Victory Commercial Management Inc. filed on May 15 10-Q Form

Victory Commercial Management Inc. filed 10-Q with SEC. Read ‘s full filing at 000149315219007522.

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.

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 did not have any business activities as of the issuance date of this report.

Iven International Group Limited, is a company registered in Hong Kong (‘Iven’). From October 31, 2016 to June 30, 2017, Alex Brown beneficially owned 100% of Iven, among which, a 70% equity interest was held directly, and a 30% equity interest was held indirectly through Dalian Yiwen New Materials Technology Development Co., Ltd, a PRC entity 80% owned by Alex Brown and 20% owned by his spouse. On June 30, 2017, Alex Brown and Dalian Yiwen New Material Technology Development Co., Ltd transferred their respective ownership of Iven to Winner Ascent Investment Limited, a Hong Kong limited liability company solely owned by Alex Brown.

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 ASC 805-10-55-13. Thus, Sino Pride and Subsidiaries were treated as the accounting acquirer in connection with the November 2016 transaction.

These lawsuits are caused by our failure of buying back the properties when requested to or our failure of paying 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 pledge of its 5% equity interest in DVBM from March 2, 2017 to March 1, 2019. The 5% equity interest in DVBM is still restricted as the date of report. In addition, DVPD has be 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 renovation, upgrade or renovation of properties. In addition, the bank accounts of DVPD are frozen by the courts which allow the inflow of cash to the bank accounts but prohibit the outflow of cash.

* In the filing of Form S-1/A dated February 12, 2019, the Company had a C-2 property group category, ‘Third party has title acquired from previous owner’. The purchase and sale transactions between previous owner and new owner – ‘third party’ will not remove the burden of the Company to buy back the property per 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 above.

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 is vested and the Company has received the payments for the sold property. As of March 31, 2019, approximately 16% 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.

As of March 31, 2019, approximately 69% of total space of Victory Plaza was sold and is 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.

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 Company currently owns 434 rental units and leased these rental properties to various tenants. Pursuant to 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 March 31, 2019, none of our leases, as a lessor, met the above criteria to be classified as a sale – type lease.

Pursuant to 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 March 31, 2019, none of our leases, as a lessor, met the above criteria to be classified as a financing lease.

Non-controlling interest is classified as a separate line item in the deficit section and disclosures in the Company’s consolidated financial statements. This amount represents the 20% non-controlling interest in DVPD owned by DVDC.

As of March 31, 2019, 1,023,519 square feet (95,088 square meters) of total rental properties (group D property), or 69% of rental properties were sold, which was the same as of December 31, 2018. 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 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 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 March 31, 2019, DVPD owned 240,799 square feet (22,371 square meters) of total rental properties (group A property) (approximately 16%) with legal title, which was the same as of December 31, 2018. 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’.

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 March 31, 2019, group B properties had 130,049 square feet (12,082 square meters), or 9% of total properties, which was the same as of December 31, 2018.

Group C represents the properties with buy-back option transferred to SML during 2017 and 2018. Pursuant to the SML financing agreement (see Note 10, Property Financing Agreements 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 extended 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 and lease payment settlements) owed to SML. As of March 31, 2019, 86,251 square feet (8,013 square meters) of properties were owned by SML, which was the same as of December 31, 2018.

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 sales type 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 or sales type lease.

On March 27, 2018, Sino Pride leased office space which is to expire on March 26, 2020. 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.

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 is June 30, 2019 (the ‘Maturity Date’). Interest shall accrue 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 at 0.7% per month. Interest is calculated based on the daily principal balance of the loan and is payable at maturity with the principal. During the three months ended March 31, 2019, DVBM made an additional loan of approximately $1,490,000 under the same terms. As of March 31, 2019, the short-term loan principal was $8,755,672 and total accrued interest was $660,596. The Company is currently in discussions with ZKCZ to renegotiate the loan terms.

