As filed with the
Securities and Exchange Commission on July 30,
2020.
Registration
No. 333- 235693
UNITED
STATES
SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
Amendment
No. 1 to
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF 1933
HF ENTERPRISES
INC.
(Exact name of
registrant as specified in its charter)
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Delaware
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6799
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83-1079861
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(State or other
jurisdiction of
incorporation or
organization)
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(Primary Standard
Industrial
Classification
Code Number)
|
(I.R.S.
Employer
Identification
Number)
|
HF Enterprises
Inc.
4800 Montgomery
Lane, Suite 210
Bethesda,
Maryland 20814
(301)
971-3940
(Address,
including zip code, and telephone number, including area code, of
registrant’s principal executive offices)
Chan Heng
Fai
Chairman and Chief Executive
Officer
HF Enterprises
Inc.
4800 Montgomery
Lane, Suite 210
Bethesda,
Maryland 20814
(301)
971-3940
(Name, address,
including zip code, and telephone number, including area code, of
agent for service)
Copies of all communications to:
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Spencer G.
Feldman, Esq.
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Thomas Poletti,
Esq.
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Olshan Frome
Wolosky LLP
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Katherine J.
Blair, Esq.
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1325 Avenue of
the Americas, 15th Floor
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Manatt, Phelps
& Phillips, LLP
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New York, New
York 10019
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695 Town Center
Drive, 14th Floor
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Tel.: (212)
451-2300
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Costa Mesa,
California 92626
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Fax: (212)
451-2222
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Tel.: (714)
371-2501
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Email:
sfeldman@olshanlaw.com
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Fax: (714)
371-2551
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Approximate date of commencement of
proposed sale to the public: As soon as practicable after the
effective date of this registration statement.
If any of the securities being
registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box.
☒
If this Form is filed to register
additional securities for an offering pursuant to Rule 462(b) under
the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective
registration statement for the same offering.
☐
If this Form is a post-effective
amendment filed pursuant to Rule 462(c) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same offering. ☐
If this Form is a post-effective
amendment filed pursuant to Rule 462(d) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same offering. ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange
Act.
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Large Accelerated Filer ☐
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Accelerated Filer ☐
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Non-Accelerated Filer ☐
(Do not check if a smaller reporting
company)
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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 7(a)(2)(B) of the Securities
Act. ☐
CALCULATION OF
REGISTRATION FEE
|
Title of each
class of
securities to be
registered
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Proposed maximum
aggregate
offering price(1)(2)
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Amount of
registration
fee
|
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Common Stock, par value $0.001 per
share (“Common Stock”)
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$20,930,000
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$2,716.71
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Underwriter
Warrant
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-
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(3)
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Common Stock underlying Underwriter
Warrant (4)
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$2,184,000
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$283.48
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Total
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23,114,000
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$3,000.19(5)
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(1)
Estimated solely
for the purpose of computing the amount of the registration fee
pursuant to Rule 457(0) under the Securities Act of 1933, as
amended.
(2)
Includes shares the
underwriter has the option to purchase to cover over-allotments, if
any.
(3)
No fee pursuant to
Rule 457(g) under the Securities Act.
(4)
We have agreed to
issue to the underwriter or its designees a warrant to purchase an
aggregate number of shares of our common stock equal to 10% of the
number of shares of common stock issued in this offering, at an
exercise price per share equal to 120% of the initial public
offering price
(5)
A registration
filing fee of $3,428.80 has been previously
paid.
The registrant
hereby amends this registration statement on such date or dates as
may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall hereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933 or
until the registration statement shall become effective on such
date as the Commission, acting pursuant to said Section 8(a),
may determine.
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The information in this preliminary prospectus is not complete and
may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange
Commission is effective. This preliminary prospectus is not an
offer to sell nor does it seek an offer to buy these securities in
any jurisdiction where the offer or sale is not
permitted.
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Subject to Completion, dated July 30,
2020
PRELIMINARY
PROSPECTUS
2,600,000 Shares
HF ENTERPRISES
INC.
Common
Stock
This is the initial
public offering of shares of common stock of HF Enterprises Inc.
Prior to this offering, no public market has existed for our common
stock. We are offering 2,600,000 shares. We currently estimate that
the initial public offering price will be between $6.00 and
$7.00 per share. We intend to list our shares of
common stock for trading on the Nasdaq Capital Market under the
symbol HFEN.
Investing
in our common stock involves a high degree of risk. See “Risk
Factors” beginning on page 12.
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Per
Share
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Total
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Initial public
offering price
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$
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$
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Underwriting
discounts and commissions (1)
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$
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$
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Proceeds to us,
before expenses
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$
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$
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__________________
(1)
Please see the
section of this prospectus entitled “Underwriting” for
additional information regarding underwriter
compensation.
We have granted the
underwriter the right to purchase up to 390,000 additional shares
of common stock from us at the initial public offering price less
underwriting discounts and commissions to cover over-allotments, if
any. The underwriter can exercise this option within 60 days after
the date of this prospectus.
We are an
“emerging growth company” as defined under U.S. federal
securities laws and, as such, may elect to comply with certain
reduced public company reporting requirements after this
offering.
Neither
the Securities and Exchange Commission nor any other regulatory
body has approved or disapproved these securities or determined if
this prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
The underwriter
expects to deliver the shares of our common stock to purchasers on
or about _______, 2020.
WestPark Capital,
Inc.
The date of this
prospectus is ,
2020
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Page
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Prospectus
Summary
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1
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Risk
Factors
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10
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Cautionary Note
Regarding Forward-Looking Statements
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26
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Use of
Proceeds
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27
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Dividend
Policy
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27
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Capitalization
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28
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Dilution
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29
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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31
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Business
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53
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Management
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67
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Executive
Compensation
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72
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Certain
Relationships and Related Party Transactions
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73
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Principal
Stockholders
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78
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Description of
Capital Stock
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79
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Shares Eligible for
Future Sale
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82
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Underwriting
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84
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Indemnification for
Securities Act Liabilities
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88
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Legal
Matters
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88
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Experts
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88
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Where You Can Find
More Information
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88
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Index to
Consolidated Financial Statements
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F-1
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About
this Prospectus
Neither we nor the
underwriter has authorized anyone to provide you with information
that is different from that contained in this prospectus or in any
free writing prospectus we may authorize to be delivered or made
available to you. We take no responsibility for, and can provide no
assurance as to the reliability of, any other information that
others may give you. We and the underwriter are offering to sell
shares of common stock and seeking offers to buy shares of common
stock only in jurisdictions where offers and sales are permitted.
The information contained in this prospectus is accurate only as of
the date on the front of this prospectus, regardless of the time of
delivery of this prospectus or any sale of shares of our common
stock. Our business, financial condition, results of operations and
prospects may have changed since that date.
For investors
outside the United States: Neither we nor the underwriter has done
anything that would permit this offering, or possession or
distribution of this prospectus, in any jurisdiction where action
for that purpose is required, other than in the United States.
Persons outside the United States who come into possession of this
prospectus must inform themselves about, and observe any
restrictions relating to, the offering of the shares of common
stock and the distribution of this prospectus outside of the United
States. See “Underwriting.”
Unless otherwise
indicated, information in this prospectus concerning economic
conditions, our industry, our markets and our competitive position
is based on a variety of sources, including information from
third-party industry analysts and publications and our own
estimates and research. Some of the industry and market data
contained in this prospectus are based on third-party industry
publications. This information involves a number of assumptions,
estimates and limitations.
The industry
publications, surveys and forecasts and other public information
generally indicate or suggest that their information has been
obtained from sources believed to be reliable. None of the
third-party industry publications used in this prospectus were
prepared on our behalf. The industry in which we operate is subject
to a high degree of uncertainty and risk due to a variety of
factors, including those described in “Risk Factors.”
These and other factors could cause results to differ materially
from those expressed in these publications.
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PROSPECTUS SUMMARY
This summary highlights information contained in this prospectus
and does not contain all of the information that you should
consider in making your investment decision. Before investing in
our common stock, you should carefully read this entire prospectus,
including our consolidated financial statements and the related
notes thereto and the information set forth under the sections
“Risk Factors,” “Management’s Discussion
and Analysis of Financial Condition and Results of
Operations” and our consolidated financial statements and
related notes thereto, in each case included in this prospectus.
Some of the statements in this prospectus constitute
forward-looking statements. See “Cautionary Note Regarding
Forward-Looking Statements.”
Unless the context requires otherwise, the words “we,”
“us,” “our,” “our
company,” "the Company" and
“our business” refer to HF Enterprises Inc., a Delaware
corporation, and its consolidated subsidiaries.
Our Company
HF
Enterprises Inc. is a diversified holding company principally
engaged through its subsidiaries in property development, digital
transformation technology and biohealth activities with operations
in the United States, Singapore, Hong Kong, Australia
and South Korea. We manage our three principal
businesses primarily through our subsidiary, Singapore eDevelopment
Limited, a public company traded on the Singapore
Stock Exchange. Through this subsidiary (and indirectly, through
other public and private U.S. and Asian subsidiaries), we are
actively developing two significant real estate projects near
Houston, Texas and in Frederick, Maryland in our property
development segment. We have designed applications for enterprise
messaging and e-commerce software platforms in the United States
and Asia in our digital transformation technology business unit.
Our recent foray into the biohealth segment includes research to
treat neurological and immune-related diseases, nutritional
chemistry to create a natural sugar alternative, research regarding
innovative products to slow the spread of disease, and natural
foods and supplements.
We opportunistically identify global businesses
for acquisition, incubation and corporate advisory services,
primarily related to our existing operating business segments. We
also have ownership interests outside of Singapore eDevelopment,
including an indirect 16.8% equity interest in Holista
CollTech Limited, a public Australian company that produces natural
food ingredients, and an indirect 13.1% equity
interest in Vivacitas Oncology Inc., a U.S.-based biopharmaceutical
company, but neither of which company has material asset value
relative to our principal businesses. Under the guidance of Chan
Heng Fai, our founder, Chairman and Chief Executive Officer, who is
also our largest stockholder, we have positioned ourselves as a
participant in these key markets through a series of strategic
transactions. Our growth strategy is both to pursue acquisition
opportunities that we can leverage on our global network using our
capital and management resources and to accelerate the expansion of
our organic businesses. From a geographical perspective, we
recognized 100% and 98% of our total revenue in the
years ended December 31, 2019 and 2018 in
the United States, respectively, and expect that our future revenue
will continue to be concentrated in the United States.
We
generally acquire majority and/or control stakes in
innovative and promising businesses that are expected to appreciate
in value over time. We have historically favored businesses that
improve an individual’s quality of life or that improve the
efficiency of businesses through technology in various industries.
Our involvement in various companies can usually be characterized
in one of three ways: (i) businesses (typically ones that we have
either created or acquired in their early stages) that we directly
manage, while maintaining a majority ownership position; (ii)
businesses where we hold a significant ownership position, and
share management with our partners; and (iii) businesses that we
acquire and hold a minority stake in, and where we do not manage
such entity (although an affiliate of our company may serve on the
board of directors), but where we view the financial stake as
contributing to the strategic goals of our other businesses. For
example, in our real estate business, which makes up the majority
of our assets, our company’s leadership is engaged in all
aspects of the management of our projects, and intends to remain so
engaged in the future. In our biohealth segment, we are more likely
to work with partners who will play a significant role in
management. At the present time, we do not anticipate that passive
investments, where we neither participate in management nor view
the ownership position as adding particular strategic value to
other businesses, will represent a significant portion of our
company’s assets in the future.
Our
focus is on businesses where our engagement will be particularly
significant for that entity’s growth prospects. Our emphasis
is on building businesses in industries where our management team
has in-depth knowledge and experience, or where our management can
provide value by advising on new markets and expansion. We have at
times provided a range of global capital and management services to
these companies in order to gain access to Asian markets. We
believe our capital and management services provide us with a
competitive advantage in the selection of strategic acquisitions
which creates and adds value for our company and our
stockholders.
