UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the fiscal year ended
or
For the transition period from _________ to _________
Commission File Number:
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Common Stock, $0.001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | |
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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 pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. The Company’s common stock did not trade during the year ended December 31, 2021.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. As of March 14, 2022, there were
DOCUMENTS INCORPORATED BY REFERENCE
None.
Throughout this Report on Form 10-K, the terms the “Company,” “we,” “us,” and “our” refer to LiquidValue Development Inc., and “our board of directors” refers to the board of directors of LiquidValue Development Inc.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K contains forward-looking statements regarding, among other things, our future operating results and financial position, our business strategy, and other objectives for our future operations. The words “anticipate,” “believe,” “intend,” “expect,” “may,” “estimate,” “predict,” “project,” “potential” and similar expression are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. There are a number of important risks and uncertainties that could cause our actual results to differ materially from those indicated by forward-looking statements. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments that we may make.
You should read this Report on Form 10-K and the documents that we have filed as exhibits to this Report on Form 10-K completely and with the understanding that our actual future results may be materially different from what we expect. The forward-looking statements contained in this Report on Form 10-K are made as of the date of this Report on Form 10-K, and we do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.
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LiquidValue Development Inc.
Form 10-K
For the Year Ended December 31, 2021
Table of Contents
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PART I
Item 1. Business.
General
LiquidValue Development Inc. (the “Company”), formerly known as SeD Intelligent Home Inc. and Homeownusa, was incorporated in the State of Nevada on December 10, 2009. Our address is 4800 Montgomery Lane, Suite 210, Bethesda, MD, 20814. Our telephone number is 301-971-3940.
On December 22, 2016 Alset International Limited (formerly known as Singapore eDevelopment Limited and referred to herein as “Alset International”) acquired 74,015,730 shares of the Company’s common stock. Alset International subsequently contributed its ownership in the Company to its subsidiary SeD Intelligent Home Inc, formerly known as SeD Home International, Inc. (which also owned Alset EHome Inc. until December 29, 2017, at which time SeD Intelligent Home Inc. contributed its shares of Alset EHome Inc. to the Company). On January 10, 2017, our board of directors appointed Fai H. Chan as Director. On March 10, 2017, Rongguo (Ronald) Wei was appointed as Chief Financial Officer of the Company.
On September 5, 2017, the Company changed its name to SeD Intelligent Home Inc., and increased its number of authorized shares to 1,000,000,000 (the par value per share remained $0.001). On July 7, 2020, the Company changed its name to LiquidValue Development Management Inc.
On December 29, 2017, the Company, SeD Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of the Company (the “Merger Sub”), Alset EHome Inc. (formerly known as Alset iHome Inc, SeD Home REITs Inc. and SeD Home, Inc., and referred to herein as “Alset EHome”), a Delaware corporation, and SeD Intelligent Home Inc., a Delaware corporation entered into an Acquisition Agreement and Plan of Merger (the “Agreement”) pursuant to which the Merger Sub was merged with and into Alset EHome, with Alset EHome surviving as a wholly-owned subsidiary of the Company. The closing of this transaction (the “Closing”) also took place on December 29, 2017. The Company ceased to be a “shell company” as that term is defined in Rule 405 of the Securities Act and Rule 12b-2 of the Exchange Act. The Company’s business operations became those operations that Alset EHome was conducting.
Alset EHome was incorporated in Delaware on February 24, 2015, and was named SeD Home USA, Inc. before changing its name in May of 2015 to SeD Home, Inc. On February 6, 2020, this name was changed to SeD Home REITs Inc., on July 7, 2020 the name was changed to Alset iHome Inc. and on December 9, 2020 it was changed to Alset EHome Inc. Prior to the Closing, the officers and directors of Alset EHome are the same six individuals who are the officers and directors of the Company.
With the completion of the Company’s acquisition of Alset EHome, we entered into the business of land development. While the Company will own real estate, the Company does not intend to be a REIT for federal tax purposes. Alset EHome’s Lakes at Black Oak (referred to herein as “Black Oak”) project is a land sub-division development located north of Houston, Texas. Our Black Oak project initially consisted of 162 acres; in January of 2021, this project was expanded with the purchase of an approximately 6.3 acre tract of land. Alset EHome’s Ballenger Run project is a 197-acre sub-division development near Washington D.C. in Frederick County, Maryland. Alset EHome conducts its operations through wholly and partially owned subsidiaries. Alset EHome’s affiliates provide project and asset management via separate agreements with consultants.
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The land development business involves converting undeveloped land into buildable lots. When possible, in future projects we will attempt to mitigate risk by attempting to enter into contracts with strategic home building partners for the sale of lots to be developed. In such circumstances, it is our intention that (i) we will conduct a feasibility study on a particular land development; (ii) both Alset EHome and the strategic home building partners will work together in connection with acquisition of the appropriate land; (iii) strategic home building partners will typically agree to enter into agreements to purchase up to 100% of the buildable lots to be developed; (iv) Alset EHome and the strategic home building partners will enter into appropriate agreements; and (v) Alset EHome will proceed to acquire the land for development and will be responsible for the infrastructure development, ensuring the completion of the project and delivery of buildable lots to the strategic home building partner.
We also intend, to the fullest extent practicable, to source land where local government agencies (including county, district and other municipalities) and public authorities, such as improvement districts, will reimburse the majority of infrastructure costs incurred by the land developer for developing the land to build taxable properties. The developers and public authorities enter into agreements whereby the developers are reimbursed for their costs of infrastructure.
The Company will also consider the potential to purchase foreclosure property development projects from banks, if attractive opportunities should arise.
The Company, utilizing the extensive business network of its management and majority shareholder, may from time to time attempt to forge joint ventures with other parties. Through its subsidiaries, Alset EHome may manage such joint ventures.
In addition to the completion of our current projects, we intend to seek additional land development projects in diverse regions across the United States. Such projects may be within both the for sale and for rent markets, and we may expand from residential properties to other property types, including but not limited to commercial and retail properties. We will consider projects in diverse regions across the United States, however, Alset EHome and its management and consultants have longstanding relationships with local owners, brokers, managers, lenders, tenants, attorneys and accountants to help it source deals throughout Maryland and Texas. Alset EHome will continue to focus on off-market deals and raise appropriate financing.
Entering into the business of building homes with the intention of owning and renting those homes would provide an opportunity for Alset EHome to create value by (i) acquiring properties for horizontal and vertical development; (ii) providing fee generation via property management and leasing; and (iii) capturing rent escalations over long term periods. Alset EHome and its affiliates would provide property management for customers seeking to offload home maintenance and lawn care.
In 2021, our subsidiary Alset EHome Inc. acquired approximately 19.5 acres of partially developed land near Houston, Texas which will be used to develop a community named Alset Villas (“Alset Villas”). Alset EHome is targeting to develop approximately 63 homes at Alset Villas for rent and/or for sale. The Alset Villas project remains at the early stage.
In 2021, the Company purchased 109 homes in Texas from other builders in different communities. We intend to rent these homes. Alset EHome pursued this new endeavor in part to improve cash flow and smooth out the inconsistencies of income in residential land development. We intend to develop our subsidiary American Home REIT Inc. as the owner of single Family rental homes.
Through our subsidiaries, we will explore the potential to pursue other business opportunities related to real estate. The Company is evaluating the potential to enter into activities related to solar energy and energy efficient products as well as smart home technologies, although we note that these potential opportunities remain at the exploratory stage, and we may not pursue these opportunities at the discretion of our management. Through the Company’s eco-systems of businesses based around sustainable, healthy living communities, Alset EHome intends to develop single family homes which are eco-friendly. They will be fitted out with solar energy products such as photovoltaic systems, battery systems, and car charging ports for sustainable transport as well as other energy efficient systems. The Company also envisions acquiring land surrounding its communities for solar farm projects to power these communities. Alset EHome has commenced the infrastructure design and engineering for this sustainable, healthy living community concept within the Black Oak project outside of Houston, Texas. The company intends to bring this concept to other strategic parts of the US.
We also intend to enlarge the scope of property-related services. Additional planned activities, which we intend to be carried out through Alset EHome, include financing, home management, realtor services, insurance and home title validation. We may particularly provide these services in connection with homes we build. These activities are also in the planning stages.
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Both land development projects and rental business are included in our only reporting segment – real estate. In determination of segments, the Company, together with its chief decision maker, who is also our CEO, considers factors that include the nature of business activities, allocation of resources and management structure.
As of December 31, 2021, we had total assets of $48,180,107 and total liabilities of $23,278,817. Total assets as of December 31, 2020 were $29,219,785 and total liabilities were $2,691,098.
Employees
At the present time, the Company has five full time employees. Much of our work is done by contractors retained for projects, and at the present time we have no part-time employees.
Compliance with Government Regulation
The development of our real estate projects will require the Company to comply with federal, state and local environmental regulations. In connection with this compliance, our real estate acquisition and development projects will require environmental studies. To date, the Company has spent approximately $57,581 on environmental studies and compliance. Such costs are reflected in construction progress costs in our financial statements.
The cost of complying with governmental regulations is significant and will increase if we add additional real estate projects and become involved in homebuilding in the future and are required to comply with certain due diligence procedures related to third party lenders.
At the present time, we believe that we have all of the material government approvals that we need to conduct our business as currently conducted. We are subject to periodic local permitting that must be addressed, but we do not anticipate that such requirements for government approval will have a material impact on our business as presently conducted. We are required to comply with government regulations and to make filings from time to time with various government entities. Such work is typically handled by outside contractors we retain.
Impact of Recent Public Health Events
In December 2019, a novel strain of coronavirus (COVID-19) was first identified in Wuhan, Hubei Province, China, and has since spread to a number of other countries, including the United States. The COVID-19 pandemic, or other adverse public health developments, could have a material and adverse effect on our business operations.
In the years ended December 31, 2020 and December 31, 2021, the COVID-19 pandemic did not have a material impact on our operations. However, the extent to which the COVID-19 pandemic and the related economic decline that occurred in the United States in March of 2020 may impact our business in the future will depend on developments which are highly uncertain and cannot be predicted. The COVID-19 pandemic’s far-reaching impact on the global economy could negatively affect various aspects of our business, including demand for real estate. In the years ended December 31, 2020 and December 31, 2021, we continued to sell lots at our Ballenger Run project (in Maryland) for the construction of homes to NVR. Such homes are often a first home that generally did not require buyers to sell an existing home. We believe low interest rates have encouraged home sales. Many buyers opted to see home models at the project virtually. This technology allowed them to ask questions to sales staff and see the homes. Home closings were able to occur electronically.
We have received strong indications that buyers and renters across the country are expressing interest in moving from more densely populated urban areas to the suburbs. We believe that our Ballenger Run project is well suited and positioned to accommodate those buyers. Our latest phase for sale at Ballenger Run, involving single-family homes, has seen a high number of interested potential buyers signing up for additional information and updates on home availability.
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The COVID-19 pandemic could impact the ability of our staff and contractors to continue to work, and our ability to conduct our operations in a prompt and efficient manner. We have experienced a slowdown in the planned construction of a clubhouse at the Ballenger Run project which was completed behind schedule. We believe this delay was caused in part by policies requiring lower numbers of contractors working in indoor spaces.
The COVID-19 pandemic may adversely impact the timeliness of local government in granting required approvals. Accordingly, COVID-19 may cause the completion of important stages in our real estate projects to be delayed.
At our Black Oak project in Texas, we have strategically redesigned the lots over the past year for a smaller “starter home” products that we believe will be more resilient in fluctuating markets. Should we initiate sales at Black Oak, we believe the same implications described above regarding our Ballenger Run project may apply to our Black Oak project (including the general trend of customers’ interest shifting from urban to suburban areas). Unlike our Ballenger Run project, our Black Oak project may include our involvement in single family rental home development.
Impact on Staff
Most of our staff works out of our Bethesda, Maryland office. Our staff has shifted to mostly working from home since March 2020, but this has had minimal impact on our operations to date. The COVID-19 pandemic has also impacted the frequency with which our management would otherwise travel to the Black Oaks project; however, we have a contractor in Texas providing supervision of the project. Management continues to regularly supervise the Ballenger Run project. Limitations on the mobility of our management and staff may slow down our ability to enter into new transactions and expand existing projects.
We have not reduced our staff in connection with the COVID-19 pandemic. To date, we did not have to expend significant resources related to employee health and safety matters related to the COVID-19 pandemic. We have a small staff, however, and the inability of any significant number of our staff to work due to illness or the illness of a family member could adversely impact our operations.
Intellectual Property
At the present time, an entity affiliated with the Company has registered the trademark “Alset” in the United States and certain other countries. We anticipate filing additional trademark applications as we expand into new areas of business.
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Corporate Organization
The following chart describes the Company’s ownership of various subsidiaries:
Black Oak
Our Black Oak project is a land infrastructure development and sub-division project situated in Magnolia, Texas north of Houston. 150 Black Oak, Ltd. was a partnership formed by our former partner prior to our investment in this project. Black Oak had contracts to purchase seven contiguous parcels of land. Our initial equity investment was US$4.3 million for ownership of 60% of the partnership. Upon this initial investment in February 2014, we changed the name of the partnership to 150 CCM Black Oak, Ltd (“Black Oak”) and subsequently increased our ownership to 69%. On July 23, 2018, SeD Development USA, LLC, a wholly owned subsidiary of the Company, entered into two Partnership Interest Purchase Agreements through which it purchased an aggregate of 31% of Black Oak. Prior to the Partnership Interest Purchase Agreements, the Company owned and controlled Black Oak through its 68.5% limited partnership interest and its ownership of the General Partner, 150 Black Oak GP, Inc, a 0.5% owner in Black Oak. As a result of the purchase, the Company, through its subsidiaries, now owns 100% of Black Oak. 150 Black Oak GP, Inc. is wholly owned by SeD USA, LLC, which in turn is wholly owned by Alset EHome. The limited partnership interests are owned by SeD Development USA, Inc., which is wholly owned by Alset EHome. 150 Black Oak GP, Inc. was previously jointly owned with a partner, but is now entirely owned by SeD USA, LLC.
In October 2015, the project obtained a $6.0 million construction loan from Revere High Yield Fund, LP. This loan was paid off in October of 2017. Currently the Black Oak project does not have any financing from third parties.
The site plan at Black Oak allows for approximately 550-600 residential lots of varying sizes. We anticipate that our involvement in land development aspects of this project will take approximately three to five additional years to complete. Since February of 2015, we have completed several important tasks related to the project, including clearing certain portions of the property, paving certain roads within the project and complying with the local improvement district to ensure reimbursement of these costs.
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On July 3, 2018, 150 CCM Black Oak Ltd. entered into a Purchase and Sale Agreement with Houston LD, LLC for the sale of 124 lots within the Black Oak project (the “Black Oak Purchase Agreement”). Pursuant to the Black Oak Purchase Agreement, it was agreed that 124 lots would be sold for a range of prices based on the lot type. In addition, Houston LD, LLC agreed to contribute a “community enhancement fee” for each lot, collectively totaling $310,000 which was held in escrow. 150 CCM Black Oak, Ltd. agreed to apply these funds exclusively towards an amenity package on the property. The closing of the transactions contemplated by the Black Oak Purchase Agreement was subject to Houston LD, LLC completing due diligence to its satisfaction.
On October 12, 2018, 150 CCM Black Oak, Ltd. entered into an Amended and Restated Purchase and Sale Agreement (the “Amended and Restated Black Oak Purchase Agreement”) for these 124 lots. Pursuant to the Amended and Restated Black Oak Purchase Agreement, the purchase price remained at $6,175,000. 150 CCM Black Oak, Ltd. was required to meet certain closing conditions and the timing for the closing was extended.
On January 18, 2019, the sale of 124 lots at Black Oak was completed for $6,175,000 and the community enhancement fee equal to $310,000 was delivered to the escrow account, which was later drawn and closed. An impairment of real estate of approximately $2.4 million related to this sale was recorded on December 31, 2018. The revenue was recognized in January, 2019, when the sale was closed, and no gain or loss was recognized in January, 2019.
On July 20, 2018, Black Oak Ltd received $4,592,079 of district reimbursement for previous construction costs incurred in the land development. Of this amount, $1,650,000 remained on deposit in the District’s Capital Projects Fund for the benefit of Black Oak Ltd and to be released upon receipt of the evidence of the: (a) execution of a purchase agreement between Black Oak Ltd and a home builder with respect to the Black Oak development and (b) of the completion, finishing and making ready for home construction of at least 105 unfinished lots in the Black Oak development. After entering the purchase agreement with Houston LD, LLC, the above requirements were met. The amount of the deposit was released to the Company after presenting the invoices paid for land development.
