Related Party Transactions

9 Months Ended

Sep. 30, 2020

NOTE 15 – RELATED PARTY TRANSACTIONS

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

Loan payable to related party consists of following as of September 30, 2020 and December 31, 2019:

	September 30,		December 31,
	2020		2019
	(Unaudited)
Loan payable to DVDC	$	10,832,134	$	10,594,843
Due to related individual including major shareholder		2,072,161		1,339,948
Loan payable to related parties	$	12,904,295	$	11,934,791

Loan Payable to DVDC

DVDC contributed land use rights and infrastructures valued at $20,000,000 to DVPD. Among this $20,000,000 contribution, $6,800,000 was recorded as registered capital, $13,200,000 was recorded as a loan payable to DVDC per the December 25, 2000 agreement. The loan is payable when DVPD is profitable. Loan principal $3,300,000 (25% of $13,200,000) bears interest at 8% per annum. The interest rate for the remaining balance of principal is equal to the loan rate published by Bank of China at 4.65% per annum as of September 30, 2020.

Loan payable to DVDC was initiated in US dollars and related interest calculations are based on the principal in US dollars per the loan agreement. However, the loan agreement did not specify which currency will be used when the loan is repaid. Considering that DVDC is a Chinese entity and located in China, loan and interest payments must be denominated in RMB, therefore, RMB is the currency utilized to record the principal and interest payable. Any gain or loss resulting the translation of the financial statements will be recorded in “accumulated comprehensive income (loss)” section. RMB 109,356,000 loan payable to DVDC was translated from $13,200,000 US dollars at the historical rate.

Loan payable to DVDC consists of following at September 30, 2020 and December 31, 2019.

	September 30, 2020			December 31, 2019
	(Unaudited)
Loan principal	$	13,200,000		$	13,200,000
Advance payments for infrastructure construction		(5,685,747	)		(5,685,747	)
Other payable to DVDC		215,136			215,136
Net loan payable to DVDC		7,729,389			7,729,389
Foreign exchange effect		3,102,745			2,865,454
Net loan payable to DVDC	$	10,832,134		$	10,594,843

Accrued interest expense – related parties was $136,310 and $134,708 for the three months ended September 30, 2020 and 2019, respectively; $402,507 and $403,084 for the nine months ended September 30, 2020 and 2019. Total accrued interest payable to related parties was $12,192,065 and $11,520,609 at September 30, 2020 and December 31, 2019, respectively.

Due to Related Individual

The spouse of our major shareholder provided working capital for our US office expenses. As of September 30, 2020, and December 31, 2019, the amount due to this individual was $2,072,161 and $1,339,948, respectively. The amount due earns no interest and is due on demand.

Loan Payable to Sino Pride

Sino Pride has been major source of fund for the operations of DVPD and DVBM. In the period from 1996 to 2008, DVPD received loans of $38,683,297 from Sino Pride and repaid $20,710,919 in the period from 1998 to 2014. In 2015, total repayments were $4,068,630. Loan payable to Sino Pride bears interest at 8% per annum. Pursuant to FASB ASC 830-20-35-1, the intra-entity (intercompany transactions) foreign currency transactions whose terms are denominated in the currency other than the entity’s functional currency and settlement is anticipated in the foreseeable future (hence not long-term investment nature), requires the increases or decreases in expected functional currency cash flows to be included in determining income (loss) in the periods as gain (loss) from foreign currency transactions.

The loan payable to Sino Pride is denominated in US dollars. The loan was for working capital and is not designed as an investment. The repayment is required when the Company is profitable or is available to make repayment. The transactions of loan proceeds and repayments are dominated in US dollars. The Company uses the bank spot exchange rate to record proceeds and repayments in RMB in the Company’s books. By the end of the year, the US$ loan balance and interest payable will be translated to RMB and recorded on DVPD’s and DVBM’s books.

Loans, repayments and accrued interest payable to Sino Pride as of September 30, 2020 are as followed:

	(Unaudited)
Loan Payable to Sino Pride
Loan balance at December 31, 2018	$	13,503,748
Repayment in 2018		(200,000	)
Loan balance at September 30, 2020	$	13,303,748

Interest Payable to Sino Pride
Interest payable at 12/31/2017	$	7,451,973
Accrued interest in 2018		1,079,968
Accrued interest in 2019		1,079,083
Interest payable at December 31, 2019		9,611,024
Accrued interest in the nine months ended September 30, 2020		809,310

Interest payable at September 30, 2020	$	10,420,334

The above inter-company loan payable of $13,303,748 and $13,303,748, and accrued interest payable of $10,420,334 and $9,611,024 at September 30, 2020 and December 31, 2019, respectively, have been eliminated in the accompanying consolidated financial statements. The interest expense of $269,770 and $269,771 for the three months ended September 30, 2020 and 2019, respectively, have been eliminated in the accompanying consolidated financial statements. The interest expense of $809,310 and $809,312 for the nine months ended September 30, 2020 and 2019, respectively, have been eliminated in the accompanying consolidated financial statements.

Loan Payable to Shareholder/Due to Shareholder

Due to shareholder represents the investment amount that Sino Pride received from its former shareholders, which was assigned to the Company’s current major shareholder, Mr. Alex Brown. Loan payable to shareholder was $66,556,694 and $65,931,644, respectively, at September 30, 2020 and December 31, 2019. During the nine months ended September 30, 2020 and 2019, Mr. Alex Brown advanced $625,050 and $949,420 to the Company, respectively. The balance due to shareholder bears no interest and is payable on demand. If the interest was calculated at 3.25% (September 2020 US (Fed) Prime rate) and 5.0% (September 2019 US (Fed) Prime rate) for the loan payable to shareholder, the balance for interest expense would have been approximately $1.6 million and $2.4 million for the nine months ended September 30, 2020 and 2019, respectively.

Transfer of Ownership of Sino Pride

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

On November 2016, Iven entered and executed an agreement of “Assignment of Common Stock and Debt Rights” (“the Original Agreement”) from VP Holding. Pursuant to the Original Agreement, Iven acquired all 30,000,000 shares of common stocks of Sino Pride then outstanding and assumed debt rights (Sino Pride owned to VP Holding) for a nominal consideration of HK$ 1 (approximately $0.13) from VP Holding.

On September 4, 2017, VCI signed “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 stock of Sino Pride then outstanding and assumed shareholder debt and loan rights of HK$493,807,633 (approximately $64,208,000) (Sino Pride owed to VP Holding) included outstanding shareholder loan of HK$ 408,409,628 (approximately $53,093,000) for nominal consideration of HK$ 1 (approximately $0.13) from Iven. The transfer was part of the restructuring to prepare the Company for listing in the U.S. capital market.

Victory Commercial Management Inc. 10-Q