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Our Current Operations
Chan Heng
Fai has led our Singapore
eDevelopment subsidiary since 2014. In March 2018, Chan Heng
Fai formed our company and subsequently assigned his equity
interests in several companies, including Singapore eDevelopment
and its subsidiaries, to us for further expansion in the United
States. Chan Heng Fai has more than 40 years of
experience serving as a chief executive officer, director and
private equity investor in more than 35 private and publicly-held
early-stage and growth companies in the United States, Singapore
and other countries. We currently have 20 employees
across four countries. We are a global company with our
corporate headquarters located in Bethesda, Maryland and additional
offices in Singapore, Magnolia, Texas, South Korea and
Hong Kong. Below is a description of our three principal
businesses.
Property
Development Business. We
initially began our real estate business in 2014, when our
49.1%-owned subsidiary Singapore eDevelopment started
developing property projects and participating in third-party
property development projects. LiquidValue
Development, a 99.9%-owned subsidiary of Singapore
eDevelopment, owns, operates and manages real estate development
projects with a focus on land subdivision developments. Development
activities are generally contracted out, including planning, design
and construction, as well as other work with engineers, surveyors,
architects and general contractors. The developed lots are then
sold to builders for the construction of new homes.
LiquidValue Development’s main assets are two
subdivision development projects, one near Houston, Texas, known as
Black Oak, consisting of 162 acres and currently projected to have
approximately 550 to 600 units, and one in Frederick,
Maryland, known as Ballenger Run, consisting of 197 acres where we
intend to have 689 units. We consider projects in diverse regions
across the United States and maintain longstanding relationships
with local owners, brokers, attorneys and lenders to source
projects. LiquidValue Development will continue to
focus on off-market deals and raise appropriate financing for
development activities. We intend to embark on residential
construction activities in partnership with U.S. homebuilders and
have commenced discussions to acquire smaller U.S. residential
construction projects. These projects may be within both the
for-sale and for-rent markets. We believe these initiatives will
provide a set of solutions to stabilize the long-term revenue
associated with property development in the United States and
create ancillary service opportunities and revenue from this
business.
Digital
Transformation Technology Business. Our digital transformation technology business
unit is committed to enabling enterprises to engage in a digital
transformation by providing consulting, implementation and
development services with various technologies, including instant
messaging, blockchain, e-commerce, social media and payment
solutions. Our digital transformation technology business is
involved in mobile application product development and other
businesses, providing information technology services to end-users,
service providers and other commercial users through multiple
platforms. Our technology platform consists of instant messaging
systems, social media, e-commerce and payment systems, direct
marketing platforms, e-real estate, brand protection and
counterfeit and fraud detection. HotApp Blockchain Inc., a
99.9%-owned subsidiary of Singapore eDevelopment, focuses on
business-to-business solutions such as enterprise messaging and
workflow. Through HotApp, we have successfully implemented several
strategic platform developments for clients, including a mobile
front-end solution for network marketing, a hotel e-commerce
platform for Asia and a real estate agent management platform in
China. We have also enhanced our technological capability from
mobile application development to include blockchain architectural
design, allowing mobile-friendly front-end solutions to integrate
with blockchain platforms.
Biohealth
Business. Our biohealth
business is committed to both funding research and developing and
selling products that promote a healthy lifestyle. Since Singapore
eDevelopment became involved in the biomedical and healthcare
market through its biohealth division – Global BioMedical
Pte. Ltd. – we have successfully formed new ventures with
biomedical companies and made headway with our research. A
subsidiary of Global BioMedical Pte. Ltd. is presently one of three
shareholders in an operating entity named Global BioLife, Inc. The
other shareholders of Global BioLife include Holista CollTech (we
indirectly own 16.8% of Holista CollTech) and an
entity owned by the chief scientist overseeing Global
BioLife’s projects. Global BioLife is a company devoted to
research in three main areas: (i) the “Linebacker”
project, which aims to develop a universal therapeutic drug
platform, (ii) a new sugar substitute called “Laetose,”
and (iii) a multi-use fragrance called “3F” (Functional
Fragrance Formulation). Global BioLife has formed a working
collaboration with Chemia Corporation, a specialty manufacturer
specializing in high quality, cost effective fragrances. Together
with Chemia, we are attempting to license 3F. We have engaged a
consulting firm in the biopharmaceutical and life sciences
industry, to assist in our goal of licensing each of Linebacker,
Laetose and 3F.
Through
our indirect 16.8% interest in Holista CollTech, we
have collaborative biotech operations in Australia and Malaysia,
operating in three segments – healthy food ingredients,
dietary supplements and collagen. Holista CollTech researches,
develops, markets and distributes health-oriented products to
address the growing need for natural medicine. It offers a suite of
food ingredients including low-glycemic index baked goods, low
sodium salt, low-fat fried foods and low-calorie and low-GI sugars.
Holista CollTech produces cosmetic-grade sheep (ovine) collagen
using patented extraction methods from Australia. Through Singapore
eDevelopment, we also own 53% of iGalen International Inc., a
distributor of supplements and other health products. The remaining
equity interests in iGalen International Inc. are owned by the
founder of Holista CollTech.
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Other
Business Activities. While we
have identified certain main areas of focus, we will not be limited
to these three principal businesses. Along with our ownership
stakes, we provide corporate strategy and business development
services. We also provide asset management services and corporate
restructuring and leveraged buy-out expertise. These service
offerings build relationships with promising companies for
potential future collaboration and expansion. We intend at all
times to operate our business in a manner as to not become
inadvertently subject to the regulatory requirements under the
Investment Company Act of 1940 or the Investment Advisers Act of
1940.
Our Market Opportunity
In
each of our businesses, we intend to focus on solid, growing
markets and capitalize on positive demographic and market trends.
In our property development business, we intend to develop
residential real estate properties in strategic markets where we
will be able to subdivide lots for development to meet expanding
needs for housing. In addition, we are exploring the potential to
expand our set of solutions for property development in the United
States, and we may engage in financing, home management, realtor
services, insurance and home title validation. We also intend to
embark on homebuilding activities in partnership with U.S.
homebuilders in the for-sale and for-rent sectors, and have
commenced discussions to acquire small U.S. homebuilding projects
(although no such agreements are currently in place). We believe
these initiatives have the opportunity to provide us with further
revenue streams. In our digital transformation technology business,
in response to the growth of internet technologies, we are being
increasingly called upon to provide software and services to manage
large amounts of personal data, prevent the unauthorized access of
such data and maintain and improve easily accessible and navigable
IT systems for firms and individuals. In the field of biohealth,
advances in neuroscience and molecular biology are resulting in new
generations of pharmaceutical products to treat neurological and
inflammatory-derived diseases. Through our ownership interests in
Global Biomedical Pte. Ltd. and Holista CollTech, we intend to
continue to seek ways to leverage our biomedical
research.
Our Growth Strategy and Competitive Advantages
Our
goal is to develop or acquire ownership interest in companies that
possess high-growth potential, and to provide those companies with
capital markets and management services that will help them grow.
Although we are aware of other, mostly larger companies that have
utilized comparable structures to achieve their business objectives
and will compete with us for not only promising acquisition targets
but also investor capital, we believe our services that extend from
the United States into Asian markets provide us competitive
advantages. We also believe that we can build a brand that is
synonymous with integrity, strong corporate governance and
transparency with an emphasis on social responsibility. Key
elements of our growth strategy and competitive advantages
include:
Accretive
acquisitions and strategic relationships at each level of our
company. We intend to continue
to pursue acquisitions in the United States and internationally
that consolidate market share, expand our geographical footprint
and further our position as a participant in each of our three
principal businesses. In addition, we regularly engage in
negotiations with potential acquisition targets seeking capital and
management services. We seek to identify and partner with companies
with complementary technology and where our management’s
access to business extension opportunities in Asia could be
commercially beneficial to them.
Diverse and
competitive positioning of our companies. Our three principal businesses operate in highly
competitive but diverse markets which we believe balance the risk
profile of our company. We have positioned ourselves over the past
five years as a participant in these markets through a series of
strategic acquisitions, following a business philosophy implemented
by Chan Heng Fai, our founder, Chairman, Chief Executive Officer
and largest stockholder. Our business has historically focused on
property development and digital transformation technology. We have
more recently entered into the biohealth business, a space which we
believe has significant growth potential. We believe the diverse
and competitive positioning in these markets of our companies
serves as a competitive strength.
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Operations
strategically located in key markets. By maintaining multiple offices in Singapore,
Magnolia, Texas, South Korea and Hong Kong, together
with our Bethesda, Maryland corporate headquarters, we are not
dependent on a single economic climate to ensure that our business
continues to grow. We have the financial and organizational
resources to support opportunistic business development on a global
scale, and we are highly experienced in expanding into new
geographical regions and markets. Additionally, we maintain
strategic alliances within each of our businesses affording us
additional scalability. We continually evaluate opportunities to
expand our businesses in key markets.
Aided by an
international distribution network. The strength of our global network provides us
with the unique opportunity to target multiple client sectors
simultaneously, rather than remain constrained to isolated regional
markets. Our management team has extensive global experience and
deep relationships in each of our operating markets, particularly
in Asia. By leveraging the reach of our international distribution
network across each of our three principal businesses, our products
and services reach a broad client base.
Central
capital and management support for all companies.
Our “hands-on” management
team provides centralized capital and management oversight across
our three principal businesses. We believe we can improve the
margins by controlling costs at our businesses as we centralize
business practices in functional areas including financing,
accounting, human resources, back-office administration,
information technology and risk management. These margin
improvements can be accomplished through leveraging our central
capital and management capabilities to allow our businesses to
better focus their efforts on revenue generation and product
enhancement. In addition, we seek to increase revenue for each of
our majority-owned and/or controlled operating
subsidiaries by cross-selling the complementary technical services
and distribution network of each company, particularly utilizing
the resources of our digital transformation technology business
unit. Also, capital and management oversight connect our businesses
under a uniform company culture of fairness, integrity,
adaptability and results orientation.
Strong
alignment of interests through founder’s ownership.
We believe a strong alignment of
interests with stockholders and investors exists through the
ownership of a significant percentage of our outstanding shares by
Chan Heng Fai, our founder, Chairman and Chief Executive Officer.
Chan Heng Fai has led Singapore eDevelopment since
2014 and has led our company since its inception. By providing
structural and economic alignment with the performance of our
company, Chan Heng Fai’s continuing controlling
interest is directly aligned with those of our investors. We
believe the combination of these characteristics has promoted
long-term planning, an enhanced culture among all of our group of
companies, strategic partners and employees, and ultimately the
creation of value for our company and our
stockholders.
Selected Risks Associated with Our Business
Our
business and prospects may be limited by a number of risks and
uncertainties that we currently face, including the
following:
●
We
operate in the intensely competitive property development, digital
transformation technology and biohealth markets against a number of
large, well-known companies in each of those markets.
●
We and our
majority-owned and/or controlled operating
subsidiaries have a limited operating history and we cannot ensure
the long-term successful operation of all of our
businesses.
●
We had net losses
of $8,053,428 and $7,490,568 for the years ended December 31, 2019
and 2018, respectively. Although we had net income of $2,214,999
for the three months ended March 31, 2020, no assurance can be
given we will continue to be profitable.
●
We are a holding
company and derive all of our operating income from, and hold
substantially all of our assets through, our U.S. and foreign
company ownership interests. The effect of this structure is that
we will depend on the earnings of our subsidiaries, and the payment
or other distributions to us of these earnings, to meet our
obligations and make capital expenditures.
●
There is no
assurance that we will be able to identify appropriate acquisition
targets, successfully acquire identified targets or successfully
develop and integrate the businesses to realize their full
benefits.
