The following discussion and analysis of the results of operations and financial
for the years ended December 31,2019 and 2018 should be read in conjunction with
our financial statements and the notes to those financial statements that are
included elsewhere in this Report. Our discussion includes forward-looking
statements based upon current expectations that involve risks and uncertainties,
such as our plans, objectives, expectations and intentions. Actual results and
the timing of events could differ materially from those anticipated in these
forward-looking statements as a result of a number of factors.
Overview
Victory Commercial Management Inc. (hereinafter referred to as the "Company",
"VCM") 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. VCI owns 100% of Sino Pride
Development Co., Ltd ("Sino Pride"), a company incorporated in Hong Kong on May
26, 1989.
36
Dalian Victory Plaza Development Co. Ltd. ("DVPD") was incorporated on March 29,
1993 as a joint venture under the laws of the People's Republic of China ("PRC"
or "China"), of which a 80% equity interest in DVPD is owned by Sino Pride and
20% is owned by Dalian Victory Development Co., Ltd ("DVDC"), a stated owned
enterprise in China. Dalian Victory Business Management Co. Ltd. ("DVBM") was
incorporated on September 12, 2000 as a joint venture under the laws of PRC. A
95% of equity interest in DVBM is owned by Sino Pride and 5% is owned by DVPD.
Dalian Victory Property Management Co. Ltd. ("DVPM") is 100% owned by Sino
Pride. VCM controls DVPD, DVBM and DVPM via ownership structures.
VCM and its subsidiaries are primarily engaged in the business of commercial
real estate rental and management in the PRC. DVPD and DVBM manage Dalian
Victory Plaza Shopping Center ("Victory Plaza"), a multi-functional underground
shopping center, located at Dalian City, Liaoning Province of China. Victory
Plaza has approximately 137,577 square meters (1,480,619 square feet) rental
space. DVPD was the developer of Victory Plaza.
The following table summarizes ownership of Dalian Victory Plaza Shopping Center
as of December 31, 2019:
% of Total
Group Description of Property SQ Ft Financial Statement Presentation
Assets Liabilities
A Owned with title by DVPD 16 % Rental properties N/A
Property
Sold properties with buy- back financing
options or return is in agreements
B process without paying off 9 % Rental properties payable
Properties with buy- back
options transferred to SML in Loan payable
C * 2017 and 2018** 6 % Rental properties 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 option. The nature of the C-2 group was the same as Group B.
Therefore, we removed Group C-2 (approximately 1%) and combined it with Group B
in current filing.
**On December 29, 2017, the Company executed the SML Agreement, pursuant to
which, SML has bought certain properties from the individual property owners and
the Company has agreed to buy back those properties from SML at the original
purchase price under the buy-back options plus annual interest of 8% commencing
on January 1, 2018 to be paid later than May 15, 2020. Acknowledging the impact
by outbreak of COVID-19, on January 15, 2020, the Company entered into a
supplemental agreement with SML to extend the original repayment date from May
15, 2020 to May 15, 2023.
Group A represents property that the Company owns 100% ownership. 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 under the buy-back options. Pursuant to the SML Agreement, the Company is
required to buy back the properties plus interest at 8%, no later than May 15,
2023. Group D represents property we sold to various individual owners without
additional rights attached.
37
As part of our business operations, the Company may lease back properties from
the owners of Group B, C and D properties and sublease these properties to
un-related third parties with a new lease term. Our rental income is generated
from leasing of our owned properties and lease-back properties. Rental income is
reported including rent income from our owned properties and lease-back
properties. Lease-back expenses are recorded as amortization, interest and
lease-back expenses separately.
We currently also provide common area management services to all tenants and
shop owners. Common area management services include utilities, security,
cleaning, fire service, landscaping, public facilities maintenance and other
traditional services provided by our property management office. Management fees
range from $17 to $20 per square foot per annum. The management fee income is
recognized over the term of the lease. Utility charges collected from tenants
will offset our utility expenses paid to utility companies. We report the net
amount of utility charges as other income.
