UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

For the quarterly period ended September 30, 2019

 

or

 

 

For the transition period from __________to _________

 

000-55038

Commission file number

 

 

4800 Montgomery Lane, Suite 210, Bethesda, Maryland		20814
(Address of principal executive offices)		(Zip Code)

 

301-971-3940

Registrant’s telephone number, including area code

  

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. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☐  No ☐

 

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

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒
(Do not check if a smaller reporting company)		Emerging growth company	☐

 

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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

 

As of November 12, 2019, there were 704,043,324 shares of the registrant’s common stock $0.001 par value per share, issued and outstanding.

 

 

Table of Contents

 

PART I FINANCIAL INFORMATION	1
Item 1. Condensed Consolidated Financial Statements	1
Condensed Consolidated Balance Sheets (unaudited)	1
Condensed Consolidated Statements of Operations (unaudited)	2
Condensed Consolidated Statements of Shareholders’ Equity (unaudited)	3
Condensed Consolidated Statements of Cash Flows (unaudited)	5
Notes to Condensed Consolidated Financial Statements (unaudited)	5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3. Quantitative and Qualitative Disclosure About Market Risk	19
Item 4. Controls and Procedures	19
PART II OTHER INFORMATION	20
Item 1. Legal Proceedings	20
Item 1A. Risk Factors	20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3. Defaults Upon Senior Securities	20
Item 4. Mine Safety Disclosures	20
Item 5. Other Information	20
Item 6. Exhibits	20
SIGNATURES	21
Exhibit Index

 

 

SeD Intelligent Home Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

	September 30,	December 31,
	2019	2018
	(Unaudited)	(As Restated)
Assets:
Real Estate
Construction in Progress	$9,350,220	$22,059,722
Land Held for Development	13,897,527	19,164,028
Real Estate Held For Sale	136,248	136,248
	23,383,995	41,359,998
Cash	1,844,176	715,754
Restricted Cash	7,049,223	3,929,410
Accounts Receivable	123,470	112,706
Related Party Receivable	78,662	-
Prepaid Expenses	3,927	46,443
Fixed Assets, Net	3,357	8,248
Deposits	23,603	23,603
Operating Lease Right-Of-Use (Asset)	105,339	-
Total Assets	$32,615,752	$46,196,162
Liabilities and Stockholders' Equity:
Liabilities:
Accounts Payable and Accrued Expenses	$291,012	$1,749,268
Accrued Interest - Related Parties	1,445,981	2,344,227
Tenant Security Deposits	1,225	1,225
Builder Deposits	2,538,756	3,878,842
Note Payable	-	13,899
Notes Payable - Related Parties	-	5,745,584
Operating Lease Liability	112,233	-
Total Liabilities	4,389,207	13,733,045
Stockholders' Equity:
Common Stock, at par $0.001, 1,000,000,000 shares authorized and 704,043,324 issued, and outstanding at September 30, 2019 and December 31, 2018, respectively	704,043	704,043
Additional Paid In Capital	32,542,720	32,542,720
Accumulated Deficit	(7,537,162)	(3,670,974)
Total Stockholders' Equity	25,709,601	29,575,789
Non-controlling Interests	2,516,944	2,887,328
Total Stockholders' Equity	28,226,545	32,463,117
Total Liabilities and Stockholders' Equity	$32,615,752	$46,196,162

 

See accompanying notes to condensed consolidated financial statements.

 

 

  SeD Intelligent Home Inc. and Subsidiaries

Consolidated Statements of Operations

For the Three and Nine Months Ended September 30, 2019 and 2018

(Unaudited)

 

