Mountain China Resorts (Holding) Limited (TSX VENTURE:MCG) reported its financial results for the quarter ended June 30, 2014. MCR reports its results in Canadian Dollars.
With winter operations ended in March and summer operations to be started in July, second quarter has been the traditional slack season for MCR. For the quarter ended June 30, 2014, the Company generated revenues from resort operations of $0.001 million and a net loss of $2.12 million or $0.01 per share compared to revenue of $0.08 million and a net loss of $5.51 million or $0.02 per share in 2013. Total revenue and the net results were from resort operations with no real estate sales revenue during the quarter ended June 30, 2014. Resort Operations EBITDA for 2014 second quarter was $0.26 million compared to negative $0.85 million last year.
Resort operations expenses totaled $0.86 million for the second quarter of 2014 compared to $0.74 million in 2013. Operations expenses within the resorts are mainly attributable to snow making, grooming, staffing, fuel and utilities, which also include the G&A expenses relating to the resort's senior management, marketing and sales, information technology, insurance and accounting.
Other income totaled $1.31 million (2013: 0.09 million), which mainly consists of income of $1.22 million (RMB 7 million) of government subsidy received for the bank loan interest of Harbin Commercial Bank paid by the Company up to October, 2013. Another major components of other income include $0.09 million (2013 - $0.08 million) recognized from the deposit by Club Med for the quarter ended June 30, 2014.
Corporate general and administrative expenses ("G&A expenses") totaled $0.19 million for the quarter ended June 30, 2014 compared to $0.28 million in 2013. This amount mainly comprised executive employee costs, public company costs, and corporate information technology costs.
Depreciation and amortization expense from continuing operations totaled $1.38 million for the quarter ended June 30, 2014 compared to $2.77 million in 2013. Decrease in depreciation and amortization was mainly caused by certain properties being fully depreciated in the first quarter of 2014. Those properties including furnishing constructions of hotels and some furniture bought in the first quarter of 2009 with an expected useful life of 5 years. No renewing work are required as those constructions and furniture are still in good condition and can be used in resort operations.
The Company incurred financing cost of $1.60 million during the quarter ended June 30, 2014 compared to $1.58 million in 2013. Financing costs mainly related to the loan interests, accretion expenses of convertible bonds, and also included bank administrative fee and service charge.
Cash and cash equivalents totaled $7.18 million and working capital deficiency was $94.30 million as at June 30, 2014.
Operations Sun Mountain Yabuli
The Company's 2012-2013 Sun Mountain Yabuli Resort winter season operations commenced on November 24, 2012 and closed on March 24, 2013. In comparison, the 2013-2014 winter season operations commenced on November 29, 2013 and closed on March 23, 2014. The revenue of Sun Mountain Yabuli Resort operation comprises mainly by mountain operation, beverage, skiing-related services and hotel lodging. Skiing-related services includes rental of ski equipment, goggles, lockers, gloves, etc, sales of ski equipment and skiing training services offered in the ski school. It also includes the mountain operation which is using the facilities built in the mountain, such as sight-seeing trams, snow tubing and alpine.
As the 2013-2014 winter operations ended in March. There were no resorts operations in the second quarter. The 2014 summer operations started on July 5th, and finished on August 31th. Preparation work including staffing, procurement, sanitation and equipment maintenance were undertook in the second quarter. Management provides a more detailed analysis on revenue and future prospects in its 2014 Interim Management Discussion and Analysis.
Sun Mountain Yabuli - Real Estate Development
By the end of Fiscal 2010, the Company had finished working on the exterior decoration of the 55 villas of which three were completed with interior finishing. At this time of the reporting date, certain construction is still needed on the exterior grounds to complete lighting, roads and utility connections. The Company had not been successful in selling any of the villas. Management is of the opinion that in order to complete sales, it is necessary to first complete the exterior construction. Management estimated these additional construction costs to be at least $4.50 million.
In 2013, general political environment further affected tourism related real estate industry negatively. A few other similar projects in ski resort areas in China started marketing and the outcome were quite frustrating. Those projects include Qingyun Town in the Yabuli region, and real estate projects of Changbai Mountain. As of December 31, 2013, management was of the opinion that, even with additional costs to be invested to get the villas ready for sale, it is unlikely that the benefit will exceed the cost at this time. Therefore no further investment was made in 2013, and management did not expect any investment to be made in the near future. Judging from the current economic environment, management's opinion is that there is very limited recoverable amount associated with the villas at the moment, and an impairment of $22.80 million was provided and reduced the carrying value of properties under construction to $1 as of December 31, 2013. As at June 30, 2014, the book value of properties under construction was still $1.
Despite of the current difficulty, the Company does have confidence with its first of a kind skiing in and skiing out villas in China. And the Company will be reasonably flexible with its pricing when the market shows sign of a turn around. No other detail milestones for the above matter are available from the Company as the related government policies are set to be temporary but with durations undetermined.