On July 20, 2014, the Company’s subsidiaries, DVPD entered into a 10-year loan agreement (the ‘RMB 390M Loan’) $58,114,411 (RMB 390,000,000 translated at March 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. 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 the three months ended March 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 $74,506 (RMB 500,000 translated at March 31, 2019 exchange rate) 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 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 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.

On March 24, 2015, DVPD entered into a loan agreement (the ‘RMB 50M Loan’) for a $7,450,565 (RMB50, 000,000 translated at March 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 effective interest rate for the three months ended March 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 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.

On December 21, 2017, DVPD entered into a liquidity loan agreement (the ‘RMB 23M Loan’) for a principal amount of $3,427,260 (RMB 23,000,000 translated at March 31, 2019 exchange rate) 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 $1,788,136 (RBM 12,000,000 translated at March 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 $1,639,124 (RBM 11,000,000 translated at March 31, 2019 exchange rate). 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. 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.

On September 27, 2018, DVPD borrowed $2,965,325 (RMB19,900,000 translated at March 31, 2019 exchange rate) in a short-term loan from Harbin Bank. 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.

On March 26, 2019, DVPD borrowed $1,525,876 (RMB10,240,000) in a short-term loan from Harbin Bank. 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.

The weighted average short-term loan balance consisting of loans from financial institutions was $1,606,387 and $718,176 for the three months ended March 31, 2019 and 2018, respectively. The weighted average interest rate for short term loans was 6.47% and 6.50% per annum for the three months ended March 31, 2019 and 2018, respectively.

As of March 31, 2019, 216,230 square feet (20,096 square meters) of total properties (15%), which are included 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.

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 has 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. The SML Agreement helps the Company to temporarily relieve part of the 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 business and renovation. However, if the Company fails to carry out the renovation, or the renovation is not successful, the Company may not have enough funds to buy back the properties from SML or pay the lease-back amounts owed to SML before May 15, 2020, and the Company may not be able to continue its operations or business. SML has no relationship or affiliation with the Company other than the SML agreement. As of March 31, 2019, the properties with buy-back options totaled 319 units, 86,244 square feet (8,013 meters) were included in the SML Agreement.

The Company has been financing its operations by borrowing funds from Sino Pride and DVDC, the holder of the 20% non-controlling equity interest of DVPD.

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.

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.

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.

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.

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.

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.

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 March 31, 2019 and December 31, 2018 as DVPD and DVBM as they have not yet generated any after-tax profits.

The Company receives rental and management fee income from approximately 700 tenants. Revenue from the top ten tenants accounted for 20.09% and 24.79% of total revenue, for the three months ended March 31, 2019 and 2018, respectively, No individual tenant’s revenue accounts for more than 10% of the total revenue in the above periods.

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’), 80% of equity interest of DVPD is owned by Sino Pride and 20% is owned by Dalian Victory Development Co., Ltd (‘DVDC’), a state 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. 95% of equity interest of DVBM is owned by Sino Pride and 5% is owned by DVDC. Dalian Victory Property Management Co. Ltd. (‘DVPM’) is 100% owned by Sino Pride. VCM controls DVPD, DVBM and DVPM via ownership structures.

* 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 sell transactions between 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 the C-2 and combined it (approximately 1%) 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. The Company is obligated to buy back these properties plus accrued interest no later than May 15, 2020.

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, 2020. Group D presents property we sold to various individual owners without additional rights attached.

Our revenues, which consist of property rentals, property management fees and other income, were $2,186,505 for the three months ended March 31, 2019, compared to $2,524,763for the three months ended March 31, 2018, a decrease of $338,258, or 13%.

Rental income was $784,713 for the three months ended March 31, 2019, a decrease of $202,008, or 20%, compared to rental income of $986,721 for the three months ended March 31, 2018. The decrease in rental income was primarily due to the increase in vacancy rates. The vacancy rate was 41.35% at the end of March 2019, compared to 27.36% for the three months ended March 31, 2018.