	Three Months Ended September 30,		Nine Months Ended September 30,
	2019	2018	2019	2018
Revenue
Rental	$-	$4,365	$8,730	$4,365
Property	4,938,018	7,786,281	21,500,468	14,005,303
	4,938,018	7,790,646	21,509,198	14,009,668
Operating Expenses
Cost of Sales	4,353,898	6,574,977	19,619,146	12,144,497
General and Administrative	213,413	243,498	700,158	738,200
Impairment of Real Estate	4,725,275	-	4,725,275	-
	9,292,586	6,818,475	25,044,579	12,882,697
Income (Loss) From Operations	(4,354,568)	972,171	(3,535,381)	1,126,971
Other Income
Interest Income	7,932	10,036	33,589	21,257
Other Income	1,500	118,218	5,470	199,531
	9,432	128,254	39,059	220,788
Net Income (Loss) Before Income Taxes	(4,345,136)	1,100,425	(3,496,322)	1,347,759
Provision for Income Taxes	-	-	-	-
Net (Loss) Income	(4,345,136)	1,100,425	(3,496,322)	1,347,759
Net Income Attributable to Non-controlling Interests	119,218	501,401	369,866	617,784
Net (Loss) Income Attributable to Common Stockholders	$(4,464,354)	$599,024	$(3,866,188)	$729,975
Net (Loss) Income Per Share - Basic and Diluted	$(0.01)	$0.00	$(0.00)	$0.00
Weighted Average Common Shares Outstanding - Basic and Diluted	704,043,324	704,043,324	704,043,324	704,043,324

 

See accompanying notes to condensed consolidated financial statements.

  

 

SeD Intelligent Home Inc. and Subsidiaries

Consolidated Statement of Stockholders' Equity

Nine Months Ended on September 30, 2019

(Unaudited)

 

	Common Stock
	Shares	Par Value $0.001	Additional Paid in Capital	Accumulated Deficit	Minority Interest	Total Stockholders Equity
January 1, 2019	704,043,324	$704,043	$32,542,720	$(3,670,974)	$2,887,328	$32,463,117
Net Income				272,805	121,308	394,113
March 31, 2019	704,043,324	$704,043	32,542,720	(3,398,169)	3,008,636	32,857,230
Cash Dividend Distribution to Minority Interest					(740,250)	(740,250)
Net Income				325,361	129,340	454,701
June 30, 2019	704,043,324	$704,043	$32,542,720	$(3,072,808)	$2,397,726	$32,571,681
Net (Loss) Income				(4,464,354)	119,218	(4,345,136)
September 30, 2019	704,043,324	$704,043	$32,542,720	(7,537,162)	$2,516,944	$28,226,545

 

SeD Intelligent Home Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders' Equity

For Nine-Month Period ended September 30, 2018

(Unaudited)

 

	Common Stock
	Shares	Par Value $0.001	Additional Paid in Capital	Accumulated Deficit	Minority Interest	Total Stockholders Equity
January 1, 2018	704,043,324	$704,043	32,739,017	(2,092,837)	2,255,091	33,605,314
Net Income				176,978	90,589	267,567
March 31, 2018	704,043,324	$704,043	32,739,017	(1,915,859)	2,345,680	33,872,881
Net (Loss) Income				(46,027)	25,794	(20,233)
June 30, 2018	704,043,324	$704,043	$32,739,017	$(1,961,886)	$2,371,474	$33,852,648
Acquisition of Minority Interest			(196,297)		136,297	(60,000)
Net Income				599,024	501,401	1,100,425
September 30, 2018	704,043,324	$704,043	$32,542,720	(1,362,862)	$3,009,172	$34,893,073

 

See accompanying notes to condensed consolidated financial statements.

 

  

SeD Intelligent Home Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2019 and 2018

(Unaudited)

 