On November 4, 2021, Black Oak Ltd received $750,000 reimbursement from Aqua Texas pursuant to a contractual agreement whereby Aqua is obligated to pay 150 CCM Black Oak $6,000 for each connection made to an individual single family home upon sale to the end customer.
On January 13, 2021, 150 CCM Black Oak, Ltd. purchased an approximately 6.300 acre tract of land in Montgomery County, Texas. The Company’s strategic acquisition contiguous to the Black Oak project is intended to provide additional lot yield, potential additional amenities and/or a solar farm to support the Company’s sustainable, healthy living concept.
At the present time, the Company is also considering expanding its current policy of selling buildable lots to include a strategy of building housing for sale or rent, particularly at our Black Oak and Alset Villas properties. The required time and expenses needed to complete the Black Oak and Alset Villas projects will be influenced by the strategy, or mix of strategies, we utilize at each project.
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Ballenger Run
In November 2015, we completed the $15.65 million acquisition of Ballenger Run, a 197-acre land sub-division development located in Frederick County, Maryland. Previously, on May 28, 2014, the RBG Family, LLC entered into the Assignable Real Estate Sales Contract with NVR, Inc. (“NVR”) by which RBG Family, LLC would sell the 197 acres for $15 million to NVR. On December 10, 2014, NVR assigned this contract to SeD Maryland Development, LLC in the Assignment and Assumption Agreement and entered into a series of Lot Purchase Agreements by which NVR would purchase subdivided lots from SeD Maryland Development, LLC.
SeD Maryland Development’s acquisition of the 197 acres was funded in part from a $5.6 million deposit from NVR Inc. (“NVR”). The balance of $10.05 million was derived from a total equity contribution of $15.2 million by SeD Ballenger LLC (“SeD Ballenger”) and CNQC Maryland Development LLC (a unit of Qingjian International Group Co, Ltd, China, “CNQC”). The project is owned by SeD Maryland Development, LLC (“SeD Maryland”). SeD Maryland is 83.55% owned by SeD Ballenger and 16.45% by CNQC.
SeD Maryland entered into a Project Development and Management Agreement for Ballenger Run with MacKenzie Development Company, LLC and Cavalier Development Group, LLC on February 25, 2015. MacKenzie Development Company, LLC assigned its rights and obligations to this agreement to Adams Aumiller Properties, LLC on September 9, 2017. Pursuant to this Project Development and Management Agreement, Adams Aumiller, LLC and Cavalier Development Group, LLC coordinate and manage the construction, financing, and development of Ballenger Run. SeD Maryland compensates Adams Aumiller LLC and Cavalier Development Group, LLC with a monthly aggregate fee of $14,667 until all single family and townhome lots are sold. The monthly aggregate fee will then be adjusted to $11,000 which will continue for approximately eight months to allow all close out items to be finished, including the release of guarantees and securities as required by government authorities. The Project Development and Management Agreement for Ballenger Run also requires SeD Maryland to pay a fee of $1,200 and $500 for each single-family and townhome, respectively, sold to a third party. SeD Maryland also paid a fee of $50,000 after the sale of the parcel underlying the multi-family lots in August 2018.
This property was initially zoned for 443 entitled Residential Lots, 210 entitled Multifamily Units and 200 entitled continuing care retirement community units approved for twenty (20) years from the date of a Developers Rights Responsibilities Agreement dated October 8, 2014, as amended on September 6, 2016. In July 2019 we received required government approval to revise the zoning of this property to include 479 entitled residential lots and 210 entitled multi-family units, with no entitled continuing care retirement community units. We anticipate that the completion of our involvement in this project will take approximately 12 to 18 months from the date of this Annual Report.
Revenue from Ballenger Run is anticipated to come from three main sources:
● | The sale of 479 entitled and constructed residential lots to NVR; |
● | The sale of the lot for the 210 entitled multi-family units; and |
● | The sale of 479 front foot benefit assessments. |
Revenues may be adversely impacted, if we fail to attain certain goals, meet certain conditions or if market prices for this development unexpectedly begin to drop.
The Company anticipates that the estimated construction costs (not including land costs and financing costs) for the final phases of the Ballenger Run project will be $1,670,820. The expected completion date for the final phases of the Ballenger Run project is June of 2022.
Financing from Union Bank (f/k/a The Bank of Hampton Roads, Shore Bank and Xenith Bank) closed simultaneous with the settlement on the land on November 23, 2015, pursuant to a subsequent amendment to the terms of this loan, the loan provides (i) for a maximum of $11 million outstanding; (ii) that the maturity of this loan will be December 31, 2019; and (iii) includes an $800,000 letter of credit facility, with an annual rate of 1.5% on all issued letters of credit.
This loan is to fund the development of the first 276 lots, the multi-family parcel and senior living parcel, the amenities associated with these phases, and certain road improvements. The Union Bank Revolving Loan was repaid in January 2019.
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On April 17, 2019, SeD Maryland Development LLC entered into a Development Loan Agreement with Manufacturers and Traders Trust Company (“MT Bank”) which is comprised of: (1) a Note in the principal amount not to exceed at any one time outstanding the sum of $8,000,000, with a cumulative loan advance amount of $18,500,000, and (2) a letter of credit facility in an aggregate amount of up to $900,000 (the “L/C Facility”). The Note bears an interest rate of the one month LIBOR plus 375 basis points. Commissions on each letter of credit (“L/C”) will be 1.5% per annum on the face amount of the L/C. Other standard lender fees will apply in the event L/C is drawn down. The Note is a revolving line of credit. The L/C Facility is not a revolving loan, and amounts advanced and repaid may not be re-borrowed. Repayment of the Development Loan Agreement is secured by $2,600,000 collateral fund and a Deed of Trust issued to MT Bank on the property owned by SeD Maryland. As of December 31, 2021 and 2020, the outstanding balance of the revolving loan was $0.
On April 17, 2019, SeD Maryland Development LLC and Union Bank terminated the Revolving Credit Note. After termination, Union Bank still held $602,150 as collateral for these outstanding Letters of Credit (L/C). The L/C collateral was released in June 2019, when all L/Cs were transferred to the MT Bank L/C Facility.
Expenses from Ballenger Run include, but are not limited to costs associated with land prices, closing costs, hard development costs, cost in lieu of construction, soft development costs and interest costs. We presently estimate these costs to be between $56 and $57 million. We may also encounter expenses which we have not anticipated, or which are higher than presently anticipated.
The initial phases of this project have been completed and we are currently in the final phases of this project.
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Sale of Residential Lots
The 479 Residential Lots were contracted for sale under a Lot Purchase Agreement to NVR, a company based in the US and listed on the New York Stock Exchange. NVR is a home builder which is engaged in the construction and sale of single-family detached homes, townhouses and condominium buildings. It also operates a mortgage banking and title services business. Under the Lot Purchase Agreements, NVR provided Alset EHome with an upfront deposit of $5.6 million and has agreed to purchase the lots at a range of prices. The lot types and quantities to be sold to NVR under the Lot Purchase Agreements include the following:
Lot Type |
| Quantity |
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Single Family Detached Large |
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| 85 |
|
Single Family Detached Small |
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| 89 |
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Single Family Detached Neo Traditional |
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| 33 |
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Single Family Attached 28’ Villa |
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| 121 |
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Single Family Attached 20’ End Unit |
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| 46 |
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Single Family Attached 16’ Internal Unit |
|
| 105 |
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Total |
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| 479 |
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There are five different types of Lot Purchase Agreements (“LPAs”), which are essentially the same except for the price and unit details for each type of lot. Under the LPAs, NVR shall purchase 30 available lots per quarter. The LPAs provide several conditions related to preparation of the lots which must be met so that a lot can be made available for sale to NVR. SeD Maryland is to provide customary lot preparation including but not limited to survey, grading, utilities installation, paving, and other infrastructure and engineering. In the event NVR does not purchase the lots under the LPAs, SeD Maryland would be entitled to keep the NVR deposit and terminate the LPAs. Should SeD Maryland breach the LPAs, it would have to return the remainder of the NVR deposit that has not already been credited to NVR for any sales of lots under the LPAs and NVR would be able to seek specific performance of the LPAs as well as any other rights available at law or in equity.
The sale of 13 model lots to NVR began in May of 2017. 88 lots were sold in the year ended December 31, 2021, compared to 121 lots sold in the year ended December 31, 2020. As of December 31, 2021, 476 lots have been sold to NVR with 3 remaining for the duration of the project. NVR continues to market and sell homes.
As part of the contract with NVR, upon establishment of FFB assessments on the lots, the Company is obligated to credit NVR with an amount equal to one year of FFB assessment per each lot purchased by NVR. As of December 31, 2021 the accrued balance due to NVR was $188,125.
Sale of Lots for the Multi-family Units
In June 2016, SeD Maryland entered into a lot purchase agreement with Orchard Development Corporation relating to the sale of 210 multifamily units in the Ballenger Run Project for a total purchase price of $5,250,000, which closed on August 7, 2018.
Sale of the Front Foot Benefit Assessments
We have established a front foot benefit (“FFB”) assessment on all of the lots sold to NVR. This is a 30-year annual assessment allowed in Frederick County which requires homeowners to reimburse the developer for the costs of installing public water and sewer to the lots. These assessments become effective as homes are settled, at which time we can sell the collection rights to investors who will pay an upfront lump sum, enabling us to more quickly realize the revenue. The selling prices range from $3,000 to $4,500 per home depending the type of the home. Our total expected revenue from the front foot benefit assessment is approximately $1 million. To recognize revenue of the FFB assessment, both our and NVR’s performance obligations have to be satisfied. Our performance obligation is completed once we complete the construction of water and sewer facilities and close the lot sales with NVR, which inspects these water and sewer facilities prior to the close of lot sales to ensure all specifications are met. NVR’s performance obligation is to sell homes they build to homeowners. Our FFB revenue is recognized upon NVR’s sales of homes to homeowners. The agreement with these FFB investors is not subject to amendment by regulatory agencies and thus our revenue from FFB assessment is not either. During the years ended December, 2021 and 2020, we recognized revenue in the amounts of $289,375 and $273,620 from FFB assessments, respectively.
Wetland Impact Permit
The Ballenger Run project required a joint wetland impact permit, which requires the review of several state and federal agencies, including the U.S. Army Corps of Engineers and Maryland Department of the Environment. The permit is primarily required for Phase 3 of construction but it also affects a pedestrian trail at the Ballenger Run project and the multi-family sewer connection. The U.S. Army Corps of Engineers allowed us to proceed with construction on Phase 1 but required archeological testing. In November 2018, the archeological testing was completed with no further recommendations on Phase 1 of the project. Required architectural studies on the final phase of development will likely result in the loss of only one lot, however, we cannot be certain of future reviews and their impact on the project. The U.S. Army Corps of Engineers and Maryland Department of the Environment permits were issued in June 2019. A modification to the permit for a temporary stream crossing was also issued in October 2019 allowing for the commencement of construction on Phase 3.
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K-6 Grade School Site
In connection with getting the necessary approvals for the Ballenger Project, we agreed to transfer thirty acres of land that abuts the development for the construction of a local K-6 grade school. We will not be involved in the construction of such school.
Planned Alset Villas Project in Texas
In 2021, our subsidiary Alset EHome Inc. acquired approximately 19.5 acres of partially developed land near Houston, Texas which will be used to develop a community named Alset Villas (“Alset Villas”). Alset EHome is targeting to develop approximately 63 homes at Alset Villas for rent and/or for sale. The Alset Villas project remains at the early stage.
Competition
There are a number of companies engaged in the development of land. Should we expand our operations into the business of constructing homes ourselves, we will face increased competition, including competition from large, established and well-financed companies, some of which may have considerable ties and experience in the geographical areas in which we seek to operate. Similarly, as we consider other opportunities, we may wish to pursue in addition to our current land development business, we anticipate that we will face experienced competitors.
We will compete in part on the basis of the skill, experience and innovative nature of our management team, and their track record of success in diverse industries.
Item 1A. Risk Factors.
An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below and the other information in this report before making a decision to invest in our common stock. If any of the following risks and uncertainties develop into actual events, our business, results of operations and financial condition could be adversely affected. In those cases, the trading price of our common stock could decline and you may lose all or part of your investment.
Risks Related to Our Company
Management has identified a material weakness in the design and effectiveness of our internal controls, which, if not remediated, could affect the accuracy and timeliness of our financial reporting and result in misstatements in our financial statements.
In connection with the preparation of our Report on Form 10-K, an evaluation was carried out by management, with the participation of our Co-Chief Executive Officers and Co-Chief Financial Officers, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) as of December 31, 2021. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified, and that such information is accumulated and communicated to management, including the Co-Chief Executive Officers and Co-Chief Financial Officers, to allow timely decisions regarding required disclosure.
During evaluation of disclosure controls and procedures as of December 31, 2021, conducted as part of our annual audit and preparation of our annual financial statements, management conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures and concluded that our disclosure controls and procedures were not effective. Management determined that at December 31, 2021, we had a material weakness that relates to the relatively small number of staff. This limited number of staff prevents us from segregating duties within our internal control system.
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This material weakness, which remained unremedied by the company as of December 31, 2021, could result in a misstatement to the accounts and disclosures that would result in a material misstatement to our annual or interim consolidated financial statements that would not be prevented or detected. If we do not remediate the material weakness or if other material weaknesses are identified in the future, we may be unable to report our financial results accurately or to report them on a timely basis, which could result in the loss of investor confidence and have a material adverse effect on our stock price as well as our ability to access capital and lending markets.
We will need additional capital to expand our current operations or to enter into new fields of operations.
Both the expansion of our current land development operations into new geographic areas and the proposed expansion of the Company into new businesses in the real estate industry will require additional capital. We will need to seek additional financing either through borrowing, private offerings of our securities or through strategic partnerships and other arrangements with corporate partners. We cannot be assured that additional financing will be available to us, or if available, will be available to us on terms favorable to us. If adequate additional financing is not available on acceptable terms, we may not be able to implement our business development plan or expand our operations.
We must retain key personnel for the success of our business.
Our success is highly dependent on the skills and knowledge of our management team, including their knowledge of our projects and network of relationships. If we are unable to retain the members of such team, or adequate substitutes, this could have a material adverse effect on our business and financial condition.
If we fail to effectively manage our growth our future business results could be harmed and our managerial and operational resources may be strained.
As we proceed with the expansion of our operations, we expect to experience significant and rapid growth in the scope and complexity of our business. We will need to hire additional personnel in order to successfully advance our operations. This growth is likely to place a strain on our management and operational resources. The failure to develop and implement effective systems, or to hire and retain sufficient personnel for the performance of all of the functions necessary to effectively service and manage our potential business, or the failure to manage growth effectively, could have a materially adverse effect on our business and financial condition.
There are risks related to conflicts of interest with our partners in the Ballenger Run Project.
The Company owns the Ballenger Run Project with another LLC member. This entity is controlled, however, by the Company not only through the Company’s majority voting interest in such project, but also through the control of the entity responsible for such project’s day-to-day operations. The project will be dependent upon SeD Development Management LLC, a subsidiary of Alset EHome, for the services required for its operations. The Company’s control of both the voting control of this project as well as the control of the entity responsible for the day-to-day interests of the project could create conflicts of interest between our Company and our partner in the project. SeD Maryland, the owner of the project, has no employees, and this project will be dependent upon SeD Development Management LLC and its affiliates for the services required for its operations.
The terms of the Management Agreement between SeD Maryland and SeD Development Management LLC were not negotiated at arm’s-length, although it was adopted by CNQC, the other member. Pursuant to the Management Agreement, the owners of SeD Maryland, SeD Ballenger and CNQC, have delegated the day-to-day operations of developing Ballenger Run to SeD Development Management, LLC.
Despite this delegation, potential conflict between CNQC and SeD Development Management, LLC regarding the management of day-to-day operations of Ballenger Run could undermine our ability to effectively implement our vision for these projects, and could result in costly and time-consuming litigation.
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Members of our management may face competing demands relating to their time, and this may cause our operating results to suffer.
Fai H. Chan, one of our Co-Chief Executive Officers, is both an officer and director of Alset International, the entity which owns SeD Intelligent Home Inc., our majority shareholder. Fai H. Chan is also the Chairman and Chief Executive Officer of Alset EHome International Inc., a Nasdaq listed company that owns the majority of Alset International. Fai H. Chan is involved in a number of other projects other than our Company’s real estate business and will continue to be so involved. Moe T. Chan, our other Co-Chief Executive Officer, is both an officer and director of Alset International and will also be involved in projects other than our Company’s real estate business. Both of our Co-Chief Executive Officers have their primarily residences and business offices in Asia, and accordingly, there will be limits on how often they are able to visit the locations of our real estate projects. Similarly, our Co-Chief Financial Officers are both engaged in non-real estate activities of Alset International and Alset EHome International Inc., and only one of our Co-Chief Financial Officers resides and works in the United States (at an office located in Bethesda, MD).