Temporary Suspension of the Renovation of Victory Plaza (the "Renovation")
We initially planned to renovate and upgrade Victory Plaza to become a
large-sized multifunctional shopping center, which would differ significantly
from a traditional retail shopping center. Under the Renovation Plan, the direct
renovation cost including the construction, regulatory approval, labor and
administration & miscellaneous is estimated at $11.2 million. We would need an
additional $83.9 million to buy back the properties that we sold to third
parties with the buy-back option in order to conduct our Renovation. The total
anticipated cost to complete the buy-backs and Renovation is approximately $95.1
million. As of the date hereof, we have obtained a construction license and fire
department permit and completed the Renovation of certain public areas and
commenced Renovation for some individual units. As the date hereof, we have not
obtained any loans to be used for direct Renovation.
However, as a result of the outbreak of COVID-19 in China, the local market
condition for shopping malls have substantially changed which brings uncertainty
that if such Renovation is completed, we would be able to generate sufficient
revenue to pay off the costs and expenses associated with the Renovation and
provide us sustainable income for future development, not to mention the
negative impact by COVID-19 to our current operation and liquidity. For more
details of the impact caused by the outbreak of COVID, please refer to risk
factor "The coronavirus breakout has a relatively big impact on the economy and
society." on page 22.
As the date hereof, management is taking prudent measures to reassess the
feasibility of the Renovation based on current market conditions, the Company's
liquidity and potential of future financing. Until a determination is made, the
Renovation is temporarily suspended.
Factors That May Influence our Future Results
We generate our revenues primarily from rental and management fee income from
tenants under existing leases at Victory Plaza. The management fee income
includes the charges mainly for property management, maintenance and repair, and
security, and is recognized over the terms of the leases. The amount of rental
income and management fee income we receive is primarily dependent on our
ability to maintain or increase rental rates and occupancy rates of our
property. Factors that could affect our rental income include (i) changes in the
economic environment; (ii) local competition from other shopping facilities
similar to our shopping mall; (iii) the attractiveness of rental space; (iv) the
financial stability of our tenants; (v) trend of market rental rates; (vi) the
development of local transportation and (vii) the outbreak of highly contagious
disease like the VOCID 19 virus.
Economic Conditions and Outlook
For a detailed discussion of economic conditions and the outlook regarding our
industry, please see the section titled "Industry Overview".
38
Results of Operations
Comparison of Results of Operations for the Years Ended December 31, 2019 and
2018.
Revenues
Our revenues, which consist of property rentals, property management fees and
other income, were $8,191,130 for the year ended December 31, 2019, compared to
$9,989,039 for the year ended December 31, 2018, a decrease of 1,797,909, or
18%.
2019 2018 $ change % change
Revenues:
Rental income $ 2,977,880 $ 3,758,060 $ (780,180 ) -21 %
Management fee income 4,470,061 5,653,687 (1,183,626 ) -21 %
Other income 743,189 577,292 165,897 29 %
Total revenues $ 8,191,130 $ 9,989,039 $ (1,797,909 ) -18 %
Rental income was $2,977,880 in fiscal 2019, a decrease of $780,180, or 21%,
compared to rental income of $3,758,060 in 2018. The decrease in rental income
was primarily due to the increase in vacancy rates. The vacancy rate in the
month of December 2019 was 51.51%, an increase of 14.79% compared to the vacancy
rate of 36.72% in the month of December 2018.
Management fee income for the year ended December 31, 2019 was $4,470,061, a
decrease of $1,183,626, or 21%, compared to management fee income of $5,653,687
in the corresponding period in 2018. The decrease in management fee income was
primarily due to the increase in vacancy rates as previously discussed. The
vacancy rate in the month of December 2019 was 51.51%, an increase of 14.79%
compared to the vacancy rate of 36.72% in the month of December 2018.