Summary Financial Results
|(in thousands of Canadian dollars except for per share data)||For the quarter
ended June 30, 2014
|For the quarter
ended June 30, 2013
|General and administrative expenses||(189)||(287)|
|Depreciation and amortization||(1,384)||(2,765)|
|Total non-operating income and expenses||(1,000)||(1,986)|
|Deferred income tax recovery||6||99|
|Results of discontinued operation||-||-|
|Net loss per share (Basic and Diluted)||(0.01)||(0.02)|
|Weighted average number of shares outstanding(Basic and Diluted)||308,859,103||308,859,103|
Balance Sheet Key Indicators
|(in thousands of Canadian dollars except for ratios)||June 30,
|Total non-current liabilities||21,470||24,500|
|Total Debt to Total Equity Ratio||(11.36):1||(20.59):1|
The Company has an accumulated deficit, a working capital deficiency and has defaulted on a bank loan, all of which cast a substantial doubt on the Company's ability to continue as a going concern. The Company's ability to meet its obligations as they fall due and to continue to operate as a going concern is dependent on further financing and ultimately, the attainment of profitable operations. These consolidated financial statements do not include any adjustments to the amounts and classifications of assets and liabilities that might be necessary should the Company be unable to continue as a going concern. Management of the Company plans to fund its future operation by obtaining additional financing through loans, private placements and the sale of the properties under construction. However, there is no assurance that the Company will be able to obtain additional financing or sell the properties under construction. The Company will need to settle with Construction Bank, either by negotiating new payment terms or by obtaining other financing to repay the debt in full. If they are not successful in doing so and the bank takes possession of the assets, the Company will no longer be able to continue operating the resort.
Despite of the financial difficulty posed by the overdue debts and continued loss, management is confident in the development of both the industry and the Company in the future. The government of Heilongjiang Province had demonstrated strong incentive to support the skiing industry and the Company by increasing local infrastructure investment. In June, 2014, the Company received $1.23 million (RMB 7 million) government subsidy for loan interest. Revenue from ClubMed in winter season has been growing steadily, and the Company will be the official partner and playing field of 2016 World Championships of Snowboarding. Management is also working on various means to attract new investments into the Company to complete the construction of villas and improve the capital structure of the Company.
|(in thousands of Canadian dollars)||June 30,||December 31,|
|Working capital deficiency||$94,301||$93,154|
There has been no substantial subsequent event up to the reporting date.
2014 MAJOR CORPORATE DEVELOPMENTS
Sun Mountain Yabuli Resort Prepared for its Third Summer Operations
As the 2013-2014 winter operations ended in March. There were no resorts operations in the second quarter. The 2014 summer operations started on July 5th, and finished on August 31th. Preparation work including staffing, procurement, sanitation and equipment maintenance were undertook in the second quarter.
Updates on China Construction Bank Loan Defaults
In March, 2014 the Company defaulted on its fourth principal payment of $8.61 million (RMB 50 million) under its $43.03 million (RMB 250 million) loan agreement with the China Construction Bank ("Construction Bank"). According to the Loan Agreement between Yabuli and Construction Bank, Construction Bank has the right to accelerate Yabuli's obligation to repay the entire unpaid principal plus interest immediately and to take legal actions to enforce on the security. The Company received a statement of claim demanding repayment in June 2013.
On April 22nd, 2014, the Company received a decision from the Higher People's Court of Heilongjiang Province stating that (1) the Company is obliged to pay off the principle of $39,583 (RMB 230 million) within 10 days of receipt of the decision; (2) the Company is obliged to pay off the accrued interest of $6,314 (RMB 36.69 million) which was accrued up December 21, 2013 within 10 days of receipt of the decision; (3) the Company should pay off the accrued interests between the actual settlement date and December 21, 2013; (4) If the Company did not pay off the debts within the required time, China Construction Bank will have the priority to recover the debts from the sales of pledged land use rights, property and equipment. As of June 30, 2014, the principal and interest owing was $47.70 million, and the collaterals associated with the loan agreement are made up of the Company's land use rights and property and equipment with a carrying value of approximately $54.23 million.
The Company has been negotiating with the bank to arrange for a debt restructuring plan, and as of the reporting date, no consensus has been arrived yet. Although the bank informally expressed their intention to maintain normal operations of the Company, there is no assurance that they will not take further actions in the future.
Updates on Harbin Commercial Bank Loan
On February 14, 2012, the Company secured a bank loan for the amount of $24.09 million (RMB 140 million) from Harbin Commercial Bank (the "Original HCB Loan").