Since some members of our board of directors are not residents of the United States, shareholders may not be able to enforce a U.S. judgment for claims brought against such directors.
Several members of our senior management team, including our Co-Chief Executive Officers, have their primary residences and business offices in Asia, and some portion of the assets of these directors are located outside the United States. As a result, it may be more difficult for shareholders to enforce a lawsuit within the United States against these non-U.S. residents than if they were residents of the United States. Also, it may be more difficult for shareholders to enforce any judgment obtained in the United States against the assets of our non-U.S. resident management located outside the United States than if these assets were located within the United States. A foreign court may not enforce liabilities predicated on U.S. federal securities laws in original actions commenced in certain foreign jurisdictions, or judgments of U.S. courts obtained in actions based upon the civil liability provisions of U.S. federal securities laws.
Concentration of ownership of our common stock by our majority shareholder will limit other investors from influencing significant corporate decisions.
Our majority shareholder will be able to make decisions such as (i) making amendments to our certificate of incorporation and by-laws, (ii) whether to issue additional shares of common stock and preferred stock, (iii) employment decisions, including compensation arrangements, (iv) whether to enter into material transactions with related parties, (v) election and removal of directors and (vi) any merger or other significant corporate transactions. The interests of our majority shareholder may not coincide with the interests of other shareholders.
Our relationship with our majority shareholder and its parent and affiliates may be on terms which are perceived by investors as more or less favorable than those that could be obtained from third parties.
Our majority shareholder, SeD Intelligent Home Inc., presently owns 99.99% of our issued and outstanding common stock. While we anticipate that such percentage will be diluted over time, our majority shareholder, its parent and affiliates will be perceived as having influence over our management and operations, and any loans or other agreements which we may enter into with our majority shareholder and its parent and affiliates may be perceived by investors as being on terms that are less favorable than we could otherwise receive; such perception could adversely impact the price of our common stock. Similarly, such agreements could be perceived as being on terms more favorable than those that could be obtained from third parties, and any unwillingness by our majority shareholder and its parent and affiliates to engage with our common stock could discourage investors.
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Risks Relating to the Real Estate Industry
The market for real estate is subject to fluctuations that may impact the value of the land or housing inventory that we hold, which may impact the price of our common stock.
Investors should be aware that the value of any real estate we own may fluctuate from time to time in connection with broader market conditions and regulatory issues which we cannot predict or control, including interest rates, the availability of credit, the tax benefits of homeownership and wage growth, unemployment and demographic trends in the regions in which we conduct business. Should the price of real estate decline in the areas in which we have purchased land, the price at which we will be able to sell lots to home builders, or if we build houses, the price at which can sell such houses to buyers, will decline.
The coronavirus or other adverse public health developments could have a material and adverse effect on our business operations, financial condition and results of operations.
In December 2019, a novel strain of coronavirus was first identified in Wuhan, Hubei Province, China, and has since spread to a number of other countries, including the United States. The coronavirus, or other adverse public health developments, could have a material and adverse effect on our business operations. The coronavirus’ far-reaching impact on the global economy could negatively affect various aspects of our business, including demand for real estate. In addition, the coronavirus could directly impact the ability of our staff and contractors to continue to work, and our ability to conduct our operations in a prompt and efficient manner. The coronavirus may adversely impact the timeliness of local government in granting required approvals. Accordingly, the coronavirus may cause the completion of important stages in our projects to be delayed. The extent to which the coronavirus may impact our business will depend on future developments, which are highly uncertain and cannot be predicted. For more information on this matter, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations- Financial Impact of the COVID-19 Pandemic.”
The regulation of mortgages could adversely impact home buyers’ willingness to buy new homes which we may be involved in building and selling.
If we become active in the construction and sale of homes to customers, the ability of home buyers to get mortgages could have an impact on our sales, as we anticipate that the majority of home buyers will be financed through mortgage financing.
An increase in interest rates will cause a decrease in the willingness of buyers to purchase land for building homes and completed homes.
An increase in interest rates will likely impact sales, reducing both the number of homes and lots we can sell and the price at which we can sell them.
Our business, results of operations and financial condition could be adversely impacted by significant inflation or deflation.
Significant inflation could have an adverse impact on us by increasing the costs of land, materials and labor. We may not be able to offset cost increases caused by inflation. In addition, our costs of capital, as well as those of our future business partners, may increase in the event of inflation, which may cause us to need to cancel projects. Significant deflation could cause the value of our inventories of land or homes to decline, which could sharply impact our profits.
New environmental regulations could create new costs for our land development business, and other business in which we may commence operations.
At the present time, we are subjected to a number of environmental regulations. If we expand into the business of building homes ourselves, we will be subjected to an increasing number of environmental regulations. The number and complexity of local, state and federal regulations may increase over time. Additional environmental regulations can add expenses to our existing business, and to businesses which we may enter into the future, which may reduce our profits.
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Zoning and land use regulations impacting the land development and homebuilding industries may limit our activities and increase our expenses, which would adversely affect our profits.
We must comply with zoning and land use regulations impacting the land development and home building industries. We will need to obtain the approval of various government agencies to expand our operations as currently into new areas and to commence the building of homes. Our ability to gain the necessary approvals is not certain, and the expense and timing of approval processes may increase in ways that adversely impact our profits.
The availability and cost of skilled workers in the building trades may impact the timing and profitability of projects that we participate in.
Should there be a lack of skilled workers to be retained by our Company and its partners, the ability to complete land development and potential construction projects may be delayed.
Shortages in required materials could impact the profitability of construction partnerships we may participate in.
Should a shortage of required materials occur, such shortage could cause added expense and delays that will undermine our profits.
Our ability to have a positive relationship with local communities could impact our profits.
Should we develop a poor relationship with the communities in which we will operate, such relationship will impact our profits.
We may face litigation in connection with either our current activities or activities which we may conduct in the future.
As we expand our activities, the likelihood of litigation shall increase. The expenses of such litigation may be substantial. We may be exposed to litigation for environmental, health, safety, breach of contract, defective title, construction defects, home warranty and other matters. Such litigation could include expensive class action matters. We could be responsible for matters assigned to subcontractors, which could be both expensive and difficult to predict.
As we expand operations, we will incur greater insurance costs and likelihood of uninsured losses.
If we expand our operations into home building, we may experience material losses for personal injuries and damage to property in excess of insurance limits. In addition, our premiums may raise.
Health and safety incidents that occur in connection with our potential expansion into the home building business could be costly.
If we commence operations in the homebuilding business, we will be exposed to the danger of health and safety risks to our employees and contractors. Health and safety incidents could result in the loss of the services of valued employees and contractors and expose us to significant litigation and fines. Insurance may not cover, or may be insufficient to cover, such losses.
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Adverse weather conditions, natural disasters and man-made disasters may delay our projects or cause additional expenses.
The land development operations which we currently conduct and the construction projects which we may become involved in at a later date may be adversely impacted by unexpected weather and natural disasters, including but not limited to storms, hurricanes, tornados, floods, blizzards, fires or earthquakes. Man-made disasters including terrorist attacks, electrical outages and cyber-security incidents may also impact the costs and timing of the completion of our projects. Cyber-security incidents, including those that result in the loss of financial or other personal data, could expose us to litigation and reputational damage. If insurance is unavailable to us on acceptable terms, or if our insurance is not adequate to cover business interruptions and losses from the conditions described above and similar incidents, or results of operations will be adversely affected. In addition, damage to new homes caused by these conditions may cause our insurance costs to increase.
Risks Associated with Real Estate Related Debt and Other Investments
Any real estate debt security that we originate or purchase is subject to the risks of delinquency and foreclosure.
We may originate and purchase real estate debt securities, which are subject to numerous risks including delinquency and foreclosure. We will not have recourse to the personal assets of our tenants. The ability of a lessee to pay rent depends primarily upon the successful operation of the property, rather than upon the existence of independent income or assets of the tenant.
Any hedging strategies we utilize may not be successful in mitigating our risks.
We may enter into hedging transactions to manage, for example, the risk of interest rate or price changes. To the extent that we may occasionally use derivative financial instruments, we will be exposed to credit, basis and legal enforceability risks. Derivative financial instruments may include interest rate swap contracts, interest rate cap or floor contracts, futures or forward contracts, options or repurchase agreements. In this context, credit risk is the failure of the counterparty to perform under the terms of the derivative contract. If the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. Basis risk occurs when the index upon which the contract is based is more or less variable than the index upon which the hedged asset or liability is based, thereby making the hedge less effective. Finally, legal enforceability risks encompass general contractual risks, including the risk that the counterparty will breach the terms of, or fail to perform its obligations under, the derivative contract. We may not be able to manage these risks effectively.
Risks Related to Our Potential Expansion into New Fields of Operations
If we pursue the development of new technologies, we will be required to respond to rapidly changing technology and customer demands.
In the event that the Company enters the business of developing “Smart Home” and similar technologies (an area which we are presently exploring), the future success of such operation will depend on our ability to adapt to technological advances, anticipate customer demands and develop new products. We may experience technical or other difficulties that could delay or prevent the development, introduction or marketing of products. Also, we may not be able to adapt new or enhanced services to emerging industry standards, and our new products may not be favorably received.
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Risks Related to Our Common Stock
The shares of our common stock are currently not being traded and there can be no assurance that there will be an active market in the future.
Our shares of common stock are not publicly traded, and if trading commences, the price may not reflect our value. There can be no assurance that there will be an active market for our shares of common stock in the future. As a result, investors may not be able to liquidate their investment or liquidate it at a price that reflects the value of the business.
It is possible that we will not establish an active market unless our stock is listed for trading on an exchange, and we cannot assure shareholders that we will ever satisfy exchange listing requirements.
It is possible that a significant trading market for our shares will not develop unless the shares are listed for trading on a national exchange. Exchange listing would require us to satisfy a number of tests as to corporate governance, public float, shareholders, equity, assets, market makers and other matters, some of which we do not currently meet. We cannot assure shareholders that we will ever satisfy listing requirements for a national exchange or that there ever will be significant liquidity in our shares.
If we issue additional shares of our common stock, shareholders will experience dilution of their ownership interest.
We may issue shares of our authorized but unissued equity securities in the future. Such shares may be issued in connection with raising capital, acquiring assets or firing or retaining employees or consultants. If we issue such shares, shareholders’ ownership will be diluted.
We do not intend to pay dividends in the foreseeable future, and investors should not purchase our stock expecting to receive dividends.
We have not paid any dividends on our common stock in the past, and we do not anticipate that we will pay dividends in the foreseeable future. Accordingly, some investors may decline to invest in our common stock, and this may reduce the liquidity of our stock.
The limitations on liability for officers, directors and employees under the laws of the State of Nevada and the existence of indemnification rights for our officers, directors and employees could result in substantial expenditures by the Company and could discourage lawsuits against our officers, directors and employees.
Our Articles of Incorporation contain a specific provision that eliminates the liability of our officers and directors for monetary damages to our company and shareholders. Further, we intend to provide indemnification to our officers and directors to the fullest extent permitted by the laws of the State of Nevada. We may also enter into employment and other agreements in the future pursuant to which we will have indemnification obligations. The foregoing indemnification obligations could result in the Company incurring substantial expenditures to cover the cost of settlement or damage awards against officers and directors. These obligations may discourage the filing of derivative litigation by our shareholders against our officers and directors even where such litigation may be perceived as beneficial by our shareholders.
Item 1B. Unresolved Staff Comments.
Not Applicable.
Item 2. Properties.
Black Oak
The Black Oak property is located in Montgomery County in Magnolia, Texas. This property is located east of FM 2978 via Standard Road to Dry Creek Road and South of the Woodlands, one of the most successful, fastest growing master planned communities in Texas. This residential land development initially consisted of approximately 162 acres. On January 13, 2021, 150 CCM Black Oak, Ltd. purchased an approximately 6.300 acre tract of land in Montgomery County. The Company’s strategic acquisition contiguous to the Black Oak project is intended to provide additional lot yield, potential additional amenities and/or a solar farm to support the Company’s sustainable, healthy living concept. Together with the additional tract of land there are approximately 550-600 lots to be platted for the Company’s future endeavors. This does not include the 124 lots sold to Rausch Coleman in Phase 1. 150 CCM Black Oak Ltd is the primary developer responsible for all infrastructure development. This property is included in Harris County Improvement District #17.
Planned Alset Villas Project in Texas
In 2021, our subsidiary Alset EHome Inc. acquired approximately 19.5 acres of partially developed land near Houston, Texas which will be used to develop a community named Alset Villas (“Alset Villas”). Alset EHome is targeting to develop approximately 63 homes at Alset Villas for rent and/or for sale. The Alset Villas project remains at the early stage.
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Ballenger Run
Ballenger Run is a residential land development project located in Frederick County in Frederick, Maryland. This property is located approximately 40 miles from Washington, DC, 50 miles from Baltimore and is located less than four miles from I-70 and I-270. Ballenger Run is situated on approximately 197 acres of land and entitled for 689 residential units consisting of 479 residential Lots and 210 multi-family units. SeD Maryland Development, LLC is the primary developer responsible for all infrastructure development.
Development of Properties
At the present time, the Company is considering expanding its current policy of selling buildable lots to include a strategy of building housing for sale or rent, particularly at our Black Oak and Alset Villas properties.
Office Space
At the present time, the Company is renting offices in Houston, Texas and Bethesda, Maryland through Alset EHome. At the present time, our office space is sufficient for our operations as presently conducted, however, as we expand into new projects and into new areas of operations, we anticipate that we will require additional office space.
Item 3. Legal Proceedings.
The Company is not a party to any pending legal proceedings, and no such proceedings are known to be contemplated.
There are no material proceedings to which any director, officer or affiliate of the Company, or any owner of record or beneficially of more than five percent of any class of voting securities of the Company, or any associate of any such director, officer, affiliate of the Company, or security holder is a party adverse to the Company or any of its subsidiaries or has a material interest adverse to the Company or any of its subsidiaries.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Company’s Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities
Market Information
There is presently no established public trading market for our shares of common stock. We plan to reapply for quoting of our common stock on the OTC Bulletin Board. However, we can provide no assurance that our shares of common stock will be quoted on the Bulletin Board or, if traded, that a public market will materialize. In connection with the change of the Company’s name from Homeownusa to SeD Intelligent Home Inc., the Company’s symbol changed from HMUS to SEDH on December 13, 2017. On July 7, 2020 the Company changed its name to LiquidValue Development Inc., changing at the same time the symbol to LVDW.
Holders
As of March 14, 2022, the Company had 53 shareholders.
Dividends
Since inception we have not paid any dividends on our common stock. We currently do not anticipate paying any cash dividends in the foreseeable future on our common stock. Although we intend to retain our earnings, if any, to finance the exploration and growth of our business, our board of directors will have the discretion to declare and pay dividends in the future. Payment of dividends in the future will depend upon our earnings, capital requirements, and other factors, which our board of directors may deem relevant.
Securities authorized for issuance under equity compensation plans.
The Company does not have securities authorized for issuance under any equity compensation plans
Performance graph
Not applicable to smaller reporting companies.
Recent sales of unregistered securities; use of proceeds from registered securities
None.
Purchases of Equity Securities by the issuer and affiliated purchasers
The Company did not repurchase any shares of the Company’s common stock during 2021.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For this purpose, any statements contained in this Form 10-K that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as “may”, “will”, “expect”, “believe”, “anticipate”, “estimate” or “continue” or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially depending on a variety of factors, many of which are not within our control. These factors include by are not limited to economic conditions generally and in the industries in which we may participate; competition within our chosen industry, including competition from much larger competitors; technological advances and failure to successfully develop business relationships.
Results of Operations
Results of Operations for the Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020
|
| Year Ended |
| |||||
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| December 31, 2021 |
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| December 31, 2020 |
| ||
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|
|
|
|
|
| ||
Revenue |
| $ | 14,213,380 |
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| $ | 15,656,829 |
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Cost of Revenue |
| $ | 11,551,301 |
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| $ | 14,326,252 |
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General and Administrative Expenses |
| $ | 1,498,052 |
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| $ | 1,185,368 |
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Net Income |
| $ | 922,353 |
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| $ | 220,189 |
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Revenue
Revenue was $14,213,380 for the period ended December 31, 2021 as compared to $15,656,829 for the period ended December 31, 2020. The decrease in revenue is caused mainly by the decrease in property sales from the Ballenger project in 2021. This project is almost finished and only 3 lots remain to be sold in 2022. In this project, builders are required to purchase a minimum number of lots based on their applicable sale agreements. We collect revenue only from the sale of lots to builders. We are not involved in the construction of homes at the present time.
