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 11, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
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 – NONCONTROLLING INTEREST
Noncontrolling
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
|
|
Noncontrolling
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
|
)
|
Noncontrolling
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.