	2019	2018
Cash Flows From Operating Activities
Net (Loss) Income	$(3,496,322)	$1,347,759
Adjustments to reconcile net (loss) income to net cash from operating activities:
Depreciation	4,891	15,747
Impairment of Real Estate	4,725,275	-
Changes in Operating Assets and Liabilities
Real Estate	13,250,728	10,703,098
Right-Of-Use Operating	55,726	-
Accounts Receivable	(10,764)	507,141
Related Party Receivable	(78,662)	-
Prepaid Expense	34,745	27,754
Accounts Payable and Accrued Expenses	(1,436,610)	(137,533)
Accrued Interest - Related Parties	(898,246)	323,644
Operating Lease Liability	(62,707)	-
Tenant Security Deposits	-	(1,400)
Builder Deposits	(1,340,086)	(1,162,354)
Net Cash Provided By Operating Activities	10,747,968	11,623,856
Cash Flows From Investing Activities
Purchase of Fixed Assets	-	(3,000)
Net Cash Used In Investing Activities	-	(3,000)
Cash Flows From Financing Activities
Acquisition of Minority Interest	-	(60,000)
Repayments to Note Payable	(13,899)	(7,874,959)
Net Proceeds from Notes Payable - Related Parties	-	(2,313,294)
Repayment to Notes Payable - Related Parties	(5,745,584)	-
Cash Dividend Distribution to Minority Shareholder	(740,250)	-
Net Cash Used In Financing Activities	(6,499,733)	(10,248,253)
Net Increase (Decrease) in Cash and Restricted Cash	4,248,235	1,372,603
Cash and Restricted Cash - Beginning of Year	4,645,164	3,014,903
Cash and Restricted Cash - End of Period	$8,893,399	$4,387,506
Supplementary Cash Flow Information
Cash Paid For Interest	$3,822	$283,900
Supplemental Disclosure of Non-Cash Investing and Financing Activities
Amortization of Debt Discount Capitalized	$381,823	$52,604

 

See accompanying notes to condensed consolidated financial statements.

 

 

SeD Intelligent Home, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

 

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations

 

SeD Intelligent Home Inc. (the “Company”), formerly known as Homeownusa, was incorporated in the State of Nevada on December 10, 2009. On December 29, 2017, the Company acquired SeD Home Inc. (“SeD Home”) by reverse merger. SeD Home, a Delaware corporation, was formed on February 24, 2015 and was named SeD Home USA, Inc. before changing its name in May of 2015. SeD Home is principally engaged in developing, selling, managing, and leasing residential properties in the United States, 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 Home International, Inc. (“SeD Home International”), which is wholly owned by Singapore eDevelopment Limited (“SeD Ltd”), a multinational public company listed on the Singapore Exchange Securities Trading Limited (“SGXST”).

 

 

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 interest.

 

As of September 30, 2019 and December 31, 2018, the aggregate non-controlling interest in SeD Home, Inc. was $2,516,944 and $2,887,328, respectively, which is separately disclosed on the Condensed Consolidated Balance Sheet.

 

On December 29, 2017, the Company, SeD Acquisition Corp., a Delaware corporation and wholly owned subsidiary of the Company (the “Merger Sub”), SeD Home, Inc. (“SeD Home”), a Delaware corporation, and SeD Home International, Inc., a Delaware corporation entered into an Acquisition Agreement and Plan of Merger (the “Reverse Merger”) pursuant to which the Merger Sub was merged with and into SeD Home, with SeD Home 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 Home International, Inc. was the owner of 100% of the issued and outstanding common stock of SeD Home 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 SeD Home from SeD Home International, Inc. in exchange for issuing to SeD Home International, Inc. 630,000,000 shares of the Company’s common stock. Accordingly, SeD Home International, Inc. remains the Company’s largest shareholder, and the Company is now the sole shareholder of SeD Home. The Agreement and the transactions contemplated thereby were approved by the Board of Directors of each of the Company, the Merger Sub, SeD Home International, Inc., and SeD Home. The Agreement is considered a business combination of companies under common control and therefore, the condensed consolidated financial statements include the financial statements of both companies.

 

 

Basis of Presentation

 

The Company’s condensed consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“US GAAP”).

 

The unaudited financial information furnished herein reflects all adjustments, consisting solely of normal recurring items, which in the opinion of management are necessary to fairly state the financial position of the Company and the results of its operations for the periods presented. This report should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Form 10-K/A for the year ended December 31, 2018 filed on May 20, 2019. The Company assumes that the users of the interim financial information herein have read or have access to the audited financial statements for the preceding fiscal year and the adequacy of additional disclosure needed for a fair presentation may be determined in that context. The condensed consolidated balance sheet at December 31, 2018 was derived from the audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. The results of operations for the interim periods presented are not necessarily indicative of results for the year ending December 31, 2019.

 

Use of Estimates

 

The preparation of condensed 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 condensed consolidated financial statements. The Company's significant estimates are the valuation of real estate. Actual results could differ from those estimates.