Income from the sale of Front Foot Benefits (“FFBs”), assessed on Ballenger Run project lots, increased from $273,620 in the year ended December 31, 2020 to $289,375 in year ended December 31, 2021. The increase is a mixed result of the increased sale of properties to homebuyers in 2021 and sale of FFBs of a higher value.
In the second quarter of 2021, the Company started renting homes to tenants. Revenue from rental business was $327,296 in the year ended December 31, 2021. The company expects that the revenue from this business will continue to increase as we acquire more rental houses and successfully rent them.
Operating Expenses
All cost of revenue in the years ended on December 31, 2021 came from our Ballenger and SeD Texas projects. The cost of revenue in the year ended on December 31, 2020 came from our Ballenger project. The gross margin for Ballenger project in years ended December 31, 2021 and 2020 were approximately 16% and 14%, respectively. The different types of lots usually have different gross margins, which is the main reason that led to the increase in 2021. The gross margin for SeD Texas project in years ended December 31, 2021 and 2020 were approximately 35% and 0%, respectively.
General and Administrative Expenses
The general and administrative expenses increased from $1,185,368 for the period ended December 31, 2020 to $1,498,052 for the period ended December 31, 2021 due to an increase in professional fees. The Company engaged new consultants and granted a bonus to a project manager during 2021.
Net Income
The Company had a net income of $220,189 for the period ended December 31, 2020 and a net income of $922,353 for the period ended on December 31, 2021. The increase in net income was caused by the decrease in cost of revenue in our Ballenger Project and increase in rental income from our SeD Texas project in 2021.
Liquidity and Capital Resources
Our real estate assets have increased to $40,034,933 as of December 31, 2021 from $20,616,237 as of December 31, 2020. This increase primarily reflects the acquisition of 109 new rental properties in 2021. Our liabilities increased from $2,691,098 at December 31, 2020 to $23,278,817 at December 31, 2021. Our total assets have increased to $48,180,107 as of December 31, 2021 from $29,219,785 as of December 31, 2020.
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As of December 31, 2021, we had cash in the amount of $3,055,745, compared to $2,375,180 as of December 31, 2020. Our Ballenger Run revolver loan balance from MT Bank was $0 at December 31, 2021 and 2020.
Our Ballenger Run project has a revolver loan from MT Bank in the principal amount not to exceed at any one time outstanding the sum of $8,000,000, with a cumulative loan advance amount of $18,500,000. As of December 31, 2021 and 2020, the revolver loan balance was $0.
On June 18, 2020, Alset EHome Inc. (formerly known as SeD Home REITs Inc. and Alset iHome Inc.) entered into a Loan Agreement with MT Bank. Pursuant to this Loan Agreement, MT Bank provided a non-revolving loan to Alset EHome Inc. in an aggregate amount of up to $2,990,000. As of December 31, 2020, the MT loan balance was $679,268. The loan was paid off in May 2021.
On February 11, 2021, the Company entered into a term note with MT Bank with a principal amount of $68,502 pursuant to the Paycheck Protection Program (“PPP Term Note”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP Loan is evidenced by a promissory note. The PPP Term Note bears interest at a fixed annual rate of 1.00%, with the first sixteen months of principal and interest deferred or until we apply for the loan forgiveness. The PPP Term Note may be accelerated upon the occurrence of an event of default.
The PPP Term Note is unsecured and guaranteed by the United States Small Business Administration. The Company may apply to MT Bank for forgiveness of the PPP Term Note, with the amount which may be forgiven equal to at least 60% of payroll costs and other eligible payments incurred by the Company, calculated in accordance with the terms of the CARES Act. At this time, we are not in a position to quantify the portion of the PPP Term Note that will be forgiven.
During 2021 the Company signed multiple purchase agreements to acquire 109 homes in Montgomery and Harris Counties, Texas. By December 31, 2021, the acquisition of the 109 homes was completed with an aggregate purchase cost of $24,940,764. The Company borrowed $19,122,471 from SeD Intelligent Home Inc. to fund most of these acquisitions.
Our subsidiaries are reviewing plans for potential additional fundraising to fund single family rental operations and the acquisition of additional real estate projects.
The future development timeline of Black Oak will be based on multiple conditions, including the amount of funds which may be raised from capital markets, the loans we may secure from third party financial institutions, and government reimbursements which may be received. The development will be step by step and expenses will be contingent on the amount of funding we will receive.
The management believes that the available cash in bank accounts, favorable cash revenue from real estate projects and availability of $8 million line of credit are sufficient to fund our operations for at least the next 12 months.
Summary of Cash Flows
A summary of cash flows from operating, investing and financing activities for the years ended December 31, 2021 and 2020 are as follows:
|
| 2021 |
|
| 2020 |
| ||
|
|
|
|
|
|
| ||
Net Cash Provided by Operating Activities |
| $ | 8,346,384 |
|
| $ | 2,434,714 |
|
Net Cash Used in Investing Activities |
| $ | (25,366,119 | ) |
| $ | (4,181 | ) |
Net Cash Provided by Financing Activities |
| $ | 16,371,217 |
|
| $ | 270,842 |
|
Net Change in Cash |
| $ | (648,518 | ) |
| $ | 2,701,375 |
|
Cash and restricted cash at beginning of the year |
| $ | 8,104,247 |
|
| $ | 5,402,872 |
|
Cash and restricted cash at end of the year |
| $ | 7,455,729 |
|
| $ | 8,104,247 |
|
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| Table of Contents |
Cash Flows from Operating Activities
Cash flows from operating activities include costs related to assets which we plan to sell, such as land purchased for development and resale, and costs related to construction, which are capitalized in the book. In 2021, cash provided by operating activities was $8,346,384 compared to cash provided of $2,434,714 in 2020. Increased sales in our Ballenger project in 2021 were the main reason for the cash provided by operating activities.
Cash Flows from Investing Activities
Cash flows used in investing activities in 2021 include the purchase of properties for our rental business, as well as small expenditures for purchases of office computer equipment.
Cash Flows from Financing Activities
In 2020 Alset EHome borrowed $664,810 from MT Bank, incurring at the same time origination fees of $61,679. During 2020, $14,458 interest incurred on this loan. In the same period, SeD Maryland Development distributed $411,250 in cash to the minority shareholder. In 2021 the Company borrowed $68,502 from PPP loan and $19,531,734 from related party. In the same period, SeD Maryland Development distributed $2,549,750 in cash to the minority shareholder and Alset EHome repaid $679,269 of MT loan.
Seasonality
The real estate business is subject to seasonal shifts in costs as certain work in more likely to be performed at certain times of year. This may impact the expenses of Alset EHome from time to time. In addition, should we commence building homes, we are likely to experience periodic spikes in sales as we commence the sales process at a particular location.
Off-Balance Sheet Arrangements
As of December 31, 2021, we did not have any off-balance sheet arrangements, as defined under applicable SEC rules.
Critical Accounting Policies and Estimates
We have established various accounting policies under US GAAP. Some of these policies involve judgments, assumptions and estimates by management. We base these estimates on historical experience, available current market information and on various other assumptions that management believes are reasonable under the circumstances. Additionally, we evaluate the results of these estimates on an ongoing basis. We are subject to uncertainties such as the impact of future events, economic, environmental and political factors and changes in our business environment. Accordingly, actual results could differ from these estimates. The accounting policies that we deem most critical are as follows:
Revenue Recognition and Cost of Revenue
Land Development Revenue Recognition
Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The Company adopted this new standard on January 1, 2018 under the modified retrospective method. The adoption did not have a material effect on our financial statements.
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| Table of Contents |
In accordance with ASC 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which we expect to be entitled to receive in exchange for these goods or services. The provisions of ASC 606 include a five-step process by which we determine revenue recognition, depicting the transfer of goods or services to customers in amounts reflecting the payment to which we expect to be entitled in exchange for those goods or services. ASC 606 requires us to apply the following steps: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, we satisfy the performance obligation. A detailed breakdown of the five-step process for the revenue recognition of our Ballenger project, which was approximately all the revenue of the Company in 2021 and 2020, is as follows:
● | Identify the contract with a customer. |
The Company has signed agreements with the builders for developing the raw land to ready to build lots. The contract has agreed upon prices, timelines, and specifications for what is to be provided.
● | Identify the performance obligations in the contract. |
Performance obligations of the company include delivering developed lots to the customer, which are required to meet certain specifications that are outlined in the contract. The customer inspects all lots prior to accepting title to ensure all specifications are met.
● | Determine the transaction price. |
The transaction price is specified in the contract. Any subsequent change orders or price changes are required to be approved by both parties.
● | Allocate the transaction price to performance obligations in the contract. |
Each lot is considered to be a separate performance obligation, for which the specified price in the contract is allocated to.
● | Recognize revenue when (or as) the entity satisfies a performance obligation. |
The builders do the inspections to make sure all conditions/requirements are met before taking title of lots. The Company recognizes revenue when title is transferred. The Company does not have further performance obligations once title is transferred.
Rental Revenue Recognition
The Company leases real estate properties to its tenants under leases that are predominately classified as operating leases, in accordance with ASC 842, Leases (“ASC 842”). Real estate rental revenue is comprised of minimum base rent and revenue from the collection of lease termination fees.
Rent from tenants is recorded in accordance with the terms of each lease agreement on a straight-line basis over the initial term of the lease. Rental revenue recognition begins when the tenant controls the space and continues through the term of the related lease. Generally, at the end of the lease term, the Company provides the tenant with a one year renewal option, including mostly the same terms and conditions provided under the initial lease term, subject to rent increases.
The Company defers rental revenue related to lease payments received from tenants in advance of their due dates. These amounts are presented within deferred revenues and other payables on the Company’s consolidated balance sheets.
| 25 |
| Table of Contents |
Rental revenue is subject to an evaluation for collectability on several factors, including payment history, the financial strength of the tenant and any guarantors, historical operations and operating trends of the property, and current economic conditions. If our evaluation of these factors indicates that it is not probable that we will recover substantially all of the receivable, rental revenue is limited to the lesser of the rental revenue that would be recognized on a straight-line basis (as applicable) or the lease payments that have been collected from the lessee. Differences between rental revenue recognized and amounts contractually due under the lease agreements are credited or charged to straight-line rent receivable or straight-line rent liability, as applicable. For the year ended December 31, 2021, the Company did not recognize any deferred revenue and collected all rents due.
Sale of the Front Foot Benefit Assessments
We have established a front foot benefit (“FFB”) assessment on all of the NVR lots. This is a 30-year annual assessment allowed in Frederick County which requires homeowners to reimburse the developer for the costs of installing public water and sewer to the lots. These assessments become effective as homes are settled, at which time we can sell the collection rights to investors who will pay an upfront lump sum, enabling us to more quickly realize the revenue. The selling prices range from $3,000 to $4,500 per home depending the type of the home. Our total revenue from the front foot benefit assessment is approximately $1 million. To recognize revenue of FFB assessment, both our and NVR’s performance obligation have to be satisfied. Our performance obligation is completed once we complete the construction of water and sewer facility and close the lot sales with NVR, which inspects these water and sewer facility prior to close lot sales to ensure all specifications are met. NVR’s performance obligation is to sell homes they build to homeowners. Our FFB revenue is recognized on quarterly basis after NVR closes sales of homes to homeowners. The agreement with these FFB investors is not subject to amendment by regulatory agencies and thus our revenue from FFB assessment is not either. During the years ended December 31, 2021 and 2020, we recognized revenue of $289,375 and $273,620 from FFB assessment, respectively.
Contract Assets and Contract Liabilities
Based on our contracts, we invoice customers once our performance obligations have been satisfied, at which point payment is unconditional. Accordingly, our contracts do not give rise to contract assets or liabilities under ASC 606. Accounts receivable are recorded when the right to consideration becomes unconditional. We disclose receivables from contracts with customers separately on the balance sheets.
Cost of Revenue
| · | Cost of Real Estate Sale |
All of the costs of real estate sales are from our land development business. Land acquisition costs are allocated to each lot based on the area method, the size of the lot comparing to the total size of all lots in the project. Development costs and capitalized interest are allocated to lots sold based on the total expected development and interest costs of the completed project and allocating a percentage of those costs based on the selling price of the sold lot compared to the expected sales values of all lots in the project.
If allocation of development costs and capitalized interest based on the projection and relative expected sales value is impracticable, those costs could also be allocated based on area method, the size of the lot comparing to the total size of all lots in the project.
| · | Cost of Rental Revenue |
Cost of rental revenue consists primarily of the costs associated with management and leasing fees to our management company, repairs and maintenance, depreciation and other related administrative costs. Utility expenses are paid directly by tenants.
| 26 |
| Table of Contents |
Real Estate Assets
Land Development Assets
Real estate assets are recorded at cost, except when real estate assets are acquired that meet the definition of a business combination in accordance with Financial Accounting Standards Board (“FASB”) ASC 805, “Business Combinations,” which acquired assets are recorded at fair value. Interest, property taxes, insurance and other incremental costs (including salaries) directly related to a project are capitalized during the construction period of major facilities and land improvements. The capitalization period begins when activities to develop the parcel commence and ends when the asset constructed is completed. The capitalized costs are recorded as part of the asset to which they relate and are reduced when lots are sold.
See following chart for details of the capitalized construction costs of Ballenger and Black Oak projects as of December 31, 2021 and 2020:
|
| As of December 31, 2021 |
| |||||||||
|
| Ballenger Run |
|
| Black Oak |
|
| Total |
| |||
|
| ($) |
|
| ($) |
|
| ($) |
| |||
Hard Construction Costs |
|
| 29,244,223 |
|
|
| 3,126,907 |
|
|
| 32,371,130 |
|
Engineering |
|
| 3,626,928 |
|
|
| 2,852,710 |
|
|
| 6,479,638 |
|
Consultation |
|
| 340,528 |
|
|
| 109,826 |
|
|
| 450,354 |
|
Project Management |
|
| 4,285,533 |
|
|
| 2,597,175 |
|
|
| 6,882,709 |
|
Legal |
|
| 375,585 |
|
|
| 237,970 |
|
|
| 613,554 |
|
Taxes |
|
| 1,326,734 |
|
|
| 985,440 |
|
|
| 2,312,174 |
|
Other Services |
|
| 605,657 |
|
|
| 33,791 |
|
|
| 639,448 |
|
Impairment Reserve |
|
| - |
|
|
| (5,920,599 | ) |
|
| (5,920,599 | ) |
Construction - Sold Lots |
|
| (39,805,188 | ) |
|
| (1,364,805 | ) |
|
| (41,169,993 | ) |
Total |
| $ | 0 |
|
| $ | 2,658,415 |
|
| $ | 2,658,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized Finance Costs |
|
|
|
|
|
|
|
|
| $ | 4,066,259 |
|
Construction in Progress |
|
|
|
|
|
|
|
|
| $ | 6,724,674 |
|
|
| As of December 31, 2020 |
| |||||||||
|
| Ballenger Run |
|
| Black Oak |
|
| Total |
| |||
|
| ($) |
|
| ($) |
|
| ($) |
| |||
Hard Construction Costs |
|
| 26,542,028 |
|
|
| 3,647,973 |
|
|
| 30,190,001 |
|
Engineering |
|
| 3,516,161 |
|
|
| 1,885,761 |
|
|
| 5,401,922 |
|
Consultation |
|
| 340,528 |
|
|
| 105,667 |
|
|
| 446,195 |
|
Project Management |
|
| 3,682,401 |
|
|
| 874,028 |
|
|
| 4,556,429 |
|
Legal |
|
| 359,353 |
|
|
| 235,961 |
|
|
| 595,314 |
|
Taxes |
|
| 1,273,587 |
|
|
| 770,983 |
|
|
| 2,044,570 |
|
Other Services |
|
| 1,291,447 |
|
|
| 33,091 |
|
|
| 1,324,538 |
|
Impairment Reserve |
|
| - |
|
|
| (5,920,599 | ) |
|
| (5,920,599 | ) |
Construction - Sold Lots |
|
| (31,979,300 | ) |
|
| (1,364,805 | ) |
|
| (33,344,105 | ) |
Total |
| $ | 5,026,205 |
|
| $ | 268,060 |
|
| $ | 5,294,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized Finance Costs |
|
|
|
|
|
|
|
|
| $ | 4,945,132 |
|
Construction in Progress |
|
|
|
|
|
|
|
|
| $ | 10,239,397 |
|
| 27 |
| Table of Contents |
As of December 31, 2021 and 2020, total capitalized finance related costs were $4,066,259 and $4,945,132, respectively.
The Company anticipates that the estimated construction costs (not including land costs and financing costs) for the final phases of the Ballenger Run project will be $1,670,820. The expected completion date for the final phases of the Ballenger Run project is June of 2022.
