DRS/A 1 filename1.htm

 

As filed with the Securities and Exchange Commission on October 11 , 2018

Registration No. 333-                

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Amendment No. 2

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

VICTORY COMMERCIAL MANAGEMENT INC.

(Exact name of registrant as specified in its charter)

 

Nevada   6510   37-1865646
(State or other jurisdiction of   (Primary Standard Industrial   (I.R.S. Employer
incorporation or organization)   Classification Code Number)   Identification No.)

 

3rd Floor, 369 Lexington Ave,

New York, NY 10017

212-922-2199

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Registered Agent Inc.

769 Basque Way

Carson City, Nevada 89706

(775) 885-7800

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

 

Arila Zhou, Esq.

Hunter Taubman Fischer & Li LLC

1450 Broadway 26th Floor

New York, New York 10018

(212) 530-2210

 

Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this Registration Statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X]

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer [  ] Accelerated Filer [  ]

Non-Accelerated Filer [  ]

Smaller reporting company [X]
(Do not check if a smaller reporting company)  
  Emerging growth company [X]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided in Section 7(a)(2)(B) of the Securities Act. [X]

 

 

 

   
 

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of
Securities to be Registered
  Amount to be registered (1)   Proposed maximum
offering price
per share (2)
   Proposed Maximum
Aggregate Offering
Price
   Amount of
Registration Fee
 
Common Stock, par value $0.0001 per share   5,000,000   $1.00   $5,000,000   $622.50 
Total   5,000,000   $1.00   $5,000,000   $622.50 

 

(1) In addition, pursuant to Rule 416 under the Securities Act of 1933, this Registration Statement includes an indeterminate number of additional shares as may be issuable as a result of stock splits or stock dividends which occur during this continuous offering.
   
(2) There is no current market for the securities. Although the registrant’s common stock has a par value of $0.0001 per share, the registrant believes that the calculations offered pursuant to Rule 457(f)(2) are not applicable and, as such, the registrant has valued the common stock in good faith and for the purposes of the registration fee, based on $1.00 per share. In the event of a stock split, stock dividend or similar transaction involving our common stock, the number of shares registered shall automatically be increased to cover the additional shares of common stock issuable pursuant to Rule 416 under the Securities Act of 1933, as amended.

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION,

DATED October 11 , 2018

 

Registration Statement No. 333-         

 

VICTORY COMMERCIAL MANAGEMENT INC.

 

5,000,000 shares of Common Stock

 

This is the self-underwritten public offering of shares of common stock of Victory Commercial Management Inc., a Nevada corporation (the “Company” or “VCM”, “we”, “us”), par value $0.0001 per share (“Common Stock”). We may offer and sell (the “Offering”) from time to time up to 5,000,000 shares of our Common Stock (the “Shares”) at a fixed price of $1.00 per share (the “Offering Price”). There is no minimum number of Shares that must be sold by us for the offering to proceed, and we will retain the proceeds from the sale of any of the offered Shares.

 

There is presently no public market for our shares of Common Stock. We intend to apply to have our shares quoted on the OTC Bulletin Board, or OTCBB, promptly after the date of this prospectus. We cannot guarantee that our securities will be approved for quoting on OTCBB. We cannot assure you that our securities will continue to be quoted on OTCBB after this offering. We also intend to apply to have our shares listed on OTCQB market. However, we cannot guarantee that our shares will be approved for listing on OTCQB.

 

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012, and, as such, we have elected to take advantage of certain reduced reporting requirements for this prospectus and may elect to comply with certain reduced public company reporting requirements for future filings, as applicable.

 

The offering is being conducted on a self-underwritten, best efforts basis, which means our management and/or controlling shareholder will attempt to sell the Shares pursuant to this prospectus directly to the public, with no commission or other remuneration payable to them for any Shares they may sell. In offering the Shares on our behalf, management and/or controlling shareholder will rely on the safe harbor from broker-dealer registration set forth in Rule 3a4-1 under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). The Shares will be offered at a fixed price of $1.00 per share for a period of 180 days from the effective date of this prospectus. The Offering shall terminate on the earlier of (i) the date when we decide to do so until 180 days from the effective date of this prospectus, or (ii) when the Offering is fully subscribed for

 

   Offering Price Per Share   Underwriting Discounts and Commissions  Proceeds to Company Before Expenses 
Common Stock  $1.00   Not Applicable  $5,000,000 
Total  $1.00   Not Applicable  $5,000,000 

 

We may amend or supplement this prospectus from time to time by filing amendments or supplements as required. You should read this entire prospectus and any amendments or supplements carefully before you make your investment decision.

 

Investing in these shares of Common Stock involves significant risks. See “Risk Factors” beginning on page 11 of this prospectus.

 

These securities have not been approved or disapproved by the Securities and Exchange Commission or any state securities commission nor has the Securities and Exchange Commission or any state securities commission passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

The date of this Prospectus is October 11 , 2018

 

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TABLE OF CONTENTS

 

PROSPECTUS SUMMARY 5
RISK FACTORS 11
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 25
USE OF PROCEEDS 26
CAPITALIZATION  
DETERMINATION OF OFFERING PRICE 26
DILUTION 26
DIVIDEND POLICY 30
DESCRIPTION OF BUSINESS  
DESCRIPTION OF PROPERTY 46
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 53
DIRECTORS AND EXECUTIVE OFFICERS 84
EXECUTIVE COMPENSATION  
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 89
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 90
LEGAL PROCEEDINGS 51
DESCRIPTION OF SECURITIES 30
PLAN OF DISTRIBUTION 29
LEGAL MATTERS 31
EXPERTS 31
WHERE YOU CAN FIND MORE INFORMATION 92
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1

 

We have not authorized any person to give you any supplemental information or to make any representations for us. You should not rely upon any information about us that is not contained in this prospectus or in one of our public reports filed with the Securities and Exchange Commission (“SEC”) and incorporated into this prospectus. Information contained in this prospectus or in our public reports may become stale. You should not assume that the information contained in this prospectus, any prospectus supplement or the documents incorporated by reference are accurate as of any date other than their respective dates, regardless of the time of delivery of this prospectus or of any sale of the shares. Our business, financial condition, results of operations and prospects may have changed since those dates. The selling stockholders are offering to sell, and seeking offers to buy, shares of our Common Stock only in jurisdictions where offers and sales are permitted.

 

The information in this preliminary prospectus is not complete and is subject to change. No person should rely on the information contained in this document for any purpose other than participating in our proposed offering, and only the preliminary prospectus issued on October 11 , 2018, is authorized by us to be used in connection with our proposed offering. The preliminary prospectus will only be distributed by us and no other person has been authorized by us to use this document to offer or sell any of our securities.

 

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PROSPECTUS SUMMARY

 

This summary highlights selected information appearing elsewhere in this prospectus. While this summary highlights what we consider to be the most important information about us, you should carefully read this prospectus and the registration statement of which this prospectus is a part in its entirety before investing in our Common Stock, especially the risks of investing in our Common Stock, which we discuss later in “Risk Factors,” and our consolidated financial statements and related notes beginning on page 11 and F-1, respectively.

 

Unless the context requires otherwise, the words the “Company,” “VCM” “we,” “us” or “our” are references to the combined business of Victory Commercial Management Inc., a Nevada corporation. References to “China” or “PRC” are references to the People’s Republic of China, excluding Hong Kong Special Administrative Region of China, Macau Special Administrative Region of China and the Taiwan Region. References to “RMB” are to Renminbi, the legal currency of China, and all references to “$”, “USD” and dollar are to the U.S. dollar, the legal currency of the United States. References to “VCI” are to Victory Commercial Investment Ltd., our wholly-owned subsidiary formed under the laws of the British Virgin Islands. Reference to “Sino Pride” are to Sino Pride Development Limited., a company formed under the laws of Hong Kong and a wholly-owned subsidiary of VCI. References to “DVPD” are Dalian Victory Plaza Development Co., Ltd., an entity formed under the PRC laws and an 80%-owned subsidiary of Sino Pride. References to “DVBM” are Dalian Victory Business Management Co. Ltd., a corporation formed under the laws of the People’s Republic of China and 5% owned by DVPD and 95% owned by Sino Pride. References to “DVPM” are Dalian Victory Property Management Co. Ltd., a corporation formed under the laws of the People’s Republic of China and 100% owned by Sino Pride.

 

All market and industry data provided in this prospectus represents information that is generally available to the public and was not prepared for us for a fee. We did not fund nor were we otherwise affiliated with these sources and we are not attempting to incorporate the information on external web sites into this prospectus. We are only providing textual reference of the information of market and industry data and the web addresses provided in this prospectus are not intended to be hyperlinks and we do not assure that those external web sites will remain active and current.

 

This prospectus contains translations of RMB amounts and Hong Kong Dollar (“HK$”) amount into USD at specified rates solely for the convenience of the reader. The relevant exchange rates are listed below:

 

   For the years ended 
   December 31, 
   2017   2016   2015 
Year Ended RMB: USD exchange rate   6.5075    6.9430    6.4920 
Year Average RMB: USD exchange rate   6.7588    6.9100    6.4890 
                
Year Ended HK$: USD exchange rate   7.8146    7.7534    7.7500 
Year Average HK$: USD exchange rate   7.7928    8.0730    8.0620 

 

    For the three months
ended June 30,
    For the six months
ended June 30,
 
    2018     2017     2018     2017  
                         
Period Ended RMB:USD exchange rate     6.6195       6.7810       6.6195       6.7810  
Average RMB:USD exchange rate     6.3816       6.8598       6.3701       6.8748  
                                 
Period Ended HK$:USD exchange rate     7.8459       7.8048       7.8459       7.8048  
Average HK$:USD exchange rate     7.8482       7.7877       7.8378       7.7741  

 

Special Note Regarding Forward-Looking Statements

 

This report contains forward-looking statements and information that are based on the beliefs of our management as well as assumptions made by and information currently available to us. Such statements should not be unduly relied upon. When used in this report, forward-looking statements include, but are not limited to, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar expressions, as well as statements regarding new and existing products, technologies and opportunities, statements regarding market and industry segment growth and demand and acceptance of new and existing products, any projections of sales, earnings, revenue, margins or other financial items, any statements of the plans, strategies and objectives of management for future operations, any statements regarding future economic conditions or performance, uncertainties related to conducting business in China, any statements of belief or intention, and any statements or assumptions underlying any of the foregoing. These statements reflect our current view concerning future events and are subject to risks, uncertainties and assumptions. There are important factors that could cause actual results to vary materially from those described in this report as anticipated, estimated or expected, including, but not limited to: competition in the industry in which we operate and the impact of such competition on pricing, revenues and margins, volatility in the securities market due to the general economic downturn; SEC regulations which affect trading in the securities of “penny stocks,” and other risks and uncertainties. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward- looking statements, even if new information becomes available in the future. Depending on the market for our stock and other conditional tests, a specific safe harbor under the Private Securities Litigation Reform Act of 1995 may be available. Notwithstanding the above, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Exchange Act expressly state that the safe harbor for forward-looking statements does not apply to companies that issue penny stock. Because we may from time to time be considered as to be an issuer of penny stock, the safe harbor for forward-looking statements may not apply to us at certain times.

 

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ITEM 3. SUMMARY INFORMATION, RISK FACTORS AND RATIO OF EARNINGS TO FIXED CHANGES.

 

Overview

 

We are a Nevada corporation that operates through our indirectly owned subsidiaries Dalian Victory Plaza Development Co., Ltd. (“DVPD”), Dalian Victory Business Management Co., Ltd. (“DVBM”), and Dalian Victory Property Management Co., Ltd (“DVPM”). and primarily engage in the business of commercial real estate lease and operation with a multi-functional underground shopping center (the “Victory Plaza”), currently scheduled to be renovated in Dalian, Liaoning Province of China.

 

We provide lease and day-to-day management operations of the Victory Plaza and aim at establishing a multi-functional shopping center, which differs from traditional retail shopping centers. Traditional retail centers typically have a few anchor tenants and rely on foot traffic. However, in recently years, due to the fast development of e-commerce and online shopping in China, particularly the fast expansion of Alibaba and Taobao, traditional retail centers become less attractive to customers. Thus, many traditional shopping centers encounter decreased revenue and financial difficulty due to this shift in consumer behavior and the financial distress of certain retailers. In order to stay competitive and adapt to the change of the market, we plan to renovate our underground Victory Plaza to attract tenants that we expect are more resilient to e-commerce alternatives by providing essential services in our premises, including but not limited to:

 

  Health &wellness services,
     
  Specialty retail,
     
  Entertainment, beauty & other services,
     
  Dining, and
     
  Internet cafes.

 

Our target tenants will engage in the local community and tend to have local residents and tourists that drive to the retail center and have an in-person individualized shopping and entertaining experience that is less likely to be replaced by e-commerce alternatives.

 

The Victory Plaza

 

DVPD was established in 1993 located at the core area of Qingniwa CBD in Dalian as a sino-foreign cooperative joint venture under the laws of PRC. The registered capital and additional paid in capital totaled $34,000,000 (RMB 249 million). Sino Pride holds 80% of its equity interest along with Dalian Victory Development Co., Ltd (20%). At the time of establishment, DVPD was one of the most leading underground shopping mall development operators in China and had won a lot of award and titles in the past.

 

DVPD developed and opened Victory Plaza in 1998. Victory Plaza is a multi-functional underground shopping center located in Dalian, a major city and seaport of Liaoning province of China. Dalian is a financial, shipping and logistics center for Northeast Asia with a population close to 6.7 million. Gifted with mild climate and multiple beaches, Dalian is a popular destination among domestic tourists and foreign visitors, especially from Japan, South Korea and Russia.

 

Total rental space is approximately 137,500 square meters (1,480,000 square feet). However, the Company does not currently own all that space. As of June 30, 2018 the ownership of the total rental space is as follows: (i) approximately 68%, or 94,431 square meters (1,016,446 square feet), are owned by the current retailer occupying such space with no additional purchase-back rights; (ii) approximately 9%, or 12,046 square meters (129,662 square feet), are owned by the current retailor occupying such space, but the retailer has the right to require the Company to purchase-back the space; (iii) approximately 18%, or 24,201 square meters (260,497 square feet), are owned by the Company; and (iv) approximately 5%, or 6,876 square meters (74,013 square feet) are owned by Dalian Sheng Ma Lin Trading Ltd. (“SML”), but the Company shall purchase-back such space pursuant to that certain Strategy Cooperation Agreement between SML dated December 29, 2017 (“SML Agreement”). (See, “Our Business – Ownership of Retail Shops”). As the date hereof, there are apparel retail shops (approximately 51%), 3C appliance shops (approximately 26%), catering shops (approximately 11%), entertainment (9%) and service related (3%) in Victory Plaza.

 

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During the six months ended in 2018, we generated revenue of USD $ 1.9 million from rent income compared to revenue of USD $ 1.6 million during the same period in 2017. The increase in rental income in 2018 was primarily due to the increase of new tenants in 2018 and the improved occupancy rate. During the fiscal year 2017, we generated revenue of USD $3.3 million from rent income compared to revenue of USD$3.9 million from rent income during the fiscal year 2016. The decrease in rent income was primarily due to the negative impact of booming E-commerce online stores from 2012 to 2016 in China. Entrepreneurs and investors have less interest in retail store business in recent years. The direct impact to us was store vacancy rate increased. Decreased occupancy rate driven down the unit rental price consequently.

 

Vacancy Rate in Recent 5 Years

 

In the month of
December
  Total Available Area For Rent (SQFT)   Total Rented Area (SQFT)   Vacancy (SQFT)   Vacancy (%) 
2013   294,974    275,115    19,849    6.73%
2014   295,684    276,212    19,472    6.59%
2015   263,683    218,507    45,176    17.13%
2016   202,372    170,715    31,657    15.64%
2017   211,758    153,235    58,523    27.64%
In the month of June 2018    

190,833

     

155,775

     

35,058

     

18.37

%

 

Average Rent in Recent 5 Years

 

In the month of
December
  Average Rent Per
Month Per SQFT in
US$
 
2013  $3.11 
2014  $2.67 
2015  $2.48 
2016  $1.97 
2017  $1.83 

In the month of June 2018

  $

1.96

 

 

Management fee income for the six months ended in 2018 was $3.0 million, an increase of $0.6 million, or 26% compared to $ 2.4 million for the same period in 2017. Management fee income for the year ended December 31, 2017 was $5.0 million, an increase of $0.2 million, or 4%, compared to $4.8 million in 2016.

 

Renovation Plan

 

In order to attract customers and tenants that are more resilient to e-commerce alternatives, we have been working on the plan to renovate the Victory Plaza. Before we can commence the renovation, we have to apply for permits or approvals from local governments, such as construction works planning permits, approvals for fire protection design and construction works commencement permits. The rental space at Victory Plaza to be renovated will be approximately 113,800 square meters (1,224,933 square feet). According to our current renovation plan, we expect to complete the renovation by the second half of 2020 and reach the maximum profitability of the Victory Plaza by the end of 2021 provided that we have obtained sufficient capital to carry out the renovation as planned. As of the date hereof, we have finalized the plan of the renovation and are in the process of obtaining necessary permit and license to commence our first stage of the renovation, which we expect to occur in the next three months. The direct renovation cost including the construction, regulatory approval, labor and administration & miscellaneous is estimated at $11.2 million. We need additional $83.9 million to buy back the properties to conduct the renovation. The total anticipated cost is approximately $95.1 million. We plan to fund the renovation through outside financing. However, there is no guarantee that we can obtain funds to support renovation project successfully. We may change our renovation plan based on available funding in the future or abandon the renovation plan if we cannot obtain enough capital to commence the renovation as we planned at all.

 

Implications of Our Being an “Emerging Growth Company”

 

Because we had less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An “emerging growth company” may take advantage of reduced reporting requirements that are otherwise generally applicable to public companies. In particular, as an emerging growth company, we:

 

  may present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A;
     
  are not required to provide a detailed narrative disclosure discussing our compensation principles, objectives and elements and analyzing how those elements fit with our principles and objectives, which is commonly referred to as “compensation discussion and analysis”;
     
  are not required to obtain an attestation and report from our auditors on our management’s assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002;
     
  are not required to obtain a non-binding advisory vote from our shareholders on executive compensation or golden parachute arrangements (commonly referred to as the “say-on-pay,” “say-on frequency” and “say-on-golden-parachute” votes);
     
  are exempt from certain executive compensation disclosure provisions requiring a pay-for-performance graph and CEO pay ratio disclosure;
     
  are eligible to claim longer phase-in periods for the adoption of new or revised financial accounting standards under §107 of the JOBS Act; and
     
  will not be required to conduct an evaluation of our internal control over financial reporting for two years.

 

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We intend to take advantage of all these reduced reporting requirements and exemptions, except the longer phase-in periods for the adoption of new or revised financial accounting standards under §107 of the JOBS Act.

 

Certain of these reduced reporting requirements and exemptions were already available to us due to the fact that we also qualify as a “smaller reporting company” under SEC rules. For instance, smaller reporting companies are not required to obtain an auditor attestation and report regarding management’s assessment of internal control over financial reporting, are not required to provide a compensation discussion and analysis, are not required to provide a pay-for-performance graph or CEO pay ratio disclosure and may present only two years of audited financial statements and related MD&A disclosure.