 

Earnings (Loss) per Share

 

Basic income (loss) per share is computed by dividing the net loss attributable to the common stockholders by weighted average number of shares of common stock outstanding during the period. Fully diluted loss per share is computed similarly to basic 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 potentially dilutive financial instruments issued or outstanding for the periods ended September 30, 2019 or December 31, 2018.

 

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 September 30, 2019 and December 31, 2018.

 

Restricted Cash

 

As a condition to the loan agreement with the Union Bank (formerly known as Xenith Bank, f/k/a The Bank of Hampton Roads), the Company was required to maintain a minimum of $2,600,000 in an interest-bearing account maintained by the lender as additional security for the loan. The funds were required to remain as collateral for the loan until the loan is paid off in full. As of December 31, 2018, the loan balance was $13,899. The loan was fully paid off in January 2019 and the collateral was released on April 19, 2019.

 

On April 17, 2019, SeD Maryland Development, LLC entered into a Development Loan Agreement with Manufacturers and Traders Trust Company (“M&T Bank”). Based on the agreement, SeD Maryland Development is required to maintain a minimum balance of $2,600,000 as a security collateral fund in the interest-bearing account maintained by the lender. As part of the agreement, NVR deposits funds to M&T Bank directly from lot sales and keeps any overpayment to apply to future borrowings. On September 30, 2019, the total restricted cash held by M&T Bank was $6,642,682.

 

 

On July 20, 2018, Black Oak LP received $4,592,079 of district reimbursement for previous construction costs incurred in land development. Of this amount, $1,650,000 will remain on deposit in the District’s Capital Projects Fund for the benefit of Black Oak LP and will be released upon receipt of the evidence of: (a) the execution of a purchase agreement between Black Oak LP and a home builder with respect to the Black Oak development and (b) the completion, finishing and readying for home construction of at least 105 unfinished lots in the Black Oak development. The restricted cash balance on September 30, 2019 and December 31, 2018 was $406,541 and $1,203,256, respectively.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

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 September 30, 2019 and December 31, 2018.

 

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 3 years.

 

Real Estate 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.

 

The Company capitalized interest from related party borrowings of $79,662 and $323,644 for the nine months ended September 30, 2019 and 2018, respectively. The Company capitalized interest from the third-party borrowings of $3,822 and $242,412 for the nine months ended September 30, 2019 and 2018, respectively. The Company capitalized interest from related party borrowings of $0 and $97,081 for the three months ended September 30, 2019 and 2018, respectively. The Company capitalized interest from the third-party borrowings of $0 and $40,193 for the three months ended on September 30, 2019 and 2018, respectively.

 

A property is classified as “held for sale” when all of the following criteria for a plan of sale have been met:

 

 

 

 

 

 

 

 

When all of these criteria are met, the property is classified as “held for sale”. “Real estate held for sale” includes the El Tesoro project only.

   

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. Based on estimated discounted future cash flows, on September 30, 2019, the Company recorded an additional $4,725,275 of impairment on Black Oak net book value. No impairment was recorded on other projects.

 

On October 12, 2018, 150 CCM Black Oak, Ltd. entered into an Amended and Restated Purchase and Sale Agreement for 124 lots. Pursuant to the Amended and Restated Purchase and Sale Agreement, the purchase price remained $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 the Company’s Black Oak project in Magnolia, Texas was completed. After allocating costs of revenue to this sale, we had approximately $2.4 million loss from this sale and recognized approximately $2.4 million as the impairment of real estate in 2018.

  

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 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 and Black Oak projects, which were essentially all of the revenue of the Company in 2019 and 2018, is as follows:

 

 

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.

 

  

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.

 

  

The transaction price is fixed and specified in the contract. Any subsequent change orders or price changes are required to be approved by both parties.

 

  

 

Each lot or a group of lots is considered to be a separate performance obligation, for which the specified price in the contract is allocated to.

 

 

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.

 

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 in the statement of financial position.

 

Cost of Sales:

 

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.

 

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 condensed 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 2018, 2017 and 2016 remain open to examination.