The required time and expenses needed to complete the Black Oak and Alset Villas projects will be impacted by the strategy, or mix of strategies, we utilize at each project.
In addition to our annual assessment of potential triggering events in accordance with ASC 360, Impairment Testing: Long- Lived Assets classified as held and used, the Company applies a fair value-based impairment test to the net book value assets on an annual basis and on an interim basis if certain events or circumstances indicate that an impairment loss may have occurred. The Company did not record impairment on any of its projects during the years ended on December 31, 2021 and 2020.
Investments in Single-Family Residential Properties
The Company accounts for its investments in single-family residential properties as asset acquisitions and records these acquisitions at their purchase price. The purchase price is allocated between land, building, improvements and existing leases based upon their relative fair values at the date of acquisition. The purchase price for purposes of this allocation is inclusive of acquisition costs which typically include legal fees, title fees, property inspection and valuation fees, as well as other closing costs.
Building improvements and buildings are depreciated over estimated useful lives of approximately 10 to 27.5 years, respectively, using the straight-line method.
The Company assesses its investments in single-family residential properties for impairment whenever events or changes in business circumstances indicate that carrying amounts of the assets may not be fully recoverable. When such events occur, management determines whether there has been impairment by comparing the asset’s carrying value with its fair value. Should impairment exist, the asset is written down to its estimated fair value. The Company did not recognize any impairment losses during the years ended December 31, 2021 and 2020.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable to smaller reporting companies.
| 28 |
| Table of Contents |
Item 8. Financial Statements and Supplementary Data
LiquidValue Development Inc. and Subsidiaries
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021 and 2020
| 29 |
| Table of Contents |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
LiquidValue Development Inc. and Subsidiaries
Bethesda, Maryland
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of LiquidValue Development Inc. and Subsidiaries (the “Company”) as of December 31, 2021, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year ended December 31, 2021, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the year ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of Real Estate Assets
Critical Audit Matter Description
As discussed in Note 1 to the consolidated financial statements, the real estate assets as of December 31, 2021 aggregated $40.0 million. Real estate assets consist of residential properties (consisting of land, buildings, and building improvements), construction in progress, and land held for development, all of which are stated at cost, unless the carrying amount is determined not to be recoverable, in which case the asset is written down to its fair value. The Company reviews each real estate asset on an annual basis or whenever indicators of impairment exist. Indicators of impairment include, but are not limited to, significant decreases in local land and building market values and selling prices of comparable land and buildings, significant decreases in gross margins or sales absorption rates, costs significantly in excess of budget and actual or projected cash flow losses. If there are indicators of impairment, the Company will perform a fair value-based impairment analysis to determine if the asset is impaired.
We identified the assessment of real estate assets for impairment as a critical audit matter. Specifically, the Company’s identification of potential impairment indicators required a high degree of subjective management judgment. In addition, where necessary, the significant assumptions used in management’s impairment analyses required the application of greater management judgment. Changes to these estimates and assumptions could have a significant impact on the Company’s impairment analyses.
How the Critical Audit Matter Was Addressed in the Audit
To test management’s identification and assessment of the severity of indicators of impairment of the Company’s real estate assets owned, our audit procedures included, among other things, evaluating management’s qualitative analyses for reasonableness and completeness through inquiries with Company personnel outside the accounting function; considering external market data and interviewing external real estate specialists. Where necessary, we also evaluated management’s quantitative analyses of fair value by evaluation of the reasonableness of methods and assumptions used by the Company’s valuation specialist and testing the underlying data used by the Company in such analyses. Additionally, our procedures performed over land held for future development also included the consideration of contrary or corroborative evidence of management’s assertions by obtaining other market data to evaluate against the Company’s projected gross margin by project.
We involved a specialist to assist in assessing the reasonableness of the underlying methods and assumptions used by the Company in performing necessary fair-value estimates for the real estate assets, and assessing the reasonableness of the comparable sales data or other market data driving cash flow assumptions of rental real estate assets used in the Company’s fair value analyses.
We have served as the Company’s auditor since 2022.
March 14, 2022
| 30 |
| Table of Contents |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
LiquidValue Development Inc. and Subsidiaries
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of LiquidValue Development Inc. and subsidiaries (the Company) as of December 31, 2020, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended December 31, 2020, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of their operations and their cash flows for the year ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of Real Estate Assets
Critical Audit Matter Description
As discussed in Note 1 to the consolidated financial statements, the real estate assets balance as of December 31, 2020 was $20.6 million. Real estate assets consist of construction in progress and land held for development, all of which are stated at cost, unless the carrying amount is determined not to be recoverable, in which case asset is written down to its fair value. The Company reviews each real estate asset on an annual basis or whenever indicators of impairment exist. Indicators of impairment include, but are not limited to, significant decreases in local land market values and selling prices of comparable lands, significant decreases in gross margins or sales absorption rates, costs significantly in excess of budget and actual or projected cash flow losses. If there are indicators of impairment, the Company will perform a fair value-based impairment analysis to determine if the asset is impaired.
We identified the assessment of real estate assets for impairment as a critical audit matter. Specifically, evaluating the Company’s identification of potential impairment indicators required subjective auditor judgment. In addition, the significant assumptions regarding selling prices of comparable land, gross margins, sales absorption rates, and discount rates used in management’s impairment analyses required the application of greater auditor judgment. Changes to these estimates and assumptions could have a significant impact on the Company’s impairment analysis.
How the Critical Audit Matter Was Addressed in the Audit
To test management’s identification and assessment of the severity of indicators of impairment of the Company’s real estate assets owned, our audit procedures included, among other things, assessing management’s quantitative analyses by testing the underlying data used by the Company. Our audit procedures also included evaluating management’s qualitative analyses for completeness through inquiries outside the accounting function and considering external market data.
We involved a specialist to assist in:
· | assessing the reasonableness of the sales comparable data used in the company’s fair value-based impairment analysis by comparing to available market data |
|
|
· | assessing the reasonableness of the discount rate used in management’s fair value calculation by comparing to available market data. |
Additionally, our procedures performed over land held for future development also included the consideration of contrary or corroborative evidence of management’s assertions by obtaining other market data to evaluate against the Company’s projected gross margin by project.
/s/ Briggs Veselka Co.
We have served as the Company’s auditor since 2021.
Houston, Texas
March 22, 2021
| 31 |
| Table of Contents |
LiquidValue Development Inc. and Subsidiaries
Consolidated Balance Sheets
|
| December 31, |
|
| December 31, |
| ||
|
| 2021 |
|
| 2020 |
| ||
Assets: |
|
|
|
|
|
| ||
Real Estate |
|
|
|
|
|
| ||
Investments in Single-family Residential Properties |
|
|
|
|
|
| ||
Land |
| $ |
|
| $ |
| ||
Building and Improvements |
|
|
|
|
|
| ||
|
|
|
|
|
| |||
Less: Accumulated Depreciation |
|
| ( | ) |
|
|
| |
Investments in Single-family Residential Properties, Net |
|
|
|
|
|
| ||
Construction in Progress |
|
|
|
|
|
| ||
Land Held for Development |
|
|
|
|
|
| ||
Other Properties |
|
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|
|
|
| ||
|
|
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|
|
|
| ||
|
|
|
|
|
|
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|
Cash |
|
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|
| ||
Restricted Cash |
|
|
|
|
|
| ||
Accounts Receivable |
|
|
|
|
|
| ||
Other Receivable |
|
|
|
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|
| ||
Related Party Receivable |
|
|
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|
| ||
Prepaid Expenses |
|
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|
| ||
Fixed Assets, Net |
|
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|
| ||
Deposits |
|
|
|
|
|
| ||
Operating Lease Right-Of-Use Asset |
|
|
|
|
|
| ||
Total Assets |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
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|
|
Liabilities and Stockholders' Equity: |
|
|
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|
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|
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|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Accounts Payable and Accrued Expenses |
| $ |
|
| $ |
| ||
Accrued Interest - Related Parties |
|
|
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Builder Deposits |
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Operating Lease Liability |
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Note Payable, net of discount |
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Note Payable - Related Parties |
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Total Liabilities |
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Stockholders' Equity: |
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Common Stock, at par $ |
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Additional Paid In Capital |
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Accumulated Deficit |
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Total LiquidValue Development Inc. Stockholders' Equity |
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Non-controlling Interests |
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Total Stockholders' Equity |
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Total Liabilities and Stockholders' Equity |
| $ |
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| $ |
| ||
See accompanying notes to consolidated financial statements.
| 32 |
| Table of Contents |
LiquidValue Development Inc. and Subsidiaries
Consolidated Statements of Operations
For the Years Ended December 31, 2021 and 2020
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| Years Ended December 31, |
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| 2021 |
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| 2020 |
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Revenue |
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Rental |
| $ |
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Property |
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Operating Expenses |
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Cost of Revenue |
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General and Administrative |
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Total Operating Expenses |
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Income From Operations |
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Other Income Expense |
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Interest (Expense) Income, net |
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Other Income |
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Total Other (Expense) Income |
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Net Income Before Income Taxes |
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Income Tax Expense |
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Net Income |
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Net Income Attributable to Non-controlling Interests |
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Net Income Attributable to Common Stockholders |
| $ |
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| $ |
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Net Income Per Share - Basic and Diluted |
| $ |
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| $ |
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Weighted Average Common Shares Outstanding - Basic and Diluted |
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See accompanying notes to consolidated financial statements.
| 33 |
| Table of Contents |
LiquidValue Development Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
for the Years Ended on December 31, 2021 and 2020
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| Total LiquidValue |
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| Development Inc. |
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| Par Value |
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| Accumulated |
| Stockholders' |
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| controlling |
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| $0.001 |
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| Deficit |
| Equity |
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| Interests |
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Balance at January 1, 2020 |
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| $ |
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Distribution to Non-Controlling Stockholder |
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| - |
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Net Income |
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Balance at December 31, 2020 |
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Distribution to Non-Controlling Stockholder |
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Net Income |
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Balance at December 31, 2021 |
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| $ |
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| $ | ( | ) |
| $ |
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| $ |
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See accompanying notes to consolidated financial statements.
| 34 |
| Table of Contents |
LiquidValue Development Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2021 and 2020
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| 2021 |
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| 2020 |
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Cash Flows From Operating Activities |
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Net Income |
| $ |
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Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: |
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Depreciation |
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Amortization of Right -Of- Use Asset |
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Amortization of Debt Discount |
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PPP Loan Forgiveness |
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Changes in Operating Assets and Liabilities |
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Real Estate Development |
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Accounts Receivable |
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Related Party Receivable |
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Prepaid Expenses |
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Other Receivable |
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Accounts Payable and Accrued Expenses |
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Related Party Payable |
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Operating Lease Liability |
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| ( | ) |
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| ( | ) |
Builder Deposits |
|
| ( | ) |
|
| ( | ) |
Income Tax Payable |
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Net Cash Provided by Operating Activities |
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Cash Flows From Investing Activities |
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Purchase of Fixed Assets |
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Purchase of Real Estate Properties |
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Net Cash Used in Investing Activities |
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Cash Flows From Financing Activities |
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Borrowing from Note Payable |
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Repayment of Note Payable |
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Distribution to Non-controlling Interest Shareholders |
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Borrowing from Notes Payable - Related Parties |
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Net Cash Provided by Financing Activities |
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Net (Decrease) Increase in Cash and Restricted Cash |
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Cash and Restricted Cash - Beginning of Year |
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| 8,104,247 |
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Cash and Restricted Cash at End of Year |
| $ |
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| $ |
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Supplementary Cash Flow Information |
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Cash Paid For Interest |
| $ |
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| $ |
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Cash Paid For Taxes |
| $ |
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Supplemental Disclosure of Non-Cash Investing and Financing Activities |
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Initial Recognition of Operating Lease Right-Of-Use Asset and Liability |
| $ |
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| $ |
| ||
See accompanying notes to consolidated financial statements.
| 35 |
| Table of Contents |
LiquidValue Development Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021
1. | NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Nature of Operations
LiquidValue Development Inc. (the “Company”), formerly known as SeD Intelligent Home Inc. and Homeownusa, was incorporated in the State of Nevada on December 10, 2009. On December 29, 2017, the Company, acquired Alset EHome Inc. (“Alset EHome”) by reverse merger. Alset EHome, a Delaware corporation, was formed on February 24, 2015 and named SeD Home USA, Inc. before changing its name to SeD Home, Inc. in May of 2015. On February 6, 2020, this name was changed to SeD Home REITs Inc., on July 7, 2020 the name was changed to Alset iHome Inc. and on December 9, 2020 it was changed to Alset EHome Inc. Alset EHome is principally engaged in developing, selling, managing, and leasing residential properties in the United States in current stage and may expand from residential properties to other property types, including but not limited to commercial and retail properties. The Company is 99.99% owned by SeD Intelligent Home Inc., formerly known as SeD Home International, Inc., which is wholly-owned by Alset International Limited (formerly known as Singapore eDevelopment Limited “Alset International”), a multinational public company, listed on the Singapore Exchange Securities Trading Limited (“SGXST”).
The Company’s current operations concentrate around two types of projects, land development and house rental business. Both of them are included in our only reporting segment – real state. In determination of segments, the Company, together with its chief operating decision maker, who is also our CEO, considers factors that include the nature of business activities, allocation of resources and management structure.
Principles of Consolidation
The consolidated financial statements include all accounts of the entities as of the reporting period ending dates and for the reporting periods as follows:
Name of consolidated subsidiary |
| State or other jurisdiction of incorporation or organization |
| Date of incorporation or formation |
| Attributable interest as of December 31, 2021 |
| Attributable interest as of December 31, 2020 |
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| 83.55% |
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| n/a |
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| n/a |
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| 36 |
| Table of Contents |
All intercompany balances and transactions have been eliminated. Non–controlling interest represents the minority equity investment in the Company’s subsidiaries, plus the minority investors’ share of the net operating results and other components of equity relating to the non–controlling interests.
As of December 31, 2021 and 2020, the aggregate noncontrolling interest was $
On December 29, 2017, the Company, SeD Acquisition Corp., a Delaware corporation and wholly owned subsidiary of the Company (the “Merger Sub”), Alset EHome Inc., a Delaware corporation, and SeD Intelligent Home Inc., a Delaware corporation entered into an Acquisition Agreement and Plan of Merger (the “Agreement”) pursuant to which the Merger Sub was merged with and into Alset EHome, with Alset EHome surviving as a wholly owned subsidiary of the Company. The closing of this transaction (the “Closing”) also took place on December 29, 2017 (the “Closing Date”). Prior to the Closing, SeD Intelligent Home Inc. was the owner of 100% of the issued and outstanding common stock of Alset EHome and was also the owner of 99.96% of the Company’s issued and outstanding common stock. The Company acquired all of the outstanding common stock of Alset EHome from SeD Intelligent Home Inc. in exchange for issuing to SeD Intelligent Home Inc. 630,000,000 shares of the Company’s common stock. Accordingly, SeD Intelligent Home Inc. remains the Company’s largest shareholder, and the Company is now the sole shareholder of Alset EHome. The Agreement and the transactions contemplated thereby were approved by the Board of Directors of each of the Company, the Merger Sub, SeD Intelligent Home Inc., and Alset EHome.
The Agreement is considered a business combination of companies under common control and therefore, the consolidated financial statements include the financial statements of both companies.
Basis of Presentation
The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements. Actual results could differ from those estimates.
Earnings (Loss) per Share
Basic income (loss) per share is computed by dividing the net income (loss) attributable to the common stockholders by weighted average number of shares of common stock outstanding during the period. Fully diluted income (loss) per share is computed similar to basic income (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. There were no dilutive financial instruments issued or outstanding for the periods ended December 31, 2021 or 2020.
Fair Value of Financial Instruments
For purpose of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. The carrying amount of the Company’s short-term financial instruments approximates fair value due to the relatively short period to maturity for these instruments.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less at the date of acquisition to be cash equivalents. There were no cash equivalents as of December 31, 2021 and 2020.
| 37 |
| Table of Contents |
Restricted Cash
As a condition to the loan agreement with the Manufacturers and Traders Trust Company (“MT Bank”), the Company is required to maintain a minimum of $
Accounts Receivable
Accounts receivable include all receivables from buyers, contractors and all other parties. The Company records an allowance for doubtful accounts based on a review of the outstanding receivables, historical collection information and economic conditions. No allowance was necessary at December 31, 2021 and 2020.
