a total of 558
cases out of which 386 cases were resolved during the twelve months ended December 31, 2019.
Surrender
Possession of Company’s New York Office
Due
to the impact of the coronavirus pandemics, the Company has moved out of its New York office located in 424 Madison Avenue, New
York, NY (the “Premise”) on February 28 2020. The lease between the landlord (the “Landlord”) and the
Company, dated June 12, 2019 (the “Lease”), will expire on August 31, 2022. On February 28, 2020, the Company entered
into a surrender agreement with the Landlord to surrender possession of the premises prior to the natural expiration of the Lease
term (the “Surrender Agreement”), pursuant to which, the Company shall remain liable for all obligations under the
Lease until the Landlord re-rents the Premises, which the Landlord will attempt to do, in good faith. The Company also represents
that the Landlord may draw down on the security deposit, which totals $85,215, to cover the rent, damages, and any other expenses.
Judging by the current market condition in New York City and the ongoing stay-at-home order issued by the local government, the
Company believes that the Landlord may not be able to re-rent the Premises and in such event, the Company will be liable for the
remaining rent from March 1, 2020 to August 31, 2022, in an estimated amount of $354,000.
Outstanding
Bank Loans
As
of December 31, 2019, the Company has 5 outstanding loans due from Harbin Bank (the “Bank”) in an aggregate amount
of approximately $66.9 million. Pursuant to the loan agreements for the RMB 390M Loan and RMB 50M Loan, the Company shall pay
the Bank the monthly interest in addition to the quarterly principal. The Company, however, has failed to make such payments since
April 2019. As of December 31, 2019, the accrued
principal and interest totaled approximately
$2.7 million for the RMB 390M Loan (the “RMB 390M Loan Balance Due”) and approximately $0.8 million for the RMB 50M
Loan (the “RMB 50M Loan Balance Due”), respectively. Upon the Bank’s declaration of an event of default under
the corresponding loan agreements, the Bank can demand the full payment of all outstanding principal and accrued interest.
In
additional to the RMB 390M Loan and RMB 50M Loan, the Company has failed to make payments to three short-term loans, including
the RMB 23M Loan, the RMB 19.9M Loan, and the RMB 10.24M Loan (collectively, the “Liquidity Loan Balance Due”). As
of the date of this Annual Report, the Short-Terms Loans have been expired while the Company has not made the corresponding payment.
The
Bank and the Company are currently discussing potential grant to convert the principal and interests due, including the RMB 390M
Loan Balance Due, the RMB 50M Loan Balance Due, and the Liquidity Loan Balance Due into a new loan and an additional liquidity
loans in an amount of RMB 50 million (collectively, the “Refinancing Loans”). The collateral for the potential RMB
50 million loan will be the remaining values of same collateral for the RMB 390M Loan and RMB 50M Loan but ranking junior to the
RMB 390MB Loan and RMB 50M Loan. In addition, the Company has been negotiating with the Bank for a waiver of the penalty for late
payment of related loan interest (the “Penalty Waiver”). The Company has already submitted the application for the
Refinancing Loans at the request of the Bank. It usually takes about 2 to 3 months for the Bank to review and approve the Refinancing
Loans and the Penalty Waiver which can be potentially longer as a result of the outbreak of the COVID-19. However, there is no
assurance or certainty that such Refinancing Loans or Penalty Waiver will be approved by the Bank.
Amendment
Agreement with SML
Acknowledging
the impact of COVID-19, on January 14,2020, the Company amended its agreement with SML to extend the original repayment date from
May 15, 2020 to May 15, 2023
Impact
of COVID-19
On
January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain
of coronavirus (“COVID-19”) and the risks to the international community as the virus spread globally beyond its point
of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.
Many
uncertainties remain regarding the COVID-19 pandemic, and it is impossible at this time to predict the full economic impact and
the impact on our business. Since the Company primarily engages in the business of the multi-functional shopping center are located
in Dalian, Liaoning, China, the COVID-19 pandemic is expected to lead to a significant impact on our business operations. In late
January 2020, the Dalian government released a stop order on all activities that involved gathering, including a temporary suspension
of shopping malls. As a result, all retailors and service providers of our shopping center were shut down until further notice,
subject to the containment of the COVID-19. Given that the outbreak has been gradually controlled in China, the
Company’s Dalian office has resumed business since March 5, 2020. However, our business was and has continued
to be adversely impacted by COVID-19. We have much less traffic in our shopping mall and less tenants after the reopening due
to the concern of the virus. In wake of the impact on local market conditions and the economic environment by COVID-19, the Company
temporarily suspended the Renovation. Consequently, the pandemics has negatively impacted our operating revenue during the first
quarter of 2020, and the Company believe the negative impact on revenue will continue throughout year 2020. We continue to monitor
and evaluate these and other developments with respect to the COVID-19 pandemic, though we cannot guarantee that any measures
we take in response thereto will be entirely effective or effective at all. In addition, the continued negative impact of the
pandemic could cause the Company to incur future impairment charges to the value of its properties.
On
March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security Act” (“CARES
ACT”). The Company is evaluating the impact, if any, that the CARES Act may have on the Company’s future operations,
financial position, and liquidity in fiscal year 2020.