 

Recent Accounting Pronouncements

 

In November 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18), which requires that restricted cash and cash equivalents be included as components of total cash and cash equivalents as presented on the statement of cash flows. ASU 2016-18 was effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 and a retrospective transition method is required. This guidance did not impact financial results, but resulted in a change in the presentation of restricted cash and restricted cash equivalents within the statement of cash flows. The Company adopted this guidance in the current period condensed consolidated statement of cash flows.

 

 

On February 25, 2016, the FASB released Accounting Standards Update No. 2016-02, Leases (Topic 842). From January 25, 2018 to July 30, 2018, the FASB also issued ASU 2018-01, 2018-10 and 2018-11 to clarify and specify some contents in ASU 2016-02. The new leasing standard presents dramatic changes to the balance sheets of lessees. Lessor accounting is updated to align with certain changes in the lessee model and the new revenue recognition standard. The standard had a material impact on the Company’s condensed consolidated balance sheets, but did not have an impact on its condensed consolidated statements of operations. The most significant impact was the recognition of right-of-use assets and lease liabilities for operating leases. The Company adopted this standard on January 1, 2019 and the balance of operating lease right-of-use assets and operating lease liabilities as of January 1, 2019 was $161,065 and $174,940, respectively. As a lessor of one home on leasing, this standard does not have material impact on the Company. The balances of operating lease right-of-use assets and operating lease liabilities as of September 30, 2019 was $105,339 and $112,233, respectively. Adoption of the standard had no impact to net cash from or used in operating, investing, or financing activities in the Company’s condensed consolidated statement of cash flows.

 

Operating lease right-of-use assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As our leases do not provide a readily determinable implicit rate, we estimate our incremental borrowing rate to discount the lease payments based on information available at lease commencement. The operating lease right-of-use asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. The lease term includes options to extend or terminate when we are reasonably certain the option will be exercised. In general, we are not reasonably certain to exercise such options. We recognize lease expense for minimum lease payments on a straight-line basis over the lease term. We elected the practical expedient to not recognize operating lease right-of-use assets and operating lease liabilities for lease agreements with terms less than 12 months.

 

In March 2018, the FASB issued ASU 2018-05, “Income Taxes (Topic 740) – Amendments to SEC paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 118.” ASU 2018-05 amends the Accounting Standards Codification to incorporate various SEC paragraphs pursuant to the issuance of SAB 118, which addresses the application of generally accepted accounting principles in situations when a registrant does not have necessary information available, prepared, or analyzed (including computation) in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act. The ASU is not expected to have a material impact on the Company.

 

Subsequent Events

 

The Company evaluated the events and transactions subsequent to September 30, 2019, the balance sheet date, through November 12, 2019, the date the condensed consolidated financial statements were available to be issued.

 

2. CONCENTRATION OF CREDIT RISK

 

The group 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. At September 30, 2019 and December 31, 2018, uninsured cash and restricted cash balances were $8,100,996 and $3,783,330, respectively.  

 

 

 

Depreciation expense was $4,891 and $15,747 for the nine months ended September 30, 2019 and 2018, respectively.

 

4. BUILDER DEPOSITS

 

In November 2015, SeD Maryland Development, LLC (“SeD 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 three times thereafter. Based on the agreements, NVR is entitled to purchase 479 lots for a price of approximately $64 million, which escalates 3% annually after June 1, 2018.

  

As part of the agreements, NVR was required to give a deposit in the amount of $5,600,000. Upon the sale of lots to NVR, 9.9% of the purchase price is taken as payback of the deposit. A violation of the agreements by NVR would cause NVR to forfeit the deposit. On January 3, 2019 NVR gave SeD Maryland Development, LLC another deposit in the amount of $100,000 based on the 3rd Amendment to the Lot Purchase Agreement. On September 30, 2019 and December 31, 2018, there were $2,538,756 and $3,878,842 outstanding, respectively.

 

5. NOTES PAYABLE

 

Union Bank Loan

 

On November 23, 2015, SeD Maryland entered into a Revolving Credit Note with the Union Bank in the original principal amount of $8,000,000. During the term of the loan, cumulative loan advances may not exceed $26,000,000. The line of credit bears interest at LIBOR plus 3.8% with a floor rate of 4.5%. On April 17, 2019, SeD Maryland Development LLC and Union Bank terminated the agreement.