Property and Equipment and Depreciation
Property and equipment are recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. Depreciation is computed by the straight-line method (after taking into account their respective estimated residual values) over the estimated useful lives, which are
Real Estate Assets
| · | Land Development Assets |
Real estate assets are recorded at cost, except when real estate assets are acquired that meet the definition of a business combination in accordance with Financial Accounting Standards Board (“FASB”) ASC 805, “Business Combinations,” which acquired assets are recorded at fair value. Interest, property taxes, insurance and other incremental costs (including salaries) directly related to a project are capitalized during the construction period of major facilities and land improvements. The capitalization period begins when activities to develop the parcel commence and ends when the asset constructed is completed. The capitalized costs are recorded as part of the asset to which they relate and are reduced when lots are sold.
In addition to our annual assessment of potential triggering events in accordance with ASC 360, the Company applies a fair value-based impairment test to the net book value assets on an annual basis and on an interim basis if certain events or circumstances indicate that an impairment loss may have occurred.
The Company did not record impairment on any of its projects during the year ended on December 31, 2021, nor for the year ended December 31, 2020.
| · | Investments in Single-Family Residential Properties |
The Company accounts for its investments in single-family residential properties as asset acquisitions and records these acquisitions at their purchase price. The purchase price is allocated between land, building, improvements and existing leases based upon their relative fair values at the date of acquisition. The purchase price for purposes of this allocation is inclusive of acquisition costs which typically include legal fees, title fees, property inspection and valuation fees, as well as other closing costs.
| 38 |
| Table of Contents |
Building improvements and buildings are depreciated over estimated useful lives of approximately
The Company assesses its investments in single-family residential properties for impairment whenever events or changes in business circumstances indicate that carrying amounts of the assets may not be fully recoverable. When such events occur, management determines whether there has been impairment by comparing the asset’s carrying value with its fair value. Should impairment exist, the asset is written down to its estimated fair value. The Company did not recognize any impairment losses during the year ended on December 31, 2021.
Revenue Recognition
| · | Land Development Revenue Recognition |
ASC 606, Revenue from Contracts with Customers ("ASC 606"), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The Company adopted this new standard on January 1, 2018 under the modified retrospective method. The adoption of this new standard did not have a material effect on our financial statements.
In accordance with ASC 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which we expect to be entitled to receive in exchange for these goods or services. The provisions of ASC 606 include a five-step process by which we determine revenue recognition, depicting the transfer of goods or services to customers in amounts reflecting the payment to which we expect to be entitled in exchange for those goods or services. ASC 606 requires us to apply the following steps: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, we satisfy the performance obligation. A detailed breakdown of the five-step process for the revenue recognition of our Ballenger project, which earned majority of the revenue of the Company in 2021 and 2020, is as follows:
a) Identify the contract with a customer.
The Company has signed agreements with the builders for developing the raw land to ready to build lots. The contract has agreed upon prices, timelines, and specifications for what is to be provided.
b) Identify the performance obligations in the contract.
Performance obligations of the company include delivering developed lots to the customer, which are required to meet certain specifications that are outlined in the contract. The customer inspects all lots prior to accepting title to ensure all specifications are met.
c) Determine the transaction price.
The transaction price is specified in the contract. Any subsequent change orders or price changes are required to be approved by both parties.
d) Allocate the transaction price to performance obligations in the contract.
Each lot is considered to be a separate performance obligation, for which the specified price in the contract is allocated to.
| 39 |
| Table of Contents |
e) Recognize revenue when (or as) the entity satisfies a performance obligation.
The builders do the inspections to make sure all conditions/requirements are met before taking title of lots. The Company recognizes revenue when title is transferred. The Company does not have further performance obligations once title is transferred.
| · | Rental Revenue Recognition |
The Company leases real estate properties to its tenants under leases that are predominately classified as operating leases, in accordance with ASC 842, Leases (“ASC 842”). Real estate rental revenue is comprised of minimum base rent and revenue from the collection of lease termination fees.
Rent from tenants is recorded in accordance with the terms of each lease agreement on a straight-line basis over the initial term of the lease. Rental revenue recognition begins when the tenant controls the space and continues through the term of the related lease. Generally, at the end of the lease term, the Company provides the tenant with a one year renewal option, including mostly the same terms and conditions provided under the initial lease term, subject to rent increases.
The Company defers rental revenue related to lease payments received from tenants in advance of their due dates. These amounts are presented within deferred revenues and other payables on the Company’s consolidated balance sheets.
Rental revenue is subject to an evaluation for collectability on several factors, including payment history, the financial strength of the tenant and any guarantors, historical operations and operating trends of the property, and current economic conditions. If our evaluation of these factors indicates that it is not probable that we will recover substantially all of the receivable, rental revenue is limited to the lesser of the rental revenue that would be recognized on a straight-line basis (as applicable) or the lease payments that have been collected from the lessee. Differences between rental revenue recognized and amounts contractually due under the lease agreements are credited or charged to straight-line rent receivable or straight-line rent liability, as applicable. For the year ended December 31, 2021, the Company did not recognize any deferred revenue and collected all rents due.
Sale of the Front Foot Benefit Assessments
We have established a front foot benefit (“FFB”) assessment on all of the NVR lots. This is a 30-year annual assessment allowed in Frederick County which requires homeowners to reimburse the developer for the costs of installing public water and sewer to the lots. These assessments become effective as homes are settled, at which time we can sell the collection rights to investors who will pay an upfront lump sum, enabling us to more quickly realize the revenue. The selling prices range from $3,000 to $4,500 per home depending the type of the home. Our total revenue from the front foot benefit assessment is approximately $1 million. To recognize revenue of FFB assessment, both our and NVR’s performance obligation have to be satisfied. Our performance obligation is completed once we complete the construction of water and sewer facility and close the lot sales with NVR, which inspects these water and sewer facility prior to close lot sales to ensure all specifications are met. NVR’s performance obligation is to sell homes they build to homeowners. Our FFB revenue is recognized on quarterly basis after NVR closes sales of homes to homeowners. The agreement with these FFB investors is not subject to amendment by regulatory agencies and thus our revenue from FFB assessment is not either. During the years ended on December 31, 2021 and 2020, we recognized revenue $
Contract Assets and Contract Liabilities
Based on our contracts, we invoice customers once our performance obligations have been satisfied, at which point payment is unconditional. Accordingly, our contracts do not give rise to contract assets or liabilities under ASC 606. Accounts receivable are recorded when the right to consideration becomes unconditional. We disclose receivables from contracts with customers separately on the balance sheets.
| 40 |
| Table of Contents |
Cost of Revenue
| · | Cost of Real Estate Sale |
All of the costs of real estate sales are from our land development business. Land acquisition costs are allocated to each lot based on the area method, the size of the lot comparing to the total size of all lots in the project. Development costs and capitalized interest are allocated to lots sold based on the total expected development and interest costs of the completed project and allocating a percentage of those costs based on the selling price of the sold lot compared to the expected sales values of all lots in the project.
If allocation of development costs based on the projection and relative expected sales value is impracticable, those costs could also be allocated based on area method, the size of the lot comparing to the total size of all lots in the project.
| · | Cost of Rental Revenue |
Cost of rental revenue consists primarily of the costs associated with management and leasing fees to our management company, repairs and maintenance, depreciation and other related administrative costs. Utility expenses are paid directly by tenants.
Income Taxes
Deferred income tax assets and liabilities are determined based on the estimated future tax effects of net operating loss and credit carry-forwards and temporary differences between the tax basis of assets and liabilities and their respective financial reporting amounts measured at the current enacted tax rates. The differences relate primarily to net operating loss carryforward from date of acquisition and to the use of the cash basis of accounting for income tax purposes. The Company records an estimated valuation allowance on its deferred income tax assets if it is more likely than not that these deferred income tax assets will not be realized.
The Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company has not recorded any unrecognized tax benefits.
The Company’s tax returns for 2020, 2019 and 2018 remain open to examination.
Recent Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of Reference Rate Reform on Financial Reporting. The amendments in this Update provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this Update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The Company’s line of credit agreement provides procedures for determining a replacement or alternative rate in the event that LIBOR is unavailable. The amendments in this Update are effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of ASU 2020-04 on its future consolidated financial statements.
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In October 2021, the FASB issued ASU No. 2021-08, "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers." ASU 2021-08 requires the company acquiring contract assets and contract liabilities obtained in a business combination to recognize and measure them in accordance with ASC 606, "Revenue from Contracts with Customers". At the acquisition date, the company acquiring the business should record related revenue, as if it had originated the contract. Before the update such amounts were recognized by the acquiring company at fair value. The amendments in this Update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including in interim periods, for any financial statements that have not yet been issued. The Company plans to adopt these requirements prospectively, effective on the first day of year 2022.
2. CONCENTRATION OF CREDIT RISK
The Company maintains cash balances at various financial institutions. These balances are secured by the Federal Deposit Insurance Corporation. At times, these balances may exceed the federal insurance limits. On December 31, 2021 and 2020, uninsured cash balances were $
The Company had only three customers in the year ended December 31, 2020: the purchaser for Ballenger project, NVR Inc. (“NVR”), a NYSE publicly listed US homebuilding and mortgage company, who is the only purchaser of 479 residential lots, Western Utility, the purchaser of the FFBs of Ballenger project, and a private customer of the historic farmhouse located in Ballenger Project, which was not included under NVR contract. During the year ended December 31, 2020, the Company earned revenues from property sales from the first two customers representing approximately 98% and 2%, respectively. The Company had two customers in the year ended December 31, 2021: the purchaser for Ballenger project – NVR and the purchaser of the FFB of Ballenger project – Western Utility. During the year ended December 31, 2021, the Company earned revenues from property sales from these two customers representing approximately 97% and 3%, respectively.
3. BUILDER DEPOSITS
In November 2015, SeD Maryland Development, LLC (“Maryland”) entered into lot purchase agreements with NVR, Inc. (“NVR”) relating to the sale of single-family home and townhome lots to NVR in the Ballenger Run Project. The purchase agreements were amended two times thereafter. Based on the agreements, NVR is entitled to purchase 479 lots for a price of approximately $
As part of the agreements, NVR was required to give a deposit in the amount of $
4. NOTES PAYABLE
MT Bank Loan
On April 17, 2019, SeD Maryland Development LLC entered into a Development Loan Agreement with Manufacturers and Traders Trust Company (“MT Bank”) in the principal amount not to exceed at any one time outstanding the sum of $
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On June 18, 2020, Alset EHome Inc. entered into a Loan Agreement with MT Bank. Pursuant to the Loan Agreement, MT Bank provided a non-revolving loan to Alset EHome Inc. in an aggregate amount of up to $
Paycheck Protection Program Loan
On April 6, 2020, the Company entered into a term note with MT Bank with a principal amount of $68,502 pursuant to the Paycheck Protection Program ("PPP Term Note") under the Coronavirus Aid, Relief, and Economic Security Act. The PPP Loan is evidenced by a promissory note. The PPP Term note bears interest at a fixed annual rate of 1.00%, with the first ten months of principal and interest deferred. On November 26, 2020, $64,502 of this loan was forgiven by the United States Small Business Administration and $64,502 was recorded as other income. The remaining balance of $4,000 was paid back in December 2020.
On February 11, 2021, the Company entered into a five year note with MT Bank with a principal amount of $
The PPP Term Note is unsecured and guaranteed by the United States Small Business Administration. The Company may apply to MT Bank for forgiveness of the PPP Term Note, with the amount which may be forgiven equal to at least 60% of payroll costs and other eligible payments incurred by the Company, calculated in accordance with the terms of the CARES Act. At this time, we are not in a position to quantify the portion of the PPP Term Note that will be forgiven. As of December 31, 2021, we owe $
5. RELATED PARTY TRANSACTIONS
Loan from SeD Home Limited
Alset EHome receives advances from SeD Home Limited (an affiliate of Alset International), to fund development and operation costs. The advances bear interest at
Loan to/from SeD Intelligent Home Inc. (f.k.a. SeD Home International)
The Company receives advances from or loans funds to SeD Intelligent Home, the owner of 99.99% of the Company. The advances or the loans bore interest of
Management Fees
MacKenzie Equity Partners, owned by a Charles MacKenzie, a Director of the Company, has a consulting agreement with the Company since 2015. Per the terms of the agreement, as amended on January 1, 2018, the Company pays a monthly fee of $
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On December 29, 2020, the Company entered into a Management Services Agreement (the “Management Services Agreement”) with Alset International, pursuant to which the Company agreed to pay Alset International a one-time payment of $360,000 for the services of certain Alset International staff members the Company received in 2020, and agreed to pay Alset International $
Advance to Alset EHome International Inc.
The Company pays some operating expenses for Alset EHome International Inc., a related party under the common control of Chan Heng Fai, the CEO of the Company. The advances are interest free with no set repayment terms. On December 31, 2021 and December 31, 2020, the balance of these advances was $
Consulting Services
A law firm, owned by Conn Flanigan, a Director of the Company, performs consulting services for the Company. The Company incurred expenses of $
6. SHAREHOLDERS’ EQUITY
Cash Dividend Distributions
During the year ended December 31, 2021, the Board of Managers of SeD Maryland Development LLC (the
During the year ended December 31, 2020, SeD Maryland Development LLC Board approved three payment distribution plans to members and paid total of $
7. SINGLE FAMILY RESIDENTIAL PROPERTIES
As of December 31, 2021, the Company owns
The following table presents the summary of our SRFs as of December 31, 2021:
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| Homes |
| Aggregate investment |
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| per Home |
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SFRs |
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| $ |
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| $ |
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8. LEASE INCOME
The Company generally rents its SFRs under lease agreements with a term of one year. Future minimum rental revenue under existing leases on our properties at December 31, 2021 in each calendar year through the end of their terms are as follows:
2022 |
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| |
Total Future Receipts |
| $ |
|
Property Management Agreements
The Company has entered into property management agreement with the property managers under which the property managers generally oversee and direct the leasing, management and advertising of the properties in our portfolio, including collecting rents and acting as liaison with the tenants. The Company pays its property managers a property management fee of $90 per month per property unit and a leasing fee equal to one month of each lease’s annual rent. For the years ended December 31, 2021 and 2020, property management fees incurred by the property managers were $
9. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office space in Texas and Maryland. Lease of our Texas office expires in 2022, while lease of our Maryland
The balance of the operating lease right-of-use asset and operating lease liability as of December 31, 2021 was $
Supplemental Cash Flow and Other Information Related to Operating Leases are as follows:
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| Year Ended December 31, 2021 |
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Weighted Average Remaining Operating Lease Term (in years) |
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The below table summarizes future payments due under these leases as of December 31, 2021.
For the Years Ended December 31:
2022 |
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2023 |
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2024 |
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Total Minimum Lease Payments |
| $ |
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Less: Effect of Discounting |
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Present Value of Future Minimum Lease Payments |
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Less: Current Obligation under Lease |
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Long-term Lease Obligation |
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Lot Sale Agreements
On November 23, 2015, SeD Maryland Development LLC completed the $
As part of the contract with NVR, upon establishment of FFB assessments on the lots, the Company is obligated to credit NVR with an amount equal to one year of FFB assessment per each lot purchased by NVR. As of December 31, 2021 the accrued balance due to NVR was $188,125.
10. INCOME TAXES
The components of income tax expense and the effective tax rates for the years ended December 31, 2021 and 2020 are as follows:
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| Year Ended December 31, |
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| 2021 |
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| 2020 |
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Current: |
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Federal |
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State |
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Total Current |
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Deferred: |
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Federal |
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State |
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Total Deferred |
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Valuation Allowance |
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Total Income Tax Expense |
| $ |
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| $ | 11,633 |
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Pre-tax Income (Loss) |
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Effective Income Tax Rate |
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A reconciliation of our income tax expense at federal statutory income tax rate of 21% to our income tax expense at the effective tax rate is as follows:
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| Year Ended December 31, |
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| 2021 |
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| 2020 |
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Tax at the Statutory Federal Rate |
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| % |
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State Income Taxes, Net of Federal Income Taxes |
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| % |
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| - | % | |
Intercompany Management Oversight Fees |
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| % | ||
Capitalized Construction Costs |
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| - | % |
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| - | % |
Minority Interest in Partnerships |
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| - | % |
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| - | % |
Deferred Finance Cost |
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| % | ||
Miscellaneous Permanent Items |
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| - |
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| - | % |
Valuation Allowance |
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| - | % |
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| - | % |
Effective Income Tax Rate |
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| % |
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| % | ||
Deferred tax assets (liabilities) consist of the following at December 31, 2021 and 2020:
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| Year Ended December 31, |
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| 2021 |
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| 2020 |
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Interest Income |
| $ | ( | ) |
| $ | ( | ) |
Interest Expense |
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Depreciation and Amortization |
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Impairment |
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Accrued Expense |
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Partnership Gain (Loss) |
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Others |
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Valuation Allowance |
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| ( | ) |
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| ( | ) |
Net Deferred Tax Asset |
| $ |
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| $ |
| ||
As of December 31, 2021, the Company has Federal and Maryland State net operating loss carry-forwards of approximately $
As of December 31, 2021, total tax receivable is $
We are subject to U.S. federal income tax as well as income tax of certain state jurisdictions. We have substantially concluded all U.S. federal income tax and state tax matters through 2017. However, our federal tax returns for the years 2018 through 2020 remain open to examination. State tax jurisdiction tax years remain open to examination as well, though we believe that any additional assessment would be immaterial to the Consolidated Financial Statements.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not Applicable.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
In connection with the preparation of our Report on Form 10-K, an evaluation was carried out by management, with the participation of our Chief Executive Officers and Chief Financial Officers, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act) as of December 31, 2021. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified, and that such information is accumulated and communicated to management, including the Chief Executive Officers and Chief Financial Officers, to allow timely decisions regarding required disclosure.