Other income for the year ended December 31, 2019 was $743,189, an increase of
$165,897, or 29%, compared to other income of $577,292 during the year ended
December 31, 2018. The increase in other income was primarily due the decrease
in net utility expensed for tenants from the decrease of occupancy rates.
Operating Expenses
2019 2018 $ change % change
Operating expenses
Selling expenses $ 4,262,763 $ 4,566,741 $ (303,978 ) -7 %
Depreciation and amortization 1,231,787 1,361,867 (130,080 ) -10 %
Lease expenses 2,712 2,364,004 (2,361,292 ) -100 %
Payroll and payroll related
expenses 1,954,530 1,759,585 194,945 11 %
Business taxes 476,211 496,243 (20,032 ) -4 %
Operating lease expense 599,054 504,401 94,653 19 %
Other general and administrative
expenses 4,051,445 1,117,124 2,934,321 263 %
Total operating expenses $ 12,578,502 $ 12,169,965 $ 408,537 3 %
39
Selling expenses were $4,262,763 for the year ended December 31, 2019, a
decrease of $303,978, or 7%, compared to $4,566,741 in 2018. The decrease in
selling expenses in 2019 was primarily due to a decrease in payroll and related
payroll taxes.
Depreciation and amortization expenses were $1,231,787 for the year ended
December 31, 2019, a decrease of $130,080, or 10%, compared to depreciation and
amortization expenses of $1,361,867 in 2018. The decrease in depreciation and
amortization expenses was primarily due to the expiration of leases and
de-recognition of right-of-use ("ROU") assets during the year ended December 31,
2019.
Lease expenses consists of lease-back expenses and additional lease payments
resulting from late payment or settlement payments to the property owners. Lease
expense was $2,712 for the year ended December 31, 2019, a decrease of
$2,361,292 or 100%, compared to $2,364,004 in 2018. The decrease in lease
expense in 2019 was primarily due to an accrued lease expense for additional
possible litigation charges for the year ended December 31, 2018.
Payroll and payroll related expenses were $1,954,530 for the year ended December
31, 2019, an increase of $194,945, or 11%, compared to payroll and payroll
related expenses of $1,759,585 in 2018. The increase in payroll and payroll
related expenses were primarily due to a $352,422 increase in our New York
office operations, partially offset by a $157,477 decrease in China's and Hong
Kong's payroll and payroll related expenses.
Business taxes consists of value added tax ("VAT"), taxes related to rental,
property tax, land use rights tax and other surcharges and fees. Business taxes
were $476,211 for the year ended December 31, 2019, a decrease of $20,032, or
4%, as compared to business taxes of $496,243 in 2018. The decrease in business
taxes resulted mostly from decrease in local and propertytaxes of $102,400
partially offset by an increase of tax penalties of $82,368 in 2019.
The operating lease expenses were $599,054 for the year ended December 31, 2019,
an increase of $94,653, or 19%, compared to the operating lease expenses of
$504,401 in 2018. The increase in operating lease expense was primarily due to
the increase of rent expenses in 2019, principally due to our new offices
located in the U.S.
Other general and administrative expenses were $4,051,445 for the year ended
December 31, 2019, an increase of $2,934,321, or 263%, compared to other general
and administrative expenses of $1,117,124 in 2018. The increase in other general
and administrative expenses was primarily due to (i) higher attorney and
consulting fees in 2018, approximately $500,000, in connection with litigation
cases, and (ii) a decrease in other expenses.