 

As of September 30, 2019 and December 31, 2018, the principal balance was $0 and $13,899, respectively. As part of the transaction, the Company incurred loan origination fees and closing fees, totaling $480,947, which were recorded as debt discount and were amortized over the life of the loan based on the effective interest method. The unamortized debt discount was $0 on both September 30, 2019 and December 31, 2018.

 

M&T Bank Loan

 

On April 17, 2019, SeD Maryland Development LLC entered into a Development Loan Agreement with Manufacturers and Traders Trust Company (“M&T 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. The line of credit bears interest of LIBOR plus 375 basis points. SeD Maryland Development LLC was also provided with a Letter of Credit (“L/C”) Facility in an aggregate amount of $900,000. The L/C commission 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 L/C Facility is not a revolving loan, and amounts advanced and repaid may not be re-borrowed. Repayment of the Loan Agreement is secured by a $2.6 million collateral fund and a Deed of Trust issued to the Lender on the property owned by SeD Maryland.

 

 

As of September 30, 2019, the principal loan balance was $0. As part of the transaction, the Company incurred loan origination fees and closing fees in the amount of $381,823 and capitalized it into construction in process.

 

6. RELATED PARTY TRANSACTIONS

  

Loan from SeD Home Limited

 

The Company receives advances from SeD Home Limited, a subsidiary of SeD Ltd, to fund development and operation costs. The Company is 99.99% owned by SeD Home International, which is wholly owned by SeD Ltd. The advances bear interest of 10% and are payable on demand. As of September 30, 2019 and December 31, 2018, SeD Home had outstanding principal due of $0 and $1,116,406 and accrued interest of $228,557 and $193,382, respectively.

 

Loan from SeD Home International

 

The Company receives advances from SeD Home International, the owner of 99.99% of the Company. The advances bore interest of 18% until August 30, 2017 when the interest rate was adjusted to 5% and have no set repayment terms. At September 30, 2019 and December 31, 2018, there were $0 and $4,629,178 of principal and $1,217,424 and $2,150,845 of accrued interest outstanding, respectively. Both accrued outstanding interests include the remaining amount of $1,723,122 after interest was forgiven on August 30, 2017 as discussed in previous paragraph.

 

During 2017, prior to the Reverse Merger, SeD Intelligent Home Inc. borrowed $30,000 from SeD Home International Inc. The borrowings did not bear any interest. In November 2017, the debt was forgiven by SeD Home International Inc. and was recognized into additional paid in capital.

  

Management Fees

 

Black Oak LP was obligated under the Limited Partnership Agreement (as amended) to pay a $6,500 per month management fee to Arete Real Estate and Development Company (Arete), a related party through common ownership and $2,000 per month to American Real Estate Investments LLC (AREI), a related party through common ownership. Arete was also entitled to a developer fee of 3% of all development costs excluding certain costs. The fees were to be accrued until $1,000,000 is received in revenue and/or builder deposits relating to the Black Oak Project. 

 

On December 31, 2017, the Company had $314,630 owed to Arete and $48,000 to AREI.

 

On April 26, 2018, SeD Development USA, Arete and AREI reached an agreement to terminate the terms related to management fees and developer fees in the Limited Partnership Agreement. In July 2018, per the terms of the termination agreement, Black Oak LP paid Arete $300,000 and AREI $30,000 to fulfill the commitments.

 

MacKenzie Equity Partners, owned by 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 $15,000 with an additional $5,000 per month due upon the close of the sale to Houston LD, LLC. From January 2019, the Company pays a monthly fee of $20,000 for the consulting services. The Company incurred expenses of $180,000 and $135,000 for the nine months ended September 30, 2019 and 2018, respectively, which were capitalized as part of Real Estate on the balance sheet as the services relate to property and project management. On September 30, 2019 and December 31, 2018, the Company owed this related party $0 and $60,000, respectively.

 

Advance to HF Enterprises Inc.