Management fee income for the three months ended March 31, 2019 was $1,263,938, a decrease of $94,593, or 7%, compared to management fee income of $1,358,531 for the three months ended March 31, 2018. The decrease in management fee income was primarily due to the Company collected part of a long historical disputed management fee in 2018.

Other income for the three months ended March 31, 2019 was $137,854, a decrease of $41,657, or 23%, compared to the other income of $179,511 for the three months ended March 31, 2018. The decrease in other income was primarily due the decrease in net utility income received from tenants, due to the higher vacancy rate.

Selling expenses were $1,243,409 for the three months ended March 31, 2019, a decrease of $154,265, or 11%, compared to $1,397,674 for the three months ended March 31, 2018. The decrease in selling expenses for the three months ended March 31, 2019 was primarily due to a decrease in payroll and related payroll taxes.

Depreciation and amortization expenses were $319,975 for the three months ended March 31, 2019, a decrease of $44,740, or 12%, compared to depreciation and amortization expenses of $364,715 for the three months ended March 31, 2018. The decrease in depreciation and amortization expenses was primarily due to the expiration of leases and derecognition of right-of-use (‘ROU’) assets during the three months ended March 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 $7,109 for the three months ended March 31, 2019, a decrease of $2,289,101, or 100%, compared to $2,296,210 for the three months ended March 31, 2018. During the three months ended March 31, 2018, the Company accrued extra liability to cover the additional cost caused by settlement with buy-back owners and lease-back owners. Those expenses are mainly additional rental payments, late payment reimbursements and taxes paid on behalf of the property owners.

Payroll and payroll related expenses were $507,677 for the three months ended March 31, 2019, an increase of $223,351, or 79%, compared to payroll and payroll related expenses of $284,326 for the three months ended March 31, 2018. The increase in payroll and payroll related expenses were primarily due to a $128,727 increase in our Hong Kong office operations and a $59,745 increase in our U.S. office operations.

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 $129,464 for the three months ended March 31, 2019, an increase of $41,268, or 47%, as compared to business taxes of $88,196 for the three months ended March 31, 2018. The increase in business taxes resulted from increase in tax penalty expenses of $27,907.

The operating lease expenses were $175,410 for the three months ended March 31, 2019, an increase of $93,370, or 114%, compared to the operating lease expenses of $82,040 for the three months ended March 31, 2018. The increase in operating lease expense was primarily due to the increase of rent expenses for the three months ended March 31, 2019, principally due to our new offices located in the U.S. and in Hong Kong.

Other general and administrative expenses were $340,276 for the three months ended March 31, 2019, an increase of $21,486, or 7%, compared to other general and administrative expenses of $318,790 for the three months ended March 31, 2018. The increase in other general and administrative expenses was primarily due to (i) higher professional fees for the three months ended March 31, 2019, in connection with the US filing, and (ii) a decrease in other expenses.

Interest – loans was $1,043,220 for the three months ended March 31, 2019, an increase of $5,556, or 1%, compared to $1,037,664 for the three months ended March 31, 2018.

Interest – ROU and other capitalized liabilities was $667,008 for the three months ended March 31, 2019, a decrease of $15,256, or 2%, compared to $682,264 for the three months ended March 31, 2018.

Interest – related parties was $134,196 for the three months ended March 31, 2019, an increase of $2,372, or 2%, compared to $131,824 for the three months ended March 31, 2018.

As a result of the above-mentioned discussion, the Company’s net loss was $1,665,932 for the three months ended March 31, 2019, an increase of $774,000, or 87%, compared to net loss of $891,932 for the three months ended March 31, 2018.

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 is 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. The interest shall be calculated based on the daily balance of the Principal amount of the loan. Accrued, but unpaid, interest shall be paid on the Maturity Date.