Other Income (Expenses)
2019 2018 $ change % change
Other income (expenses)
Interest income $ 725,778 $ 509,619 $ 216,159 42 %
Interest - loans (4,147,614 ) (4,131,313 ) (16,301 ) 0 %
Interest - ROU and other
capitalized liabilities (2,773,739 ) (1,672,119 ) (1,101,620 ) 66 %
Interest - related parties (537,210 ) (519,970 ) (17,240 ) 3 %
Gain (loss) from foreign
currency transactions (271,447 ) (1,220,769 ) 949,322 -78 %
Gain (loss) from disposal of
fixed assets 119 1,337,124 (1,337,005 ) -100 %
Other income 276,564 3,129,585 (2,853,021 ) -91 %
Total other expenses, net $ (6,727,549 ) $ (2,567,843 ) $ (4,159,706 ) 162 %
40
Interest income was $725,778 for the year ended December 31, 2019, an increase
of 42% or $216,159, compared to interest income of $509,619 in 2018. Increase in
interest income mainly resulted from interest charged on short-term loan
receivables in 2019.
Interest - loans was $4,147,614 for the year ended December 31, 2019, an
increase of $16,301, or 0%, compared to $4,131,313 in 2018.
Interest - ROU assets and other capitalized liabilities was $2,773,739 for the
year ended December 31, 2019, an increase of $1,101,620, or 66%, compared to
$1,672,119 in 2018. The increase in interest - ROU and other capitalized
liabilities in 2019 was primarily due to the interest accrued for SML.
Interest - related parties was $537,210 for the year ended December 31, 2019, an
increase of $17,240, or 3%, compared to $519,970 in 2018.
Loss from foreign currency transactions was $271,447 for the year ended December
31, 2019; a decrease of $949,322 or 78%, compared to $1,220,769 for the year
ended December 31, 2018.
The unpaid loan balance due to Sino Pride, a related party, was approximately
$13 million. This loan and related interest payable are denominated in US
dollars. The Company uses the bank spot exchange rate to record proceeds and
repayments in RMB on the Company's books. By the end of the year, the loan
balance and interest payable in US dollars is translated to RMB recorded on the
Company's books. The gain or loss will be recognized in the statements of
operations. $271,447 currency exchange loss in the year ended December 31, 2019
was primarily due to the change of US$/RMB rate. As of December 31, 2019, one US
dollar translated to RMB 6.9615, while at December 31, 2018, one US dollar
translated to RMB 6.8778. Exchange gain means that the Company needs less RMB to
repay the loan and interest payable denominated in US dollars due to the change
of the exchange rate.
Other income was $276,564 for the year ended December 31, 2019, compared to
$3,129,585 in 2018. The decrease in other income is mainly due to refund of
$3,129,585 received in 2018 for property and business taxes paid in previous
years.
As a result of the above-mentioned discussion, the Company's net loss was
$11,114,921 for the year ended December 31, 2019, an increase of $6,366,152, or
134%, compared to net loss of $4,748,769 in 2018.
Liquidity and Capital Resources
The Cash flow generated from our operations is not sufficient to meet our daily
operations, including the interest payments on bank loans. The current cash
balance is not sufficient to support our Renovation plan (currently terminated)
and repayment of bank loans. The Company will need to seek additional capital
resources from our current shareholder, management or employees, outside
sources, including through the sale of our equity securities, or from bank loans
if available. There is no assurance that additional financing will be available
to us. As explained elsewhere, DVPD has been listed as a "dishonest debtor" by
the PRC courts and such designation may negatively impact our ability to obtain
additional financing. In addition, we are currently in default of certain of our
loans with Harbin Bank.
The Company had cash and cash equivalents of $122,884 and $188,921 as of
December 31, 2019 and 2018, respectively. Most of the Company's funds are kept
in financial institutions in China. The Company is subject to the regulations of
the PRC, which restrict the transfer of cash from China, except under certain
circumstances. Accordingly, such funds may not be readily available to satisfy
obligations which are outside the PRC.