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●
Our business
depends on the availability to us of Chan Heng Fai, our founder,
Chairman and Chief Executive Officer, who has developed and
implemented our business philosophy and who would be extremely
difficult to replace, and our business would be materially and
adversely affected if his services were to become unavailable to
us.
●
We are vulnerable
to adverse changes in the economic environment in the United
States, Singapore, Hong Kong, Australia and
South Korea, particularly with respect to increases in wages
for professionals, fluctuation in the value of foreign currencies
and governmental trade policies between nations.
In
addition, we face other risks and uncertainties that may materially
affect our business prospects, financial condition and results of
operations. You should consider the risks discussed in “Risk
Factors” and elsewhere in this prospectus before investing in
our common stock.
Implications of Our Being an “Emerging Growth
Company”
As
a company with less than $1.07 billion in revenue during our last
completed fiscal year, we qualify as an “emerging growth
company” under the Jumpstart Our Business Startups Act of
2012, or the JOBS Act. An emerging growth company may take
advantage of specified reduced reporting requirements that are
otherwise generally applicable to public companies. In particular,
as an emerging growth company, we:
●
are not required to
obtain an attestation and report from our auditors on our
management’s assessment of our internal control over
financial reporting pursuant to the Sarbanes-Oxley
Act;
●
are not required to
provide a detailed narrative disclosure discussing our compensation
principles, objectives and elements and analyzing how those
elements fit with our principles and objectives (commonly referred
to as “compensation discussion and
analysis”);
●
are not required to
obtain a non-binding advisory vote from our stockholders on
executive compensation or golden parachute arrangements (commonly
referred to as the “say-on-pay,”
“say-on-frequency” and
“say-on-golden-parachute” votes);
●
are exempt from
certain executive compensation disclosure provisions requiring a
pay-for-performance graph and CEO pay ratio
disclosure;
●
may present only
two years of audited financial statements and only two years of
related Management’s Discussion and Analysis of Financial
Condition and Results of Operations, or MD&A; and
●
are eligible to
claim longer phase-in periods for the adoption of new or revised
financial accounting standards under §107 of the JOBS
Act.
We intend to take advantage of all of these
reduced reporting requirements and exemptions, including the longer
phase-in periods for the adoption of new or revised financial
accounting standards under §107 of the JOBS Act. Our election
to use the phase-in periods may make it difficult to compare our
financial statements to those of non-emerging growth companies and
other emerging growth companies that have opted out of the phase-in
periods under §107 of the JOBS Act. Please see “Risk
Factors” on page 24 (“We are an ‘emerging
growth company’. . . .”).
Certain
of these reduced reporting requirements and exemptions were already
available to us due to the fact that we also qualify as a
“smaller reporting company” under SEC rules. For
instance, smaller reporting companies are not required to obtain an
auditor attestation and report regarding internal control over
financial reporting, are not required to provide a compensation
discussion and analysis, are not required to provide a
pay-for-performance graph or CEO pay ratio disclosure, and may
present only two years of audited financial statements and related
MD&A disclosure.
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Under
the JOBS Act, we may take advantage of the above-described reduced
reporting requirements and exemptions for up to five years after
our initial sale of common equity pursuant to a registration
statement declared effective under the Securities Act of 1933, or
such earlier time that we no longer meet the definition of an
emerging growth company. The JOBS Act provides that we would cease
to be an “emerging growth company” if we have more than
$1.07 billion in annual revenue, have more than $700 million in
market value of our common stock held by non-affiliates, or issue
more than $1 billion in principal amount of non-convertible
debt over a three-year period. Further, under current SEC rules, we
will continue to qualify as a “smaller reporting
company” for so long as we have a public float (i.e., the
market value of common equity held by non-affiliates) of less than
$250 million as of the last business day of our most recently
completed second fiscal quarter.
Status as a Controlled Company
Upon
the completion of this offering, we expect to be considered a
“controlled company” within the meaning of the listing
standards of Nasdaq. Under these rules, a “controlled
company” may elect not to comply with certain corporate
governance requirements, including the requirement to have a board
that is composed of a majority of independent directors. We intend
to take advantage of these exemptions following the completion of
this offering. These exemptions do not modify the independence
requirements for our audit committee, and we intend to comply with
the applicable requirements of the Sarbanes-Oxley Act and rules
with respect to our audit committee within the applicable time
frame. For more information, please see “Management –
Status as a Controlled Company.”
Organizational Background and Corporate Information
HF
Enterprises Inc. was incorporated in the State of Delaware on March
7, 2018. The following chart illustrates the current corporate
structure of our key operating entities:
The percentages in
the chart above indicate the ownership of such entities. The
indirect ownership omits 100% owned intermediate holding companies.
Our consolidated financial statements include the financial results
of all the entities listed except for Holista CollTech Limited and
Vivacitas Oncology Inc., for which we own only a minority
interest. As of July 30, 2020, we own 49.1% of Singapore
eDevelopment Limited; however, following the exercise of certain
warrants to purchase shares of Singapore eDevelopment scheduled for
August 17, 2020, we anticipate that we will own at least 50.1% of
Singapore eDevelopment as of such date. Accordingly, we refer to
Singapore eDevelopment and its consolidated subsidiaries as our
subsidiaries. Our founder, Chairman, and Chief Executive Officer,
Chan Heng Fai, agreed to loan us $1,200,000 Singapore Dollars
(approximately $900,000 U.S. Dollars), which we will use to
exercise warrants to purchase 30,000,000 shares of Singapore
eDevelopment. We will issue our founder a two-year, interest-free
promissory note for such loan.
This
prospectus gives effect to the following internal restructuring
transactions, completed on October 1, 2018, by which we issued a
total of 10,000,000 shares of our common stock to HFE Holdings
Limited:
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●
100% of the
ownership interest in Hengfai International Pte. Ltd. was
transferred from Chan Heng Fai (an officer and director of our
company) to HF Enterprises Inc. in exchange for 8,500,000 shares of
our common stock to be held by HFE Holdings Limited. Hengfai
International Pte. Ltd., a Singapore limited company, is the sole
stockholder of Hengfai Business Development Pte. Ltd., which is the
owner of 761,150,294 ordinary shares of Singapore
eDevelopment Limited and warrants to purchase 359,834,471 ordinary
shares of Singapore eDevelopment Limited.
●
100% of the
ownership interest in Global eHealth Limited was transferred from
Chan Heng Fai to HF Enterprises Inc. in exchange for 1,000,000
shares of our common stock to be held by HFE Holdings Limited.
Global eHealth Limited, a Hong Kong company, is the owner of
46,226,673 ordinary shares of Holista CollTech
Limited.
●
100% of the
ownership interest in Heng Fai Enterprises Pte. Ltd. was
transferred from Chan Heng Fai to HF Enterprises Inc. in exchange
for 500,000 shares of our common stock to be held by HFE Holdings
Limited. Heng Fai Enterprises Pte. Ltd., a Singapore limited
company, owns 2,480,000 shares of common stock of Vivacitas
Oncology Inc.
Pursuant
to an agreement entered into by us on June 24, 2020 with our
stockholders HFE Holdings Limited and Chan Heng Fai, HFE Holdings
Limited surrendered 3,600,000 shares of our common stock to the
treasury of our company, and Chan Heng Fai surrendered 1,000 shares
of our common stock to the treasury of our company, and all such
shares were cancelled. As a result, the total number of outstanding
shares of our common stock before this offering was reduced to
6,400,000 shares from 10,001,000
shares.
In
addition to the named companies referenced in the chart above, we
own a number of companies that serve only to hold other entities or
are intended to hold businesses that we plan to develop at a later
date.
Our
principal executive offices are located at 4800 Montgomery Lane,
Suite 210, Bethesda, Maryland 20814, telephone (301) 971-3940. We
also maintain offices in Singapore, Magnolia, Texas, South
Korea and Hong Kong. We maintain a corporate website at
http://www.hfenterp.com. Information on our website, and any
downloadable files found there, are not part of this prospectus and
should not be relied upon with respect to this
offering.
Any
information that we consider to be material to an evaluation of our
company will be included in filings on the SEC website,
http://www.sec.gov, and may also be disseminated using our investor
relations website, http://www.hfenterp.com, and press
releases.
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THE
OFFERING
The summary below
describes the principal terms of this offering. The
“Description of Capital Stock” section of this
prospectus contains a more detailed description of our common
stock.
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Common stock
offered by us
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2,600,000
shares
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Underwriter’s over-allotment
option
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We have granted the
underwriter a 60-day option to purchase up to an additional 390,000
shares of our common stock from us at the initial public offering
price less underwriting discounts and commissions, to cover
over-allotments, if any.
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Common stock to be outstanding
after this offering
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9,000,000
shares.(1)
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Use of proceeds
after expenses
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We estimate that
the net proceeds of the sale of our common stock in this offering
will be approximately $13,958,600 (or approximately
$16,164,050 if the underwriter exercises its option in
full to purchase additional shares of our common stock), based on
an assumed initial public offering price of $6.50 per
share, which is the midpoint of the range set forth on the cover
page of this prospectus, after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable
by us.
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We intend to use
the net proceeds of this offering (i)
to fund possible acquisitions of new companies and
additional properties, and (ii) for working capital and general
corporate purposes. See “Use of Proceeds” for more
information.
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Dividend
policy
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We have never
declared or paid any cash dividends on our common stock. We
anticipate that we will retain any earnings to support operations
and to finance the growth and development of our business.
Accordingly, we do not expect to pay cash dividends on our common
stock in the foreseeable future.
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Controlled
company
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Chan Heng Fai,
through HFE Holdings Limited, controls a majority of the combined
voting power of all classes of our voting stock. As a result, we
qualify as a “controlled company” within the meaning of
the listing standards of Nasdaq. Under these rules, a
“controlled company” may elect not to comply with
certain corporate governance requirements, including the
requirement to have a board that is composed of a majority of
independent directors. We have elected to take advantage of these
exemptions.
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Risk
factors
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Investing in our
common stock involves a high degree of risk. See “Risk
Factors” and other information included in this prospectus
for a discussion of factors you should carefully consider before
deciding to invest in shares of our common stock.
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Proposed Nasdaq
Capital Market symbol
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HFEN
(2)
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______________________________
(1)
In this prospectus,
except as otherwise indicated, the number of shares of our common
stock that will be outstanding immediately after this offering and
the other information based thereon:
●
assumes an initial
public offering price of $6.50 per share of common
stock, which is the midpoint of the range set forth on the cover
page of this prospectus;
●
excludes 500,000
shares of our common stock reserved for future issuance under our
2018 Incentive Compensation Plan; and
●
no exercise of the
underwriter’s option to purchase up to 390,000 additional
shares from us in this offering to cover over-allotments, if
any.
(2)
We have reserved
the trading symbol HFEN in connection with our application to have
our common stock listed for trading on the Nasdaq Capital
Market.
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SUMMARY
CONSOLIDATED FINANCIAL DATA
We derived the
summary consolidated statements of operations data for the years
ended December 31, 2019 and 2018 from our
audited consolidated financial statements included elsewhere in
this prospectus. The summary consolidated statements of operations
for the three months ended March 31,
2020 and 2019 and the summary
consolidated balance sheet data as of March 31,
2020 are derived from our unaudited condensed
consolidated financial statements on the same basis as the audited
consolidated financial statements and include, in our opinion, all
adjustments consisting only of normal recurring adjustments that we
consider necessary for a fair statement of the financial
information set forth in those statements. Our historical results
are not necessarily indicative of the results that may be expected
in the future. This summary of historical financial data should be
read together with the financial statements and the related notes,
as well as “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” appearing
elsewhere in this prospectus.
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The following table
summarizes our consolidated balance sheet data as of March
31, 2020, on an actual basis and on an as
adjusted basis, to give effect to the net proceeds from the sale of
2,600,000 shares of our common stock in this offering at an assumed
initial public offering price of $6.50 per share,
which is the midpoint of the range set forth on the cover page of
this prospectus, after deducting the estimated underwriting
discounts and commissions and estimated offering expenses payable
by us and excluding the exercise of the over-allotment option held
by the underwriter with respect to this offering, as if the
offering had occurred on March 31, 2020.