 

EMPLOYEES

 

We currently have 308 employees including our executive officers. Among them, there are 5 senior managers holding collegial degrees or above with the average of more than 15 years’ experiences in different aspects of operation and management of large shopping centers. In addition, we have 19 department managers holding collegial degree or above with the average of more than 10 years’ experience in investment attraction, property management, project finance, HR and other areas.

 

CORPORATE INFORMATION

 

Our principal executive office is located at 3rd Floor, 369 Lexington Ave., New York, New York, 10017 and our telephone number is 212-922-2199. The information contained therein or connected thereto shall not be deemed to be incorporated into this prospectus or the registration statement of which it forms a part.

 

OFFERING SUMMARY

 

Issuer:   Victory Commercial Management Inc.
     
Securities being Offered:   up to 5,000,000 shares of Common Stock
Price per Share:    
     
Duration of the Offering:   Up to 180 days
     
Shares Outstanding as of December 31, 2017   20,700,000 shares of Common Stock
     
Shares Outstanding following the consummation of the Offering:   Up to 25,700,000 shares of Common Stock
     
Amount of the Offering:   up to $5,000,000
     
Minimum purchase   Not applicable
     
Symbol:   Not applicable
     
Transfer Agent:  

VStock Transfer, LLC

18 Lafayette Place

Woodmere, New York 11598

 

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Use of Proceeds   We plan to devote the net proceeds of the offering for i) renovation of the Victory Plaza, ii) general working capital to meet the needs of the continued development and operation of the Victory Plaza; and (iii) other general working capital and corporate matters. See the “Use of Proceeds” section beginning on page 26.
     
Risk Factors   The Common Stock offered hereby involves a high degree of risk and should not be purchased by investors who cannot afford the loss of their entire investment. See “Risk Factors” beginning on Page 11.
     
Plan of Distribution   The shares of Common Stock covered by this prospectus may be sold by the selling stockholder in the manner described under “Plan of Distribution.”
     
Dividend Policy:   We have no present plan to declare dividends and plan to retain our earnings to continue to grow our business.

 

Summary Consolidated Financial Information

 

The following summary consolidated financial data for the three and six months ended by June 30, 2018 and 2017, and fiscal years ended December 31, 2017 and 2016 are only a summary and does not provide all of the information contained in our financial statements and related notes. You should read the “Management’s Discussion and Analysis of Financial Condition and Results of Operation” beginning on page 53 of this prospectus and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

CONSOLIDATED STATEMENT OF OPERATIONS DATA:

 

    For the Three Months
Ended June 30,
   For the Six Months
Ended June 30,
 
    2018    2017    2018    2017  
                      
Revenues   $ 2,797,559     $ 2,176,988     $ 5,322,322     $ 4,058,957  
Operating expenses     2,460,813       2,372,796       8,507,924       5,190,277  
Income (loss) from operations     336,746       (195,808 )     (3,185,602 )     (1,131,320 )
Other income (expenses)     (1,507,248 )     (972,165 )     507,265       (2,124,097 )
Net Loss     (1,170,502 )     (1,167,973 )     (2,678,337 )     (3,255,417 )
Net loss attributable to noncontrolling interest     288,249       322,299       564,667       786,354  
Net loss attributable to the Company’s common shareholder   $ (882,253 )   $ (845,674 )   $ (2,113,670 )   $ (2,469,063 )
Net loss attributable to the Company’s common shareholder   $ (0.04 )   $ (0.04 )   $ (0.10 )   $ (0.12 )
Weighted-average shares outstanding, basic and diluted     20,700,000       20,700,000       20,700,000       20,700,000  

 

    For the Years Ended
December 31,
 
    2017     2016  
          (As Restated)  
Revenues   $ 8,796,781     $ 9,420,403  
Operating expenses     11,449,855       16,315,434  
Loss from operations     (2,653,074 )     (6,895,031 )
Other expenses     (4,339,432 )     (7,681,993 )
Net loss     (6,992,506 )     (14,577,024 )
Net loss attributable to noncontrolling interest     1,536,231       3,035,343  
Net loss attributable to the Company’s common shareholder   $ (5,456,275 )   $ (11,541,681 )
                 
Loss per common share attributable to the Company’s common shareholder - basic and diluted:   $ (0.26 )   $ (0.56 )
                 
Weighted-average shares outstanding, basic and diluted     20,700,000       20,700,000  

 

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CONSOLIDATED BALANCE SHEETS DATA:

 

   As of June 30   As of December 31, 
   2018   2017   2016 
   (Unaudited)       (As Restated) 
ASSETS               
                
Rental properties, net  $24,198,339   $25,110,414   $24,464,389 
Cash and cash equivalents   400,716    755,027    32,763 
Restricted cash   92,726    118,891    - 
Tenant and sundry receivables , net of allowance for doubtful accounts   552,112    311,051    447,063 
Prepaid expenses and other assets   714,470    475,320    1,346,687 
Property and equipment, net   739,696    785,354    903,119 
Intangible assets, net   26,498    -    1,160 
ROU assets, net    605,139     142,205    873,512 
Other receivable     3,674,875       -       -  
TOTAL ASSETS  $ 31,004,571    $27,698,262   $28,068,693 
                
LIABILITIES AND DEFICIT               
                
Liabilities               
Bank loans payable, net  $66,715,610   $66,569,656   $61,513,950 
Property financing agreements payable   77,054,175    78,219,579    68,629,620 
Accounts payable and accrued liabilities   3,607,311    3,881,717    3,857,745 
Deferred rental income   4,816,420    4,260,775    4,782,483 
Leases liability payable    1,012,707     725,426    5,253,532 
Other payables    25,968,684     23,222,476    17,023,550 
Loans payable to related parties   11,718,580    11,875,883    10,623,074 
Due to shareholder   63,198,557    63,020,584    63,257,533 
Interest payable to related party   11,287,816    11,223,684    10,006,239 
Total Liabilities    265,379,860     262,999,780    244,947,726 
                
Commitments and Contingencies               
Deficit               
Victory Commercial Management Inc. Shareholder’s Deficit               
Common stock, $0.0001 par value, 600,000,000 shares authorized;   -    -    - 
20,700,000 shares issued and outstanding   2,070    2,070    2,070 
Paid-in capital   10,816,289    10,816,289    10,814,219 
Accumulated deficit   (192, 524,907 )   (190,411,237)   (184,954,962)
Accumulated other comprehensive loss   (9, 473,156 )   (12,439,971)   (3,252,672)
Total stockholder’s deficit attributable to the Company’s common shareholder   (191,179,704)   (192,032,849)   (177,391,345)
Noncontrolling interest   (43,195,585    (43,268,669)   (39,487,688)
Total Deficit   (234,375,289)   (235,301,518)   (216,879,033)
                
TOTAL LIABILITIES AND DEFICIT  $ 31,004,571    $27,698,262   $28,068,693 

 

10
 

 

RISK FACTORS

 

An investment in our Common Stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this prospectus, before making an investment decision. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, the trading price of our shares of Common Stock, once we successfully list our Common Stock on OTCBB, could decline, and you may lose all or part of your investment. You should read the section entitled “Cautionary Note Regarding Forward Looking Statements” below for a discussion of what types of statements are forward-looking statements, as well as the significance of such statements in the context of this prospectus.

 

Risks Relating to Our Business

 

Our independent registered public accounting firm added an emphasis paragraph to its audit report describing an uncertainty related to our ability to continue as a going concern.

 

Due to our significant accumulated deficit, recurring losses and limited capital resources, our independent registered public accounting firm has issued a report that describes an uncertainty related to our ability to continue as a going concern. The auditors’ report discloses that we had a net loss of $6,992,506 and $14,577,024 for the years ended December 31, 2017 and 2016, respectively; an accumulated deficit of $190,411,237 at December 31, 2017 and net cash used in operations of $1,099,315 for the year ended December 31, 2017. Additionally, total revenues for the year ended December 31, 2017 decreased by approximately 7% as compared to the total revenue for the year ended December 31, 2016. As of December 31, 2017, to our knowledge, there were total of 455 litigations against us for unpaid rent from lease-back owners and for the past due of purchase-back property from current owners of properties. Total claims amounted approximately $22,737,166 (RMB147, 962,107). These conditions raise substantial doubt about our ability to continue as a going concern and may make it difficult for us to raise capital and make our securities an unattractive investment for potential investors. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. We may be unable to continue operations if we cannot generate revenues in excess of our expenses.

 

Majority of our business, assets and operations are located in the People’s Republic of China.

 

The majority of our business, assets and operations are located in the People’s Republic of China. The economy of the PRC differs from the economies of most developed countries in many aspects. The economy of the PRC has been transitioning from a planned economy to a market-oriented economy. Although in recent years the PRC’s government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in the PRC is still owned by the PRC’s government. In addition, the PRC’s government continues to play a significant role in regulating industry by imposing industrial policies. The PRC’s government exercises significant control over the PRC’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Some of these measures benefit the overall economy of the PRC, but may have a negative effect on us.

 

Actions of government or change of policies may adversely affect our business, financial condition and results of operations.

 

We are at risk from significant and rapid change in the legal systems, regulatory controls, and practices in areas in which we operate. These affect a wide range of areas including the real estate development approval system, employment practices, financing and sale of the buildings; our property rights; data protection; environment, health and safety issues; macro-economic policies and accounting, taxation and stock exchange regulation. Accordingly, changes to, or violation of, these systems, controls or practices could increase costs and have material and adverse impacts on the reputation, performance and financial condition of our development and operation.

 

We may not be able to obtain sufficient capital and may be forced to limit the scope of our operations.

 

We have sustained recurring losses and experienced negative cash flow from operations in recent years. As of December 31, 2017 and 2016, we had generated cumulative losses of approximately $190,411,237 and $184,954,962, respectively; and we expect to continue to incur losses until completion of our renovation plan. We believe that our existing cash resources will not be sufficient to sustain operations during the next twelve months. We need to generate revenue and raise funding in order to sustain our operations and continue to implement our business plan. If adequate additional financing is not available on reasonable terms, we may not be able to undertake the renovation of our Victory Plaza or continue to develop and expand the services of our Victory Plaza, which may as a result impact our cash flow and we would have to modify our renovation plan accordingly. There is no assurance that additional financing will be available to us. As explained below, DVPD has been listed as a “dishonest debtor” by the courts and such designation may negatively impact our ability to obtain additional financing.

 

11
 

 

In connection with our growth strategies, we may experience increased capital needs and accordingly, we may not have sufficient capital to fund our future operations without additional capital investments. Our capital needs will depend on numerous factors, including (i) our profitability; (ii) the development of competitive projects undertaken by our competitors; and (iii) the level of our investment in operation and renovation. We cannot assure you that we will be able to obtain capital in the future to meet our needs.

 

If we cannot obtain additional funding, we may be required to: (i) modify our renovation plan, to the worst case, abandon the renovation plan; (ii) limit our operations and expansion; (iii) limit our marketing efforts; and (iv) decrease or eliminate capital expenditures. Such reductions could have a materially adverse effect on our business and our ability to compete the renovation.

 

Even if we do find a source of additional capital, we may not be able to negotiate terms and conditions for receiving such additional capital that are favorable to us. Any future capital investments could dilute or otherwise materially and adversely affect the holdings or rights of our existing shareholders. In addition, new equity or convertible debt securities issued by us to obtain financing could have rights, preferences and privileges senior to the Common Stock offered hereof. We cannot give you any assurances that any additional financing will be available to us, or if available, will be on terms favorable to us.

 

We derive the majority of our revenues from rental business in the PRC and any downturn in the Chinese economy could have a material adverse effect on our business and financial condition.

 

The majority of our revenues are expected to be generated from rentals and management fee of our Victory Plaza in the PRC and we anticipate that revenues from such rentals and management fee will continue to represent the substantial portion of our total revenues in the near future. Our revenues can also be affected by changes in the general economy. Our success is influenced by a number of economic factors which affect retail business and commercial real estate, such as employment levels, business conditions, interest rates and taxation rates. Adverse changes in these economic factors, among others, may restrict consumer spending, thereby negatively affecting our profitability.

 

We are subject to extensive government regulation that could cause us to incur significant liabilities or restrict our business activities.

 

Regulatory requirements could cause us to incur significant liabilities and operating expenses and could restrict our business activities. We are subject to statutes and rules regulating, among other things, property management, fire safety in public places, certain developmental matters, building and site design, and matters concerning the protection of health and the environment. Our operating expenses may be increased by governmental regulations, such as fees and taxes that may be imposed. Any delay or refusal from government agencies to grant us necessary licenses, permits, and approvals could have an adverse effect on our operations, particularly, our renovation.

 

We may be unable to compete effectively in the local shopping center and retail industry.

 

Dalian local retail industry is fragmented and intensely competitive. We compete with several reputable multifunctional local shopping centers on the basis of price, variety of services, perceived value, customer service, atmosphere, location and overall shopping experience. We also compete with other restaurants and retail establishments for qualified franchisees, site locations and employees to work in a shopping center.

 

Many of our competitors have significantly greater financial and other resources than we do. Many of our competitors also have greater influence over their respective retail systems than we do because of their significantly higher percentage of company-owned shopping centers and/or ownership of franchise real estate, giving them a greater ability to implement operational initiatives and business strategies. Some of our competitors are local shopping centers that, in some cases, have a loyal customer base and strong brand recognition because of its long history. As our competitors expand their operations and as new competitors enter the industry, we expect competition to be more intensive. Increased competition could result in price reductions, decreases in profitability and loss of market share by us. In the event we are unable to compete effectively against other local competitors, our business, financial condition and results of operations could be materially and adversely affected.

 

12
 

 

A majority of our leases will expire within one year, and we may be unable to renew these leases or find new tenants on a timely basis, or at all.

 

A majority of the lease agreements with our tenants have a term of one year. As a result, we experience lease cycles in which a significant number of tenancies expire each year. These relatively short lease cycles expose us to rental market fluctuations. We may not be able to renew the lease agreements or find new tenants at rates equal to or higher than those of the expiring leases, or to find replacement tenants in time so as to minimize periods between leases. If the rental price for our underground shopping center decreases, or our existing tenants do not renew their lease agreements, or we are unable to find replacement tenants in time after the expiration of existing tenancies, our business, financial condition, results of operations and prospects could be materially and adversely affected.

 

Short term rental leases as of December 31, 2016 and 2017 and June 30, 2018

 

As of   Number of tenants     Leased area in square feet     Rent income
in US$
    % of total rent income  
December 31, 2016     608       145,259       2,223,955       57 %
December 31, 2017     454       144,882       2,080,117       54 %
June 30, 2018 - six months     449       130,480       920,361       48 %

 

Defaulting on bank loans could have a material adverse effect on our results of operations

 

As of June 30, 2018 , we had a total of $67,155,483 outstanding loans payable to Harbin Bank. The collaterals with Harbin Bank contain certain protective contractual provisions that limit our activities in order to protect the lender. The risk of default may increase in the event of an economic downturn or due to our failure to successfully execute our business plan. We have entered into guarantee or security agreements with the banks in connection with the bank loans, pursuant to which we have guaranteed or provided security including property mortgage, pledge of accounts receivable (including property management fees and rentals) and 80% equity interest of DVPD held by Sino Pride was pledged for all liabilities under the bank loans, as applicable. Defaulting on our bank loans could result in loss of our collateralized assets and cause a material adverse effect on our results of operations.

 

Our operating companies must comply with environmental protection laws that could adversely affect our profitability.

 

We are required to comply with the environmental protection laws and regulations promulgated by the national and local governments of the PRC. Some of these regulations govern the level of fees payable to government entities providing environmental protection services and the prescribed standards relating to construction. During the renovation and daily operation of our Victory Plaza, wastes are unavoidably generated. If we fail to comply with any of the environmental laws and regulations of the PRC, depending on the type and severity of the violation, we may be subject to, among other things, warnings from relevant authorities, imposition of fines, specific performance and/or criminal liability, forfeiture of profits made, or an order to close down our business operations and suspension of relevant permits. As of the date of reporting, the Company has no violation or noncompliance with the environment rules of China.

 

The operating histories of our operating companies may not serve as adequate bases to judge our future prospects and results of operations.

 

The operating histories of DVPD and DVBM may not provide a meaningful basis for evaluating our business as we plan to renovate the Victory Plaza into a multifunctional shopping plaza to attract more diversified group of customers. We cannot guarantee that we can achieve profitability or that we will have net profit in the future. We will encounter risks and difficulties that companies who substantially adjust or expand their business frequently experience, including the potential failure to:

 

  Obtain sufficient working capital to support our operation and renovation;
     
  Manage our expanding operations and continue to meet customers’ demands;
     
  Maintain adequate control of our expenses allowing us to realize anticipated income growth;
     
  Implement, adapt and modify our business strategies as needed;
     
  Anticipate and adapt to changing conditions in the commercial real estate rental and management industry resulting from changes in government regulations, mergers and acquisitions involving our competitors, technological developments and other significant competitive and market dynamics.

 

If we are not successful in addressing any or all of the foregoing risks, our business may be materially and adversely affected.

 

Our failure to effectively manage growth may cause a disruption of our operations resulting in the failure to generate revenue at the levels we expect.

 

In order to maximize potential growth in our current and potential markets, we believe that we must be able to attract new renters and customers to use the services provided by our shopping center to ensure the sustainable development capability of the company and to maintain our operations. This strategy may place a significant strain on our management and our operational, accounting, and information systems. We expect that we will need to continue to improve our financial controls, operating procedures, and management information systems. We will also need to effectively train, motivate, and manage our employees. Our failure to effectively manage our operations could prevent us from generating the revenues we expect and therefore have a material adverse effect on the results of our operations.

 

13
 

 

We may need additional employees to meet our operational needs.

 

Our future success also depends upon our ability to attract and retain highly qualified personnel. We may need to hire additional managers and employees with industry experience from time to time, and our success will be highly dependent on our ability to attract and retain skilled management personnel and other employees. There can be no assurance that we will be able to attract or retain highly qualified personnel. Competition for skilled personnel in the commercial real estate industries is significant. This competition may make it more difficult and expensive to attract, hire and retain qualified managers and employees.

 

We will incur significant costs as a public company in the United States.

 

We will incur significant costs associated with our public company reporting requirements, costs associated with newly applicable corporate governance requirements, including requirements under the Sarbanes-Oxley act of 2002 and other rules implemented by the SEC. We expect all of these applicable rules and regulations to significantly increase our legal and financial compliance costs and to make some activities more time consuming and costly. We also expect that these applicable rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract or retain qualified individuals to serve on our board of directors or as executive officers. We cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

 

Our certificates, permits, and licenses related to our operations are subject to governmental control and renewal, and failure to obtain or renew such certificates, permits, and licenses will cause all or part of our operations to be terminated.

 

Our operations require licenses, permits and, in some cases, renewals of these licenses and permits from various governmental authorities in the PRC. Our ability to obtain, maintain, or renew such licenses and permits on acceptable terms is subject to change, as are, among other things, the regulations and policies of applicable governmental authorities.

 

If our qualification certificate of property management enterprise or our land use rights certificates are revoked or suspended or we are unable to renew the permits for any reason, we cannot assure you that our business operations will not be stopped and, accordingly, our financial performance would be adversely affected.

 

Our shopping center may be affected by fire or natural calamities. Our operations are also subject to the risk of power outages, equipment failures or labor disturbances and other business interruptions. We have limited insurance coverage and do not carry any business interruption insurance.