During evaluation of disclosure controls and procedures as of December 31, 2021 conducted as part of our annual audit and preparation of our annual financial statements, management conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures and concluded that our disclosure controls and procedures were ineffective for those reasons set forth below.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for the preparation and fair presentation of the financial statements included in this annual report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and reflect management’s judgment and estimates concerning effects of events and transactions that are accounted for or disclosed.
Management is also responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting includes those policies and procedures that pertain to our ability to record, process, summarize and report reliable data. Management recognizes that there are inherent limitations in the effectiveness of any internal control over financial reporting, including the possibility of human error and the circumvention or overriding of internal control. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement presentation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.
In order to ensure that our internal control over financial reporting is effective, management regularly assesses controls and did so most recently for its financial reporting as of December 31, 2021. This assessment was based on criteria for effective internal control over financial reporting described in the Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. In connection with management’s evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021, management determined that the Company did not maintain effective controls over financial reporting due to limited staff. This limited number of staff prevents us from segregating duties within our internal control system. Management determined that the ineffective controls over financial reporting constitute a material weakness.
This annual report filed on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
We continue taking steps to enhance and improve the design of our internal controls over financial reporting. During the period covered by this Annual Report on Form 10-K, we have not been able to completely remediate the material weaknesses identified above. To remediate such weaknesses, we plan to appoint additional qualified personnel with financial accounting, GAAP, and SEC experience.
Item 9B. Other Information.
Not Applicable.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Identification of directors and executive officers
The name, age and position of our officers and directors are set forth below:
Name |
| Age |
| Position(s) |
Fai H. Chan |
| 77 |
| Co-Chief Executive Officer and Chairman of the Board of Directors |
Moe T. Chan |
| 43 |
| Co-Chief Executive Officer and Member of the Board of Directors |
Conn Flanigan |
| 53 |
| Secretary and Member of the Board of Directors |
Charles MacKenzie |
| 51 |
| Member of the Board of Directors |
Rongguo (Ronald) Wei |
| 50 |
| Co-Chief Financial Officer |
Alan W. L. Lui |
| 51 |
| Co-Chief Financial Officer |
The mailing address for each of the officers and directors named above is c/o of the Company at: 4800 Montgomery Lane, Suite 210, Bethesda, MD, 20814.
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Business Experience
Fai H. Chan. Mr. Chan has served as a member of our Board of Directors since January 2017 and has served as Co-Chief Executive Officer of the Company since December 2017. Mr. Chan is an expert in banking and finance, with 45 years of experience in these industries. He has also restructured numerous companies in various industries and countries during the past 40 years. Mr. Chan has served as the Chief Executive Officer of Alset International Limited, a diversified holding company listed on the Catalist of the Singapore Exchange Securities Trading Limited, since April 2014, and has served as a director of that company since May of 2013. Since March, 2018, Mr. Chan has served as a Chairman of the Board and Chief Executive Officer of Alset EHome International Inc., a Nasdaq listed company. Mr. Chan has served as the Chairman and Chief Executive Officer of Alset Capital Acquisition Corp., a Nasdaq listed company, since October 2021. Additionally, Mr. Chan has served as a member of the Board of Directors of GigWorld Inc., a technology company since October of 2014, as Executive Chairman since December 2017 and served as the Acting Chief Executive Officer of GigWorld Inc. from August 2018 until September 2019, having previously served as Chief Executive Officer from December of 2014 until June of 2017. He has served as a director of DSS, Inc., an NYSE listed company, since January 2017 and as Chairman of the Board since March of 2019. Mr. Chan has also served as a non-executive director of Holista CollTech Ltd., an ASX listed company, since July 2013. Mr. Chan has served as a director of OptimumBank Holdings, Inc. and Optimum Bank since June 2018. Mr. Chan has served as a member of the Board of Directors of Sharing Services Global Corporation since April of 2020.
Mr. Chan’s previous experiences include serving as Managing Chairman of Zensun Enterprises Limited (formerly known as ZH International Holdings Limited and Heng Fai Enterprises Limited), an investment holding company listed on the HKSE, from 1992 to 2015. Mr. Chan was formerly the Managing Director of SingHaiyi Group Ltd., a property development, investment and management company listed on the Singapore Exchange Mainboard, from March 2003 to September 2013, and the Executive Chairman of China Gas Holdings Limited, a Hong Kong listed investor and operator of city gas pipeline infrastructure in China from 1997 to 2002. Mr. Chan served on the Board of RSI International Systems, Inc., the developer of RoomKeyPMS, a web-based property management system, from June 2014 to February 2019.
Mr. Chan has also served as a director of Global Medical REIT Inc., a healthcare facility real estate company, from December 2013 to July 2015. He was a director of American Housing REIT Inc. from October of 2013 to July of 2015. He served as a director of Skywest Ltd., a public Australian airline company from 2005 to 2006. Mr. Chan was a director of Global Med Technologies, Inc., a medical company engaged in the design, development, marketing and support information for management software products for healthcare-related facilities, from May 1998 until December 2005.
Director Qualifications of Fai H. Chan:
The board of directors appointed Mr. Chan in recognition of his abilities to assist the Company in expanding its business and the contributions he can make to the Company’s strategic direction.
Moe T. Chan. Moe Chan was appointed Co-Chief Executive Officer of our Company and a member of our Board of Directors in December 2017. Moe Chan also serves as the Group Chief Development Officer and Executive Director of Alset International. Moe Chan is responsible for Alset International’s international property development business (including serving as Co-Chief Executive Officer and a member of the Board of Alset EHome). Moe Chan has served as a director of DSS, Inc., a NYSE listed company, since September 2020. From April 2014 to June 2015 Moe Chan was the Chief Operating Officer of HKSE listed ZH International Holdings Limited (formerly known as Heng Fai Enterprises Limited) and was responsible for that company’s global business operations consisting of REIT ownership and management, property development, hotels and hospitality, as well as property and securities investment and trading. Prior to that, he was an executive director (from March 2006 to February 2014) and the Chief of Project Development (from April 2013 to February 2014) of Singapore Exchange Mainboard listed SingHaiyi Group Ltd, overseeing its property development projects. He was also a non-executive director of the Toronto Stock Exchange-listed RSI International Systems Inc., a hotel software company, from July 2007 to August 2016.
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Moe T. Chan has a diverse background and experience in the fields of property, hospitality, investment, technology and consumer finance. He holds a Master’s Degree in Business Administration with honors from the University of Western Ontario, a Master’s Degree in Electro-Mechanical Engineering with honors and a Bachelor’s Degree in Applied Science with honors from the University of British Columbia. Moe Chan is the son of Fai H. Chan.
Director Qualifications of Moe T. Chan:
The board of directors appointed Moe Chan in recognition of his extensive knowledge of real estate and ability to assist the Company in expanding its business.
Conn Flanigan. Mr. Flanigan has served as a member of our Board of Directors since December of 2013 and is a practicing attorney specializing in corporate, real estate, and securities law. Mr. Flanigan is a legal advisor to Alset International and has served as officer and director to several US subsidiaries of Alset International. Mr. Flanigan currently serves as Secretary and General Counsel of American Medical REIT, Inc., a real estate investment trust that acquires healthcare properties and facilities. Mr. Flanigan served as the Secretary and General Counsel for Global Medical REIT Inc. (NYSE:GMRE) from December 2013 to May 2017. From September 2013 to May 2017, Mr. Flanigan also served as Chief Executive Officer, General Counsel and Secretary, and as a director, of American Housing REIT Inc. Mr. Flanigan served as a member of the Board Directors of Amarantus Bioscience Holdings, Inc., a biotech company, from February 2017 until May 2017. Mr. Flanigan served as a director of GigWorld Inc. from October 2014 until September 2018 and as legal counsel and Secretary from December 2014 until September 2018. From February 2000 until May 2017, Mr. Flanigan was employed as General Counsel by subsidiaries of ZH International Holdings, Ltd., including eBanker USA.com, Inc. and ZH USA, LLC. In this role, he served as General Counsel and Secretary for other ZH International Holdings, Ltd. subsidiaries. Mr. Flanigan received a B.A. in International Relations from the University of San Diego in 1990 and a Juris Doctor Degree from the University of Denver Sturm College of Law in 1996.
Director Qualifications of Conn Flanigan:
Mr. Flanigan’s service as an officer, director and employee of various entities has provided him with significant knowledge and experience regarding corporate financial and governance matters.
Charles MacKenzie. Mr. MacKenzie has served as a member of the Company’s Board of Directors since December 2017 and serves as the Chief Development Officer for SeD Development Management, a subsidiary of Alset EHome, since July of 2015. Mr. MacKenzie also has served as a member of the Board of Directors of Alset EHome since October of 2017 and as Chief Executive Officer – United States since April 2020. In December 2019 Mr. MacKenzie was appointed the Chief Development Officer of Alset EHome International Inc., a Nasdaq listed company. He was previously the Chief Development Officer for Inter- American Development (IAD), a subsidiary of Heng Fai Enterprises (now known as Zensun Enterprises Limited) from April of 2014 to June of 2015. Mr. MacKenzie was the Founder and President of MacKenzie Equity Partners, specializing in mixed-use real estate investments as well as the owner of Smartbox Portable Storage, a residential moving and storage company from October 2006 to a successful sale in February 2017. Mr. MacKenzie focuses on acquisitions and development of residential and mixed-use projects within the United States. Mr. MacKenzie specializes in site selection, contract negotiations, marketing and feasibility analysis, construction and management oversight, building design and investor relations. Mr. MacKenzie has developed over 1,300 residential units inclusive of single-family homes, multi-family, and senior living dwellings totaling more than $110M and over 650,000 square feet of commercial valued at over $100M. Mr. MacKenzie received a BA and graduate degree from St. Lawrence University where he served on the Board of Trustees from 2003-2007.
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Director Qualifications of Charles MacKenzie:
The board of directors appointed Charles MacKenzie in recognition of his extensive knowledge of real estate and ability to assist the Company in expanding its business.
Rongguo (Ronald) Wei. Mr. Wei has served as the Company’s Chief Financial Officer since March 2017. Mr. Wei is a finance professional with more than 15 years of experience working in public and private corporations in the United States. Mr. Wei has also served as Co-Chief Financial Officer of Alset EHome International Inc., a Nasdaq listed company, since March 2018 and has served as Chief Financial Officer of Alset Capital Acquisition Corp., a Nasdaq listed company, since October 2021. As the Chief Financial Officer of our subsidiary SeD Development Management LLC, Mr. Wei is responsible for oversight of all finance, accounting, reporting, and taxation activities for that company. Prior to joining SeD Development Management LLC in August of 2016, Mr. Wei worked for several different US multinational and private companies including serving as Controller at American Silk Mill, LLC, a textile manufacturing and distribution company, from August of 2014 to July of 2016, serving as a Senior Financial Analyst at Air Products Chemicals, Inc., a manufacturing company, from January of 2013 to June of 2014 and serving as a Financial/Accounting Analyst at First Quality Enterprise, Inc., a personal products company, from 2011 to 2012. Mr. Wei also worked as an equity analyst in Hong Yuan Securities, an investment bank, in Beijing, China, concentrating on industrial and public company research and analysis. Mr. Wei is a Certified Public Accountant and received his Master of Business Administration from the University of Maryland and a Master of Business Taxation from the University of Minnesota. Mr. Wei also holds a Master in Business degree from Tsinghua University and a Bachelor degree from Beihang University. Mr. Wei served as a member of the Board Directors of Amarantus Bioscience Holdings, Inc., a biotech company, from February 2017 until May 2017, and served as Chief Financial Officer of such company from February, 2017 to November, 2017.
Alan W. L. Lui. Mr. Lui has served as the Company’s Co-Chief Financial Officer since December 2017 and has served as the Co-Chief Financial Officer of Alset EHome since October of 2017. Mr. Lui has served as Chief Financial Officer of GigWorld Inc., a technology company since May 2016 and has served as a director of one of GigWorld’s subsidiaries since July of 2016. Mr. Lui has been Chief Financial Officer of Alset International, the Company’s majority shareholder since November 2016 and served as its Acting Chief Financial Officer since June 2016. Mr. Lui has served as an Executive Director of Alset International since July 2020. Since October of 2016, Mr. Lui has also served as a director of BMI Capital Partners International Ltd, a Hong Kong investment consulting company. He has also served as a director of LiquidValue Asset Management Pte Limited (formerly known as Hengfai Asset Management Pte. Ltd.), a Singapore fund management company, since April, 2018. Mr. Lui has also served a Co-Chief Financial Officer of Alset EHome International Inc., a Nasdaq listed company, since March, 2018. From June of 1997 through March of 2016, Mr. Lui served in various executive roles at ZH International Holdings Ltd. (a Hong Kong-listed company formerly known as Heng Fai Enterprises Ltd), including as Financial Controller. Mr. Lui oversaw the financial and management reporting and focusing on its financing operations, treasury investment and management. He has extensive experience in financial reporting, taxation and financial consultancy and management in Hong Kong. He also managed all financial forecasts and planning. Mr. Lui is a Certified Practicing Accountant in Australia and received a Bachelor’s Degree in Business Administration from the Hong Kong Baptist University in 1993.
The board of directors has no nominating or compensation committees. The Company’s Audit Committee consists of Conn Flanigan.
Section 16(a) Beneficial Ownership Reporting Compliance
To our knowledge, no director, officer or beneficial owner of more than ten percent of any class of our equity securities, failed to file on a timely basis reports required by Section 16(a) of the Exchange Act during the fiscal year ended December 31, 2021.
Code of Ethics
We have not yet adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. We intend to adopt a code of ethics in the immediate future.
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Corporate Governance
There have been no changes in any state law or other procedures by which security holders may recommend nominees to our board of directors. We do not have a nominating committee, however we intend to appoint one in the immediate future.
Audit Committee
Our board of directors had an Audit Committee consisting of Mr. Flanigan. The Audit Committee does not at the present time have an audit committee financial expert serving on its Audit Committee; however, our board intends to appoint an audit committee financial expert in the immediate future.
Family Relationships
Fai H. Chan, our Co-Chief Executive Officer, Chairman of our Board and Chairman of the Board and Chief Executive Officer of our majority shareholder and its corporate parent is the father of Moe T. Chan, our other Co-Chief Executive Officer and a Member of our Board.
Involvement in Certain Legal Proceedings
None of our directors, executive officers and control persons has been involved in any of the following events during the past ten years:
● | Any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time, |
● | Any conviction in a criminal proceeding or being subject to any pending criminal proceeding (excluding traffic violations and other minor offenses); |
● | Being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his or her involvement in any type of business, securities or banking activities; or |
● | Being found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated. |
Conflicts of Interest
Except as provided for in Article XI of the Company’s By-Laws: Board Director Compensation, no officer, director or security holder of the company may be involved in pecuniary interest in any investment acquired or disposed of by the registrant or in any transaction to which the registrant or any of its subsidiaries is party or has an interest.
None of the directors, officers, security holders or affiliates of the registrant may engage, for their own account, business activities of the types conducted by the registrant and its subsidiaries.
Item 11. Executive Compensation.
At the present time, neither LiquidValue Development Inc. nor Alset EHome and its subsidiaries is a party to any compensation arrangements with any officer or director of either entity and has made no provisions for paying cash or non-cash compensation to such officers and directors, except for Charles MacKenzie and Rongguo (Ronald) Wei. A subsidiary of Alset EHome is paying salaries to five employees at the present time, which includes Mr. Wei, and has consulting arrangements with certain individuals, including Mr. MacKenzie.
| 53 |
| Table of Contents |
In 2021, Mr. Wei was compensated by SeD Development Management LLC for his services to Alset EHome at a rate of $136,184 per year, excluding bonus. Mr. Wei has been compensated by SeD Development Management LLC since 2016. Mr. Wei was not paid by LiquidValue Development Inc. prior to its acquisition of Alset EHome. SeD Development Management LLC will continue to compensate Mr. Wei at the same rate, and he will perform services for LiquidValue Development Inc. as well as its subsidiary Alset EHome.