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As of March 31,
2020
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Consolidated Balance Sheet Data:
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Actual
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As
Adjusted
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(unaudited)
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Cash and restricted
cash
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$ 7,089,645
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$ 21,048,245
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Working
capital
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4,293,415
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18,252,015
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Total
assets
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35,910,943
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49,869,543
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Total
indebtedness*
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6,133,378
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6,133,378
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Total
liabilities
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13,351,633
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13,351,633
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Total
stockholders’ equity
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22,559,310
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36,517,910
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*Total
indebtedness= Notes Payable + Accrued Interest
Pursuant
to an agreement entered into by us on June 24, 2020 with our
stockholders HFE Holdings Limited and Chan Heng Fai, HFE Holdings
Limited surrendered 3,600,000 shares of our common stock to the
treasury of our company, and Chan Heng Fai surrendered 1,000 shares
of our common stock to the treasury of our company, and all such
shares were cancelled. As a result, the total number of outstanding
shares of our common stock before this offering was reduced to
6,400,000 shares from 10,001,000 shares. Income (loss) per share
–basic and diluted would have been $0.25, $0.05, $(0.82), and
$(0.78) for the three months ended March 31, 2020 and 2019 and the
years ended December 31, 2019 and 2018,
respectively.
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RISK
FACTORS
An investment in our common stock involves a high degree of risk.
In addition to the other information contained in this prospectus,
prospective investors should carefully consider the following risks
before investing in our common stock. If any of the following risks
actually occur, as well as other risks not currently known to us or
that we currently consider immaterial, our business, operating
results and financial condition could be materially adversely
affected. As a result, the trading price of our common stock could
decline, and you may lose all or part of your investment in our
common stock. The risks discussed below also include
forward-looking statements, and our actual results may differ
substantially from those discussed in these forward-looking
statements. See “Cautionary Note Regarding Forward-looking
Statements” in this prospectus. In assessing the risks below,
you should also refer to the other information contained in this
prospectus, including the financial statements and the related
notes, before deciding to purchase any shares of our common
stock.
Risks
Relating to Our Business
We have a history of annual net losses which may continue and which
may negatively impact our ability to achieve our business
objectives.
Our property
development and digital transformation technology businesses were
started in 2014 and 2015, respectively, and our biohealth business
was started in 2017. Our limited operating history makes it
difficult to evaluate our current business and future prospects and
may increase the risk of your investment. For the three
months ended March 31, 2020 and years ended December 31, 2019 and
2018, we had revenue of $2,965,171, $24,257,953 and $20,380,940,
net income of $2,214,999 in the three months ended March 31, 2020
and net losses of $8,053,428 and $7,490,568 in the years ended
December 31, 2019 and 2018, respectively. Our failure
to increase our revenues or improve our gross margins will harm our
business. We may not be able to achieve, sustain or increase
profitability on a quarterly or annual basis in the future. If our
revenues grow more slowly than we anticipate, our gross margins
fail to improve or our operating expenses exceed our expectations,
our operating results will suffer. The prices we charge for our
properties, products and services may decrease, which would reduce
our revenues and harm our business. If we are unable to sell our
properties, products and services at acceptable prices relative to
our costs, or if we fail to develop and introduce on a timely basis
new products or services from which we can derive additional
revenues, our financial results will suffer.
We and our subsidiaries have limited operating histories and
therefore we cannot ensure the long-term successful operation of
our business or the execution of our growth strategy.
Our prospects must
be considered in light of the risks, expenses and difficulties
frequently encountered by growing companies in new and rapidly
evolving markets. We must meet many challenges
including:
●
establishing and
maintaining broad market acceptance of our products and services
and converting that acceptance into direct and indirect sources of
revenue;
●
establishing and
maintaining adoption of our technology on a wide variety of
platforms and devices;
●
timely and
successfully developing new products and services and increasing
the features of existing products and services;
●
developing products
and services that result in high degrees of customer satisfaction
and high levels of customer usage;
●
successfully
responding to competition, including competition from emerging
technologies and solutions;
●
developing and
maintaining strategic relationships to enhance the distribution,
features, content and utility of our products and services;
and
●
identifying,
attracting and retaining talented technical and sales services
staff at reasonable market compensation rates in the markets in
which we operate.
Our growth strategy
may be unsuccessful and we may be unable to address the risks we
face in a cost-effective manner, if at all. If we are unable to
successfully address these risks our business will be
harmed.
We
have a holding company ownership structure and will depend on
distributions from our majority-owned and/or
controlled operating subsidiaries to meet our obligations.
Contractual or legal restrictions applicable to our subsidiaries
could limit payments or distributions from
them.
We are a holding
company and derive all of our operating income from, and hold
substantially all of our assets through, our U.S. and foreign
subsidiaries, some of which are publicly held and traded. The
effect of this structure is that we will depend on the earnings of
our subsidiaries, and the payment or other distributions to us of
these earnings, to meet our obligations and make capital
expenditures. Provisions of U.S. and foreign corporate and tax law,
like those requiring that dividends are paid only out of surplus,
and provisions of any future indebtedness, may limit the ability of
our subsidiaries to make payments or other distributions to us.
Certain of our subsidiaries are minority owned and the assets of
these companies are not included in our consolidated balance
sheets. Additionally, in the event of the liquidation, dissolution
or winding up of any of our subsidiaries, creditors of that
subsidiary (including trade creditors) will generally be entitled
to payment from the assets of that subsidiary before those assets
can be distributed to us.
Our significant ownership interests in public companies listed on
limited public trading markets subjects us to risks relating to the
sale of their shares and the fluctuations in their stock
prices.
We own indirect
interests in several publicly traded companies – most
significantly, Singapore eDevelopment Limited, whose
shares are listed on the Singapore Stock Exchange, and Holista
CollTech Limited, whose shares are listed on the Australian Stock
Exchange (LiquidValue Development Inc. and HotApp
Blockchain Inc. are not currently traded on any exchange). Although
the publicly traded shares of Singapore eDevelopment and Holista
CollTech Limited are quoted on a trading market, the average
trading volume of the public shares is limited in each case. In
view of the limited public trading markets for these shares, there
can be no assurance that we would succeed in obtaining a price for
these shares equal to the price quoted for such shares in their
respective trading markets at the time of sale or that we would not
incur a loss on our shares should we determine to dispose of them
in any of these companies in the future. Additionally, on an
ongoing basis, fluctuations in the stock prices of these companies
are likely to be reflected in the market price of our common stock.
Given the limited public trading markets of these public companies,
stock price fluctuations in our price may be
significant.
General political, social and economic conditions can adversely
affect our business.
Demand for our
products and services depends, to a significant degree, on general
political, social and economic conditions in our markets. Worsening
economic and market conditions, downside shocks, or a return to
recessionary economic conditions could serve to reduce demand for
our products and services and adversely affect our operating
results. In addition, an economic downturn could impact the
valuation and collectability of certain long-term receivables held
by us. We could also be adversely affected by such factors as
changes in foreign currency rates and weak economic and political
conditions in each of the countries in which we
operate.
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 (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
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.”
We have made and expect to continue to make acquisitions as a
primary component of our growth strategy. We may not be able to
identify suitable acquisition candidates or consummate acquisitions
on acceptable terms, which could disrupt our operations and
adversely impact our business and operating results.
A primary component
of our growth strategy has been to acquire complementary businesses
to grow our company. We intend to continue to pursue acquisitions
of complementary technologies, products and businesses as a primary
component of our growth strategy to expand our operations and
customer base and provide access to new markets and increase
benefits of scale. Acquisitions involve certain known and unknown
risks that could cause our actual growth or operating results to
differ from our expectations. For example:
●
we may not be able
to identify suitable acquisition candidates or to consummate
acquisitions on acceptable terms;
●
we may pursue
international acquisitions, which inherently pose more risks than
domestic acquisitions;
●
we compete with
others to acquire complementary products, technologies and
businesses, which may result in decreased availability of, or
increased price for, suitable acquisition candidates;
●
we may not be able
to obtain the necessary financing, on favorable terms or at all, to
finance any or all of our potential acquisitions; and
●
we may ultimately
fail to consummate an acquisition even if we announce that we plan
to acquire a technology, product or business.
We may be unable to successfully integrate acquisitions, which may
adversely impact our operations.
Acquired
technologies, products or businesses may not perform as we expect
and we may fail to realize anticipated revenue and profits. In
addition, our acquisition strategy may divert management’s
attention away from our existing business, resulting in the loss of
key customers or employees, and expose us to unanticipated problems
or legal liabilities, including responsibility as a successor for
undisclosed or contingent liabilities of acquired businesses or
assets.
If we fail to
conduct due diligence on our potential targets effectively, we may,
for example, not identify problems at target companies or fail to
recognize incompatibilities or other obstacles to successful
integration. Our inability to successfully integrate future
acquisitions could impede us from realizing all of the benefits of
those acquisitions and could severely weaken our business
operations. The integration process may disrupt our business and,
if new technologies, products or businesses are not implemented
effectively, may preclude the realization of the full benefits
expected by us and could harm our results of operations. In
addition, the overall integration of new technologies, products or
businesses may result in unanticipated problems, expenses,
liabilities and competitive responses. The difficulties integrating
an acquisition include, among other things:
●
issues in
integrating the target company’s technologies, products or
businesses with ours;
●
incompatibility of
marketing and administration methods;
●
maintaining
employee morale and retaining key employees;
●
integrating the
cultures of our companies;
●
preserving
important strategic customer relationships;
●
consolidating
corporate and administrative infrastructures and eliminating
duplicative operations; and
●
coordinating and
integrating geographically separate organizations.
In addition, even
if the operations of an acquisition are integrated successfully, we
may not realize the full benefits of the acquisition, including the
synergies, cost savings or growth opportunities that we expect.
These benefits may not be achieved within the anticipated time
frame, or at all.
Acquisitions which we complete may have an adverse impact on our
results of operations.
Acquisitions may
cause us to:
●
issue common stock
that would dilute our current stockholders’ ownership
percentage;
●
use a substantial
portion of our cash resources;
●
increase our
interest expense, leverage and debt service requirements if we
incur additional debt to pay for an acquisition;
●
assume liabilities
for which we do not have indemnification from the former owners;
further, indemnification obligations may be subject to dispute or
concerns regarding the creditworthiness of the former
owners;
●
record goodwill and
non-amortizable intangible assets that are subject to impairment
testing and potential impairment charges;
●
experience
volatility in earnings due to changes in contingent consideration
related to acquisition earn-out liability estimates;
●
incur amortization
expenses related to certain intangible assets;
●
lose existing or
potential contracts as a result of conflict of interest
issues;
●
become subject to
adverse tax consequences or deferred compensation
charges;
●
incur large and
immediate write-offs; or
●
become subject to
litigation.
Our resources may not be sufficient to manage our expected growth;
failure to properly manage our potential growth would be
detrimental to our business.
We may fail to
adequately manage our anticipated future growth. Any growth in our
operations will place a significant strain on our administrative,
financial and operational resources and increase demands on our
management and on our operational and administrative systems,
controls and other resources. We cannot assure you that our
existing personnel, systems, procedures or controls will be
adequate to support our operations in the future or that we will be
able to successfully implement appropriate measures consistent with
our growth strategy. As part of this growth, we may have to
implement new operational and financial systems, procedures and
controls to expand, train and manage our employee base, and
maintain close coordination among our technical, accounting,
finance, marketing and sales. We cannot guarantee that we will be
able to do so, or that if we are able to do so, we will be able to
effectively integrate them into our existing staff and systems.