 

Our Shopping Center is currently underground. A fire, floods or other natural calamity may result in significant damage to our shopping center. Our operations are subject to risks of various business interruptions, including power outages, equipment failures or disturbances from labor unrest. If we are unable to obtain timely replacements of damaged equipment, or if we are unable to find an acceptable contract manufacturer in the event our shopping center are damaged by a catastrophic event, then major disruptions to our production would result, which would have significant adverse effect on our operations and financial results. Our property insurance may not be sufficient to cover damages to our Shopping Center, and we do not carry any business interruption insurance covering lost profits as a result of the disruption to our production.

 

We are subject to certain risks related to litigation filed by or against us, and adverse results may harm our business and operation.

 

We are currently involved in, and may in the future be subject to, claims, suits, government investigations, and proceedings arising from our business. As of June 30, 2018 , to our knowledge, there were total of 492 litigations against us for unpaid rent by the lease-back owners and for the past due of purchasing-back property from current owner of properties. Total claims amounted to $24,045,310 (RMB 159,167,926 ). Historically, when DVPD sold property, it granted a purchase-back option to certain purchasers pursuant to which, such purchasers could request DVPD to buy back their properties at the original purchase prices during certain time frame. DVPD also leased back certain sold units and then sub-lease to third parties. These litigations 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, deposition, pledge of its 5% equity interest in DVBM during a period from March 2, 2017 to March 1, 2019. In addition, DVPD has been listed as a “dishonest debtor” by the PRC courts. Once listed as a dishonest debtor, DVPD may been imposed with certain restrictions in connection with the commercial loans at banks’ discretion; purchase or transfer of properties and land use rights; and renovation, upgrade or renovation of properties. In addition, the bank accounts of DVPD are frozen by the courts which allows the inflow of cash to the bank accounts but prohibits the outflow of cash. The management is negotiating with these claimers actively and willing to settle these cases with a discounted payment amount. However, we cannot predict with certainty the cost of defense, the cost of prosecution, or the ultimate outcome of litigation and other proceedings filed by or against us, including remedies, damage awards, and penalties. Regardless of outcome, any such claims or actions require significant time, money, managerial and other resources, result in negative publicity, and harm our business and financial condition. See “Historical Issue” on page 38.

 

One of our operating subsidiaries has been listed as a “dishonest debtor” by PRC courts due to the litigations filed against us. Until such subsidiary has been cleared by PRC courts, that designation may materially adversely affect our ability to obtain financings, thus affecting our renovation plan.

 

As of June 30, 2018, to our knowledge, there were total of 492 litigations against us for unpaid rent by the lease-back owners and for the past due of purchasing-back property from current owner of properties. Total claims amounted to $24,045,310 (RMB159,167,926). Subsequently, DVPD has been listed as a “dishonest debtor” by the courts. In accordance with the Regulation of the Supreme People’s Court on the Publication of Information on the List of Dishonest Debtor, the courts has announced such listing to the public through the list database and informed the relevant government departments, financial regulatory agencies, financial institutions, institutions that undertake administrative functions and industry association of such information of dishonest debtor, so that the relevant parties can give credit disciplinary action to the dishonest debtor. As such, DVPD may suffer certain restrictions in connection with commercial loans at banks’ discretion, purchase or transfer of properties and land use rights, and renovation, upgrade or renovation of properties. Additionally, certain properties of DVPD have been frozen from transfer or disposition and its bank accounts are frozen. The total anticipated cost associated with our renovation plan is approximately $95.1 million and we plan to fund the renovation through outside financing, bank loans and/or shareholder lending. Until we are able to enforce the judgments against us and DVPD is removed from the Dishonest Debtor list, it will be very difficult for us to obtain additional loans from banks. Accordingly, unless we can successfully raise sufficient capital from other sources, which we cannot assure, the Dishonest Debtor designation will materially adversely affect our ability to carry our renovation plan and business.

 

We provided properties as collateral to help individuals to acquire bank loans which imposes substantial risks to a substantial loss in our assets.

 

On May 18, 2017, the Company provided 14 units of rental properties, totaled 293 square meters (3,153 square feet), owned by the Company as collaterals to help three individuals, among which, a board member of DVPD, an employee of DVPD (now a former employee) and one individual, to acquire 12 months bank loans in the aggregate amount of $2,160,450 (RMB 15,000,000). There was no profit or gain for the Company to provide collateral to those individuals and the Company did not have appropriate controls and procedures to approve or prevent the entry into this type of the transactions. The 12 months period was past due. The Company is in discussion with these three individuals to replace the collaterals provided by themselves. The collateral of Company’s properties exposed the Company in a material risk to a loss in the case of any or all of these individuals are is insolvent and failed to return the bank loans.

 

We have identified multiple material weaknesses in our internal control over financial reporting which could, if not remediated, result in material misstatements in our financial statements.

 

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act. As disclosed elsewhere in this report, we identified material weaknesses in our internal control over financial reporting primarily as a result of lack of accounting staffing, insufficient policies and procedures to ensure the correct application of accounting and financing reporting with respect to the current requirements of GAAP and SEC disclosure requirements, lack of segregation of duties, no independent audit committee and no effective controlling procedures as to approval the use of the Company’s assets, and concluded that neither our disclosure controls and procedures nor our internal control over financial reporting were effective as of December 31, 2017. A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As a result of these material weaknesses, our management concluded that our internal control over financial reporting was not effective based on criteria set forth by the Committee of Sponsoring Organization of the Treadway Commission in Internal Control-An Integrated Framework (2013). We are actively engaged in developing a remediation plan designed to address these material weaknesses. If our remedial measures are insufficient to address the material weakness, or if additional material weaknesses or significant deficiencies in our internal control are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results.

 

14
 

 

RISKS RELATING TO DOING BUSINESS IN CHINA

 

Labor laws in the PRC may adversely affect our results of operations.

 

On June 29, 2007, the PRC’s government promulgated the labor contract law of the PRC, which became effective on January 1, 2008 and was subsequently amended on December 28, 2012. The labor contract law imposes greater liabilities on employers and significantly affects the cost of an employer’s decision to reduce its workforce. Further, the law requires certain terminations be based upon seniority and not merit. In the event that we decide to significantly change or decrease our workforce, the labor contract law could adversely affect our ability to enact such changes in a manner that is most advantageous to our business or in a timely and cost-effective manner, thus materially and adversely affecting our financial condition and results of operations.

 

We may be exposed to liabilities under the foreign corrupt practices act and Chinese anti-corruption law.

 

In connection with this offering, we will become subject to the U.S. foreign corrupt practices act (“FCPA”), and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute for the purpose of obtaining or retaining business. We are also subject to Chinese anti-corruption laws, which strictly prohibit the payment of bribes to government officials. We have operations, agreements with third parties, and make sales in China, which may experience corruption. Our activities in China create the risk of unauthorized payments or offers of payments by one of the employees, consultants of our company, because these parties are not always subject to our control. We are in the process of implementing an anticorruption program, which will prohibit the offering or giving of anything of value to governmental officials or third parties, directly or indirectly, for the purpose of obtaining or retaining business. In the meantime, we believe to date we have complied in all material respects with the provisions of the FCPA and Chinese anti-corruption laws. However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants of our company may engage in conduct for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the government may seek to hold our company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.

 

The government in China has the right to take over part or all of our underground properties during times of war.

 

Among the approximately 137,500 square meters (1,480,000 square feet) of the total rental area of Victory Plaza, approximately 59,000 square meters (635,071 square feet) was designed for underground civil air defense shelter (the “Civil Air Defense Shelter”). The Civil Air Defense Shelter is allowed to be used for shopping place or garage during peace time as set forth in approvals by local air defense authority. However, the primary use of any civil air defense shelter is to protect civilians during times of war. In order to serve this purpose, the PRC government authorities, by law and regulation, reserve the right to take over the Civil Air Defense Shelter during times of war. If any military conflict or a war breaks out between China and other countries or regions, it is likely that the Civil Air Defense Shelter or other part of our underground Victory Plaza will be seized by the government in China as underground civil air defense shelters. Although the seizure of civil air defense shelters by the government authorities in China for use during times of war does not mean the government authorities permanently revoke our right to use, operate and profit from the facilities and we may continue the use and operation of our the Civil Air Defense Shelter after the war, our business would still be interrupted.

 

Uncertainties with respect to the PRC’s legal system could adversely affect us.

 

We conduct a substantial amount of our business through our subsidiaries in China. Our operations in China are governed by PRC laws and regulations. Our PRC subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws and regulations applicable to the operative joint venture enterprises. The PRC legal system is based on statutes. Prior court decisions may be cited for reference but have limited precedential value.

 

15
 

 

Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because some of these laws and regulations are relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.

 

We are a holding company and we rely on funding for dividend payments from our subsidiaries, which are subject to restrictions under PRC laws.

 

We are a holding company incorporated in Nevada and we operate our core businesses through our subsidiaries in the PRC. Therefore, the availability of funds for us to pay dividends to our shareholders and to service our indebtedness depends upon dividends received from such PRC subsidiaries. The ability of our subsidiaries to pay dividends and make payments on intercompany loans or advances to their shareholders is subject to, among other things, distributable earnings, cash flow conditions, restrictions contained in the articles of association of our subsidiaries, joint-venture contracts, applicable laws and restrictions contained in the debt instruments of such subsidiaries. If our subsidiary incurs debt or losses, its ability to pay dividends or other distributions to us may be impaired. As a result, our ability to pay dividends and to repay our indebtedness will be restricted. PRC laws require that dividends be paid only out of the after-tax profit of our PRC subsidiary calculated according to PRC accounting principles, which differ in many aspects from generally accepted accounting principles in other jurisdictions. PRC laws also require enterprises established in the PRC to set aside part of their after-tax profits as statutory reserves. These statutory reserves are not available for distribution as cash dividends. In addition, restrictive covenants in bank credit facilities or other agreements that we or our subsidiary entered into or may enter into in the future may also restrict the ability of our subsidiaries to pay dividends to us. Further, starting from January 1, 2008, dividends paid by our PRC subsidiaries to their non-PRC parent companies will be subject to a 10% withholding tax, unless there is a tax treaty between the PRC and the jurisdiction in which the overseas parent company is incorporated, which specifically exempts or reduces such withholding tax. Pursuant to a double tax treaty between Hong Kong and the PRC, if the non-PRC parent company is a Hong Kong resident and directly holds a 25% or more interest in the PRC enterprise, such withholding tax rate may be lowered to 5%. These restrictions on the availability of our funding may impact our ability to pay dividends to our shareholders and to service our indebtedness.

 

In addition, the PRC government imposes controls on the convertibility of the renminbi, or “RMB” into foreign currencies and, in certain cases, the remittance of currency out of China. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiary to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions can be made in foreign currencies without prior approval from State Administration of Foreign Exchange (“SAFE”) by complying with certain procedural requirements. However, approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also, at its discretion, restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our security-holders.

 

Our business may be materially and adversely affected if any of our PRC subsidiaries declares bankruptcy or becomes subject to a dissolution or liquidation proceeding.

 

The enterprise bankruptcy law of the PRC, or the bankruptcy law, came into effect on June 1, 2007. The bankruptcy law provides that an enterprise will be liquidated if the enterprise fails to settle its debts as and when they fall due and if the enterprise’s assets are, or are demonstrably, insufficient to clear such debts.

 

Our PRC subsidiaries hold assets that are important to our business operations. If our PRC subsidiaries undergo a voluntary or involuntary liquidation proceeding, unrelated third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations.

 

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According to SAFE’s provisions for administration of foreign exchange relating to inbound direct investment by foreign investors, effective on June 10, 2015, if our PRC subsidiaries undergo a voluntary or involuntary liquidation proceeding, prior approval from the safe for remittance of foreign exchange to our shareholders abroad is no longer required, but we still need to conduct a registration process with the SAFE designated commercial bank. It is not clear whether “registration” is a mere formality or involves the kind of substantive review process undertaken by SAFE designated commercial bank.

 

Fluctuations in exchange rates could adversely affect our business and the value of our securities.

 

Changes in the value of the RMB against the U.S. dollar and other foreign currencies are affected by, among other things, changes in China’s political and economic conditions. Any significant revaluation of the RMB may have a material adverse effect on our revenues and financial condition, and the value of, and any dividends payable on our shares in U.S. dollar terms. For example, to the extent that we need to convert U.S. dollars we receive from our Offering into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of paying dividends on our Common Stock or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us.

 

Since July 2005, the RMB is no longer pegged to the U.S. dollar. Although the people’s bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future, PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.

 

Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.

 

It may be difficult to effect service of process and enforcement of legal judgments upon our Company and our officers and directors because they reside outside the United States.

 

Our operations are based in China and all of our assets are located in China. In addition, a majority of our directors and officers reside in China. As a result, service of process on the Company and such foreign directors and officers may be difficult or impossible to effect within the United States. Moreover, China does not have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement of the judgment of courts. As a result, recognition and enforcement in China of judgments of a court in any of these jurisdictions may be difficult or impossible.

 

PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to penalties and limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute profits to us, or otherwise adversely affect us.

 

The SAFE promulgated the notice on relevant issues relating to domestic resident’s investment and financing and roundtrip investment through special purpose vehicles (“SPV(s)”), or Notice 37, in July 2014 that requires PRC residents or entities to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. In addition, such PRC residents or entities must update their safe registrations when the offshore SPV undergoes material events relating to material change of capitalization or structure of the PRC resident itself (such as capital increase, capital reduction, share transfer or exchange, merger or spin off). On February 28, 2015, SAFE issued a notice according to which the aforesaid PRC residents or entities are no longer required to register with SAFE or its local branch, instead the aforesaid PRC residents or entities need to register with local banks. Failure by an individual to comply with the required SAFE registration and updating requirements described above may result in penalties up to RMB50,000 imposed on such individual and restrictions being imposed on the foreign exchange activities of the PRC subsidiaries of such offshore SPV, including increasing the registered capital of, payment of dividends and other distributions to, and receiving capital injections for the offshore SPV. Failure to comply with Notice 37 may also subject relevant PRC residents or the PRC subsidiaries of such offshore SPV to penalties under PRC foreign exchange administration regulations for evasion of applicable foreign exchange restrictions. Our controlling shareholder, Alex Brown (a.k.a “You Chang”) did not register with local SAFE branch or its delegated commercial bank when he acquired ownership of Sino Pride through his indirect holding of Victory Commercial Investment Ltd. in November 2016. Although Alex Brown was no longer a PRC nationality afterwards, we cannot assure you that our controlling shareholder will not be required under Notice 37 to register with local SAFE branch or its delegated commercial bank. These risks could in the future have a material adverse effect on our business, financial condition and results of operations.

 

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Failure to comply with the individual foreign exchange rules relating to the overseas direct investment or the engagement in the issuance or trading of securities overseas by our PRC resident stockholders may subject such stockholders to fines or other liabilities.

 

Other than Notice 37, our ability to conduct foreign exchange activities in the PRC may be subject to the interpretation and enforcement of the implementation rules of the administrative measures for individual foreign exchange promulgated by safe in January 2007 (as amended and supplemented, the “Individual Foreign Exchange Rules”). Under the individual foreign exchange rules, any PRC individual seeking to make a direct investment overseas or engage in the issuance or trading of negotiable securities or derivatives overseas must make the appropriate registrations in accordance with safe provisions. PRC individuals who fail to make such registrations may be subject to warnings, fines or other liabilities.

 

We may not be fully informed of the identities of all our beneficial owners who are PRC residents. For example, because the investment in or trading of our shares will happen in an overseas public or secondary market where shares are often held with brokers in brokerage accounts, it is unlikely that we will know the identity of all of our beneficial owners who are PRC residents. Furthermore, we have no control over any of our future beneficial owners and we cannot assure you that such PRC residents will be able to complete the necessary approval and registration procedures required by the individual foreign exchange rules.

 

It is uncertain how the individual foreign exchange rules will be interpreted or enforced and whether such interpretation or enforcement will affect our ability to conduct foreign exchange transactions. Because of this uncertainty, we cannot be sure whether the failure by any of our PRC resident stockholders to make the required registration will subject our PRC subsidiaries to fines or legal sanctions on their operations, delay or restriction on repatriation of proceeds of this offering into the PRC, restriction on remittance of dividends or other punitive actions that would have a material adverse effect on our business, results of operations and financial condition.

 

Because our funds are held in banks that do not provide insurance, the failure of any bank in which we deposit our funds may affect our ability to continue to operate.

 

Banks and other financial institutions in the PRC do not provide insurance for funds held on deposit. As a result, in the event of a bank failure, we may not have access to funds on deposit. Depending upon the amount of money we maintain in a bank that fails, our inability to have access to our cash may impair our operations, and, if we are not able to access funds to pay our employees and other creditors, we may be unable to continue to operate.

 

If we are unable to obtain business insurance in the PRC, we may not be protected from risks that are customarily covered by insurance in the United States.

 

Business insurance is not readily available in the PRC. To the extent that we suffer a loss of a type that would normally be covered by insurance in the United States, such as product liability and general liability insurance, we would incur significant expenses in both defending any action and in paying any claims that result from a settlement or judgment. We have not obtained fire, casualty and theft insurance, and there is no insurance coverage for our raw materials, goods and merchandise, furniture or buildings in China. Any losses incurred by us will have to be borne by us without any assistance, and we may not have sufficient capital to cover material damage to, or the loss of, our Victory Plaza due to fire, severe weather, flood or other causes, and such damage or loss may have a material adverse effect on our financial condition, business and prospects.

 

Under the new enterprise income tax law, we may be classified as a “resident enterprise” of China. Such classification may result in unfavorable tax consequences to us and our non-PRC shareholders.

 

China passed a new enterprise income tax law, or the new EIT law, which became effective on January 1, 2008. Under the new EIT law, an enterprise established outside of China with de facto management bodies within China is considered a resident enterprise, meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the new EIT law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise. In addition, a circular issued by the state administration of taxation on April 22, 2009 clarified that dividends and other income paid by such resident enterprises will be considered to be the PRC’s source income and subject to the PRC’s withholding tax. This recent circular also subjects such resident enterprises to various reporting requirements with the PRC’s tax authorities.

 

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Although substantially all of our management is currently located in the PRC, it remains unclear whether the PRC’s tax authorities would require or permit our overseas registered entities to be treated as PRC resident enterprises. We do not currently consider our company to be a PRC resident enterprise. However, if the PRC’s tax authorities determine that we are a resident enterprise for the PRC’s enterprise income tax purposes, a number of unfavorable PRC tax consequences may follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as the PRC’s enterprise income tax reporting obligations. This would also mean that income such as interest on offering proceeds and non-China source income would be subject to the PRC’s enterprise income tax at a rate of 25%. Second, although under the new EIT law and its implementing rules, dividends paid to us from our PRC subsidiary would qualify as tax-exempt income, we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC authorities responsible for enforcing the withholding tax have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for the PRC’s enterprise income tax purposes. Finally, dividends paid to stockholders with respect to their shares of our Common Stock or any gains realized from transfer of such shares may generally be subject to the PRC’s withholding taxes on such dividends or gains at a rate of 10% if the shareholders are deemed to be non-resident enterprises or at a rate of 20% if the shareholders are deemed to be non-resident individuals. In addition, any gain realized on the transfer of shares of our common stock by such investors is also subject to PRC tax at a current rate of 10%, subject to any reduction or exemption set forth in relevant tax treaties, if such gain is regarded as income derived from sources within the PRC. If dividends payable to our non-PRC investors or gains from the transfer of our common stock by such investors are subject to PRC tax, the value of your investment in our common stock may decline significantly.