41
On June 28, 2018, DVBM entered into a loan agreement to lend RMB 50,000,000 or
US$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") accrued on
the unpaid Principal amount of the loan from July 1, 2018 to September 30, 2018
at 2% per month and from October 1, 2018 to June 30, 2019 0.7% per month. All
computations of the Interest rate were based on the daily balance of the
Principal amount of the loan. Accrued, but unpaid, interest was 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 RMB 50,000,000 to RMB 75,000,000 or US$10,773,540 and
extended the Maturity Date to September 30, 2020. At the request of the Company,
ZKCZ has provided the Company a Promissory Note and payment plan related to the
outstanding loan. As of June 30, 2019, the Company has recorded a reserve
allowance of 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 6.2 million back to the Company.
On July 20, 2014, the Company's subsidiary, DVPD entered into a 10-year loan
agreement (the "RMB 390M Loan") US$56,022,409 (RMB 390,000,000 translated at the
December 31, 2019 exchange rate) long-term borrowing from Harbin Bank (the
"Bank"). The RMB 390M Loan was used for "repayment of other bank loans,
repayment of shareholder loans and renovations". The RMB 390M Loan charges a
floating rate of interest at 120% of the loan rate published by the People's
Bank of China for similar loans. The current benchmark rate for a business loan
over 5 years is 4.9% per annum adjusted on October 24, 2015. The effective
interest rate was 5.88% for years ended December 31, 2019 and 2018. Originally,
the RMB 390M 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 RMB 390M 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$71,824 (RMB 500,000
translated at December 31, 2019 exchange rate ) per quarter plus monthly
interest; and (iii) add Mr. Alex Brown, our controlling shareholder and founder
of VCI, as a joint and several guarantor. The RMB 390M 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)
as of December 31, 2019.
The RMB 390M Loan is secured substantially by the 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.
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. As of December 31, 2019, the 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 with the same Bank for
US$7,182,360 (RMB50, 000,000) (the "RMB 50M Loan"). The RMB 50M Loan was used
for Renovation. 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 effective interest rate for the year ended December 31, 2019 and 2018
was 5.88%. 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) as of December 31, 2019.
42
The RMB 50M Loan is secured substantially by the 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.
According to the loan agreement with the Bank dated March 24, 2015, the Company
had paid to the Bank the been making principle quarterly principal plus related
monthly interest through the first quarter of 2019. The Company, however, has
not paid the principle and interest since April 2019 which can be considered as
an event of default. As of December 31, 2019, the accrued principal and
interest totaled approximately US$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 US $3,303,886 (RMB 23,000,000 translated at December 31, 2019
exchange rate) from the Bank with interest at 6.5%, payable monthly. The RMB 23M
Loan was used for short term liquidity needs. On December 28, 2017, DVPD
borrowed US$1,723,766 (RBM 12,000,000 translated at December 31, 2019 exchange
rate). The term of the loan was one year and was due on December 20, 2018. On
January 19, 2018, DVPD borrowed an additional US$1,580,119 (RBM 11,000,000
translated at December 31, 2019 exchange rate). 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. The Company did not make repayment at the due date and is
currently in default , DVPD is negotiating the bank to extend the term of the
loan.
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 of the date of this Annual Report, the RMB 23M Loan has not been paid.
On September 27, 2018, DVPD borrowed $2,858,579 (RMB19,900,000), translated at
December 31, 2019 rate, in a short-term loan from Harbin Bank (the "RMB 19.9M
Loan"). The loan requires interest at 6.50% per annum and expires 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 RMB 19.9M
Loan has been expired while the Company has not made the corresponding
repayment.
On March 26, 2019, DVPD borrowed $1,470,947 (RMB10,240,000) 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
December 31, 2019 and 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 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.
43
Sino Pride is a major cash source to the operations of DVPD and DVBM. In the
period from 1996 to 2008, DVPD received total loans of $38,683,297 from Sino
Pride and repaid $20,710,919 in the period from 1998 to 2014. In 2015, repayment
amount was $4,068,630. Loan payable to Sino Pride bears interest at 8% per
annum. As of December 31, 2019, remaining principal payable was $13,303,748 and
interest payable was $9,611,023. Related party loan has been eliminated in
accompanying consolidated financial statements.