A company controlled by Mr. MacKenzie was paid consulting fees of approximately $20,000 per month (and $120,000 additional bonus in 2021) in 2020 and 2021, which includes payment for his services to Alset EHome and its subsidiaries.
Mr. Flanigan serves in various director and officer positions with subsidiaries of Alset International. Mr. Flanigan’s law firm has been paid legal fees by various subsidiaries of Alset International in the past, including those fees paid to his law firm by Alset EHome and its subsidiaries that are described in Item 13.
Mr. Fai H. Chan is compensated by Alset International, where he serves as Chief Executive Officer. He is also compensated by Alset EHome International Inc., which owns the majority of Alset International. Mr. Alan Lui is also employed and compensated by Alset International. Mr. Moe T. Chan served as a consultant to Alset International and in August of 2020 the consulting agreement was terminated and he became an employee of Alset International. Moe T. Chan is also compensated by Alset EHome International Inc. As part of their duties as officers or consultants of Alset International, each of these three individuals works on a number of matters for Alset International, including devoting various amounts of time to the management of Alset International’s various subsidiaries and divisions, such as LiquidValue Development and Alset EHome. The amount of time each of these individuals spends on matters related to LiquidValue Development and Alset EHome has varied greatly based on the Company’s needs, and no definite statement may be made as to what percentage of these three individuals’ time has been spent or will be spent in the future on matters related to LiquidValue Development and Alset EHome. LiquidValue Development and Alset EHome and its subsidiaries do not compensate these three individuals for their services. On December 29, 2020, the Company entered into a Management Services Agreement with Alset International, pursuant to which the Company agreed to pay Alset International a one-time payment of $360,000 for the services of certain Alset International staff members the Company received in 2020, and agreed to pay Alset International $30,000 per month for services to be provided in 2021.
In connection with the acquisition of Alset EHome by LiquidValue Development Inc., LiquidValue Development Inc. and its subsidiaries intend to enter into revised compensation agreements with officers, directors and certain employees in the immediate future.
The table below summarizes all compensation awarded to, earned by, or paid to LiquidValue Development Inc.’s named executive officer for all services rendered in all capacities to us for the period from January 1, 2020 through December 31, 2021.
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SUMMARY COMPENSATION TABLE
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| Non-Equity |
| Nonqualified deferred |
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| Stock |
| Option |
| Incentive |
| Comp |
| All Other |
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Name and Principal Position (1) |
| Year |
| Salary |
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| Bonus |
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| Awards |
| Awards |
| Plan Comp |
| Earnings |
| Comp |
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| Total |
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Fai H. Chan (2) |
| 2021 |
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Chairman of the Board and Co-Chief Executive Officer |
| 2020 |
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Moe T. Chan (2) |
| 2021 |
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Director and Co-Chief Executive Officer |
| 2020 |
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Conn Flanigan |
| 2021 |
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| $ | 0 |
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| $ | 0 |
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Director and Former Chief Executive Officer |
| 2020 |
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| $ | 12,645 | (3) |
| $ | 12,645 | (3) | ||
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Rongguo (Ronald) Wei |
| 2021 |
| $ | 136,184 |
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| 86,092 |
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| $ | 222,276 |
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Co-Chief Financial Officer |
| 2020 |
| $ | 118,800 |
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| $ | 118,800 |
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Alan W. L. Lui (2) |
| 2021 |
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Co-Chief Financial Officer |
| 2020 |
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Charles MacKenzie |
| 2021 |
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| $ | 360,000 | (4) |
| $ | 360,000 | (4) |
Director |
| 2020 |
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| $ | 240,000 | (4) |
| $ | 240,000 | (4) |
(1) | Effective as of December 29, 2017, Mr. Fai H. Chan was appointed as our Chairman and Co-Chief Executive Officer; Moe T. Chan was appointed as a member of our Board and as Co-Chief Executive Officer; Rongguo (Ronald) Wei and Alan W. L. Lui were appointed as our Co-Chief Financial Officers; and Charles MacKenzie joined the Company’s Board of Directors. |
(2) | Alset International compensates Mr. Fai H. Chan, Mr. Moe T. Chan and Mr. Lui for their services to a number of divisions and subsidiaries of Alset International. Each of these three individuals works on a number of matters for Alset International, including devoting various amounts of time to matters related to LiquidValue Development Inc. LiquidValue Development Inc. does not compensate these individuals but on December 29, 2020, the Company entered into a Management Services Agreement with Alset International, pursuant to which the Company paid Alset International a one-time payment of $360,000 for the services of certain Alset International staff members the Company received in 2020, and paid Alset International $30,000 per month for services provided in 2021. |
(3) | Mr. Flanigan’s law firm was paid $0 and $12,645 in total fees by various subsidiaries of Alset EHome for Mr. Flanigan’s services in 2021 and 2020, respectively. |
(4) | A company controlled by Mr. MacKenzie was paid total consulting fees of $240,000 in 2020 and $360,000 in 2021 by Alset EHome. |
As of the date of this Report, the Company does not have any stock option plans, retirement, pension, or profit-sharing plans for the benefit of any of our officers or directors.
Outstanding Equity Awards at Fiscal Year-End
There were no grants of stock options through the date of this report.
We do not have any long-term incentive plans that provide compensation intended to serve as incentive for performance.
The board of directors of the Company has not adopted a stock option plan. The Company has no plans to adopt it but may choose to do so in the future. If such a plan is adopted, this may be administered by the board or a committee appointed by the board (the “Committee”). The Committee would have the power to modify, extend or renew outstanding options and to authorize the grant of new options in substitution therefore, provided that any such action may not impair any rights under any option previously granted. The Company may develop an incentive-based stock option plan for its officers and directors.
Stock Awards Plan
The company has not adopted a Stock Awards Plan but may do so in the future. The terms of any such plan have not been determined.
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| Table of Contents |
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Security Ownership
The following table sets forth, as of December 31, 2021, and as of March 14, 2022, the number and percentage of our outstanding shares of common stock owned by (i) each person known to us to beneficially own more than 5% of its outstanding common stock, (ii) each director, (iii) each named executive officer and significant employee, and (iv) all officers and directors as a group.
The number of shares listed below includes shares that each shareholder listed in the table has the right to acquire beneficial ownership of within 60 days.
Name and Address (2) |
| Number of Common Shares Beneficially Owned |
|
| Percentage of Outstanding Common Shares (1) |
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Fai H. Chan (3) |
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| 704,015,730 |
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| 99.99 | % |
Moe T. Chan |
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| 0 |
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| 0.00 | % |
Conn Flanigan |
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| 0 |
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| 0.00 | % |
Charles MacKenzie |
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| 0 |
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| 0.00 | % |
Rongguo (Ronald) Wei |
|
| 0 |
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| 0.00 | % |
Alan W. L. Lui |
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| 0 |
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| 0.00 | % |
All Directors and Officers (6 individuals) |
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| 704,015,730 |
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| 99.99 | % |
Alset International Limited (3) |
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| 704,015,730 |
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| 99.99 | % |
SeD Intelligent Home, Inc. (3) |
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| 704,015,730 |
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| 99.99 | % |
(1) | Based upon 704,043,324 outstanding common shares as of December 31, 2021 and March 14, 2022. |
(2) | The mailing address for each individual and entity set forth above is c/o LiquidValue Development Inc., 4800 Montgomery Lane, Suite 210, MD 20814. |
(3) | Fai H. Chan may be deemed to be the beneficial owner of those 704,015,730 shares held by Alset International Limited’s wholly-owned subsidiary SeD Intelligent Home, Inc. Mr. Chan is the Chairman and Chief Executive Officer of Alset International Limited, a diversified holding company listed on the Catalist of the Singapore Exchange Securities Trading Limited and the Chairman and Chief Executive Officer of Alset EHome International Inc., a Nasdaq listed company. The majority of Alset International Limited is owned by a wholly-owned subsidiary of Alset EHome International Inc. Mr. Chan is the largest shareholder of Alset EHome International Inc. through HFE Holdings Limited, a holding company owned by Mr. Chan. |
Change of Control
The Company is not aware of any arrangement which may at a subsequent date result in a change in control of the Company.
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| Table of Contents |
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Family Relationships
Fai H. Chan, our Co-Chief Executive Officer, Chairman of our Board and Chairman of the Board and Chief Executive Officer of our majority shareholder and its corporate parent is the father of Moe T. Chan, our other Co-Chief Executive Officer and a Member of our Board.
Policies and Procedures for Transactions with Related Persons
Our board of directors intends to adopt a written related person transaction policy to set forth the policies and procedures for the review and approval or ratification of related person transactions. Related persons include any executive officer, director or a holder of more than 5% of our common stock, including any of their immediate family members and any entity owned or controlled by such persons. Related person transactions refer to any transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships in which (i) we were or are to be a participant, (ii) the amount involved exceeds $120,000, and (iii) a related person had or will have a direct or indirect material interest. Related person transactions include, without limitation, purchases of goods or services by or from the related person or entities in which the related person has a material interest, indebtedness, guarantees of indebtedness, and employment by us of a related person, in each case subject to certain exceptions set forth in Item 404 of Regulation S-K under the Securities Act.
We expect that the policy will provide that in any related person transaction, our audit committee and board of directors will consider all of the available material facts and circumstances of the transaction, including: the direct and indirect interests of the related persons; in the event the related person is a director (or immediate family member of a director or an entity with which a director is affiliated), the impact that the transaction will have on a director’s independence; the risks, costs and benefits of the transaction to us; and whether any alternative transactions or sources for comparable services or products are available. After considering all such facts and circumstances, our audit committee and board of directors will determine whether approval or ratification of the related person transaction is in our best interests. For example, if our audit committee determines that the proposed terms of a related person transaction are reasonable and at least as favorable as could have been obtained from unrelated third parties, it will recommend to our board of directors that such transaction be approved or ratified. Our audit committee will recommend that our board of directors reject any transaction if it could affect our ability to comply with securities laws and regulations.
Transactions with Related Persons, Promoters, and Certain Control Persons
Loan from SeD Home Limited
Alset EHome receives advances from SeD Home Limited (an affiliate of Alset International), to fund development and operation costs. The advances bear interest at 10% and are payable on demand. As of December 31, 2021 and 2020, Alset EHome had outstanding principal due of $0 and $0 and accrued interest of $228,557 and $228,557, respectively.
Loan from SeD Intelligent Home Inc. (f.k.a. SeD Home International)
The Company receives advances from or loans funds to SeD Intelligent Home, the owner of 99.99% of the Company. The advances or the loans bore interest of 18% until August 30, 2017 when the interest rate was adjusted to 5% and have no set repayment terms. On December 31, 2021, the Company owed $19,891,734 of advance principal and $144,588 of accrued interest. On December 31, 2020, SeD Intelligent Home owed the Company $98,680 in loan principal and $19,261 in accrued loan interest.
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| Table of Contents |
Management Fees
MacKenzie Equity Partners, owned by a Charles MacKenzie, a Director of the Company, has a consulting agreement with the Company since 2015. Per the terms of the agreement, as amended on January 1, 2018, the Company pays a monthly fee of $20,000 for the consulting services. The Company incurred expenses of $360,000 and $240,000 in the years ended December 31, 2021 and 2020, respectively, which were capitalized as part of Real Estate on the balance sheet as the services relate to property and project management. In 2021, MacKenzie Equity Partners was granted an additional $120,000 bonus payment. On December 31, 2021 and 2020, the Company owed this related party $80,000 and $0, respectively.
On December 29, 2020, the Company entered into a Management Services Agreement (the “Management Services Agreement”) with Alset International, pursuant to which the Company agreed to pay Alset International a one-time payment of $360,000 for the services of certain Alset International staff members the Company received in 2020, and agreed to pay Alset International $30,000 per month for services to be provided in 2021. This Management Services Agreement has a term that ended December 31, 2021, and can be cancelled by either party on thirty days’ notice. Alset International will provide the Company with services related to the development of the Black Oak and Ballenger Run real estate projects near Houston, Texas and in Frederick, Maryland, respectively, and the potential development of future real estate projects. During the year ended December 31, 2021 the Company incurred expense of $360,000, and owed this related party $720,000 as of December 31, 2021. This balance due is included in the loan amount from SeD Intelligent Home Inc., which in turn owes the funds to Alset International.
Advance to Alset EHome International Inc.
The Company pays some operating expenses for Alset EHome International Inc., a related party under the common control of Chan Heng Fai, the CEO of the Company. The advances are interest free with no set repayment terms. On December 31, 2021 and December 31, 2020, the balance of these advances was $26,566 and $0, respectively.
Consulting Services
A law firm, owned by Conn Flanigan, a Director of the Company, performs consulting services for the Company. The Company incurred expenses of $0 and $12,645 for the years ended December 31, 2021 and 2020, respectively. On December 31, 2021 and 2020, the Company owed this related party $0.
Item 14. Principal Accounting Fees and Services
The following table indicates the fees paid by us for services performed for the years ended December 31, 2021 and December 31, 2020:
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| Year Ended December 31, 2021 |
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| Year Ended December 31, 2020 |
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Audit Fees |
| $ | 47,443 |
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| $ | 61,500 |
|
Audit-Related Fees |
| $ | 0 |
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| $ | 0 |
|
Tax Fees |
| $ | 27,400 |
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| $ | 25,000 |
|
All Other Fees |
| $ | 0 |
|
| $ | 0 |
|
Total |
| $ | 74,843 |
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| $ | 86,500 |
|
Audit Fees. This category includes the aggregate fees billed for professional services rendered by the independent auditors during the years ended December 31, 2021 and December 31, 2020 for the audit of our financial statements and review of previous years’ Form 10-Qs.
Tax Fees. This category includes the aggregate fees billed for tax services rendered in the preparation of our federal and state income tax returns.
All Other Fees. This category includes the aggregate fees billed for all other services, exclusive of the fees disclosed above, rendered during the year ended December 31, 2021 and December 31, 2020.
On December 21, 2021, the Board of Directors of the Company dismissed Briggs Veselka Co. (“BV”) as its independent registered public accounting firm at the recommendation of the Audit Committee. BV’s audit report on the Company’s financial statements for the year ended December 31, 2020 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.
On December 22, 2021, the Company engaged Grassi Co., CPAs, P.C. (“Grassi”) as its independent registered public accounting firm for the Company’s fiscal year ending December 31, 2021. The decision to engage Grassi was recommended by the Company’s Audit Committee and approved by the Company’s Board of Directors.
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| Table of Contents |
PART IV
Item 15. Exhibit and Financial Statement Schedules
(a)(1) List of Financial statements included in Part II hereof:
Balance Sheets as of December 31, 2021 and December 31, 2020
Statements of Operations for the twelve months ended December 31, 2021 and December 31, 2020
Statements of Stockholders' Equity (Deficit) for the period December 31, 2020 through December 31, 2021
Statements of Cash Flows for the twelve months ended December 31, 2021 and December 31, 2020
(a)(2) List of Financial Statement schedules included in Part IV hereof:
None.
(a)(3) Exhibits
The following exhibits are filed with this report or incorporated by reference:
Exhibit No. |
| Description |
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101.INS |
| XBRL Instance Document |
101.SCH |
| XBRL Taxonomy Extension Schema Document |
101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document |
101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase Document |
* Filed herewith.
** Furnished herewith.
Item 16. Form 10-K Summary
None.
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| Table of Contents |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| LiquidValue Development Inc. |
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Dated: March 14, 2022 | By: | /s/ Rongguo (Ronald) Wei |
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| Name: | Rongguo (Ronald) Wei |
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| Title: | Co-Chief Financial Officer |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature |
| Title |
| Date |
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/s/ Fai H. Chan |
| Co-Chief Executive Officer, Director |
| March 14, 2022 |
Fai H. Chan |
| (Principal Executive Officer) |
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/s/ Moe T. Chan |
| Co-Chief Executive Officer, Director |
| March 14, 2022 |
Moe T. Chan |
| (Principal Executive Officer) |
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/s/ Conn Flanigan |
| Secretary, Director |
| March 14, 2022 |
Conn Flanigan |
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/s/ Charley MacKenzie |
| Director |
| March 14, 2022 |
Charley MacKenzie |
|
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/s/ Rongguo (Ronald) Wei |
| Co-Chief Financial Officer |
| March 14, 2022 |
Rongguo (Ronald) Wei |
| (Principal Financial Officer and Principal Accounting Officer) |
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/s/ Alan W. L. Lui |
| Co-Chief Financial Officer |
| March 14, 2022 |
Alan W. L. Lui |
| (Principal Financial Officer and Principal Accounting Officer) |
|
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| 62 |