There may be greater strain on our systems as we acquire new
businesses, requiring us to devote significant management time and
expense to the ongoing integration and alignment of management,
systems, controls and marketing. If we are unable to manage growth
effectively, such as if our sales and marketing efforts exceed our
capacity to design and produce our products and services or if new
employees are unable to achieve performance levels, our business,
operating results and financial condition could be materially and
adversely affected.
Our international operations are subject to increased risks which
could harm our business, operating results and financial
condition.
In addition to
uncertainty about our ability to expand our international market
position, there are risks inherent in doing business
internationally, including:
●
trade
barriers, tariffs and changes in trade
regulations;
●
difficulties in
developing, staffing and simultaneously managing a large number of
varying foreign operations as a result of distance, language and
cultural differences;
●
the
need to comply with varied local laws and regulations;
●
longer
payment cycles;
●
possible credit
risk and higher levels of payment fraud;
●
profit
repatriation restrictions and foreign currency exchange
restrictions;
●
political or social
unrest, economic instability or human rights issues;
●
geopolitical
events, including acts of war and terrorism;
●
import
or export regulations;
●
compliance with
U.S. laws (such as the Foreign Corrupt Practices Act), and local
laws prohibiting corrupt payments to government
officials;
●
laws
and business practices that favor local competitors or prohibit
foreign ownership of certain businesses; and
●
different and more
stringent data protection, privacy and other laws.
Our failure to
manage any of these risks successfully could harm our international
operations and our overall business, and results of our
operations.
If we are unable to retain the services of Chan Heng Fai or if we
are unable to successfully recruit qualified personnel, we may not
be able to continue operations.
Our success depends
to a significant extent upon the continued service of Chan Heng
Fai, our founder, Chairman and Chief Executive Officer. The loss of
the services of Chan Heng Fai could have a material
adverse effect on our growth, revenues and prospective business. If
Chan Heng Fai was to resign or we are unable to retain
his services, the loss could result in loss of sales, delays in new
product development and diversion of management resources. We could
face high costs and substantial difficulty in hiring a qualified
successor and could experience a loss in productivity while any
such successor obtains the necessary training and
experience. Chan Heng
Fai has committed that the majority of his time will be
devoted to managing the affairs of our company; however, Chan
Heng Fai may engage in other business ventures, including
other technology-related businesses.
In order to
successfully implement and manage our businesses, we are also
dependent upon successfully recruiting qualified personnel. In
particular, we must hire and retain experienced management
personnel to help us continue to grow and manage each business, and
skilled engineering, product development, marketing and sales
personnel to further our research and product development efforts.
Competition for qualified personnel is intense. If we do not
succeed in attracting new personnel or in retaining and motivating
our current personnel, our business could be harmed.
If we do not successfully develop new products and services, our
business may be harmed.
Our business and
operating results may be harmed if we fail to expand our various
product and service offerings (either through internal product or
capability development initiatives or through partnerships and
acquisitions) in such a way that achieves widespread market
acceptance or that generates significant revenue and gross profits
to offset our operating and other costs. We may not successfully
identify, develop and market new product and service offerings in a
timely manner. If we introduce new products and services, they may
not attain broad market acceptance or contribute meaningfully to
our revenue or profitability. Competitive or technological
developments may require us to make substantial, unanticipated
capital expenditures in new products and technologies or in new
strategic partnerships, and we may not have sufficient resources to
make these expenditures. Because the markets for many of our
products and services are subject to rapid change, we may need to
expand and/or evolve our product and service offerings quickly.
Delays and cost overruns could affect our ability to respond to
technological changes, evolving industry standards, competitive
developments or customer requirements and harm our business and
operating results.
Your investment return may be reduced if we are required to
register as an investment company under the Investment Company Act;
if we or our majority-owned and/or controlled
operating subsidiaries become an unregistered investment company,
then we would need to modify our business philosophy and/or make
other changes to our asset composition.
Neither
we nor any of our majority-owned and/or controlled
subsidiaries intends to register as an investment company under the
Investment Company Act of 1940. If we or our subsidiaries were
obligated to register as investment companies, then we would have
to comply with a variety of regulatory requirements under the
Investment Company Act that impose, among other
things:
●
limitations on
capital structure;
●
restrictions on
specified investments;
●
prohibitions on
transactions with affiliates; and
●
compliance with
reporting, record keeping, voting, proxy disclosure and other rules
and regulations that would significantly increase our operating
expenses.
Under
the relevant provisions of Section 3(a)(1) of the Investment
Company Act, an investment company is any issuer that:
●
pursuant
to Section 3(a)(1)(A), is or holds itself out as being engaged
primarily, or proposes to engage primarily, in the business of
investing, reinvesting or trading in securities (the
“primarily engaged test”); or
●
pursuant
to Section 3(a)(1)(C), is engaged or proposes to engage in the
business of investing, reinvesting, owning, holding or trading in
securities and owns or proposes to acquire “investment
securities” having a value exceeding 40% of the value of such
issuer’s total assets (exclusive of United States government
securities and cash items) on an unconsolidated basis (the
“40% asset test”). “Investment securities”
exclude United States government securities and securities of
majority-owned subsidiaries that are not themselves investment
companies and are not relying on the exception from the definition
of investment company under Section 3(c)(1) or Section 3(c)(7)
(relating to private investment companies).
Neither
we nor any of our majority-owned and/or
controlled subsidiaries should be required to
register as an investment company under either of the tests above.
With respect to the 40% asset test, most of the entities through
which we and our majority-owned and/or
controlled subsidiaries will own assets will in turn
be majority-owned and/or
controlled subsidiaries that will not themselves be
investment companies and will not be relying on the exceptions from
the definition of investment company under Section 3(c)(1) or
Section 3(c)(7) (relating to private investment
companies).
With
respect to the primarily engaged test, we, together with our
majority-owned and/or
controlled subsidiaries, are a holding company and do
not intend to invest or trade in securities. Rather, through our
majority-owned and/or
controlled subsidiaries, we will be primarily engaged
in the non-investment company businesses of these subsidiaries,
namely, property development, digital transformation technology and
biohealth.
To
maintain compliance with the Investment Company Act, our
majority-owned and/or
controlled operating subsidiaries may be unable to
sell assets we would otherwise want them to sell and may need to
sell assets we would otherwise wish them to retain. In addition,
our subsidiaries may have to acquire additional assets that they
might not otherwise have acquired or may have to forego
opportunities to buy minority equity interests that we would
otherwise want them to make and would be important to our business
philosophy. Moreover, the SEC or its staff may issue
interpretations with respect to various types of assets that are
contrary to our views and current SEC staff interpretations are
subject to change, which increases the risk of non-compliance and
the risk that we may be forced to make adverse changes to our asset
composition. If we were required to register as an investment
company but failed to do so, we would be prohibited from engaging
in our current business and criminal and civil actions could be
brought against us. In addition, our contracts would be
unenforceable unless a court required enforcement and a court could
appoint a receiver to take control of our company and liquidate our
business.
If we do not adequately protect our intellectual property rights,
we may experience a loss of revenue and our operations may be
materially harmed.
We rely on and
expect to continue to rely on a combination of confidentiality and
license agreements with our employees, consultants and third
parties with whom we have relationships, as well as patent,
trademark, copyright and trade secret protection laws, to protect
our intellectual property and proprietary rights. We cannot assure
you that we can adequately protect our intellectual property or
successfully prosecute potential infringement of our intellectual
property rights. Also, we cannot assure you that others will not
assert rights in, or ownership of, trademarks and other proprietary
rights of ours or that we will be able to successfully resolve
these types of conflicts to our satisfaction. Our failure to
protect our intellectual property rights may result in a loss of
revenue and could materially harm our operations and financial
condition.
New legislation, regulations or rules related to obtaining patents
or enforcing patents could significantly increase our operating
costs and decrease our revenue.
We spend a
significant amount of resources to enforce our patent assets. If
new legislation, regulations or rules are implemented either by
Congress, the U.S. Patent and Trademark Office (the
“USPTO”), any state or the courts that impact the
patent application process, the patent enforcement process or the
rights of patent holders, these changes could negatively affect our
expenses and revenue and any reductions in the funding of the USPTO
could negatively impact the value of our assets.
A number of states
have adopted or are considering legislation to make the patent
enforcement process more difficult for non-practicing entities,
such as allowing such entities to be sued in state court and
setting higher standards of proof for infringement claims. We
cannot predict what, if any, impact these state initiatives will
have on the operation of our enforcement business. However, such
legislation could increase the uncertainties and costs surrounding
the enforcement of our patented technologies, which could have a
material adverse effect on our business and financial
condition.
In addition, the
U.S. Department of Justice has conducted reviews of the patent
system to evaluate the impact of patent assertion entities on
industries in which those patents relate. It is possible that the
findings and recommendations of the Department of Justice could
impact the ability to effectively license and enforce
standards-essential patents and could increase the uncertainties
and costs surrounding the enforcement of any such patented
technologies.
Finally, new rules
regarding the burden of proof in patent enforcement actions could
significantly increase the cost of our enforcement actions, and new
standards or limitations on liability for patent infringement could
negatively impact any revenue we might derive from such enforcement
actions.
Recently enacted tax legislation in the United States may impact
our business.
We are subject to
taxation in the United States, as well as in a number of foreign
jurisdictions. The recently enacted Tax Cuts and Jobs Act (the
“Tax Act”) provided for significant and wide-ranging
changes to the U.S. Internal Revenue Code. The implications most
relevant to our company include (a) a reduction in the U.S. federal
corporate income tax rate from 35% to 21%, with various “base
erosion” rules that may effectively limit the tax
deductibility of certain payments made by U.S. entities to non-U.S.
affiliates and additional limitations on deductions attributable to
interest expense, and (b) adopting elements of a territorial tax
system. To transition into the territorial tax system, the Tax Act
includes a one-time tax on cumulative retained earnings of
U.S.-owned foreign subsidiaries, at a rate of 15.5% for earnings
represented by cash or cash equivalents and 8.0% for the balance of
such earnings. Taxpayers may make an election to pay this tax over
eight years. These tax reforms will give rise to significant
consequences, both immediately in terms of one-off impacts relating
to the transition tax and the measurement of deferred tax assets
and liabilities and going forward in terms of the company’s
taxation expense. An initial review and estimate have been
undertaken by us. The Tax Act could be subject to potential
amendments and technical corrections, any of which could lessen or
increase adverse impacts of the law. The final transitional impact
of the Tax Act may differ from the estimates provided in this
prospectus, due to, among other things, changes in interpretations
of the Tax Act, any legislative action to address questions that
arise because of the Tax Act, any changes in accounting standards
for income taxes or related interpretations in response to the Tax
Act, or any updates or changes to estimates we utilized to
calculate the transitional impacts, including impacts related to
changes to current year earnings estimates and the amount of the
repatriation tax. Given the unpredictability of these and other tax
laws and related regulations, and their potential interdependency,
it is difficult to currently assess the overall effect of such
changes. Nonetheless, any material negative effect of such changes
to our earnings and cash flow could adversely impact our financial
results.
For our property development business, 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 may 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 we
can sell such houses to buyers, will decline.
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 financial
results.
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 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.
Health and safety incidents that occur in connection with our
potential expansion into the homebuilding business could be costly
with uninsured losses.
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, and premiums may
rise.
Adverse weather conditions, natural disasters and man-made
disasters may delay our real estate development 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 storms, hurricanes, tornados, floods,
blizzards, fires and 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, our results of operations
will be adversely affected. In addition, damage to new homes caused
by these conditions may cause our insurance costs to
increase.
We have a concentration of revenue and credit risk with one
customer.