DVDC contributed land use rights and infrastructures totaling $20,000,000 to
DVPD in December 2000. Among this $20,000,000 contribution, $6,800,000 was
recorded as registered capital, and $13,200,000 was recorded as loan payable by
DVDC per December 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 remaining balance of principal bears interest at benchmark bank rate of
China, which was 5.88% at December 31, 2019.
Due to shareholder represents the investment amount that Sino Pride received
from its former shareholders, which was assigned to current shareholder Mr. Alex
Brown. Loan payable to shareholder was $65,931,644 and $64,151,148, respectively
at December 31, 2019 and 2018. 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 twelve months ended December 31, 2019 and
2018, respectively.
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 total of 565 lawsuits 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 (RMB 172,788,781). These payables
were included in and reported under the caption of "Property financing
agreements payable", "Lease liabilities payable" and "Other payables". As of
December 31, 2019, 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 cases was $21,869and $97,071 for December 31, 2019
and 2018, respectively.
These lawsuits are caused by our failure to buy back the properties when
requested to or our failure to pay rents for certain lease-back units.
Subsequently, certain units owned by DVPD have been frozen from transfer or
disposition by the courts. DVPD has been restricted from free transfer, disposal
and pledged its 5% equity interest in DVBM from March 2, 2017 to March 1, 2019.
The 5% equity interest in DVBM is still restricted currently. In addition, DVPD
has been listed as a "dishonest debtor" by the courts. Once listed as a
dishonest debtor, DVPD can be imposed with certain restrictions in connection
with commercial loans at the banks' discretion; the purchase or transfer of
properties and land use rights; and renovation, upgrade or renovation of
properties. In addition, the bank accounts of DVPD are frozen by the courts
which allows the inflow of cash to the bank accounts but prohibits the outflow
of cash.
Management believes that the recorded total property financing agreements
payable, buy-back payables, lease-back liabilities payable and expired lease
payable liabilities of $92,410,701 is a reasonable estimation. Should the
settlement of these liabilities exceed management's estimates, additional
accruals will be necessary.
To address our capital needs in 2018 and going forward, we have engaged SML to
buy back certain properties and have been actively negotiating with owners to
resolve the litigation cases. In addition, we plan to raise capital through an
equity or debt offering and obtain loans from the banks once DVPD is removed
from the dishonest debtor listing and borrow from our shareholders if necessary
to implement our Renovation plan to develop Victory Plaza into a modern
multi-functional shopping center and fund future operations. Failure to raise
adequate capital and generate adequate revenues could result in the Company
having to curtail or cease operations.
In addition, the PRC government imposes controls on the convertibility of the
renminbi, or "RMB" into foreign currencies and, in certain cases, the remittance
of currency out of China. Shortages in the availability of foreign currency may
restrict the ability of our PRC subsidiaries to remit sufficient foreign
currency to pay dividends or other payments to us, or otherwise satisfy their
foreign currency denominated obligations. Please see "Regulations Regarding
Foreign Exchange"on page 13-14.
44
Pursuant to the Registration Statement on Form S-1 initially filed with the SEC
on November 7, 2018, which was declared effective on February 14, 2019, the
Company closed its initial public offering on March 28, 2019. As of March 28,
2019, there were total of 30 individual investors signed "Subscription
Agreement" to purchase the shares of the Common Stock of the Company. The
offering price was $1 US dollar per share, and 1,011,000 shares were sold. As of
April 16, 2019, $262,000 has been wired into our US bank account and $749,000
has been deposited into DVBM's bank account.
Cash Flows
Cash and cash equivalents were $122,884 and $188,921, as of December 31, 2019
and 2018, respectively. Cash and cash equivalents decreased by $169,012 and
$554,798 during 2019 and 2018, respectively. The following table shows the
changes in cash flows.