 

The Company pays some operating expenses for HF Enterprise 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 September 30, 2019 and December 31, 2018, the balance of these advances was $78,662 and $0, respectively.

 

 

Purchase of Minority Interest of Black Oak LP

 

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 LP for total of $60,000. Regarding the potential future reimbursement proceeds, if and when Black Oak LP should receive at least $15 million in net reimbursement receivable proceeds from HC17 and/or Aqua Texas, Inc. (net of any expenses Harris County Improvement District 17 and/or Aqua Texas, Inc. may deduct), Black Oak LP shall pay Fogarty Family Trust II, one of two previous partners of Black Oak LP, an amount equal to 10% of the net reimbursement receivable proceeds received from HC17 and/or Aqua Texas, Inc. that exceeds $15 million; provided however, this obligation shall only apply to reimbursement revenue received on or before December 31, 2025. Prior to the Partnership Interest Purchase Agreements, the Company owned and controlled Black Oak LP 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 LP. As a result of the purchase, the Company, through its subsidiaries, now owns 100% of Black Oak LP.

 

Consulting Services

 

A law firm, owned by Conn Flanigan, a Director of the Company, performs legal consulting services for the Company. The Company incurred expenses of $45,634 and $88,030 for the nine months ended September 30, 2019 and 2018, respectively. On September 30, 2019 and December 31, 2018, the Company owed this related party $0 and $8,000, respectively.

 

7. STOCKHOLDERS’ EQUITY

 

Purchase of Minority Interest of Black Oak LP

 

On July 23, 2018, the Company entered into two Partnership Interest Purchase Agreements through which it purchased an aggregate of 31% of Black Oak LP for $60,000.

 

Cash Dividend Distributions

 

From April to June, 2019, SeD Maryland Development LLC Board approved three payment distribution plans to members and paid total $740,250 in distributions to the non-controlling shareholder.

 

8. COMMITMENTS AND CONTINGENCIES

 

Leases

 

The Company leases office spaces in Texas and Maryland. Both leases expire in 2020 and have monthly rental payments ranging between $2,409 and $8,205. Rent expenses were $85,278 and $89,595 for the nine months ended September 30, 2019 and 2018, respectively. The Company’s leases are accounted for as operating leases. Operating lease right-of-use assets and operating lease liability is included on the face of the condensed consolidated balance sheet. The Company elected the practical expedient to not recognize operating lease right-of-use assets and operating lease liabilities for lease agreements with terms less than 12 months. The Company has no leases that have not yet commenced as of September 30, 2019.

 

The balance of the operating lease right-of-use asset and operating lease liability as of September 30, 2019 was $105,339 and $112,233, respectively.

 

Supplemental Cash Flow and Other Information Related to Operating Leases are as follows:

 

	Nine Months Ended September 30, 2019
Weighted Average Remaining Operating Lease Term (in years)	1.17
Weighted Average Operating Lease Discount Rate	6.1%

 

 

The below table summarizes future payments due under these leases as of September 30, 2019.

 

  

Lot Sale Agreements

 

On February 19, 2018, SeD Maryland entered into a contract to sell the Continuing Care Retirement Community Assisted Independent Living parcel to Orchard Development Corporation. It was agreed that the purchase price for the 5.9-acre lot would be $2,900,000.00 with a $50,000 deposit. It was also agreed that Orchard Development Corporation would have the right to terminate the transaction during the feasibility study period, which would last through May 30, 2018, and receive a refund of its deposit. On April 13, 2018, Orchard Development Corporation indicated that it would not be proceeding with the purchase of the CCRC parcel. On December 31, 2018, SeD Maryland entered into the Third Amendment to the Lot Purchase Agreement for Ballenger Run with NVR. Pursuant to the Third Amendment, SeD Maryland was obliged to convert the 5.9-acre CCRC parcel to 36 lots (these will be 28 feet wide villa lots) and sell such lots to NVR. SeD Maryland received the required zoning approval to change the number of such lots from 85 to 121 in July 2019.

 

9. SUBSEQUENT EVENTS

 

On October 7, 2019 SeD Maryland Development LLC Board approved the fourth payment distribution plans to members and paid $82,250 in distributions to the non-controlling shareholder.