 

We and our shareholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.

 

Pursuant to a notice, or Circular 698, issued by the State Administration of Taxation, where a non-resident enterprise conducts an “indirect transfer” by transferring the equity interests of a PRC resident enterprise indirectly via disposing of the equity interests of an overseas holding company, and such overseas holding company is located in a tax jurisdiction that: (1) has an effective tax rate less than 12.5%; or (2) does not tax foreign income of its residents, the non-resident enterprise, being the transferor, shall report to the relevant tax authority of the PRC resident enterprise such indirect transfer. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, currently at a rate of 10%. In 2015, the State Administration of Taxation issued a circular, known as Circular 7, which replaced or supplemented certain previous rules under Circular 698. Circular 7 sets out a wider scope of indirect transfer of PRC assets that might be subject to PRC enterprise income tax, and more detailed guidelines on the circumstances when such indirect transfer is considered to lack a bona fide commercial purpose and thus regarded as avoiding PRC tax. The conditional reporting obligation of the non-PRC investor under Circular 698 is replaced by a voluntary reporting by the transferor, the transferee or the underlying PRC resident enterprise being transferred. Furthermore, if the indirect transfer is subject to PRC enterprise income tax, the transferee has an obligation to withhold tax from the sale proceeds, unless the transferor reports the transaction to the PRC tax authority under Circular 7. Late payment of applicable tax will subject the transferor to default interest. Gains derived from the sale of shares by investors through a public stock exchange are not subject to the PRC enterprise income tax pursuant to Circular 7 where such shares were acquired in a transaction through a public stock exchange. Circular 698 was abolished by an announcement promulgated by the State Administration of Taxation in October 2017 and effective from December 1, 2017, or SAT Circular 37, which, among others, provides specific provisions on matters concerning withholding of income tax of non-resident enterprises at source.

 

As newly implemented, there is uncertainty as to the application of Circular 7 and SAT Circular 37, both of which may be determined by the tax authorities to be applicable to our offshore restructuring transactions or sale of the shares of our offshore subsidiaries where non-resident enterprises, being the transferors, were involved. The PRC tax authorities may pursue such non-resident enterprises with respect to a filing regarding the transactions and request our PRC subsidiaries to assist in the filing. As a result, we and our non-resident enterprises in such transactions may become at risk of being subject to filing obligations or being taxed under Circular 7, and may be required to expend valuable resources to comply with Circular 7 or to establish that we and our non-resident enterprises should not be taxed under Circular 7, for our previous and future restructuring or disposal of shares of our offshore subsidiaries, which may have a material adverse effect on our financial condition and results of operations.

 

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The PRC government may issue further restrictive measures in the future.

 

We cannot assure you that the PRC’s government will not issue further restrictive measures in the future. The PRC government’s restrictive regulations and measures could increase our operating costs in adapting to these regulations and measures, limit our access to capital resources or even restrict our business operations, which could further adversely affect our business and prospects.

 

Our PRC subsidiaries are not in compliance with the taxation and social security rules of China, and they may face penalties imposed by the PRC government.

 

As of June 30, 2018, December 31, 2017 and 2016, the Company had tax payables including real estate tax, land use right tax, income tax, taxes related to rental and other taxes in the aggregate amount of $0.3 million, $1.4 million and $1.9 million, respectively. As of June 30, 2018 , December 31, 2017, and 2016, the Company accrued tax penalty payable in the amount of $40,384, $378,647 and $370,896, respectively in accordance with Chinese tax law including the expected accrued penalties for not incompliance with social security rules of China. Some of these tax payables were incurred prior to November 2016, when we acquired the ownership of Sino Pride. As of May 31, 2018, we have paid off 2017 and prior year’s tax dues including penalties. However, we cannot guarantee that we have sufficient cash to pay all the payables under the settlements or if we can reach a settlement with the tax authorities, if at all. In addition, our PRC subsidiaries failed to strictly comply with PRC laws and regulations to contribute towards social insurance premium and housing fund on behalf of their employees, which are based on the average salary of employees of Dalian city instead of their employees’ average monthly salary for the preceding year, as required by the applicable laws and regulations. We may be required by relevant authorities to make up the shortfall of social insurance premium and housing fund. Even after we have successfully settled all tax payables, if any PRC government authority takes the position that there is non-compliance with the taxation, environmental protection, employment and/or social security rules by our PRC subsidiary, they may be exposed to penalties from PRC government authorities, in which case the operation of our PRC subsidiary in question may be adversely affected.

 

If relations between the United States and China worsen, our stock price may decrease and we may have difficulty accessing the U.S. capital markets.

 

At various times during recent years, the United States and China have had disagreements over political and economic issues. Controversies may arise in the future between these two countries. Any political or trade conflicts between the United States and China could adversely affect the market price of our Common Stock and our ability to access U.S. capital markets.

 

PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans to or make additional capital contributions to our PRC subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

 

Under PRC laws and regulations, we are permitted to utilize the proceeds from this offering to fund our PRC subsidiary by making loans to or additional capital contributions to our PRC subsidiary, subject to applicable government registration and approval requirements.

 

Any loans to our PRC subsidiary, which are treated as foreign-invested enterprises under PRC laws, are subject to PRC regulations and foreign exchange loan registrations. For example, loans by us to our PRC subsidiary to finance their activities cannot exceed statutory limits and must be registered with the local counterpart of the State Administration of Foreign Exchange, or SAFE. The statutory limit for the total amount of foreign debts of a foreign-invested company is the difference between the amount of total investment as approved by the MOC or its local counterpart and the amount of registered capital of such foreign-invested company.

 

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We may also decide to finance our PRC subsidiary by means of capital contributions. These capital contributions must be approved by the MOC or its local counterpart. In addition, SAFE issued a circular in September 2008, SAFE Circular 142, regulating the conversion by a foreign-invested enterprise of foreign currency registered capital into RMB by restricting how the converted RMB may be used. SAFE Circular 142 provides that the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable government authority and unless otherwise provided by law, may not be used for equity investments within the PRC. On July 4, 2014, the SAFE issued the Circular of the SAFE on Relevant Issues Concerning the Pilot Reform in Certain Areas of the Administrative Method of the Conversion of Foreign Exchange Funds by Foreign-invested Enterprises, or SAFE Circular 36, which launched a pilot reform of the administration of the settlement of the foreign exchange capitals of foreign-invested enterprises in certain designated areas from August 4, 2014 and some of the restrictions under SAFE Circular 142 will not apply to the settlement of the foreign exchange capitals of the foreign-invested enterprises established within the designate areas and such enterprises are allowed to use its RMB capital converted from foreign exchange capitals to make equity investment. On March 30, 2015, SAFE promulgated Circular 19, to expand the reform nationwide. Circular 19 came into force and replaced both Circular 142 and Circular 36 on June 1, 2015. Circular 19 allows foreign-invested enterprises to make equity investments by using RMB fund converted from foreign exchange capital. However, Circular 19 continues to prohibit foreign-invested enterprises from, among other things, using RMB fund converted from its foreign exchange capitals for expenditure beyond its business scope, providing entrusted loans or repaying loans between non-financial enterprises. In addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital of a foreign-invested company. The use of such RMB capital may not be altered without SAFE’s approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. Violations of these Circulars could result in severe monetary or other penalties. These circulars may significantly limit our ability to use RMB converted from the net proceeds of this offering to fund the establishment of new entities in China by our PRC subsidiary, to invest in or acquire any other PRC companies through our PRC subsidiary, or to establish new variable interest entities in the PRC.

 

In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans to our PRC subsidiary or future capital contributions by us to our PRC subsidiary. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we expect to receive from this offering and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

 

Fluctuations in exchange rates could have a material adverse effect on our results of operations and the value of your investment.

 

Substantially all of our revenues and expenditures are denominated in RMB, whereas our reporting currency is the U.S. dollar. As a result, fluctuations in the exchange rate between the U.S. dollar and RMB will affect the relative purchasing power in RMB terms of our U.S. dollar assets and the proceeds from this offering. Our reporting currency is the U.S. dollar while the functional currency for our PRC subsidiary and consolidated variable interest entity is RMB. Gains and losses from the remeasurement of assets and liabilities that are receivable or payable in RMB are included in our consolidated statements of operations. The remeasurement has caused the U.S. dollar value of our results of operations to vary with exchange rate fluctuations, and the U.S. dollar value of our results of operations will continue to vary with exchange rate fluctuations. A fluctuation in the value of RMB relative to the U.S. dollar could reduce our profits from operations and the translated value of our net assets when reported in U.S. dollars in our financial statements. This could have a negative impact on our business, financial condition or results of operations as reported in U.S. dollars. If we decide to convert our RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. In addition, fluctuations in currencies relative to the periods in which the earnings are generated may make it more difficult to perform period-to-period comparisons of our reported results of operations.

 

The value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar, and the RMB appreciated more than 20% against the U.S. dollar over the following three years. However, the People’s Bank of China, or the PBOC, regularly intervenes in the foreign exchange market to limit fluctuations in RMB exchange rates and achieve policy goals. During the period between July 2008 and June 2010, the exchange rate between the RMB and the U.S. dollar had been stable and traded within a narrow range. However, the RMB fluctuated significantly during that period against other freely traded currencies, in tandem with the U.S. dollar. Since June 2010, the RMB has started to slowly appreciate against the U.S. dollar, though there have been periods when the U.S. dollar has appreciated against the RMB. On August 11, 2015, the PBOC allowed the RMB to depreciate by approximately 2% against the U.S. dollar. It is difficult to predict how long such depreciation of RMB against the U.S. dollar may last and when and how the relationship between the RMB and the U.S. dollar may change again.

 

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There remains significant international pressure on the PRC government to adopt a flexible currency policy. Any significant appreciation or depreciation of the RMB may materially and adversely affect our revenues, earnings and financial position, and the value of, and any dividends payable on, our securities in U.S. dollars. For example, to the extent that we need to convert U.S. dollars we receive from this initial public offering into RMB to pay our operating expenses, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion. Conversely, a significant depreciation of the RMB against the U.S. dollar may significantly reduce the U.S. dollar equivalent of our earnings, which in turn could adversely affect the price of our securities.

 

Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currency. As a result, fluctuations in exchange rates may have a material adverse effect on your investment.

 

Governmental control of currency conversion may limit our ability to utilize our net revenues effectively and affect the value of your investment.

 

The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our net revenues in RMB. Under our current corporate structure, we rely on dividend payments from our PRC subsidiary to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. Therefore, our PRC subsidiary is able to pay dividends in foreign currencies to us without prior approval from SAFE, subject to the condition that the remittance of such dividends outside of the PRC complies with certain procedures under PRC foreign exchange regulation, such as the overseas investment registrations by the beneficial owners of our company who are PRC residents. But approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our stockholders.

 

Interpretation of PRC laws and regulations involves uncertainty.

 

Our core business is conducted within China and is governed by PRC’s laws and regulations. The PRC’s legal system is based on written statutes, and prior court decisions can only be used as a reference. Since 1979, the PRC’s government has promulgated laws and regulations in relation to economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade, with a view to developing a comprehensive system of commercial law, including laws relating to property ownership and development. However, due to the fact that these laws and regulations have not been fully developed, and because of the limited volume of published cases and the non-binding nature of prior court decisions, interpretation of PRC’s laws and regulations involves a degree of uncertainty. Some of these laws may be changed without immediate publication or may be amended with retroactive effect. Depending on the government agency or how an application or case is presented to such agency, we may receive less favorable interpretations of laws and regulations than our competitors, particularly if a competitor has long been established in the locality of, and has developed a relationship with such agency. In addition, any litigation in China may be protracted and result in substantial costs and a diversion of resources and management attention. All of these uncertainties may cause difficulties in the enforcement of our land use rights, entitlements under our permits and other statutory and contractual rights and interests.

 

RISKS RELATED TO OUR OFFERING AND OWNERSHIP OF OUR COMMON STOCK

 

The market price of our Common Stock may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the Offering Price.

 

The Offering Price for our Common Stock will be determined by our Company and may vary from the market price of our Common Stock following our Offering. If you purchase our Common Stock in our Offering, you may not be able to resell those shares at or above the Offering Price. Prior to this Offering, our Common Stock were not traded on any market. An active, liquid and orderly trading market for our Common Stock may not develop or be maintained after this Offering. Active, liquid and orderly trading markets usually result in less price volatility and more efficiency in carrying out investors’ purchase and sale orders. We cannot assure you that the Offering Price of our Common Stock, or the market price following our Offering, will equal or exceed prices in privately negotiated transactions of our shares that have occurred from time to time prior to our Offering. The market price of our Common Stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

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  actual or anticipated fluctuations in our revenue and other operating results;
     
  the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
     
  actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
     
  announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;
     
  price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
     
  lawsuits threatened or filed against us; and
     
  other events or factors, including those resulting from war or incidents of terrorism, or responses to these events.

 

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. Stock prices of many companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have filed securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business.

 

We have broad discretion in the use of the net proceeds from our Offering and may not use them effectively.

 

To the extent (i) we raise more money than required for the purposes explained in the section titled “Use of Proceeds” or (ii) we determine that the proposed uses set forth in that section are no longer in the best interests of our Company, we cannot specify with any certainty the particular uses of such net proceeds that we will receive from our Offering. Our management will have broad discretion in the application of such net proceeds, including working capital, possible acquisitions, and other general corporate purposes, and we may spend or invest these proceeds in a way with which our stockholders disagree. The failure by our management to apply these funds effectively could harm our business and financial condition. Pending their use, we may invest the net proceeds from our Offering in a manner that does not produce income or that loses value.

 

We do not intend to pay dividends for the foreseeable future.

 

We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. As a result, you may only receive a return on your investment in our Common Stock if the market price of our Common Stock increases.

 

You will experience immediate and substantial dilution.

 

The Offering Price of our shares is substantially higher than the pro forma net tangible book value per share of our Common Stock. Upon the completion of this offering, if you purchase shares in this offering, you will incur immediate and substantial dilution of your investment. See “Dilution” on page 26.

 

Management did not perform due diligence on market and industry data cited in this prospectus.

 

This prospectus includes market and industry data that has been obtained from third-party sources, including industry publications, as well as industry data prepared by our management on the basis of its knowledge of and experience in the industries in which we operate (including our management’s estimates and assumptions relating to such industries based on that knowledge). Management’s knowledge of such industries has been developed through its experience and participation in these industries. Neither we nor our management have conducted due diligence or independently verified any of the data from such sources referred to in this prospectus or ascertained the underlying economic assumptions relied upon by such sources. Internally prepared and third-party market forecasts, in particular, are estimates only and may be inaccurate, especially over long periods of time. Furthermore, references in this prospectus to any publications, reports, surveys or articles prepared by third parties should not be construed as depicting the complete findings of the entire publication, report, survey or article. If such market and industry data turned out to be inaccurate, management’s belief and perception of our competitive strength may need to be adjusted and, as a result, our business strategy may need to be changed which may have a negative effect on our results of operations.

 

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Our majority stockholder may have significant influence over the outcome of matters submitted to our stockholders for approval, which may prevent us from engaging in certain transactions.

 

As the date hereof, one shareholder owning 100% outstanding equity interest of the Company. Immediately after the closing of the Offering, assuming the maximum amount of Shares have been sold, such shareholder will own 80.54 % of the outstanding equity of the Company. As a result, this majority stockholder may exercise significant influence over all matters requiring stockholder approval, including the appointment of our directors and the approval of significant corporate transactions. This ownership and control may also have the effect of delaying or preventing a future change in control, impeding a merger, consolidation, takeover or other business combination that may be in the best interest of the Company.

 

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud.

 

The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to include a management report on such company’s internal controls over financial reporting in its annual report, which contains management’s assessment of the effectiveness of internal controls over financial reporting.

 

Our reporting obligations as a public company place a significant strain on our management and operational and financial resources and systems. Effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to prevent fraud. As a result, our failure to achieve and maintain effective internal controls over financial reporting may result in the loss of investor confidence in the reliability of our financial statements, which in turn may harm our business and negatively impact the trading price of our stock. Furthermore, we anticipate that we will continue to incur considerable costs and use significant management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act.

 

There is a limited market for our Common Stock, which may make it difficult for holders of our Common Stock to sell their stock.

 

We plan to apply to be listed on OTCQB Market, but there is no assurance that we will be approved for the listing at this point. There is a limited trading market for our Common Stock and at times there is no trading in our Common Stock. Accordingly, there can be no assurance as to the liquidity of any markets that may develop for our Common Stock, the ability of holders of our Common Stock to sell our Common Stock, or the prices at which holders may be able to sell our Common Stock. Further, many brokerage firms will not process transactions involving low price stocks, especially those that come within the definition of a “penny stock.” If we cease to be quoted, holders of our Common Stock may find it more difficult to dispose of, or to obtain accurate quotations as to the market value of our Common Stock, and the market value of our Common Stock would likely decline.

 

We may be subject to the penny stock rules which will make shares of our Common Stock more difficult to sell.

 

We may be subject now and in the future to the SEC’s “penny stock” rules if our shares of Common Stock sell below $5.00 per share. Penny stocks generally are equity securities with a price of less than $5.00. The penny stock rules require broker-dealers to deliver a standardized risk disclosure document prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer must also provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson, and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information must be given to the customer orally or in writing prior to completing the transaction and must be given to the customer in writing before or with the customer’s confirmation.

 

In addition, the penny stock rules require that prior to a transaction, the broker dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. The penny stock rules are burdensome and may reduce purchases of any offerings and reduce the trading activity for shares of our Common Stock. As long as our shares of Common Stock are subject to the penny stock rules, the holders of such shares of Common Stock may find it more difficult to sell their securities.

 

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If a more active trading market for our Common Stock develops, the market price of our Common Stock is likely to be highly volatile and subject to wide fluctuations, and holders of our Common Stock may be unable to sell their shares at or above the price at which they were acquired.

 

The market price of our Common Stock is likely to be highly volatile and could be subject to wide fluctuations in response to a number of factors that are beyond our control, including:

 

  quarterly variations in our revenues and operating expenses;

 

  developments in the financial markets and worldwide economies;

 

  announcements of innovations or services by us or our competitors;

 

  announcements by the PRC government relating to regulations that govern our industry;

 

  significant sales of our Common Stock or other securities in the open market;

 

  variations in interest rates;

 

  changes in the market valuations of other comparable companies; and

 

  changes in accounting principles.

 

The rights of the holders of our Common Stock may be impaired by the potential issuance of preferred stock.

 

Our board of directors has the right to create a new series of preferred stock. As a result, the Board of Directors may, without stockholder approval, issue preferred stock with voting, dividend, conversion, liquidation or other rights that may adversely affect the voting power and equity interest of the holders of our Common Stock. Although we have no present intention to issue any additional shares of preferred stock or to create any new series of preferred stock, we may issue such shares in the future.

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward looking statements that involve risks and uncertainties, principally in the sections entitled “Description of Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All statements other than statements of historical fact contained in this prospectus, including statements regarding future events, our future financial performance, business strategy and plans and objectives of management for future operations, are forward-looking statements. We have attempted to identify forward-looking statements by terminology including but not limited to “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plans,” “potential,” “predict,” “should,” or “will” or the negative of these terms or other comparable terminology. Although we do not make forward looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks outlined under “Risk Factors” or elsewhere in this prospectus, which may cause our or our industry’s actual results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for us to predict all risk factors, nor can we address the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause our actual results to differ materially from those contained in any forward-looking statements. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements.