In our property
development segment, we have been highly dependent on the sales of
residential lots to NVR Inc. (“NVR”), a NYSE
publicly-traded U.S. homebuilding and mortgage company. Pursuant to
agreements between NVR and our subsidiary SeD Maryland Development,
LLC, NVR is the sole purchaser of 479 residential lots at our
Ballenger project. During the three
months ended March 31, 2020 and 2019, we earned approximately $3.0
million and $5.1 million in cash from lot sales to NVR,
respectively. During 2019 and 2018, we earned $15.9 million and
$12.0 million in cash from lot sales to
NVR, respectively. Therefore, at the present time, a significant
portion of our business depends largely on NVR’s continued
relationship with us. A decision by NVR to discontinue or limit its
relationship with us could have a material adverse impact on our
property development business and our entire company
overall.
We may face liability for information displayed on or accessible
via our website, and for other content and commerce-related
activities, which could reduce our net worth and working capital
and increase our operating losses.
We could face
claims for errors, defamation, negligence or copyright or trademark
infringement based on the nature and content of information
displayed on or accessible via our website, which could adversely
affect our financial condition. Even to the extent that claims made
against us do not result in liability, we may incur substantial
costs in investigating and defending such claims.
Our insurance, if
any, may not cover all potential claims to which we are exposed or
may not be adequate to indemnify us for all liabilities that may be
exposed. Any imposition of liability that is not covered by
insurance or is in excess of insurance coverage would reduce our
net worth and working capital and increase our operating
losses.
Any failure of our network could lead to significant disruptions in
our businesses, which could damage our reputation, reduce our
revenues or otherwise harm our businesses.
All of our
businesses and, in particular, our digital transformation
technology business unit, are dependent upon providing our
customers with fast, efficient and reliable services. A reduction
in the performance, reliability or availability of our network
infrastructure may harm our ability to distribute our products and
services to our customers, as well as our reputation and ability to
attract and retain customers and content providers. Our systems and
operations are susceptible to, and could be damaged or interrupted
by outages caused by fire, flood, power loss, telecommunications
failure, Internet or mobile network breakdown, earthquakes and
similar events. Our systems are also subject to human error,
security breaches, power losses, computer viruses, break-ins,
“denial of service” attacks, sabotage, intentional acts
of vandalism and tampering designed to disrupt our computer systems
and network communications, and our systems could be subject to
greater vulnerability in periods of high employee turnover. A
sudden and significant increase in traffic on our customers’
websites or demand from mobile users could strain the capacity of
the software, hardware and telecommunications systems that we
deploy or use. This could lead to slower response times or system
failures. Our failure to protect our network against damage from
any of these events could harm our business.
Public scrutiny of internet privacy and security issues may result
in increased regulation and different industry standards, which
could deter or prevent us from providing our current products and
solutions to our members and customers, thereby harming our
business.
The regulatory
framework for privacy and security issues worldwide is evolving and
is likely to remain in flux for the foreseeable future. Practices
regarding the collection, use, storage, display, processing,
transmission and security of personal information by companies
offering online services have recently come under increased public
scrutiny. The U.S. government, including the White House, the
Federal Trade Commission, the Department of Commerce and many state
governments, are reviewing the need for greater regulation of the
collection, use and storage of information concerning consumer
behavior with respect to online services, including regulation
aimed at restricting certain targeted advertising practices and
collection and use of data from mobile devices. The Federal Trade
Commission in particular has approved consent decrees resolving
complaints and their resulting investigations into the privacy and
security practices of a number of online, social media companies.
Similar actions may also impact us directly.
Our business,
including our ability to operate and expand internationally or on
new technology platforms, could be adversely affected if
legislation or regulations are adopted, interpreted, or implemented
in a manner that is inconsistent with our current business
practices that may require changes to these practices, the design
of our websites, mobile applications, products, features or our
privacy policy. In particular, the success of our business is
expected to be driven by our ability to responsibly use the data
that our members share with us. Therefore, our business could be
harmed by any significant change to applicable laws, regulations or
industry standards or practices regarding the storage, use or
disclosure of data our members choose to share with us, or
regarding the manner in which the express or implied consent of
consumers for such use and disclosure is obtained. Such changes may
require us to modify our products and features, possibly in a
material manner, and may limit our ability to develop new products
and features that make use of the data that we collect about our
members.
Particularly with regard to our biohealth business, product
reliability, safety and effectiveness concerns can have significant
negative impacts on sales and results of operations, lead to
litigation and cause reputational damage.
Concerns about
product safety, whether raised internally or by litigants,
regulators or consumer advocates, and whether or not based on
scientific evidence, can result in safety alerts, product recalls,
governmental investigations, regulatory action on the part of the
FDA (or its counterpart in other countries), private claims and
lawsuits, payment of fines and settlements, declining sales and
reputational damage. These circumstances can also result in damage
to brand image, brand equity and consumer trust in our products.
Product recalls could in the future prompt government
investigations and inspections, the shutdown of manufacturing
facilities, continued product shortages and related sales declines,
significant remediation costs, reputational damage, possible civil
penalties and criminal prosecution.
Significant challenges or delays in our innovation and development
of new products, technologies and indications could have an adverse
impact on our long-term success.
Our continued
growth and success depend on our ability to innovate and develop
new and differentiated products and services that address the
evolving health care needs of patients, providers and consumers.
Development of successful products and technologies is also
necessary to offset revenue losses when our existing products lose
market share due to various factors such as competition and loss of
patent exclusivity. We cannot be certain when or whether we will be
able to develop, license or otherwise acquire companies, products
and technologies, whether particular product candidates will be
granted regulatory approval, and, if approved, whether the products
will be commercially successful.
We pursue product
development through internal research and development as well as
through collaborations, acquisitions, joint ventures and licensing
or other arrangements with third parties. In all of these contexts,
developing new products, particularly biotechnology products,
requires a significant commitment of resources over many years.
Only a very few biopharmaceutical research and development programs
result in commercially viable products. The process depends on many
factors, including the ability to discern patients’ and
healthcare providers’ future needs; develop new compounds,
strategies and technologies; achieve successful clinical trial
results; secure effective intellectual property protection; obtain
regulatory approvals on a timely basis; and, if and when they reach
the market, successfully differentiate our products from competing
products and approaches to treatment. New products or enhancements
to existing products may not be accepted quickly or significantly
in the marketplace for healthcare providers, and there may be
uncertainty over third-party reimbursement. Even following initial
regulatory approval, the success of a product can be adversely
impacted by safety and efficacy findings in larger real world
patient populations, as well as market entry of competitive
products.
Our competitors may have greater financial and other resources than
we do and those advantages could make it difficult for us to
compete with them.
Our three principal
businesses, property development, digital transformation technology
and biohealth activities are each highly competitive and constantly
changing. We expect that competition will continue to intensify.
Increased competition may result in price reductions, reduced
margins, loss of customers, and changes in our business and
marketing strategies, any of which could harm our business. Current
and potential competitors may have longer operating histories,
greater name recognition, more employees and significantly greater
financial, technical, marketing, public relations and distribution
resources than we do. In addition, new competitors with potentially
unique or more desirable products or services may enter the market
at any time. The competitive environment may require us to make
changes in our products, pricing, licensing, services or marketing
to maintain and extend our current brand and technology. Price
concessions or the emergence of other pricing, licensing and
distribution strategies or technology solutions of competitors may
reduce our revenue, margins or market share, any of which will harm
our business. Other changes we have to make in response to
competition could cause us to expend significant financial and
other resources, disrupt our operations, strain relationships with
partners, or release products and enhancements before they are
thoroughly tested, any of which could harm our operating results
and stock price.
Since some members of our board of directors are not residents of
the United States and certain of our assets are located outside of
the United States, you may not be able to enforce a U.S. judgment
for claims you may bring against such directors or
assets.
Several members of
our senior management team, including Chan Heng Fai, have their
primary residences and business offices in Asia, and a portion of
our assets and a substantial portion of the assets of these
directors are located outside the United States. As a result, it
may be more difficult for you 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
you to enforce any judgment obtained in the United States against
our assets or the assets of our non-U.S. resident management
located outside the United States than if these assets were located
within the United States. We cannot assure you that foreign courts
would enforce liabilities predicated on U.S. federal securities
laws in original actions commenced in such foreign jurisdiction, or
judgments of U.S. courts obtained in actions based upon the civil
liability provisions of U.S. federal securities laws.
We may be required to record a significant charge to earnings if
our real estate property become impaired.
Our policy is to
obtain an independent third-party valuation for each major project
in the United States to identify triggering events for
impairment. Our management may use a market comparison method to
value other relatively small projects, such as the project in
Perth, Australia. In addition to the annual assessment of potential
triggering events in accordance with ASC 360 – Property Plant
and Equipment (“ASC 360”), we apply 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.
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 our Black
Oak project in Magnolia, Texas was completed. After allocating
costs of revenue to this sale, we incurred a loss of approximately
$1.5 million from this sale and recognized a real estate impairment
of approximately $1.5 million for the year ended December 31, 2018.
On June 30, 2019, the Company
recorded approximately $3.9 million of impairment on the Black Oak
project based on discounted estimated future cash flows after
updating the projection of market value of the project. On December
31, 2019, the Company recorded approximately $1.3 million of
additional impairment on the Black Oak project based on discounted
estimated future cash flows after updating the projected cost of
the project. There can be no assurance that we will
not record additional impairment charges in the
future.
Fluctuations in foreign currency exchange rates affect our
operating results in U.S. dollar terms.
A portion of our
revenues arises from international operations. Revenues generated
and expenses incurred by our international subsidiaries are often
denominated in the currencies of the local countries. As a result,
our consolidated U.S. dollar financial statements are subject to
fluctuations due to changes in exchange rates as the financial
results of our international subsidiaries are translated from local
currencies into U.S. dollars. In addition, our financial results
are subject to changes in exchange rates that impact the settlement
of transactions in non-local currencies.
The effect of
foreign exchange rate changes on the intercompany loans (under ASC
830), which mostly consist of loans from Singapore to the United
States and which were approximately $35.5
million, $35.8 million and $41.1 million on March 31, 2020,
December 31, 2019 and 2018, respectively, are the
reason for the significant fluctuation of foreign currency
transaction Gain or Loss on the Consolidated Statements of
Operations and Other Comprehensive Income. Because the intercompany
loan balances between Singapore and United States will remain at
approximately $40 million over the next year, we expect this
fluctuation of foreign exchange rates to still significantly impact
the results of operations in 2020 and
2021, especially given that the foreign exchange rate
may and is expected to be volatile. If the amount of intercompany
loans is lowered in the future, the effect will also be reduced.
However, at this moment, we do not expect to repay the intercompany
loans in the short term.
Our international operations expose us to additional legal and
regulatory risks, which could have a material adverse effect on our
business, results of operations and financial
conditions.
At the present
time, the majority of our activities are conducted in the United
States (particularly with regard to our real estate operations).
However, we also have operations worldwide through employees,
contractors and agents, as well as those companies to which we
outsource certain of our business operations. Compliance with
foreign and U.S. laws and regulations that apply to our
international operations increase our cost of doing business. These
numerous and sometimes conflicting laws and regulations include,
among others, labor relations laws, tax laws, anti-competition
regulations, import and trade restrictions, data privacy
requirements, export requirements, and anti-bribery and
anti-corruption laws.
Our business
activities currently are subject to no particular regulation by
governmental agencies in the United States or the other countries
in which we operate other than that routinely imposed on corporate
businesses, and no such regulation is currently anticipated. As our
operations expand, we anticipate that we will need to comply with
laws and regulations in additional jurisdictions.
There is a risk
that we may inadvertently breach some provisions which apply to us
at the present time or which may apply to us in the future.
Violations of these laws and regulations could result in fines,
criminal sanctions against us, our officers or our employees,
requirements to obtain export licenses, cessation of business
activities in sanctioned countries, implementation of compliance
programs, and prohibitions on the conduct of our business.
Violations of laws and regulations also could result in
prohibitions on our ability to operate in one or more countries and
could materially damage our reputation, our ability to attract and
retain employees, or our business, results of operations and
financial condition.