On July 20, 2014, DVPD entered into a loan agreement (the ‘RMB 390M Loan’) for $58,114,411 (RMB 390,000,000 translated at March 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’. Pursuant to the RMB 390M Loan agreement, the interest rate floats at 120% of the similar benchmark loan rate published by the People’s Bank of China. The current benchmark rate for a business loan over 5 years is 4.9% per annum adjusted on October 24, 2015. The effective interest rate was 5.88% for the three months ended March 31, 2019 and 2018. Originally, the RMB 390M Loan was to mature on June 19, 2024. On August 17, 2017, the Bank informed DVPD that the Bank agreed 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, during the extended period, the Company has to repay principal of $74,506 (RMB 500,000 translated at March 31, 2019 exchange rate) 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 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 Dalian Victory. Upon the Bank’s declaration of an event of default under the Loan agreement, it may demand payment in full of all outstanding principal and accrued interest. The RMB 390M Loan balance was $57,592,871 (RMB 386,500,000) and $57,667,377 (RMB 387,000,000 translated at March 31, 2019 exchange rate) as of March 31, 2019 and December 31, 2018, respectively.

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. The damages are calculated to be equal to 20% of the principal amount of the loan.

On March 24, 2015, DVPD entered into a bank loan agreement (the ‘RMB 50M Loan’) to borrow $7,450,565 (RMB50, 000,000 translated at March 31, 2019 exchange rate). The RMB 50M Loan was used for ‘renovations’. The interest rate floats at 120% of the similar benchmark loan rate published by the People’s Bank of China. The current benchmark rate for a business loan over 5 years is 4.9% per annum adjusted on October 24, 2015. The effective interest rate for the three months ended March 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 may demand payment in full of all outstanding principal and accrued interest.

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 calculated to be equal to 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. The RMB 50M Loan balance was $4,257,466 (RMB 28,571,429) and $4,457,035 (RMB 29,910,714 translated at March 31, 2019 exchange rate) at March 31, 2019 and December 31, 2018, respectively.

On December 21, 2017, DVPD entered into a liquidity loan agreement (the ‘RMB 23M Loan’) for a principal amount of $3,427,260 (RMB 23,000,000 translated at March 31, 2019 exchange rate) from Harbin Bank (the ‘Bank’) with interest at 6.5%, payable monthly. The RMB 23M Loan is to be used for short term liquidity needs. On December 28, 2017, DVPD borrowed $1,788,136 (RBM 12,000,000 translated at March 31, 2019 exchange rate). The term of the loan is one year and was due on December 20, 2018. Upon the maturity date, the entire principal amount is required to be paid. DVPD can elect to repay the loan before the maturity date upon 30 days prior notice to the Bank. On January 19, 2018, DVPD borrowed an additional $1,639,124 (RBM 11,000,000 translated at March 31, 2019 exchange rate). 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. 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 Branch’s declaration of an event of default under the loan agreement, the Branch may demand repayment in full of principal and accrued interest. The Loan also includes a dividend blocker. 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 date of due, DVPD is still negotiating the extended term of the loan with the bank.

On September 29, 2017, DVPD entered into a liquidity loan agreement (the ‘RMB 9M Loan’) with the Dalian Economic Development Zone Branch of the Bank (the ‘Branch’), pursuant to which DVPD borrowed $1.3 million (RMB 9 million) from the Bank with interest at 6.5% payable monthly. The loan was due on September 24, 2018. The RMB 9M loan was used for short term liquidity needs and guaranteed jointly by Alex Brown, DVPD and DVBM. The RMB 9M Loan was repaid on December 29, 2017.

On September 27, 2018, DVPD acquired $2,965,325 (RMB19,900,000 translated at March 31, 2019 exchange rate) short-term loan from Harbin Bank. 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.

On March 26, 2019, DVPD acquired $1,525,876 (RMB10,240,000) short-term loan from Harbin Bank. 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.

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 March 31, 2019, remaining principal payable was $13,303,748 and interest payable was $8,801,712. 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 March 31, 2019.

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.

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