 

You should not place undue reliance on any forward-looking statement, each of which applies only as of the date of this prospectus. Before you invest in our securities, you should be aware that the occurrence of the events described in the section entitled “Risk Factors” and elsewhere in this prospectus could negatively affect our business, operating results, financial condition and stock price. Except as required by law, we undertake no obligation to update or revise publicly any of the forward-looking statements after the date of this prospectus to conform our statements to actual results or changed expectations.

 

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ITEM 4. USE OF PROCEEDS.

 

Our Offering is being made on a self-underwritten basis: no minimum number of Shares must be sold in order for the offering to proceed. The Offering Price per Share is $1.00 and we intend to sell up to 5,000,000 Shares for a total of $5,000,000.

 

We currently have $67.0 million bank loan available for us to use as working capital. $66.3 million has been used, which may mature from December 2018 to July 2027. In addition, our shareholders have funded the Company on as needed basis. For the twelve months ended December 31, 2017, our shareholders have loaned us the aggregate amount of $1.05 million. To the extent necessary to support our business, our shareholders may loan us additional funds in the future. See “Liquidity and Capital Resources ” on page 58.

 

We intend to use the net proceeds to carry out our renovation plan. Subject to the adjustments from time to time, our estimated cost of renovation in 2018 is approximately $2.87 million and the cost of repurchase including the enforcement of pending judgment is approximately $28.43 million. See “Our Project: Renovation of Victory Plaza” on page 34. In addition to public offering, we plan to raise funds for the renovation as follows: (a) $18.3 million from bank loan in 2018, (b) $30.7 million from non-bank institute loan in 2019, (c) $46.1 million from Chinese government sponsored interest free renovation loan in 2020. If such financing is not available on terms acceptable to us, the project will be delayed until appropriate financing is available. In the event that we do not raise sufficient proceeds to satisfy such needs or if we raise additional proceeds exceeding such needs, we intend to use the proceeds from this offering in the following order to fund i) the repurchase of the properties under which owners have exercised their purchase-back options and the enforcement of the pending judgment against us in the same aspect, ii) the direct renovation and enlargement of the Victory Plaza; iii) general working capital to meet the needs of the continued development and operation of the Victory Plaza; and iiv) other general working capital and corporate purpose.

 

ITEM 5. DETERMINATION OF OFFERING PRICE

 

The Offering Price of the shares has been determined arbitrarily by us. The price does not bear any relationship to our assets, book value, earnings, or other established criteria for valuing a privately held company. In determining the number of shares to be offered and the Offering Price, we took into consideration our cash on hand and the amount of money we would need to implement our renovation plan. Accordingly, the Offering Price should not be considered an indication of the actual value of the securities.

 

ITEM 6. DILUTION

 

The price of the current offering is fixed at $1.00 per share. Dilution represents the difference between the Offering Price and the net tangible book value per share immediately after completion of this offering. Net tangible book value is the amount that results from subtracting total liabilities and intangible assets from total assets. Dilution arises mainly as a result of our arbitrary determination of the Offering Price of the shares being offered. Dilution of the value of the shares you purchase is also a result of the lower book value of the shares held by our existing stockholder. The following compare the differences of your investment in our shares with the investment of our existing stockholder.

 

As of June 30, 2018 , the net negative tangible book value of our shares of Common Stock was negative ($234,375,289) or ($11.32) per share based upon 20,700,000 shares outstanding. 

 

If 100% of the Shares Are Sold:

 

Upon completion of this offering, in the event all of the shares are sold, the net negative tangible book value of the 25,700,000 shares to be outstanding will be approximately ($9.1 2 ) per share. The net negative tangible book value of the shares held by our existing stockholder will be decreased by $2.2 0 per share without any additional investment on their part.

 

After completion of this offering, if 5,000,000 shares are sold, investors in the offering will own 19.46% of the total number of shares then outstanding for which they will have made cash investment of $5,000,000, or $1.00 per share. Both the 19.46% ownership and $5,000,000 cash investment are in the aggregate. Our existing sole stockholder will own 80.54% of the total number of shares then outstanding, for which he has made contributions of cash totaling $2,070 or approximately $0.0001 per share.

 

If 75% of the Shares Are Sold

 

Upon completion of this offering, in the event 3,750,000 shares are sold, the net negative tangible book value of the 24,450,000 shares to be outstanding will be approximately ($9. 59 ) per share. The net negative tangible book value of the shares held by our existing stockholder will be decreased by $1.74 per share without any additional investment on their part.

 

After completion of this offering investors in the offering will own 15.34% of the total number of shares then outstanding for which they will have made cash investment of $3,750,000, or $1.00 per share. Both the 15.34% ownership and $3,750,000 cash investment are in the aggregate. Our existing sole stockholder will own 84.66% of the total number of shares then outstanding, for which he has made contributions of cash totaling $2,070 or $0.0001 per share.

 

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If 50% of the Shares Are Sold

 

Upon completion of this offering, in the event 2,500,000 shares are sold, the net negative tangible book value of the 23,200,000 shares to be outstanding will be approximately ($10. 10 ), per share. The net negative tangible book value of the shares held by our existing stockholder will be decreased by $1.22 per share without any additional investment on their part.

 

After completion of this offering investors in the offering will own approximately 10.78% of the total number of shares then outstanding for which they will have made cash investment of $2,500,000, or $1.00 per share. Both the 10.78% ownership and $2,500,000 cash investment are in the aggregate. Our existing sole stockholder will own approximately 89.22% of the total number of shares then outstanding, for which he has made contributions of cash totaling $2,070 or $0.0001 per share.

 

If 30% of the Shares Are Sold

 

Upon completion of this offering, in the event 1,500,000 shares are sold, the net negative tangible book value of the 22,200,000 shares to be outstanding will be approximately ($10. 56 ) per share. The net negative tangible book value of the shares held by our existing stockholder will be decreased by $0.77 per share without any additional investment on their part.

 

After completion of this offering investors in the offering will own approximately 6.76% of the total number of shares then outstanding for which they will have made cash investment of $1,500,000, or $1.00 per share. Both the 6.76% ownership and $1,500,000 cash investment are in the aggregate. Our existing sole stockholder will own approximately 93.24% of the total number of shares then outstanding, for which he has made contributions of cash totaling $2,070 or $0.0001 per share.

 

If 25% of the Shares Are Sold

 

Upon completion of this offering, in the event 1,250,000 shares are sold, the net negative tangible book value of the 21,950,000 shares to be outstanding will be approximately ($10. 68 ) per share. The net negative tangible book value of the shares held by our existing stockholder will be decreased by $0.6 4 per share without any additional investment on their part.

 

After completion of this offering investors in the offering will own approximately 5.69% of the total number of shares then outstanding for which they will have made cash investment of $1,250,000, or $1.00 per share. Both the 5.69% ownership and $1,250,000 cash investment are in the aggregate. Our existing sole stockholder will own approximately 94.31% of the total number of shares then outstanding, for which he has made contributions of cash totaling $2,070 or $0.0001 per share.

 

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The following table compares the differences of your investment in our shares with the investment of our existing stockholder.

 

Existing Stockholder if all of the Shares are Sold:    
Price per share  $1.00 
Net negative tangible book value per share before offering  $(11.3 2 )
Potential gain to existing shareholders  $N/A 
Net negative tangible book value per share after offering  $(9.1 2 )
Decrease to present stockholder in net negative tangible book value per share after offering  $(2.2 0 )
Capital contributions  $2,070 
Number of shares outstanding before the offering   20,700,000 
Number of shares after offering assuming the sale of the maximum number of shares   25,700,000 
Percentage of ownership after offering   80.54%
Purchasers of Shares in this Offering if all 100% Shares Sold     
Price per share  $1.00 
Dilution per share  $(10.1 2 )
Capital contributions  $5,000,000 
      
Percentage of capital contributions by existing shareholders   0.04%
Percentage of capital contributions by new investors   99.96%
Number of shares after offering held by new investors   5,000,000 
Percentage of ownership after offering   19.46%
Purchasers of Shares in this Offering if 75% of Shares Sold     
Price per share  $1.00 
Dilution per share  $(10. 59 )
Capital contributions  $3,750,000 
Percentage of capital contributions by existing shareholders   0.06%
Percentage of capital contributions by new investors   99.94%
Number of shares after offering held by new investors   3,750,000 
Percentage of ownership after offering   15.34%
Purchasers of Shares in this Offering if 50% Shares Sold     
Price per share  $1.00 
Dilution per share  $(11.1 0 )
Capital contributions  $2,500,000 
Percentage of capital contributions by existing shareholders   0.08%
Percentage of capital contributions by new investors   99.92%
Number of shares after offering held by new investors   2,500,000 
Percentage of ownership after offering   10.78%
Purchasers of Shares in this Offering if 30% Shares Sold     
Price per share  $1.00 
Dilution per share  $(11. 56 )
Capital contributions  $1,500,000 
Percentage of capital contributions by existing shareholders   0.14%
Percentage of capital contributions by new investors   99.86%
Number of shares after offering held by new investors   1,500,000 
Percentage of ownership after offering   6.76%
Purchasers of Shares in this Offering if 25% of Shares Sold     
Price per share  $1.00 
Dilution per share  $(11. 68 )
Capital contributions  $1,250,000 
Percentage of capital contributions by existing shareholders   0.17%
Percentage of capital contributions by new investors   99.83%
Number of shares after offering held by new investors   1,250,000 
Percentage of ownership after offering   5.69%

 

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ITEM 7. SELLING SECURITIES HOLDERS

 

Not applicable

 

ITEM 8. PLAN OF DISTRIBUTION

 

We have 20,700,000 shares of Common Stock issued and outstanding as of the date of this prospectus. We are registering an additional 5,000,000 shares of our Common Stock for sale at the price of $1.00 per share. There is no arrangement to address the possible effect of the offering on the price of the stock.

 

We intend to offer our securities through our management and our controlling shareholder. In connection with the Company’s selling efforts in the Offering, our management and/or controlling shareholder will not register as a broker-dealer pursuant to Section 15 of the Exchange Act, but rather will rely upon the “safe harbor” provisions of SEC Rule 3a4-1, promulgated under the Exchange Act. Generally speaking, Rule 3a4-1 provides an exemption from the broker-dealer registration requirements of the Exchange Act for persons associated with an issuer that participate in an offering of the issuer’s securities. None of our management and/or controlling shareholder is subject to any statutory disqualification, as that term is defined in Section 3(a)(39) of the Exchange Act. Our management and/or controlling shareholder will not be compensated in connection with his participation in the Offering by the payment of commissions or other remuneration based either directly or indirectly on transactions in our securities. Any of our management and/or controlling shareholder is not, nor has he been within the past 12 months, a broker or dealer, and he is not, nor has he been within the past 12 months, an associated person of a broker or dealer. At the end of the offering, our management and/or controlling shareholder will continue to primarily perform substantial duties for the Company or on its behalf otherwise than in connection with transactions in securities. Our management and/or controlling shareholder will not participate in selling an offering of securities for any issuer more than once every 12 months other than in reliance on Exchange Act Rule 3a4-1(a)(4)(i) or (iii).

 

We will receive all proceeds from the sale of up to 5,000,000 Shares being offered. The price per Share is fixed at $1.00 for the duration of this Offering. No public market currently exists for our shares of Common Stock. There is presently no public market for our shares of Common Stock. We intend to apply to have our shares quoted on the OTC Bulletin Board, or OTCBB, promptly after the date of this prospectus. We cannot guarantee that our securities will be approved for quoting on OTCBB. We cannot assure you that our securities will continue to be quoted on OTCBB after this offering. We also intend to apply to have out shares listed on OTCQB market.

 

The Shares may be sold to purchasers from time to time directly by and subject to our discretion. Further, the Company will not offer its shares for sale through underwriters, dealers, agents or anyone who may receive compensation in the form of underwriting discounts, concessions or commissions from the Company and/or the purchasers of the shares for whom they may act as agents. The shares of Common Stock sold by the Company may be occasionally sold in one or more transactions; all shares sold under this prospectus will be sold at a fixed price of $1.00 per share.

 

In order to comply with the applicable securities laws of certain states, the securities will be offered or sold in those only if they have been registered or qualified for sale; an exemption from such registration or if qualification requirement is available and with which we have complied.

 

In addition and without limiting the foregoing, we will be subject to applicable provisions, rules and regulations under the Exchange Act with regard to security transactions during the period of time when this Registration Statement is effective.

 

We will pay all expenses incidental to the registration of the shares (including registration pursuant to the securities laws of certain states) which we expect to be $408,435.50 ($159,403 of which has already been paid to cover for the offering expenses).

 

Offering Period and Expiration Date

 

This offering will start on the date that this registration statement is declared effective by the SEC and continue for a period of 180 days. The offering shall terminate on the earlier of (i) the date when the sale of all 5,000,000 shares is completed, (ii) when the Board of Directors decides that it is in the best interest of the Company to terminate the offering prior the completion of the sale of all 5,000,000 shares registered under the Registration Statement of which this Prospectus is part, and (iii) 180 days of the effective date of this registration statement.

 

We will not accept any money until this registration statement is declared effective by the SEC.

 

Procedures for Subscribing

 

If you decide to subscribe for any shares in this offering, you must:

 

- execute and deliver a subscription agreement; and

 

- deliver a check or certified funds to us as instructed in the subscription agreement for acceptance or rejection.

 

All checks for subscriptions must be made payable to “Victory Commercial Management Inc.”. No subscription may be executed nor funds delivered prior to effectiveness of the registration statement.

 

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Right to Reject Subscriptions

 

We have the right to accept or reject subscriptions in whole or in part, for any reason or for no reason. All monies from rejected subscriptions will be returned immediately by us to the subscriber, without interest or deductions. Subscriptions for securities will be accepted or rejected within 72 hours after we receive them.

 

ITEM 9. DESCRIPTION OF SECURITIES TO BE REGISTERED

 

The authorized capital of the Company is 600,000,000 shares of Common Stock with a par value of $0.0001 per share.

 

Common Stock

 

As of the date hereof, 20,700,000 shares of our Common Stock are issued and outstanding.  Holders of our Common Stock have the following rights: (i) equal ratable rights to dividends from funds legally available therefore, when, as and if declared by the Board of Directors of the Company; (ii) is entitled to share ratably in all of the assets of the Company available for distribution to holders of Common Stock upon liquidation, dissolution or winding up of the affairs of the Company (iii) does not have preemptive, subscription or conversion rights and there are no redemption or sinking fund provisions or rights applicable thereto; and (iv) is entitled to one non-cumulative vote per share on all matters on which stock holders may vote. Please refer to the Company’s Articles of Incorporation, Bylaws and the applicable statutes of the State of Nevada for a more complete description of the rights and liabilities of holders of the Company’s securities.

 

Preferred Stock

 

We do not have an authorized class of preferred stock.

 

Share Purchase Warrants

 

We have not issued and do not have any outstanding warrants to purchase shares of our Common Stock.

 

Options

 

We have not issued and do not have any outstanding options to purchase shares of our Common Stock.

 

Convertible Securities

 

We have not issued and do not have any outstanding securities convertible into shares of our Common Stock or any rights convertible or exchangeable into shares of our Common Stock.

 

Anti-Takeover Law

 

Currently, we have no Nevada shareholders and since this offering will not be made in the State of Nevada, no shares will be sold to its residents. Further, we do not do business in Nevada directly or through an affiliate corporation and we do not intend to do so. Accordingly, there are no anti-takeover provisions that have the affect of delaying or preventing a change in our control.

 

Dividend Policy

 

We have never declared or paid any cash dividends on our Common Stock. We currently intend to retain future earnings, if any, to finance the expansion of our business. As a result, we do not anticipate paying any cash dividends in the foreseeable future.

 

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ITEM 10. INTEREST OF NAMED EXPERTS AND COUNSEL

 

Legal Matters

 

Certain legal matters with respect to the shares of Common Stock offered hereby will be passed upon for us by Hunter Taubman Fischer & Li LLC, New York, New York 10036.

 

Experts

 

The audited consolidated financial statements of Victory Commercial Management Inc. and Subsidiaries included herein and elsewhere in the registration statement have been audited by RBSM LLP, independent registered public accounting firm, for the periods and to the extent set forth in their Report appearing herein and elsewhere in the registration statement. Such financial statements have been so included in reliance upon the report of such firm given upon the firm’s authority as expert in accounting and auditing.

 

ITEM 11. INFORMATION WITH RESPECT TO THE REGISTRANT

 

BUSINESS OVERVIEW

 

VCM is a Nevada corporation that operates through its subsidiaries VCI and Sino Pride to control two joint ventures formed under the laws of the PRC. DVPD is a joint venture formed under the laws of the PRC (80% equity interest owned by Sino Pride). DVBM is a joint venture formed under the laws of PRC. DVBM is 95% owned by Sino Pride and 5% owned by DVPD. DVPM is a PRC entity 100% owned by Sino Pride. The Company primarily engages in the business of commercial real estate lease and management with a multi-functional shopping center in Dalian, Liaoning Province of China. DVBM focuses on providing day-to-day management operations of the Victory Plaza which is to be renovated pursuant to the Company’s business plan. DVPM is recently formed as a property management company and will play similar role as DVBM to improve the management of Victory Plaza. DVPD is focused on rental income. The Victory Plaza after renovation is expected to offer multiple services including but not limited to shopping, entertainment, restaurants, social and recreation.

 

Industry Overview

 

China’s retail sector sees modest growth in recent years. China has become the world’s second largest retail and consumer market after the U.S. since 2014. Total retail sales increased nominally by 10.4% year over year (YOY) to reach RMB33.2 trillion (approximately USD$4.8 trillion) in 2016. In real terms, retail sales of consumer goods increased by 9.6%. Consumer confidence index gradually picked up towards the end of 2016, indicating that the consumption atmosphere in China remained positive. Middle-class consumers in China, particularly the millennials, are becoming increasingly influential in the retail sector. It is estimated that more than 75% of China’s urban consumers will earn between RMB60,000 (approximately USD$8,642) and RMB229,000 (approximately USD$32,983) per year by 2022. Total sales of the Top 100 retail chain operations (Top 100s) in 2015 were RMB2.1 trillion (approximately USD$0.3 trillion), up 4.3% YOY. The total sales of the Top 100s increased at the slowest pace since 2007, and the growth rate was slower than for national total retail sales of consumer goods over five consecutive years. Having said that, the performance of individual enterprises varied, those who can better adjust to the current environment and can cope with the changing consumer needs as well as increasing competition from online retailer’s demonstrated better results. Meanwhile, domestic retailers in the Top 100s outperformed foreign players. (Source link: https://www.fbicgroup.com/sites/default/files/SCR2017_full.pdf)

 

Rise of the “New Retail” Regime

 

The term “New Retail” has been a buzz phrase in China’s retail sector in recent years. Many retailers – especially traditional ones with large physical stores – have striven hard to adapt to the new online reality by reinventing and transforming their business models and formats. Another significant development under the “New Retail” regime is for more retailers to leverage Internet and advanced technologies such as Virtual Reality and Augmented Reality to offer experience- and lifestyle-driven opportunities. Physical stores are no longer just places for selling goods but also venues providing a combination of artistic, cultural, social and entertainment elements. Moreover, the deployment of online-to-offline (O2O) business strategies by retailers to enhance shopping experience is also a key development.