If tariffs or other restrictions are placed on foreign imports or
any related counter-measures are taken by other countries, our
business and results of operations could be harmed.
At the present
time, we do not sell any products produced in China and have no
plans to commence manufacturing in China; however, this may change
at some point in the future. The Trump administration has put into
place tariffs and other trade restrictions and signaled that it may
additionally alter trade agreements and terms between the United
States and China, among other countries, including limiting trade
and/or imposing tariffs on imports from such countries. In
addition, China, among others, has either threatened or put into
place retaliatory tariffs of their own. Should we commence
manufacturing in China, and if tariffs or other restrictions are
placed on foreign imports, including on any of our products
manufactured overseas for sale in the United States, or any related
counter-measures are taken by other countries, our business and
results of operations may be materially harmed.
These tariffs have
the potential to significantly raise the cost of any products we
may manufacture in China. In such a case, there can be no assurance
that we will be able to shift manufacturing and supply agreements
to non-impacted countries, including the United States, to reduce
the effects of the tariffs. As a result, we may suffer margin
erosion or be required to raise our prices, which may result in the
loss of customers, negatively impact our results of operations, or
otherwise harm our business. Additionally, the imposition of
tariffs on products that we export to international markets could
make such products more expensive compared to those of our
competitors if we pass related additional costs on to our
customers, which may also result in the loss of customers,
negatively impact our results of operations, or otherwise harm our
business.
We are an “emerging growth company” and our election to
delay adoption of new or revised accounting standards applicable to
public companies may result in our consolidated financial
statements not being comparable to those of some other public
companies. As a result of this and other reduced disclosure
requirements applicable to emerging growth companies, our shares
may be less attractive to investors.
As a company with
less than $1.07 billion in revenue during our last completed fiscal
year, we qualify as an “emerging growth company” under
the JOBS Act. An emerging growth company may take advantage of
specified reduced reporting requirements that are otherwise
generally applicable to public companies. In particular, as an
emerging growth company, we:
●
are not required to
obtain an attestation and report from our auditors on our
management’s assessment of our internal control over
financial reporting pursuant to the Sarbanes-Oxley
Act;
●
are not required to
provide a detailed narrative disclosure discussing our compensation
principles, objectives and elements and analyzing how those
elements fit with our principles and objectives (commonly referred
to as “compensation discussion and
analysis”);
●
are not required to
obtain a non-binding advisory vote from our stockholders on
executive compensation or golden parachute arrangements (commonly
referred to as the “say-on-pay,”
“say-on-frequency” and
“say-on-golden-parachute” votes);
●
are exempt from
certain executive compensation disclosure provisions requiring a
pay-for-performance graph and CEO pay ratio
disclosure;
●
may present only
two years of audited financial statements and only two years of
related Management’s Discussion & Analysis of
Financial Condition and Results of Operations, or MD&A;
and
●
are eligible to
claim longer phase-in periods for the adoption of new or revised
financial accounting standards under §107 of the JOBS
Act.
We intend to take
advantage of all of these reduced reporting requirements and
exemptions, including the longer phase-in periods for the adoption
of new or revised financial accounting standards under §107 of
the JOBS Act. Our election to use the phase-in periods may
make it difficult to compare our consolidated financial statements
to those of non-emerging growth companies and other emerging growth
companies that have opted out of the phase-in periods under
§107 of the JOBS Act.
Certain of these
reduced reporting requirements and exemptions were already
available to us due to the fact that we also qualify as a
“smaller reporting company” under SEC rules. For
instance, smaller reporting companies are not required to obtain an
auditor attestation and report regarding management’s
assessment of internal control over financial reporting, are not
required to provide a compensation discussion and analysis, are not
required to provide a pay-for-performance graph or CEO pay ratio
disclosure, and may present only two years of audited financial
statements and related MD&A disclosure.
Under the JOBS Act,
we may take advantage of the above-described reduced reporting
requirements and exemptions for up to five years after our initial
sale of common equity pursuant to a registration statement declared
effective under the Securities Act, or such earlier time that we no
longer meet the definition of an emerging growth company. In
this regard, the JOBS Act provides that we would cease to be an
“emerging growth company” if we have more than $1.07
billion in annual revenue, have more than $700 million in market
value of our common stock held by non-affiliates, or issue more
than $1.0 billion in principal amount of non-convertible debt
over a three-year period. Under current SEC rules, however, we
will continue to qualify as a “smaller reporting
company” for so long as we have a public float (i.e., the
market value of common equity held by non-affiliates) of less than
$250 million as of the last business day of our most recently
completed second fiscal quarter.
We cannot predict
if investors will find our shares less attractive due to our
reliance on these exemptions. If investors were to find our
shares less attractive as a result of our election, we may have
difficulty raising all of the proceeds we seek in this
offering.
We will incur increased costs as a result of being a U.S. public
company, and our management expects to devote substantial time to
public company compliance programs.
As a public
company, we will incur significant legal, insurance, accounting and
other expenses that we did not incur as a private company. The
Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer
Protection Act, Nasdaq Capital Market listing requirements and
other applicable securities rules and regulations impose various
requirements on public companies. Our management and administrative
staff will need to devote a substantial amount of time to comply
with these requirements. For example, in anticipation of becoming a
public company, we will need to adopt additional internal controls
and disclosure controls and procedures and bear all of the internal
and external costs of preparing periodic and current public reports
in compliance with our obligations under the securities laws. We
intend to commit resources to comply with evolving laws,
regulations and standards, and this commitment will result in
increased general and administrative expenses and may divert
management’s time and attention away from product development
activities. If for any reason our efforts to comply with new laws,
regulations and standards differ from the activities intended by
regulatory or governing bodies, regulatory authorities may initiate
legal proceedings against us and our business may be
harmed.
Additionally, in
order to comply with the requirements of being a public company, we
may need to undertake various actions, including implementing new
internal controls and procedures and hiring new accounting or
internal audit staff. The Sarbanes-Oxley Act requires that we
maintain effective disclosure controls and procedures and internal
control over financial reporting. We are continuing to develop and
refine our disclosure controls and other procedures that are
designed to ensure that information required to be disclosed by us
in the reports that we file with the SEC is recorded, processed,
summarized and reported within the time periods specified in the
SEC’s rules and forms, and that information required to be
disclosed in reports under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), is accumulated and
communicated to our principal executive and financial officers. Any
failure to develop or maintain effective controls could adversely
affect the results of our periodic management evaluations. In the
event that we are not able to demonstrate compliance with the
Sarbanes-Oxley Act, that our internal control over financial
reporting is perceived as inadequate, or that we are unable to
produce timely or accurate consolidated financial statements,
investors may lose confidence in our operating results and the
price of our common stock could decline. In addition, if we are
unable to continue to meet these requirements, we could be subject
to sanctions or investigations by Nasdaq, the SEC or other
regulatory authorities, and we may not be able to remain listed on
the Nasdaq Capital Market.
We are not
currently required to comply with the SEC’s rules that
implement Section 404 of the Sarbanes-Oxley Act, and are therefore
not yet required to make a formal assessment of the effectiveness
of our internal control over financial reporting for that purpose.
Upon becoming a public company, we will be required to comply with
certain of these rules, which will require management to certify
financial and other information in our quarterly and annual reports
and provide an annual management report on the effectiveness of our
internal control over financial reporting commencing with our
second annual report. This assessment will need to include the
disclosure of any material weaknesses in our internal control over
financial reporting identified by our management or our independent
registered public accounting firm. To achieve compliance with
Section 404 within the prescribed period, we will be engaged in a
costly and challenging process to document and evaluate our
internal control over financial reporting. In this regard, we will
need to continue to dedicate internal resources, potentially engage
outside consultants and adopt a detailed work plan to assess and
document the adequacy of our internal control over financial
reporting. We will also need to continue to improve our control
processes as appropriate, validate through testing that our
controls are functioning as documented and implement a continuous
reporting and improvement process for our internal control over
financial reporting. Despite our efforts, there is a risk that we
will not be able to conclude, within the prescribed timeframe or at
all, that our internal control over financial reporting is
effective as required by Section 404.
If we are unable to address the weaknesses in our internal control
over financial reporting, investors may lose confidence in our
company.
We
have identified material weaknesses in our internal control over
financial reporting, which resulted in the need to restate our
consolidated financial statements. If we do not remediate the
material weaknesses in our internal control over financial
reporting, we may not be able to accurately report our financial
results or file our periodic reports in a timely manner, which may
cause investors to lose confidence in our reported financial
information and may lead to a decline in the market price of our
common stock.
Our business is subject to reporting requirements that continue to
evolve and change, which could continue to require significant
compliance effort and resources.
Because our common
stock will be publicly traded, we will be subject to certain rules
and regulations of federal, state and financial market exchange
entities charged with the protection of investors and the oversight
of companies whose securities are publicly traded. These entities,
including the Public Company Accounting Oversight Board (PCAOB),
the SEC and the Nasdaq Capital Market (assuming our common stock
has been approved for listing), periodically issue new requirements
and regulations and legislative bodies also review and revise
applicable laws. As interpretation and implementation of these laws
and rules and promulgation of new regulations continues, we will
continue to be required to commit significant financial and
managerial resources and incur additional expenses to address such
laws, rules and regulations, which could in turn reduce our
financial flexibility and create distractions for
management.
Any of these
events, in combination or individually, could disrupt our business
and adversely affect our business, financial condition, results of
operations and cash flows.
Risks
Related to Ownership of Our Common Stock and this
Offering
Our stock price may be volatile and your investment could decline
in value.
The market price of
our common stock following this offering may fluctuate
substantially as a result of many factors, some of which are beyond
our control. These fluctuations could cause you to lose all or part
of the value of your investment in our common stock. Factors that
could cause fluctuations in the market price of our common stock
include the following:
●
quarterly
variations in our results of operations;
●
results
of operations that vary from the expectations of securities
analysts and investors;
●
results
of operations that vary from those of our competitors;
●
changes
in expectations as to our future financial performance, including
financial estimates by securities analysts;
●
publication of
research reports about us or the industries in which we
participate;
●
announcements by us
or our competitors of significant contracts, acquisitions or
capital commitments;
●
announcements by
third parties of significant legal claims or proceedings against
us;
●
changes
affecting the availability of financing for smaller publicly traded
companies like us;
●
regulatory
developments in the property development, digital transformation
technology or biohealth businesses;
●
significant future
sales of our common stock, and additions or departures of key
personnel;
●
the
realization of any of the other risk factors presented in this
prospectus; and
●
general
economic, market and currency factors and conditions unrelated to
our performance.
In addition, the
stock market in general has experienced significant price and
volume fluctuations that have often been unrelated or
disproportionate to operating performance of individual companies.
These broad market factors may seriously harm the market price of
our common stock, regardless of our operating performance. In the
past, following periods of volatility in the market price of a
company’s securities, securities class action litigation has
often been instituted. A class action suit against us could result
in significant liabilities and, regardless of the outcome, could
result in substantial costs and the diversion of our
management’s attention and resources.
Our common stock has no prior market and our stock price may
decline after the offering.
Before this
offering, there has been no public market for shares of our common
stock. Although we have applied to have our common stock listed for
trading on the Nasdaq Capital Market, an active trading market for
our common stock may not develop or, if it develops, may not be
sustained after this offering. Our company and the underwriters
will negotiate to determine the initial public offering price. The
initial public offering price may be higher than the market price
of our common stock after the offering and you may not be able to
sell your shares of our common stock at or above the price you paid
in the offering. As a result, you could lose all or part of your
investment.
Investors purchasing common
stock in this offering will experience immediate
dilution.
The initial public
offering price of shares of our common stock is higher than the pro
forma as adjusted net tangible book value per outstanding share of
our common stock. You will incur immediate dilution of $4.55 per
share in the pro forma as adjusted net tangible book value of
shares of our common stock, based on an assumed initial public
offering price of $6.50 per share, which is the
midpoint of the range set forth on the cover page of this
prospectus. To the extent stock options are issued pursuant to our
2018 Incentive Compensation Plan in the future and ultimately
exercised, there will be further dilution of the common stock sold
in this offering.