In order to improve the capital structure, management of the Company negotiated with the bank to extend the repayment schedule. In August 2013, the Company was notified by Harbin Commercial Bank that the bank had approved to extend the repayment schedule from three years to ten years (the "Adjusted HCB Loan"). According to the new arrangement the loan will mature in December 2022. The first installment of $0.52 million (RMB 3 million) was repayable in August 2013, and thereafter the Company will need to repay $2.41 million (RMB 14 million) each year for eight consecutive years (RMB 0.2 million in December and 13.8 million in February), and $4.30 (RMB 25 million) in the final year (RMB 0.4 million in December and 24.6 million in February). On February 28th, 2014, the company made payment of $2.37 million (RMB 13.8 million) as the third installment.
Updates on MLE Loan Restructuring
On February 8, 2012, the Company entered into a Debt Settlement Agreement with Melco Leisure and Entertainment Group Limited ("Melco" or "MLE") for the settlement of a loan in the principal of US$12 million (the "MCR Loan") and a loan in the principal of US$11 million (the "MCRI Loan") made by Melco to the Company and MCRI. MCR Loan and MCRI loan (together "Melco Loans" or "MLE Loan") were borrowed in 2008. On May 29, 2012, the Company and Melco entered into Amended and Restated Debt Settlement Agreement ("the Agreement") to clarify details of the loan settlement mechanism and procedures to implement the settlement of the Melco Loans. On July 10, 2012, during the Company's Annual General Meeting, the Company obtained Shareholder Approval on the Agreement. The transactions contemplated under the Agreement have been approved by the TSX Venture Exchange.
Detailed settlement arrangement can be found in Note 14 of 2013 Annual Consolidated Financial Statements. Settlement procedures were started in the second quarter of 2013, and the Company paid $3.01 million ($2.5 million of loan principal and $0.51 million of interest) to MLE on May 31, 2013 as a partial fulfilment to its cash repayment obligation specified in the Agreement. The Company also filed for issuance of 20,600,000 (the "Issuance I") and 19,444,444 (the "Issuance II") common shares to its subsidiary MCRI on July 2, 2013 and July 23, 2013 respectively. Subject to the Agreement, the 20,600,000 shares issued in Issuance I are proposed to be transferred to MLE for full satisfaction of the MCRI Loan with the new principal amount of USD $14.9 million. According to the Company's initial contact with MLE, the US$3.5m Principal would be settled by conversion into 19,444,444 shares. Issuance II was then made for the purpose of settlement. However, after a series of negotiation, it is probable that management of MLE will choose to take up to the maximum of five villas on the basis of USD $0.7 million per villa as part of the settlement. Therefore, it is probable that the Issuance II will be later canceled accordingly. Furthermore, there is discrepancy in calculation of number of shares in relation to the Issuance II. As of the reporting date, the Company is still in negotiation with MLE on the details of the settlement.
Update on Changchun Resort
On November 17, 2010, the Company announced its updates with respect to certain developments that have taken place with respect to its Changchun Resort. The government of Erdao district of Changchun city in the Jilin province of the People's Republic of China (the "Erdao Government") holds the view that the Changchun Resort, is still owned by the government and it may, through Changchun Lianhua Mountain Agricultural Project Development Company Limited ("CCL Agricultural"), manage the same to the Company's exclusion. The Company disagrees with the Erdao Government's position. The Company had engaged Global Law Office, a reputable law firm in PRC, to do legal due diligence on the assets before they were acquired by the Company. Global Law Office had advised the Company that the assets acquired are not state-owned assets and the same may be validly transferred to the Company. Because of CCL Agricultural's and the Erdao Government's action, the Company has been deprived of management of the Changchun Resort. The Company has engaged in discussions with the Erdao Government, Changchun Lianhua Mountain Sports & Travel Development Company Changchun Sports and CCL Agricultural with an aim of resolving this matter. As a result of the foregoing, the Company has lost control of the company itself and has therefore written off the full value of the assets and liabilities of Changchun Resort and reported it as a loss from discontinued operations as of December 31, 2010. In 2011, the Company commenced legal actions against the Erdao Government in an effort to regain control and ownership of the assets and operations.
The Company's legal department has sent three letters of formal complaint to the Ministry of Commerce of the People's Republic of China in June 2012, the Erdao Government, and Jilin Lianhua Tourist Committee. Recently, the Ministry of Commerce of the People's Republic of China has assigned the case to the relevant authority called the Economic and Technological Cooperation Department of Jilin Province for handling. After a series of negotiations made and no consensus arrived as at reporting date, management had decided to start formal administrative prosecution process against the government. As at June 30, 2014, management had sent several letters of notice, but no formal prosecution has been started.
MCR is the premier developer of four season destination ski resorts in China. MCR is transforming existing China ski properties into world-class, four seasons luxury mountain resorts with excellent real estate investment opportunities for discerning buyers. In February 2009, the Company's Sun Mountain Yabuli Resort was awarded Best Resort Makeover in Asia by TIME Magazine. Yabuli is also the permanent home of the China Entrepreneur's Forum the leading and most influential community of China's most distinguished and successful entrepreneurs and business leaders with over 5,000 members from across a variety of key industries.
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