 

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Local Market Overview Market

 

Dalian City

 

Dalian is a major city and seaport in the south of Liaoning Province, China. It is the southernmost city of Northeast China and at the tip of the Liaodong Peninsula. Dalian is the province’s second largest city and has sub-provincial administrative status. Dalian, a financial, shipping and logistics center for Northeast Asia, was named China’s most livable city by China Daily in 2006. Touted as a gateway to Northeast China, the coastal city in southern Liaoning province is at the heart of the central government’s agenda to revitalize the region. Dalian is a mature seaport city that has benefited greatly from strong Japanese investment, and is now considered as a transitional “Tier 1.5” city as it has been among the quickest to prosper and develop, regionally. Dalian enjoys a higher disposable income per capita than all three of China’s north-eastern provincial capitals. The relatively strong incomes of local residents have helped consumerism and brand recognition take hold in Dalian. Domestic tourism is also a driver of Dalian’s retail market, with some 52.3 million domestic tourists and 1.2 million foreign visitors coming to the city for its mountain and water scenery, pushing up retail sales to RMB 253 billion in 2013. Overall, the city’s steady development of a modern retail market continues to attract an increasing number of international retailers, with Dalian often chosen as an entry point into the country’s northeast region.

 

Dalian is a sub-provincial city of Liaoning Province and is located at the southern tip of Liaodong Peninsula. Situated on the coast of the Huanghai Sea and the Bohai Sea, backed by the hinterland of northeast China and across the sea from the Shandong Peninsula, it is an important economic, trade, port, industrial and tourism city in the eastern costal area of China. There is 6.987 million of resident population in Dalian. The “Study Report on Livable Cities in China” published by the Chinese Academy of Sciences on June 14, 2016 showed that the livable index of Dalian ranked fourth in 40 cities nationwide. On December 30, 2016, the National Development and Reform Commission and other three departments identified Dalian, one of the 13 cities, as the demonstrative city for reform of private economy in northeast China. Meanwhile, Dalian is the permanent host city of summer Davos of the World Economic Forum (WEF).

 

(Source link: https://www.joneslanglasalle.com.cn/China/en-gb/Documents/an-overview-of-30-retail-locations-in-China.pdf)

 

Dalian Shopping Districts (“Qingniwa”)

 

The primary retail area, Qingniwa, is the traditional heart of the city, having witnessed the emergence of the city’ s first department store (Mackay Mall) and the first large shopping mall (New Mart Shopping Plaza). The area is now home to many department stores of various sizes, large shopping malls as well as street stores with most retail centers owned by a local developer called Dashang Group.

 

Qingniwa is the birthplace of Dalian city, and also the place of origin of Dalian’s commerce. It is located in Zhongshan District, near the Dalian Railway Station. The transportation is convenient with over 30 bus stops and the Metro Line 2 and future Metro Line 5 crossing here. The Victory Plaza is one of the most important projects in the Qingniwa business district. The opening of Victory Plaza in Qingniwa district will renovate the aged business street of Qingniwa into a new core commercial area filled with fashionable and energetic young customers and business people.

 

As a mature center of middle and high-end retailers, Qingniwa business district also witnessed the emergence of entry luxury brands. The Parkland Mall is popular here, and the Dashang Group, the largest retailer in northeastern China also operates several successful projects here, with department stores remain as the predominant retail format. In addition, pedestrian Mall is the highlight of this business district. This retail-orientated market has a large flow of people with very convenient traffic conditions.

 

Here gathered a variety of large-scale department stores, shopping malls, brand chains and franchise stores covering catering, shopping, entertainment, leisure and business and other functions. There are middle and high-end large-scale restaurants, all kinds of branded and characteristic Chinese and Western restaurants, coffee shops, fitness center, CGV cinema and other movie theaters, NEW-MART supermarket, Gome and Suning appliance flagship store, which can fully meet various needs of consumers.

 

Our unique location

 

Victory Plaza, opened in 1998 as an underground traditional retail shopping center, has built a solid customer base. Victory Plaza is located at the intersection of commercial center and traffic center of Dalian City. It relies on the railway station to the north, joins Tianjin Street (traditional pedestrian commercial street) to the east, and directly connects the Qingniwa business district (Dalian municipal level shopping district) in the southwest. It is surrounded by 52 bus routes, and connected directly to the Metro Line 2 and Line 5, with unique four-sided positive advantages. The Qingniwa business district where the project belongs to is the most important traditional core business district in Dalian. It is crowded with cars and people, a place contented for by merchants; meanwhile, it is surrounded by large supermarkets, star hotels and famous flagship stores, strived for by well-known brands.

 

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Benefited from its excellent geographical location and special passageway function, Victory Plaza is a commercial project with the biggest passenger flow volume in Dalian. The surrounding Qingniwa business district is the most prosperous area in Dalian. Meanwhile, it is close to the Dalian Railway Station, with 54 bus stations within 1 km of the surrounding area, and 2 metro lines intersecting here. The daily passenger flow volume of it exceeds 500,000 within 1 km, serving as a significant guarantee for the development of the project.

 

Our Business Plan and Strategy:

 

Developing a Multifunctional Victory Plaza catering to the millennial

 

We intend to develop a Victory Plaza capable of offering millennials unique experiences. The millennial generation is generally more educated, technologically advanced than the previous generation. Given that tech-savvy millennials have a natural preference for online shopping, a shopping center needs to create an emotional connection to get them away from their cellphones and computers. Our strategy is to present millennials multi-dimensional experiences covering a variety of topics attracting their interests such as fitness, food, fashion, beauty, entertainment and parenting. Our goal is to convert a simple shopping trip into an exciting adventure. We are constantly conducting market analysis to identify millennials’ primary interests and modify our business plan accordingly.

 

Committed to providing “new retail” experience in align with the future of shopping

 

As ecommerce becomes an irreversible trend that takes a heavy toll on traditional retailers, the solution for both Chinese and Western retailers is innovation. We are committed to develop an integrated omni-channel model that capitalizes on online and offline strengths, delivers a seamless and compelling customer experience, and increases efficiency in inventory management, product selection, and logistics. In this digital world, the distinction between online and offline commerce gradually becomes a blur, and the way the consumer thinks and behaves across all channels determine the way the merchant runs its business. We intend to focus on engaging the customer through personalized content and develop capabilities across marketing, innovation, and logistics to adapt to ever-evolving customer needs.

 

Improving the Business Mix by Attracting Appropriate New Tenants

 

Although the DVPD will not face a vacancy problem, it is important to be pro-active about the future and consider possible businesses that would assist in achieving our vision for DVPD. We intend to strengthen our Victory Plaza’s business mix by attracting more cafes with provision for breakfast and lunch, more local food shops specializing in traditional Dalian Cuisine and juice bars, more variety in take-away food shops including chain stores, fitness center and karaoke lounge. We intend to establish a pro-active process to attract these types of new businesses into our Victory Plaza to remain attractive to local residents and tourists. In some circumstance, we will directly approach the desired new types of businesses (e.g., good businesses in other shopping centers particularly those looking to expand; new businesses looking to establish in Dalian) present them with our business plan, and encourage them to look at DVPD and be ready to take up any vacant premise or be part of any new development.

 

Aim to attract local consumers and tourists.

 

We target to attract, after the Renovation, stylish youth, white-collar workers, office staffs in surrounding office buildings, enterprise workers, students and freelance workers, as well as tourists, resident residents and Dalian citizens. The resident population of Dalian is nearly 7 million, the young and middle-aged dominated migrant population is over 1 million; the project has abundant customer resource. As a tourist city, Dalian received a total of 77.38 million tourists in 2016, an increase of 11.74% over the same period of last year. The total tourism revenue reached to 113.5 billion yuan, up by 12.5%. During the peak tourist season of each year (from June to October), the domestic and overseas customers all come to this place for shopping, dining and relaxation. (source link: http://www.sohu.com/a/124353280_114731)

 

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Ownership of Retail Shops:

 

As stated previously, Victory Plaza is approximately 137,500 square meters (1,480,038 square feet), which is owned and occupied by various retailers (See, “Description of Property – Rental Property”). The ownership of each retailer’s space falls into one of the four following categories:

 

Group(1)  Level of Ownership of Retail Space  Percentage of Victory Plaza
A  DVPD has title  18%, or 24,201 square meters (260,497 square feet)
       
B  Current occupant/retailer has title; occupant/retailer has an option, which is in his/her sole discretion to exercise , to require the Company buy back the space  9%, or 12,046 square meters (129,662 square feet)
       
C  SML has title(2)  5% or 6,876 meters square (74,013 square feet)
       
D  Current occupant/retailer has title; no additional ownership rights  68%, or 94,431 square meters (1,016,446 square feet)

 

(1)The categories are broken down for disclosure purposes; the Company does not maintain a similar alphabetical labelling system on its books.
   
(2)

On December 29, 2017, the Company entered and executed SML Agreement, pursuant to which, SML has bought back certain properties from the owners (See, “Description of Property – SML Agreement”).

 

Our Project: Renovation of Victory Plaza

 

In order to adjust to a New Retail and adapt to today’s consumer demographics, we decided to renovate and upgrade Victory Plaza to become a large-sized multifunctional shopping center, which will differ significantly from a traditional retail shopping center.

 

We expect that the essential services provided by tenants at Victory Plaza include:

 

  Health & Wellness Services,
     
  Specialty Retail,
     
  Entertainment, Beauty & Other Services,
     
  Dining, and
     
  Internet café

 

The Victory Plaza tenants may also focus on:

 

  Clothing
     
  Fitness
     
  Education
     
  Movie and Theater
     
  Medical and pharmacies
     
  Other consumer staples or frequently purchased goods and services.

 

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After the renovation, our targeted tenants will engage in the local community and tend to have customers and clients that drive to the retail center and have an in-person individualized shopping experience that is less likely to be replaced by e-commerce alternatives.

 

We believe the consumers will continue to focus not only on what they want, but the durable and staple consumer goods that they need to purchase on a recurring basis. Traditional shopping centers typically have a few anchor tenants and rely on foot traffic which has experienced a decline as consumer behavior shifts to more e-commerce alternatives. This shift in consumer behavior and the financial distress of certain retailers that anchor traditional larger shopping malls and the loss of same store sales by some of these retailers have resulted in decreased financial performance and future prospects by many traditional shopping centers. We expect that Victory Plaza, after renovation, will not be anchored by such large or traditional retailers and will have tenants that we expect will be more resilient to e-commerce alternatives by providing essential services.

 

The direct renovation cost including the construction, regulatory approval, labor and administration & miscellaneous is estimated at $11.2 million. We need additional $83.9 million to buy back the properties that we sold to third parties with a purchase-back option in order to conduct our renovation. The total anticipated cost to complete the renovation is approximately $95.1 million.

 

The current schedule of the renovation is as follows:

 

Period   Renovation Focus   Cost of direct renovation (USD)   Cost of repurchase (USD)   Total cost (USD)
2018  

Renovating the “Self-service Vending Experience Area” and “Beauty Care Life Hall” Reconstructing “Culture and Creation Streets”, renovating and upgrading certain areas as “Victory Market”, “Famous Local Food Streets”, “Zhenhua Korean City” and “Shoes Bazaar”, decorating public area, landscaping and signboards, etc.

  2.87 million   28.43 million   31.30 million
                 
January –June, 2019   Reconstructing “Theme Restaurant”, “Metropolis Brand”, decorating certain areas and public areas and flipping small shops into big stores.   2.03 million   5.30 million   7.33 million
                 
July-December, 2019   Reconstructing “Children Place”, “Culture & Tourism Street”, “Gentleman’s Hall”, “Sports Hall”, “KTV Bar”, “Crossover Apparel Store”, combining local stores and decorating the passages and signboards, etc.   2.38 million   18.25 million   20.63 million
                 
January –June, 2020   Reconstructing “Culture & Technology Square” and decorating public passages of cross street of each floor.   1.07 million   5.88 million   6.95 million
                 
July-December, 2020   Reconstructing “open square urban park”, phase II of “Culture and Creation Streets” and passages of cross street of each floor, etc.   2.87 million   26.03 million   28.90 million
Total       11.22 million   83.89 million   95.11 million

  

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In addition to public offering, we plan to raise funds for the renovation as follows: (a) $18.3 million from bank loan in 2018, (b) $30.7 million from non-bank institute loan in 2019, (c) $46.1 million from Chinese government sponsored interest free renovation loan in 2020 . If such financing is not available on terms acceptable to us, the project will be delayed until appropriate financing is available. As a result, the timelines for the Renovation described above are subject to adjustment pending the status of outside financing. Please see risk of “We may not be able to obtain sufficient capital and may be forced to limit the scope of operation” on page 11, risk of “One of our operating subsidiaries has been listed as a “dishonest debtor” by PRC courts due to the litigations filed against us. Until such subsidiary has been cleared by PRC courts, that designation may materially adversely affect our ability to obtain financings, thus affecting our renovation plan” on page 14 and “Liquidity and Capital Resources ” on page 58. for more details.

 

As of the date hereof, we have obtained 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.

 

Our Rental Income and Income from Common Area Management:

 

Our Victory Plaza currently has approximately 3,100 rental units. Among these rental properties, the Company owned approximately 500 units and 2,600 units were sold. The Company will lease back part of those sold property at the owner’s will and rent out to the tenants. As of December 31, 2017, and 2016, the Company had 23 and 249 lease-back units respectively. Our rent income was approximately $3.3 million and $3.9 million for the years ended December 31, 2017 and 2016, respectively. We expect the renovation to attract more tenants, which will increase our rental income accordingly.

 

We currently provide common area management services to all tenants leasing properties we own or occupying the property we do not own and shop owners that we sold the property to with or without a purchase-back option. Common area management services include utilities, security, cleaning, fire service, landscaping, public facilities maintenance and other traditional services provided by a property management office. Our management income was approximately $5.0 million and $4.8 million for the year ended December 31, 2017 and 2016, respectively.

 

The following is a charge table of management fee.

 

Property location and class   RMB / per square foot     US $ / per square feet  
Most popular location with highest footprints     110       17  
second popular location     119       18  
third popular location     137       21  
the least popular location     133       20  
Exchange rate as of 12/31/2017             6.5075  

 

Electricity charge has three options: a, meter reading – per actual usage; b, electricity card – pay as you go; c, one-time charge. Due to price of electricity is varying in peak hours plus wastage during the usage, the electricity price we charged to tenant will slightly higher than the price we paid to the electrical supplier. Utility expenses collected from tenant directly will offset our utility expenses paid to utility companies. We report net amount of utility charge as our management income.

 

Victory Plaza, after the renovation, will not be anchored by such large or traditional retailers and will have tenants that we expect more resilient to e-commerce alternatives by providing essential services and experiences. In addition, after the renovation, we intend to expand our services to provide agency for franchises, training and consultation for shop operation, shop design, agency for shop lease and sale, marking design and broadcast of merchandise, expedited and guaranteed repairs, small amount credit loan to tenants and owners and other one-to-one concierge-like services. As a result, we expect that our rent income will increase accordingly after the renovation. However, we cannot guarantee that will be the case or we can successfully raise the funds we need to complete the renovation.

 

Competition

 

We face intense competition in the Dalian retail industry. Our primary competition comes from ecommerce. China’s retail industry including Dalian is undergoing a major shift as a result of rapidly changing consumer behavior, adoption of technology, the emergence of local competitors and the surge of ecommerce. Retail ecommerce sales in China reached $1.1 trillion in 2017, an increase of 39 % from 2016. Although retail growth is expected to continue in the healthy double digits over the next three years, it is primarily driven by ecommerce. By 2020, retail ecommerce is expected to make up more than 37% of total retail sales in China. In Dalian, we also compete fiercely with local multifunctional shopping centers who offer similar services such as Olympia 66 Plaza, New Mart Shopping Plaza, Galleria Shopping Plaza, and Dalian Friendship Victory Plaza.

 

(source link: https://retail.emarketer.com/article/China-glut-of-shopping-malls/59318504ebd4000b2ceae033)

(source link: http://www.100ec.cn/zt/17wlls/)

 

Particularly in the Qingniwa District, we compete with Century City Victory Plaza, Pavilion Victory Plaza, New Mart Shopping Plaza, which all aspire to be multifunctional shopping centers and to a certain degree offer similar services to ours. However, we believe we compete favorably with them because of our diverse tenant base, millennial -focused marketing strategy, and experience-oriented shopping services.

 

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Our Competitive Strength:

 

Experienced Victory Plaza Management Team.

 

We have a professional team with significant experience in commercial real estate management, particularly in shopping center management. Members of the Company’s team have had work experience with well-known shopping center management companies in different cities.

 

Preferred Shopping Destination

 

Strategically located in Dalian’s most important financial district “Qingniwa”, also known as Dalian’s premier shopping, dining, and entertainment destination, our Victory Plaza had no problem of attracting a large volume of consumers in the past. It has easy access to public transportation and is within walking distance to Dalian’s central train station. Qingniwa is also a popular destination for both domestic and international tourists, which bestow the Victory Plaza the potential to become a tourist landmark.

 

No Shortage of Tenants

 

We expect to attract more tenants after renovation. For years we have maintained a strong relationship with our existing tenants and continue to attract new tenants that are nationally recognized corporations or professional services providers alike.

 

Corporate History

 

Victory Commercial Management Inc. (hereinafter referred to as the “Company”, “VCM”, and where appropriate, the terms “Company”, “we”, “us” or “our” are also referred to VCM and its wholly owned and majority owned subsidiaries as a whole) was incorporated on July 5, 2017 under the laws of Nevada.

 

On July 13, 2017, VCM formed a wholly-owned subsidiary, Victory Commercial Investment Ltd. (“VCI”) under the laws of British Virgin Islands.

 

Sino Pride Development Limited (“Sino Pride”) is a Hong Kong company, incorporated on May 26, 1989. Sino Pride is a holding company who is directly owned 80% equity interest of Dalian Victory Plaza Development Co., Ltd. (“DVPD”) and is directly owned 95% equity interest of 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 stated owned enterprise in China, owns 20% equity interest of DVPD.

 

DVBM was incorporated as a joint venture on September 12, 2000 under the laws of PRC. Sino Pride owns 95% equity interest of DVBM and DVPD owns 5% equity interest of DVBM.

 

DVPM was incorporated on June 6, 2018 as limited liability under the laws of PRC. Sino Pride owns 100% equity interest of DVPM. DVPM is formed as a property management company and will play similar role as DVBM to improve the management of Victory Plaza.

 

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

 

Victory Plaza Holding Limited, (“VP Holding”) a BVI company, is the original owner of Sino Pride. VP Holding was a shell company and incurred significant losses from the operations of Sino Pride and operations of its subsidiaries DVPD and DVBM and resulted a negative working capital and net negative net assets in the balance sheet. VP Holding and Sino Pride had no relationship or affiliation with us or Alex Brown prior to corporate restructure.

 

November 30, 2016 Transaction

 

On November 2016, Iven entered and executed an agreement of “Assignment of Common Stocks 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 stocks of Sino Pride then outstanding and assumed shareholder loan and loan interest totaled $52,750,000 (Sino Pride owed to VP Holding) for a nominal consideration of HK$ 1 (approximately US$0.13) from VP Holding. The change of ownership in Sino Pride from VP Holding to Iven had no impact on Sino Pride’s ownership in DVPD (operating entity) and DVBM (operating entity).