2019 2018 $ Change
Net Cash Provided by (Used in) Operating
Activities $ (413,257 ) $ 1,787,675 $ (2,200,932 )Net Cash Used in Investing Activities (2,664,404 ) (7,412,372 ) 4,747,968
Net Cash Provided by Financing Activities 2,894,432 5,076,475 (2,182,043 )
Effect of exchange rate changes on cash
and cash equivalents
14,217 (6,576 ) 20,793
Net increase (decrease) in cash and cash
equivalents $ (169,012 ) $ (554,798 ) $ 385,786
Operating Activities
Cash flows from operating activities primarily consist of cash inflows from
tenant rentals and management fee income payments, and tenant property expense
reimbursements and cash outflows for property operating costs, selling expenses,
business taxes, and general and administrative expenses.
In 2019, net cash used in operating activities was $413,257. The net cash used
in operating activities was primarily from an increase in account payables and
accrued liabilities of $5,039,015, non-cash depreciation and amortization of
$1,231,787, allowance for doubtful accounts of $3,090,825, an increase in SML
loan interest payable of $1,688,217, offset by $11,114,921 in net loss, $513,862
in short-term loan interest receivable, and $677,485 decrease in deferred rental
income.
In 2018, net cash provided by operating activities was $1,787,675. The net cash
provided by operating activities was primarily from $1,361,866 in non-cash
depreciation and amortization, $1,220,769 in non-cash foreign currency exchange
loss on loan and interest repayments to a related party, an increase in other
payables of $2,942,626, and increase in property financing agreements payables
of $1,665,273, offset by $4,748,769 in net loss, $1,337,124 in gain on
sale/disposal of fixed assets, and short-term loan interest receivable of
$495,943.
Investing Activities
Cash flows from investing activities are impacted by the nature, timing and
extent of investments and improvement in our shopping center, including capital
expenditures associated with leasing and renovation efforts, and our acquisition
and disposition plans. Capital used in or provided from these activities can
vary significantly from period to period based on the volume and timing of these
activities.
45
In 2019, net cash used in investing activities was $2,664,404 which was
primarily from an advance of $2,642,563 for a short-term loan receivable,
$21,841 in capital expenditures - fixed assets and improvements,
In 2018, net cash used in investing activities was $7,412,372 which was
primarily from an advance of $8,923,642 for a short-term loan receivable,
$150,688 in capital expenditures - fixed assets and improvements, offset by cash
of $1,661,958 received for disposition of fixed assets. During 2018, the Company
sold 26 properties with 7,460 square feet (693 square meters) to third parties
without buy-back options. Those sales were considered as final.
Financing Activities
Cash flows from financing activities are impacted by the nature, timing and
extent of borrowings and repayments of loans and advances from banks and related
parties.
In 2019, net cash provided by financing activities was $2,894,432 which was due
to $1,943,830 in repayment from short-term loan receivable, $1,774,621 in
advances from our principal shareholder, and $1,481,610 in proceeds from bank
loans, $1,011,000 in proceeds from initial public offering, and $172,300 in
advance from related individual, offsets by $3,222,806 in decrease in property
financing agreements payable, and $266,123 in repayment of bank loans.
In 2018, net cash provided by financing activities was $5,076,475 which was due
to $4,668,591 in proceeds from bank loans, $1,362,472 in advances from our
principal shareholder, and $156,981 in advances from a related individual,
offsets by $1,111,569 in repayment of bank loans.
Cash, cash equivalents and restricted cash consist of following at December 31,
2019 and 2018, respectively.
December 31, 2019 December 31, 2018
Cash $ 122,884 $ 188,921
Restricted cash 27,223 130,199
Cash, cash equivalents and restricted cash $ 150,107 $ 319,120
In the normal course of business, we also face risks that are either
non-financial or non-qualitative. Such risks from the numerous lawsuits that the
Company is involved with principally include legal risk. For a discussion of
other factors which may adversely affect our liquidity and capital resources,
please see the section titled "Risk Factors" in this prospectus.
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VICTORY COMMERCIAL MANAGEMENT INC. 