 

Iven is a private shell company with no operations and with no or nominal assets, which is 100% directly and indirectly owned by Mr. Brown. Iven was a legal acquirer in the November 30, 2016 acquisition. At the date of acquisition, Sino Pride was a holding company of two Chinese operating entities, DVPD and DVBM. The accounting acquirer usually is the combining entity whose relative size (measures 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 are the accounting acquirer in connection with the November 2016 transaction.

 

The November 30, 2016 transaction was treated as a reverse acquisition or recapitalization. The accounting is similar to that resulting from a reverse acquisition, except that no goodwill or other intangible assets should be recorded. Accordingly, the historical financial statements are those of Sino Pride and Subsidiaries.

 

September 4, 2017 Transaction

 

On September 4, 2017, VCI signed an agreement of “Assignment of All Outstanding Shares and All Debt Right Agreement” (“the Agreement”) with Iven. Pursuant to the Agreement, VCI acquired all 30,000,000 shares of common stocks of Sino Pride then outstanding and assumed shareholder debt and loan rights totaled HK$493,807,633 (approximately $64,208,000) (Sino Pride owed to VP Holding) included outstanding shareholder loan of HK$408,409,628 (approximately $53,093,000) with 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 (operating entity) and DVBM (operating entity).

 

Iven and VCI are under common control of our controlling shareholder. The transfer of ownership in Sino Pride from Iven to VCI is a part of the corporate restructuring to prepare the Company to list in the U.S. capital markets.

 

The Company accounted for the September 2017 transaction as a transaction between entities under common control based on the guidance provided by ASC 805-50-25. Following the above transactions, VCI has gained control over Sino Pride and subsidiaries, in an essence, VCM has gained control over VCI, Sino Pride and Subsidiaries.

 

The Company together with its wholly-owned subsidiary, 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 have been accounted for similar to the pooling method of accounting. The accompanying consolidated financial statements have been prepared as if the current corporate restructuring had been in existence at the beginning of the periods presented. Accordingly, the historical financial statements are those of Sino Pride and Subsidiaries.

 

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Organization & Subsidiaries

 

The following diagram illustrates our corporate structure as of the date of this prospectus:

 

 

Historical Issue

 

Prior to our acquisition of Sino Pride in November 2016, the former management sold approximately 14% properties with buy-back option, pursuant to which such purchasers could request us to buy back their units at the agreed-upon price-approximately 20% (average) higher than the original sale prices. In addition, we have leased back some units and rent to third parties. As of December 31, 2016, there were approximately 750 store units, 18,828 square meters (202,663 square feet) had purchase-back option. Total buy-back liability amounted to $68.6 million and total lease back liability amounted to $8.8 million. As many purchasers have exercised the buy-back options and we do not have enough cash to satisfy a huge demand of exercise of the options as well as we failed to pay rent for certain lease-back units; many purchasers have brought litigations against us complaining the breach of the contract due to our failure to fulfill our obligations under the buy-back options or lease-back terms.

 

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As of June 30, 2018, to our knowledge, there were total of 492 litigations against us for unpaid rent by the lease-back owners and for the past due of purchasing-back property from current owner of properties. Total claims amounted to $24,045,310 (RMB159,167,926). Those claims were brought by owners of certain properties. For certain properties, the Company granted the owners an option to request the Company to buy back the properties from the owners. Some claims are brought by owners when the Company has failed to buy back the properties when such owners exercise the purchase-back option. For certain properties, the Company leases back from the owners and rent to others. The Company has failed to pay the rent under those leases-back and some owners have brought claims against the Company. As of June 30, 2018, the Management estimated that current recorded property financing agreement payable in the amount of $77,054,175, buy-back payable of $7,267,278, lease-back liability payable of $1,012,707 and expired lease payable $6,121,749, totaled $91,455,909, were approximate to the total final payments. In the case of a reasonable possibility that a loss is to exceed the amount already recognized, the Company will accrue additional estimated liability. As of June 30, 2018, the Company accrued a total of $2,855,910 litigation payable.

 

As of September 6, 2018, to our knowledge, there were a total of 498 litigation cases filed against the Company in Dalian City, China. Litigant claimed that the Company did not buy back the property as stated in the sales contracts or the Company did not pay promised rental payments for those properties it leased back from the unit owners. These claims amounted approximately $23,295,505 (RMB 159,089,666).

 

Claims of Lawsuits As of September 6, 2018   Store Unit     Square Feet     Contract Amount in RMB     Claimed Amount in RMB  
Property purchase-back related issues     234       52,853       97,223,232       134,504,079  
Leases payment related issues     221       46,972       90,520,293       17,379,503  
Other issues     43       13,019       17,491,964       7,206,084  
Total in RMB     498       112,844       205,235,489       159,089,666  
September 6, 2018 exchange rate is 6.8292                                
Total in US $                   $ 30,052,640     $ 23,295,505  

 

As of September 6, 2018, the Company settled the following cases.

 

Resolved cases as of September 6, 2018   Resolved Cases     Resolved after 6/30/2018  
Property purchase-back related issues     54       -  
Leases payment related issues     100       -  
Other issues     5        -  
Total resolved cases     159       -  

 

As a result of certain pending litigations and enforcement of certain judgments, certain units owned by DVPD have been frozen by the courts from transfer or disposition and 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, for the purpose of executing the judgments or pending litigations. DVPD has been restricted from free transfer, deposition, pledge of its 5% equity interest in DVBM during the period from March 2, 2017 to March 1, 2019. In addition, DVPD has been listed as a “dishonest debtor” by the courts. Once listed as a dishonest debtor, DVPD may been imposed with certain restrictions in connection with the commercial loans at banks’ discretion; purchase or transfer of properties and land use rights; and renovation, upgrade or renovation of properties.

 

We are actively and progressively negotiating with those litigants by offering discounted rental or purchase price, and installments of payment. In addition, we entered into SML Agreement on December 19, 2017, pursuant to which, we agree to transfer certain liabilities to SML so that it can settle with individual owners either to buy back the properties from them or pay the rent due under the lease-back agreements; and we further agree to repurchase those properties or pay those leases from SML, no later than May 15, 2020, at the prices under initial buy-back options or lease-back agreements (with those litigants) with 8% annual interest commencing on January 1, 2018. By doing so, we can focus our limited resources of funds on the renovation and pay back SML when our financial position improves. However, it will depend on our available cash and other business operation consideration. We cannot assure you that we can successfully settle all the complaints or we will have enough cash to settle with all the purchasers.

 

Government Regulation

 

In addition to U.S. securities laws, banking laws and laws applicable to all companies, such as The Foreign Corrupt Practices Act, as a China-based entity, we are subject to various Chinese regulations. This section sets forth a summary of the most significant China regulations or requirements that may affect our business activities operated in China or our shareholders’ right to receive dividends and other distributions of profits from the PRC subsidiary.

 

Regulations Regarding Foreign Investment

 

Investment activities in the PRC by foreign investors are principally governed by the Guidance Catalogue of Industries for Foreign Investment, or the Catalogue, which was promulgated and is amended from time to time by the Ministry of Commerce and the National Development and Reform Commission. Industries listed in the Catalogue are divided into three categories: encouraged, restricted and prohibited. The restricted and prohibited categories combined are also called the negative list for foreign investment entry and will be subject to special administrative measures. Industries not listed in the Catalogue are generally deemed as constituting a fourth “permitted” category. Establishment of wholly foreign-owned enterprises is generally allowed in encouraged and permitted industries. Some restricted industries are limited to equity or contractual joint ventures, while in some cases Chinese partners are required to hold the majority interests in such joint ventures. Foreign investors are not allowed to invest in industries in the prohibited category. Industries not listed in the Catalogue are generally open to foreign investment unless specifically restricted by other PRC regulations.

 

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Regulations Regarding Sino-foreign Cooperative Joint Ventures

 

Sino-foreign cooperative joint ventures are mainly governed by the Sino-foreign Cooperative Joint Ventures Law of the PRC promulgated by the PRC National People’s Congress on 13 April 1988 and amended on 31 October 2000, September 3, 2016, November 7, 2016 and November 4, 2017 and the Implementation Rules of the Sino-foreign Cooperative Joint Ventures Law of the PRC promulgated by the Ministry of Foreign Trade and Economic Cooperation, the predecessor of the Ministry of Commerce, on 4 September 1995 and amended on February 19, 2014 and March 1, 2017.

 

The establishment of a Sino-foreign cooperative joint venture

 

The establishment of a Sino-foreign cooperative joint venture requires the approval of the Ministry of Commerce or such departments and local governments as authorized by the State Council with certain requisite documents to be submitted for approvals before October 1, 2016. On September 3, 2016, National People’s Congress Standing Committee adopted a decision on amending the relevant laws in relation to foreign invested companies, which took effect on October 1, 2016. Upon the effectiveness of the decision, the establishment of the foreign invested enterprise (including the Sino-foreign cooperative joint venture) and its subsequent changes are required to file with relevant commerce authorities instead of obtaining approvals from relevant commerce authorities, except for the foreign invested enterprises which are subject to special administrative measures regarding foreign investment entry in the PRC.

 

Prior to filing with relevant commerce authorities or within 30 days upon filing with relevant commerce authorities, the applicant is required to apply to the State Administration for Industry & Commerce or its local branches for the issue of a business license. A Sino-foreign cooperative joint venture is formally established on the date its business license is issued.

 

Profits and losses of Sino-foreign cooperative joint ventures may be distributed to and shared by the joint venture partners in such manner as those partners may agree to. A Sino-foreign cooperative joint venture should set aside a portion of its profits after tax as certain reserve funds,

 

Management

 

The highest authority of a Sino-foreign cooperative joint venture is vested in its board of directors or joint management committee, which shall decide on all important matters of the joint venture. The powers and functions of the board of directors or joint management committee are generally governed by the provisions of the joint venture contract and the articles of association of the joint venture. Meetings of the board of directors or joint management committee are required to be held at least once every year. A number of specified important matters are to be decided upon unanimously by the directors present or the committee members present at a meeting, such as amending articles of association, change in registered capital, dissolution, mortgage of assets of the joint venture, merger, division or change in organization structure, and other matters required to be decided unanimously as agreed by the joint venture partners. The board of directors or joint management committee should appoint a general manager in charge of the daily operation and management of the joint venture.

 

Termination

 

A Sino-foreign cooperative joint venture may be dissolved in the following situations:

 

(1) where its term of joint venture has expired;
   
(2) where the joint venture suffers heavy losses or suffers from serious damages incurred by force majeure, and is unable to continue operations;
   
(3) where one or many of the joint venture partners fail(s) to fulfil the obligations prescribed by the joint venture contract or articles of association, and the joint venture is unable to continue its operation;
   
(4) where other reasons for dissolution prescribed by the joint venture contract and articles of association occur; or
   
(5) where the joint venture was shut down by the relevant authorities due to its violation of laws or regulations.

 

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In any of the circumstances described in (2) and (4) above, the board of directors or joint management committee shall submit an application for dissolution to the relevant commerce authorities for approval or filing, depending on whether the Sino-foreign cooperative joint venture is subject to special administrative measures regarding foreign investment entry in the PRC. In the circumstances described in (3) above, the party that has performed its obligations as stipulated in the joint venture contract shall make such application, and the party or parties that failed to fulfill the obligations stipulated in the joint venture contract or articles of association shall be liable for the losses thus caused.

 

Before the expiration of the joint venture term, the board of directors or joint management committee of a cooperative joint venture may decide to dissolve the joint venture upon unanimous approval by the directors present or the committee members present at the meeting held to approve this and the assets and properties of the cooperative joint venture shall be distributed between the joint venture partners according to the stipulations of the joint venture contract.

 

Regulations Regarding the Land and Property System of the PRC

 

The Land system

 

All land in the PRC is either state-owned or collectively-owned, depending on the location of the land. All land in the urban areas in a city or town is state-owned, and all land in the rural areas of a city or town and all rural land are, unless otherwise specified by law, collectively-owned. The State has the right to resume land in accordance with law if required for the benefit of the public. Although all land in the PRC is owned by the State or by collectives, private individuals, enterprises and other organizations are permitted to hold and develop land for which they are granted land use rights.

 

Under the Provisional Regulations of the PRC Concerning the Grant and Assignment of the Right to Use State-owned Land in Urban Areas (the “Urban Land Regulations”) promulgated in May 1990, local governments at or above county level have the power to grant land use rights for specific purposes and for a definite period to a land user pursuant to a contract for the grant of land use rights upon payment of a grant premium. Under the Urban Land Regulations, there are different maximum periods of grant for different uses of land. They are generally as follows:

 

Use of land  Maximum
period
 
   (in years) 
Commercial, tourism, entertainment   40 
      
Residential   70 
      
Industrial   50 
      
Others   50 

 

Under the Urban Land Regulations, all local and foreign enterprises are permitted to acquire land use rights unless the law provides otherwise. A land use right terminates upon the expiration of the term of the grant specified in the land grant contract and the resumption of that right. Upon expiry, the land use rights and ownership of the related buildings erected thereon and other attachments shall be resumed by the State without compensation. The land user will take steps to surrender the land use rights certificate and cancel the registration of the certificate in accordance with relevant regulations. A land user may apply for renewal of the land use rights and, if the application is granted, the land user is required to enter into a new land grant contract, pay a premium and effect appropriate registration for the renewed right.

 

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The State may not resume possession of lawfully granted land use rights prior to expiration of the term of grant. If public interest requires the resumption of possession by the State under special circumstances during the term of grant, compensation must be paid by the State. A land user may lawfully assign, mortgage or lease its land use rights to a third party for the remainder of the term of grant.

 

Upon expiration of the term of grant, renewal is possible subject to the execution of a new contract for the grant of land use rights and payment of a premium. If the term of the grant is not renewed, the land use rights and ownership of any buildings thereon will revert to the State without compensation.

 

The National People’s Congress adopted the PRC Property Rights Law in March 2007, which became effective on 1 October 2007. According to the Property Rights Law, when the term of the right to use construction land for residential (but not other) property purposes expires, it will be renewed automatically.

 

Real Estate Registration

 

On November 24, 2014, the State Council promulgated the Interim Regulations on Real Estate

 

Registration, effective from March 1, 2015, which provides for the following, among others:

 

i) the competent department of land and resources under the State Council shall be responsible for guiding and supervising the real estate registration of the State. The local government at or above the county level shall designate a department as the real estate registration authority within its administrative region which shall be subject to the guidance and supervision by the competent real estate registration authority at the higher level;

 

ii) the real estate authority shall establish a uniform real estate registration book to record the items including, without limitation, the natural condition and ownership conditions of the real estate, and restriction of rights;

 

iii) the competent department of land and resources under the State Council shall, in coordination with other related departments, establish a uniform management platform for real estate registration information. The information registered by the real estate registration authorities at all levels shall be incorporated into the uniform management platform to ensure the real-time sharing of registration information at the national, provincial, municipal and county levels; and

 

iv) any right holder or interested party may inquire about or copy the real estate registration materials and the registration authority shall not refuse to provide such information. Units and individuals inquiring about the real estate registration information shall not use such registration information for any other purposes and no such information may be disclosed to the public or others without the consent of the right holder.

 

The “Implementing Rules of the Interim Regulations on Real Estate Registration”, effective from January 1, 2016, authorizes the real estate registration authority to perform a site inspection following an acceptance of the application for real estate registration and sets out regulations regarding real estate registration information management.

 

Mortgage

 

Under the Urban Real Estate Law promulgated in July, 1994, as amended in August 2007, the Guarantee Law of the PRC promulgated in June 1995 and implemented in October 1995, the Measures for Administration of Mortgages of Urban Real Estate promulgated in May 1997, as amended in August 2001, when a mortgage is created on the ownership of a building legally obtained, a mortgage shall be simultaneously created on the land use right of the land on which the property is situated. The mortgager and the mortgagee shall sign a mortgage contract. After a real estate mortgage contract has been signed, the parties to the mortgage shall register the mortgage with the real estate administration authority at the location where the property is situated. If a mortgage is created on the property in respect of which a property ownership certificate has been obtained legally, the registration authority shall make an entry under the “third party rights” item on the original property ownership certificate and then issue a certificate of third-party rights on the property to the mortgagee. If a mortgage is created on the commodity property put up for pre-sale or on works in progress, the registration authority shall record the details on the mortgage contract.

 

The validity of a mortgage depends on the validity of the mortgage contract, possession of the real estate certificate and/or land use right certificate of the mortgagor and registration of the mortgage with authorities. If the loan in respect of which the mortgage was given is not duly repaid, the mortgagee may sell the property to settle the outstanding amount and return the balance of the proceeds from the sale or auction of the mortgaged property to the mortgagor. If the proceeds from the sale of such property are not sufficient to cover the outstanding amount, the mortgagee may bring proceedings before a competent court or arbitration tribunal (where there is an agreement to recover the amount still outstanding through arbitration) in the PRC.

 

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Leasing

 

Pursuant to the Law on Administration of Urban Real Estate, when leasing premises, the lessor and lessee are required to enter into a written lease contract, containing such provisions as the leasing term, use of the premises, rental and repair liabilities, and other rights and obligations of both parties. Both lessor and lessee are also required to register the lease with the real estate administration department. If the lessor and lessee fail to go through the registration procedures, both lessor and lessee may be subject to fines.

 

According to the PRC Contract Law, the lease contract shall be in writing if its term is over six months, and the term of any lease contract shall not exceed twenty years. The lessee may sublease the leased premises to a third party, subject to the consent of the lessor. Where the lessee subleases the premises, the lease contract between the lessee and the lessor remains valid. The lessor is entitled to terminate the lease contract if the lessee subleases the premises without the consent of the lessor. In addition, if the lessor transfers the premises, the lease contract between the lessee and the lessor will still remain valid. When the lessor is to sell the premises under a lease contract, it shall give the lessee a reasonable advance notice before the sale, and the lessee has the priority to buy such premises on equal conditions.

 

Pursuant to the PRC Property Law, if a mortgagor leases the mortgaged property before the mortgage contract is executed, the previously established leasehold interest will not be affected by the subsequent mortgage; and where a mortgagor leases the mortgaged property after the creation and registration of the mortgage interest, the leasehold interest will be subordinated to the registered mortgage.

 

Transfer of Real Estate

 

According to the Urban Real Estate Law and the “Provisions on Administration of Transfer of Urban Real Estate” promulgated by the Ministry of Construction, the predecessor of the Ministry of Housing and Urban-rural Development, in August 1995, as amended in August 2001, a property owner may sell, bequeath or otherwise legally transfer the property to another person or legal entity. When a property is transferred, the ownership of the property and the land use rights attached to property are transferred. The parties to a transfer shall enter into a real estate transfer contract in writing and register the transfer with the real estate administration authority having jurisdiction over the location of the property within 90 days of the execution of the transfer contract.

 

Property Management

 

According to the Regulation on Property Management enacted by the State Council on 8 June 2003 and enforced on 1 September 2003, as amended on 26 August 2007 and on 6 February 2016, the state implements a qualification scheme system in monitoring the property management enterprises and enterprises engaging in property management shall obtain relevant qualifications from competent authorities. According to the Measures for Administration of Qualifications of Property Service Enterprises enacted by the Ministry of Housing and Urban-Rural Development on 17 March 2004, as amended on 30 October 2007, a property service enterprise shall be classified as either class one, class two or class three. The relevant construction authorities will issue the qualification certificates for property service enterprises according to relevant criteria, including but not limited to, the numbers of relevant technical personnel, the property service experience and the service administration systems of the property service enterprise.

 

Taxation

 

PRC Enterprise Income Tax

 

The PRC Enterprise Income Tax Law, or EIT Law, and its implementation rules provide that from January 1, 2008, a uniform income tax rate of 25% is applied equally to domestic enterprises as well as foreign investment enterprises.

 

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The EIT Law and its implementation rules provide that a withholding tax at the rate of 10% is applicable to dividends and other distributions payable by a PRC resident enterprise to investors who are “non-resident enterprises” (that do not have an establishment or place of business in the PRC, or that have such establishment or place of business but the relevant dividend or other distribution is not effectively connected with the establishment or place of business). However, pursuant to the Arrangement between the Mainland and Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income effective on December 8, 2006, the withholding tax rate for dividends paid by a PRC resident enterprise is 5% if the Hong Kong enterprise owns at least 25% of the capital of the PRC enterprise; otherwise, the dividend withholding tax rate is 10%. According to the Notice of the PRC State Administration of Taxation on Issues relating to the Administration of the Dividend Provision in Tax Treaties promulgated on February 20, 2009 and effective on the same day, the corporate recipient of dividends distributed by PRC enterprises must satisfy the direct ownership thresholds at all times during the 12 consecutive months preceding the receipt of the dividends. However, if a company is deemed to be a pass-through entity rather than a qualified owner of benefits, it cannot enjoy the favorable tax treatments provided in the tax arrangement. In addition, if transactions or arrangements are deemed by the relevant tax authorities to be entered into mainly for the purpose of enjoying favorable tax treatments under the tax arrangement, such favorable tax treatments may be subject to adjustment by the relevant tax authorities in the future.

 

Business Tax and Value-added Tax

 

Pursuant to the Temporary Regulations on Business Tax, which were promulgated by the State Council on December 13, 1993 and effective on January 1, 1994, as amended on November 10, 2008 and effective January 1, 2009, any entity or individual conducting business in a service industry is generally required to pay business tax at the rate of 5% on the revenues generated from providing such services.

 

In March 2016, the Ministry of Finance and SAT jointly issued the Pilot Program of Replacing Business Tax with Value-Added Tax (“VAT”) in an All-round Manner, or Circular 36, effective from May 2016, according to which PRC tax authorities have started imposing VAT on revenues from various service sectors, including real estate, construction, financial services and insurance, as well as other lifestyle service sectors, replacing the business tax replacing the business tax that co-existed with VAT for over 20 years. The VAT rates applicable to us may be generally higher than the business tax rate we were subject to prior to the implementation of Circular 36. For example, the VAT rate for sale and leasing of self-developed real estate will be increased from 5% (business rate) to 11%. However, VAT rate for leasing of real estate which was owned by general taxpayer before April 30, 2016, will be reduced to 5 %. The PRC Enterprise Income Tax Law, or EIT Law, and its implementation rules provide that from January 1, 2008, a uniform income tax rate of 25% is applied equally to domestic enterprises as well as foreign investment enterprises.

 

Regulations Regarding Foreign Exchange

 

The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, which were most recently amended in August 2008. Payments of current as profit distributions and trade and service-related foreign exchange transactions, can usually be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. By contrast, approval from or registration with appropriate PRC authorities or banks authorized by appropriate PRC authorities is required where RMB capital is to be converted into foreign currency and remitted out of China to pay capital expenses.

 

SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming the Administration of Foreign Exchange Settlement of Capital of Foreign-invested Enterprises (the “Circular 19”), effective on June 1, 2015, in replacement of SAFE Circular 142 (the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises. According to Circular 19, the flow and use of the RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company is regulated such that RMB capital may not be used for the issuance of RMB entrusted loans or the repayment of inter-enterprise loans or the repayment of banks loans that have been transferred to a third party. Although Circular 19 allows RMB capital converted from foreign currency-denominated registered capital of a foreign-invested enterprise to be used for equity investments within the PRC, it also reiterates the principle that RMB converted from the foreign currency-denominated capital of a foreign-invested company may not be directly or indirectly used for purposes beyond its business scope. Thus, it is unclear whether SAFE will permit such capital to be used for equity investments in the PRC in actual practice. SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account (the “Circular 16”), effective on June 9, 2016, which reiterates some of the rules set forth in Circular 19, but changes the prohibition against using RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company to issue RMB entrusted loans to a prohibition against using such capital to issue loans to non-associated enterprises. Violations of SAFE Circular 19 or Circular 16 could result in administrative penalties.

 

44
 

 

From 2012, SAFE has promulgated several circulars to substantially amend and simplify the current foreign exchange procedure. Pursuant to these circulars, the opening of various special purpose foreign exchange accounts, the reinvestment of RMB proceeds by foreign investors in the PRC and remittance of foreign exchange profits and dividends by a foreign-invested enterprise to its foreign shareholders no longer require the approval or verification of SAFE. In addition, domestic companies are no longer limited to extend cross-border loans to their offshore subsidiaries but are also allowed to provide loans to their offshore parents and affiliates and multiple capital accounts for the same entity may be opened in different provinces. SAFE also promulgated the Circular on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic Direct Investment by Foreign Investors and the Supporting Documents in May 2013, which specifies that the administration by SAFE or its local branches over direct investment by foreign investors in the PRC shall be conducted by way of registration and banks shall process foreign exchange business relating to the direct investment in the PRC based on the registration information provided by SAFE and its branches. In February 2015, SAFE promulgated SAFE Circular 13, which took effect on June 1, 2015. SAFE Circular 13 delegates the power to enforce the foreign exchange registration in connection with inbound and outbound direct investments under relevant SAFE rules from local branches of SAFE to banks, thereby further simplifying the foreign exchange registration procedures for inbound and outbound direct investments.

 

On January 26, 2017, SAFE issued the Notice of State Administration of Foreign Exchange on Improving the Check of Authenticity and Compliance to Further Promote Foreign Exchange Control (the “SAFE Circular 3”), which stipulates several capital control measures with respect to the outbound remittance of profit from domestic entities to offshore entities, including (i) under the principle of genuine transaction, banks shall check board resolutions regarding profit distribution, the original version of tax filing records and audited financial statements; and (ii) domestic entities shall hold income to account for previous years’ losses before remitting the profits. Moreover, pursuant to SAFE Circular 3, domestic entities shall make detailed explanations of the sources of capital and utilization arrangements, and provide board resolutions, contracts and other proof when completing the registration procedures in connection with an outbound investment.

 

Regulations Regarding Foreign Exchange Registration of Offshore Investment by PRC

 

SAFE promulgated the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles (the “SAFE Circular 37”) in July 2014 that requires PRC residents or entities to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. In addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions.

 

SAFE Circular 37 was issued to replace SAFE Circular 75 (the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles. SAFE further enacted the Notice on Further Simplifying and Improving the Foreign Exchange Management Policies for Direct Investment (the “SAFE Circular 13”) effective from June 1, 2015, , which allows PRC residents or entities to register with qualified banks in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. However, remedial registration applications made by PRC residents that previously failed to comply with the SAFE Circular 37 continue to fall under the jurisdiction of the relevant local branch of SAFE. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from distributing profits to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Moreover, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange controls.

 

Residents

 

Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment Through Special Purpose Vehicles, or Circular 37, issued by SAFE and effective in July 4, 2014, regulates foreign exchange matters in relation to the use of special purpose vehicles, or SPVs, by PRC residents or entities to seek offshore investment and financing and conduct round trip investment in China.

 

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Circular 37 and other SAFE rules require PRC residents, including both legal and natural persons, to register with the local banks before making capital contribution to any company outside of China (an “offshore SPV”) with onshore or offshore assets and equity interests legally owned by PRC residents. In addition, any PRC individual resident who is the shareholder of an offshore SPV is required to update its registration with the local banks with respect to that offshore SPV in connection with change of basic information of the offshore SPV such as its company name, business term, the shareholding by individual PRC resident, merger, division and with respect to the individual PRC resident in case of any increase or decrease of capital in the offshore SPV, transfer of shares or swap of shares by the individual PRC resident. Failure to comply with the required SAFE registration and updating requirements described above may result in restrictions being imposed on the foreign exchange activities of the PRC subsidiaries of such offshore SPV, including increasing the registered capital of, payment of dividends and other distributions to, and receiving capital injections from the offshore SPV. Failure to comply with Circular 37 may also subject the relevant PRC residents or the PRC subsidiaries of such offshore SPV to penalties under PRC foreign exchange administration regulations for evasion of applicable foreign exchange restrictions.

 

Regulation Regarding Labor and Social Insurance

 

Pursuant to the PRC Labor Law and the PRC Labor Contract Law, employers must execute written labor contracts with full-time employees. All employers must comply with local minimum wage standards. Violations of the PRC Labor Contract Law and the PRC Labor Law may result in the imposition of fines and other administrative and criminal liability in the case of serious violations.

 

In addition, according to the PRC Social Insurance Law and Administration Measures on Housing Fund, employers like our PRC subsidiaries in China must provide employees with welfare schemes covering pension insurance, unemployment insurance, maternity insurance, work-related injury insurance, medical insurance, and housing funds.

 

Employees

 

As of the date of this prospectus, we have a total of 308 employees, including our executive officers.

 

Our employees are not represented by any collective bargaining agreement, and we have never experienced a work stoppage. We believe we have good relations with our employees.

 

Description of Property

 

Our corporate headquarter is located at 3rd Floor, 369 Lexington Ave, New York, NY 10017, for which we currently pay a rent of $6,200 per month for our lease.

 

Rental Property

 

All of our rental properties are located in Victory Plaza, located at Dalian, Liaoning Province, PRC. As previously disclosed, Victory Plaza is approximately 137,500 square meters (1,480,038 square feet), which is owned and occupied by various retailers. We categorize the various ownership status of such rental space into the following four categories:

 

Group A: rental properties 100% owned by us;

 

Group B: rental properties that were previously sold to a third party buyer with a buy-back arrangement, as described below the following table;

 

Group C: rental properties that were previously sold to a third party buyer with a buy-back arrangement, which has since been transferred to SML according to SML Agreement; and

 

Group D: rental properties that were previously sold to a third party buyer without any buy-back arrangements or rights.

 

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The following chart illustrates the specific number of each group of rental properties as of June 30, 2018 and December 31, 2017.

 

                          % of Total  
              % of Total     Square     Square  
Group   Description of Property   Units     Units     Feet     Feet  
A   Properties 100% owned     506       16 %     260,497       18 %
    Properties sold with                                
    buy-back option -                                
    book owned per US                                
B   GAAP     488       15 %     129,662       9 %
    Properties sold with                                
    buy-back option                                
    hold by SML - book                                
C   owned per US GAAP     273       9 %     74,013       5 %
D   Properties sold     1,899       60 %     1,016,446       68 %
Total Properties     3,166       100 %     1,480,618       100 %

 

SML Agreement

 

On December 29, 2017, the Company executed SML Agreement. Pursuant to SML Agreement, SML will negotiate with each individual property owner who exercised 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 with an annual interest of 8% commencing on January 1, 2018 no later than May 15, 2020. In addition, SML will settle the lease-back payables under the lease-back agreements with each individual property owner and the Company agrees to pay SML the initial amount of rent payables under the lease-back with an annual interest of 8% commencing on January 1, 2018 no later than May 15, 2020. SML Agreement helps 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, if the Company fails to carry out the renovation, or the renovation is not successfully, the Company may not have enough fund to buy back the properties from SML or pay the lease-back owed to SML before May 15, 2020, and the Company may not able to continue its operation or business.

 

Buy-Back Arrangement

 

When the Company sold certain properties in the past, the Company granted the buyers a separate option to request the Company to buy back those sold properties at an agreed buy-back price stated in the purchase-back agreements. These buy-back options vest during a period from 2014 to 2018 (majority transactions). Due to those buy-back arrangements, buyers obtained the legal title of those properties but would request the Company to buy back their properties at their sold discretion.

 

Lease-back

 

As part of business operations, the Company may lease-back properties from the owners of the properties and subleases these properties to un-related third parties with new lease terms. Sales and lease-back are two separated business transactions. Lease-back could happen immediately after the sale of property or at any time after the sale if the owner of the property wants to do so. A typical lease-back consists of a fixed annual payment amount and duration of lease period.

 

Rent Lease

 

The Company will rent out rental properties 100% owned by us and the properties leased back (properties not owned by us) to retail store tenants. A typical rent lease consists of a fixed rent payment amount and for the duration of lease period. Normally, an advanced rent payment is required before occupancy.

 

Collateral of Property

 

As a part of securities of bank loan, 18,650 square meters (200,747 square feet) of rental properties owned by DVPD were pledged to a long-term bank loan, approximately $60 million (RMB 390 million). The maturity date of bank loan is July 18, 2027. The interest rate will float at 120% of the similar benchmark loan rate published by the People’s Bank of China. 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 5.97% and 6.01% for the year ended December 31, 2017 and 2016, respectively.

 

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On March 24, 2015, DVPD secured 2,053 square meters (22,098 square feet) of rental properties owned to a long-term bank loan, approximately $7.7 million (RMB 50 million). The maturity date of bank loan is July 19, 2024. T he interest rate will float at 120% of the similar benchmark loan rate published by the People’s Bank of China. 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 5.92% and 5.93% for the year ended December 31, 2017 and 2016, respectively.

 

On May 18, 2017, DVPD provided 5 units of rental properties, totaled 140 square meters (1,507 square feet), owned by the Company as collaterals to help one unrelated individual to acquire a $770,000 (RMB 5,000,000) 12 months bank loan. The loan bore interest of 8.568% per annum.

 

On May 18, 2017, DVPD provided 7 units of rental properties, totaled 138 square meters (1,485 square feet), owned by the Company as collaterals to help one individual, who is a board member of DVPD to acquire a $770,000 (RMB 5,000,000) 12 months bank loan. The loan bore interest of 8.568% per annum.

 

On May 18, 2017, DVPD provided 2 units of rental properties, totaled 15 square meters (161 square feet), owned by the Company as collaterals to help an employee of DVPD (now former employee) to acquire a $770,000 (RMB 5,000,000) 12 months bank loan. The loan bore interest of 8.568% per annum.

 

There was no profit or gain for the Company to provide collateral to those individuals’ loans. Those loans are due as the date of this filing. The collateral of Company’s properties exposed the Company in a material risk to a loss in the case of the individual is insolvent and failed to return the bank loan.

 

Occupancy Rate

 

Vacancy Rate in Recent 5 Years

 

In the month of December  Total Available Area For Rent (SQFT)   Total Rented Area (SQFT)   Vacancy (SQFT)   Vacancy (%) 
2013   294,974    275,115    19,849    6.73%
2014   295,684    276,212    19,472    6.59%
2015   263,683    218,507    45,176    17.13%
2016   202,372    170,715    31,657    15.64%
2017   211,758    153,235    58,523    27.64%
In the month of June 2018    

190,833

     

155,775

     

35,058

     

18.37

%

 

Average Rent in Recent 5 Years

 

In the month of
December
  Average Rent Per
Month Per SQFT in
US$
 
2013  $3.11 
2014  $2.67 
2015  $2.48 
2016  $1.97 
2017  $1.83 
In the month of June 2018   $

1.96

 

 

Tenants

 

The Company received its rental income and management fee income from approximately 700 tenants. Revenue from top ten tenants accounted for 24% and 21% of the total revenue, for the year ended December 31, 2017 and 2016, respectively. No individual tenant’s revenue accounts for more than 10% of the total revenue in both years.

 

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Top 10 Tenants in the Six Months Ended June 30, 2018

 

Top 10   Revenue in US$     % of Total Revenue  
1   $ 333,257       6.21 %
2     259,023       4.87 %
3     129,767       2.44 %
4     125,848       2.36 %
5     109,574       2.06 %
6     61,224       1.15 %
7     47,095       0.88 %
8     30,051       0.56 %
9     21,314       0.40 %
10     21,193       0.40 %
Total top 10   $ 1,135,346       21.33 %
                 
Total Revenue for the Six Months Ended June 30, 2018   $ 5,322,322          

 

Top 10 Tenants in 2017

 

Top 10   Revenue in US$     % of Total Revenue  
1   $ 522,346       5.94 %
2     456,730       5.19 %
3     440,767       5.01 %
4     266,260       3.03 %
5     166,450       1.89 %
6     91,486       1.04 %
7     54,671       0.62 %
8     48,730       0.55 %
9     48,730       0.55 %
10     43,165       0.49 %
Total top 10   $ 2,139,335       24.31 %
                 
Total Revenue in 2017   $ 8,796,781          

 

Top 10 Tenants in 2016

 

Top 10   Revenue in US$     % of Total Revenue  
1   $ 465,692       4.94 %
2     339,074       3.60 %
3     333,739       3.54 %
4     286,095       3.04 %
5     157,907       1.68 %
6     119,151       1.26 %
7     100,075       1.06 %
8     65,336       0.69 %
9     52,269       0.55 %
10     31,901       0.34 %
Total top 10   $ 1,951,239       20.70 %
                 
Total Revenue in 2016   $ 9,420,403          

 

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Intellectual Property

 

Trademark

 

We are currently holding the following trademarks in China and we anticipate that we will be able to renew the trademarks when to be expired.

 

No.  Brand Name  Registration No.  Holder  Class  Goods/Services Covered  Expiry Date
1.    No. 5480714  Dalian Victory Plaza Development Co., Ltd.  Category 36  Real estate lease; real estate management; real estate agency; insurance; financial services; brokerage; escrow industry; pawn; sales of commercial housing services; office (real estate) lease (terminate)  11/ 2009 to 11/ 2019
                   
2.    No. 5258876  Dalian Victory Plaza Development Co., Ltd.  Category 43  Cafeteria; buffet; dining hall; restaurant; restaurant; buffet; fast food restaurant; bar; mobile diet supply; teahouse  09/2009 to 09/2019
                   
3.    No. 5480700  Dalian Victory Plaza Development Co., Ltd.  Category 43  Rental of counters, rental of chairs, tables, tablecloths and glassware; fast food restaurant; bar; teahouse; cafeteria; animal foster care; nursing home; restaurant; mobile homes for rent  11/ 2009 to 11/ 2019
                   
4.    No. 5480699  Dalian Victory Plaza Development Co., Ltd.  Category 36  Real estate lease; real estate management; real estate agency; insurance; financial services; brokerage; escrow industry; pawn; sales of commercial housing services; office (real estate) lease  11/ 2009 to 11/ 2019
                   
5.    No. 6550808  DVPD  Category 43  Rental of counters, rental of chairs, tables, tablecloths and glassware; animal foster care; mobile homes for rent  09/2010 to 09/2020
                   
6.    No. 5258820  DVPD  Category 43  Cafeteria; buffet; dining hall; restaurant; buffet; fast food restaurant; bar; mobile diet supply; teahouse  09/2009 to 09/2019

 

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No.  Brand Name  Registration No.  Holder  Class  Goods/Services Covered  Expiry Date
7.    No. 5480702  DVPD  Category 43  Rental of counters, rental of chairs, tables, tablecloths and glassware; animal foster care; mobile homes for rent  05/2010 to 05/2020
                   
8.    No. 6550809  DVPD  Category 36  Brokerage; guarantee; pawn; sales of commercial housing; real estate lease; real estate management; real estate agency  09/2010 to 09/2020
                   
9.    No. 5480701  DVPD  Category 36  Real estate lease; real estate management; real estate agenc