Future sales, or the perception of future sales, of a substantial
amount of our shares of common stock could depress the trading
price of our common stock.
If we or our
stockholders sell substantial amounts of our shares of common stock
in the public market following this offering or if the market
perceives that these sales could occur, the market price of shares
of our common stock could decline. These sales may make it more
difficult for us to sell equity or equity-related securities in the
future at a time and price that we deem appropriate, or to use
equity as consideration for future acquisitions.
Immediately upon
completion of this offering, based on the number of shares
outstanding as of July 30, 2020, we will have
20,000,000 shares of common stock authorized and
9,000,000 shares of common stock outstanding. Of these
shares, the 2,600,000 shares to be sold in this offering (assuming
the underwriter does not exercise its option to purchase additional
shares in this offering to cover over-allotments, if any) will be
freely tradable. We, our executive officers and directors, and our
stockholder have entered into agreements with the underwriter not
to sell or otherwise dispose of shares of our common stock for a
period of nine months following the effectiveness of this
prospectus, with certain exceptions. Immediately upon the
expiration of this lock-up period, 6,400,000 shares
will be eligible for resale pursuant to Rule 144 under the
Securities Act, subject to the volume, manner of sale, holding
period and other limitations of Rule 144.
If securities or industry analysts do not publish or cease
publishing research or reports about us, our business or our
market, or if they change their recommendations regarding our stock
adversely, or if our actual results differ significantly from our
guidance, our stock price and trading volume could
decline.
The trading market
for our common stock will be influenced by the research and reports
that industry or securities analysts may publish about us, our
business, our market or our competitors. If any of the analysts who
may cover us change their recommendation regarding our stock
adversely, or provide more favorable relative recommendations about
our competitors, our stock price would likely decline. If any
analyst who may cover us were to cease coverage of our company or
fail to regularly publish reports on us, we could lose visibility
in the financial markets, which in turn could cause our stock price
or trading volume to decline.
In addition, from
time to time, we may release earnings guidance or other
forward-looking statements in our earnings releases, earnings
conference calls or otherwise regarding our future performance that
represent our management’s estimates as of the date of
release. Some or all of the assumptions of any future guidance that
we furnish may not materialize or may vary significantly from
actual future results. Any failure to meet guidance or
analysts’ expectations could have a material adverse effect
on the trading price or volume of our stock.
Anti-takeover provisions in our charter documents could discourage,
delay or prevent a change in control of our company and may affect
the trading price of our common stock.
Our corporate
documents and the Delaware General Corporation Law contain
provisions that may enable our board of directors to resist a
change in control of our company even if a change in control were
to be considered favorable by you and other stockholders. These
provisions include:
●
authorize the
issuance of “blank check” preferred stock that could be
issued by our board of directors to help defend against a takeover
attempt;
●
establish that
advance notice requirements for nominating directors and proposing
matters to be voted on by stockholders at stockholder meetings will
be as provided in the bylaws; and
●
provide that
stockholders are only entitled to call a special meeting upon
written request by 33.3% of the outstanding common
stock.
In addition,
Delaware law prohibits large stockholders, in particular those
owning 15% or more of our outstanding voting stock, from merging or
consolidating with us except under certain circumstances. These
provisions and other provisions under Delaware law could
discourage, delay or prevent a transaction involving a change in
control of our company. These provisions could also discourage
proxy contests and make it more difficult for you and other
stockholders to elect directors of your choosing and cause us to
take other corporate actions you desire.
Concentration of ownership of our common stock by our principal
stockholder will limit new investors from influencing significant
corporate decisions.
Upon completion of
this offering, our principal stockholder Chan Heng Fai will own
approximately 90% of our outstanding shares of common stock. He
will be able to make decisions such as (i) making amendments to our
certificate of incorporation and bylaws, (ii) whether to issue
additional shares of common stock and preferred stock, including to
himself, (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 Chan Heng Fai may not coincide with our interests
or the interests of other stockholders.
We expect to be a “controlled company” within the
meaning of the listing standards of Nasdaq and, as a result, we
will qualify for exemptions from certain corporate governance
requirements. You will not have the same protections afforded to
stockholders of companies that are subject to such
requirements.
Chan
Heng Fai, through HFE Holdings Limited, controls a majority of the
combined voting power of all classes of our voting stock. As a
result, we qualify as a “controlled company” within the
meaning of the listing standards of Nasdaq, and we have elected not
to comply with certain Nasdaq corporate governance requirements.
Under these rules, a “controlled company” may elect not
to comply with certain corporate governance requirements, including
the requirement that we have a majority of independent directors on
our board of directors. Accordingly, our stockholders may not have
the same protections afforded to stockholders of companies that are
subject to all of Nasdaq’s corporate governance
requirements.
We do not expect to pay any dividends on our common stock for the
foreseeable future.
We currently expect
to retain all future earnings, if any, for future operation,
expansion and debt repayment and have no current plans to pay any
cash dividends to holders of our common stock for the foreseeable
future. Any decision to declare and pay dividends in the future
will be made at the discretion of our board of directors and will
depend on, among other things, our operating results, financial
condition, cash requirements, contractual restrictions and other
factors that our board of directors may deem relevant. In addition,
our ability to pay dividends may be limited by covenants of any
existing and future outstanding indebtedness we or our subsidiaries
incur. As a result, you may not receive any return on an investment
in our common stock unless you sell our common stock for a price
greater than that which you paid for it.
We have 5,000,000 authorized unissued shares of preferred stock,
and our board has the ability to designate the rights and
preferences of this preferred stock without your vote.
Our certificate of
incorporation authorizes our board of directors to issue
“blank check” preferred stock and to fix the rights,
preferences, privileges and restrictions, including voting rights,
of these shares, without further stockholder approval. The rights
of the holders of common stock will be subject to and may be
adversely affected by the rights of holders of any preferred stock
that may be issued in the future. As indicated in the preceding
risk factor, the ability to issue preferred stock without
stockholder approval could have the effect of making it more
difficult for a third party to acquire a majority of the voting
stock of our company thereby discouraging, delaying or preventing a
change in control of our company. We currently have no outstanding
shares of preferred stock, or plans to issue any such shares in the
future.
We may utilize the proceeds of this offering in ways with which you
may not agree or in ways that may not yield a return.
Our management will
have considerable discretion in the application of the net proceeds
of this offering, and you will not have the opportunity, as part of
your investment decision, to assess whether the proceeds are being
used appropriately. The net proceeds may be used with a view
towards long-term benefits for our stockholders and this may not
increase our operating results or market value. Until the net
proceeds are used, they may be placed in capital preservation
investments that do not produce significant income or that may lose
value.
Our certificate of incorporation provides that the Court of
Chancery of the State of Delaware will be the exclusive forum for
substantially all disputes between us and our stockholders, which
could limit our stockholders’ ability to obtain a favorable
judicial forum for disputes with us or our directors, officers or
employees.
Our
certificate of incorporation provides that, unless we consent in
writing to the selection of an alternative forum, the Court of
Chancery of the State of Delaware will be the sole and exclusive
forum for (i) any derivative action or proceeding brought on our
behalf, (ii) any action asserting a claim of breach of a fiduciary
duty owed by our directors, officers or other employees to us or to
our stockholders, (iii) any action asserting a claim against us or
any director, officer or other employee arising pursuant to any
provision of the Delaware General Corporation Law, our certificate
of incorporation or bylaws or (iv) any action asserting a claim
that is governed by the internal affairs doctrine, in all
cases to the fullest extent permitted by law and subject to the
court having personal jurisdiction over the indispensable parties
named as defendants; provided that these provisions of our
certificate of incorporation will not apply to suits brought to
enforce a duty or liability created by the Exchange Act, or any
other claim for which the federal courts have exclusive
jurisdiction. Our certificate of incorporation further provides
that the federal district courts of the United States of America
will be the exclusive forum for resolving any complaint asserting a
cause of action arising under the Securities Act, unless we consent
in writing to the selection of an alternative
forum.
These
exclusive-forum provisions may limit a stockholder’s ability
to bring a claim in a judicial forum that it finds favorable for
disputes with us or our directors, officers or other employees and
may discourage these types of lawsuits. Further, the enforceability
of similar choice of forum provisions in other companies’
certificates of incorporation has been challenged in legal
proceedings, and it is possible that a court could find these types
of provisions to be inapplicable or
unenforceable.
This prospectus
contains forward-looking statements that involve substantial risks
and uncertainties. The forward-looking statements are contained
principally in the sections entitled “Prospectus
Summary,” “Risk Factors,”
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and
“Business,” but are also contained in this prospectus.
In some cases, you can identify forward-looking statements by the
words “may,” “might,” “will,”
“could,” “would,” “should,”
“expect,” “intend,” “plan,”
“aim,” “objective,”
“anticipate,” “believe,”
“estimate,” “predict,”
“project,” “potential,”
“continue,” “ongoing,”
“target,” “seek” or the negative of these
terms, or other comparable terminology intended to identify
statements about the future. Forward-looking statements contained
in this prospectus include, but are not limited to, statements
about:
●
our future
financial performance, including our revenue, costs of revenue,
operating expenses and profitability;
●
the sufficiency of
our cash and cash equivalents to meet our liquidity
needs;
●
our predictions
about the property development, digital transformation technology
and biohealth businesses and their respective market
trends;
●
our ability to
attract and retain customers in all our business segments to
purchase our products and services;
●
the availability of
financing for smaller publicly-traded companies like
us;
●
our ability to
successfully expand in our three principal business markets and
into new markets and industry verticals;
●
our ability to
effectively manage our growth and future expenses;
and
●
our
ability to respond to the potential risks resulting from the spread
of the COVID-19 pandemic, and its potential impact on our
operations.
We caution you that
the foregoing list may not contain all of the forward-looking
statements made in this prospectus.
These statements
involve known and unknown risks, uncertainties and other factors
that may cause our actual results, levels of activity, performance
or achievements to be materially different from the information
expressed or implied by these forward-looking statements. Although
we believe that we have a reasonable basis for each forward-looking
statement contained in this prospectus, we caution you that these
statements are based on a combination of facts and factors
currently known by us and our expectations of the future, about
which we cannot be certain.
You should refer to
the “Risk Factors” section of this prospectus for a
discussion of important factors that may cause our actual results
to differ materially from those expressed or implied by our
forward-looking statements. As a result, of these factors, we
cannot assure you that the forward-looking statements in this
prospectus will prove to be accurate. Furthermore, if our
forward-looking statements prove to be inaccurate, the inaccuracy
may be material. In light of the significant uncertainties in these
forward-looking statements, you should not regard these statements
as a representation or warranty by us or any other person that we
will achieve our objectives and plans in any specified time frame,
or at all. We undertake no obligation to publicly update any
forward-looking statements, whether as a result of new information,
future events or otherwise, except as required by federal
securities law.
You should read
this prospectus and the documents that we reference in this
prospectus and have filed as exhibits to the registration
statement, of which this prospectus is a part, completely and with
the understanding that our actual future results may be materially
different from what we expect. We qualify all of our
forward-looking statements by these cautionary
statements.
USE
OF PROCEEDS
We estimate that
the net proceeds from the sale of our common stock in this offering
will be approximately $13,958,600 (or approximately
$16,164,050 if the underwriter exercises its option in
full to purchase additional shares of our common stock), based upon
an assumed initial public offering price of $6.50 per
share, which is the midpoint of the range set forth on the cover
page of this prospectus, after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable
by us.
We intend to use
the net proceeds approximately as follows:
|
Application of
Proceeds
|
Approximate Dollar
Amount
|
Approximate
Percentage of Net Proceeds
|
|
Fund acquisitions
of new companies and properties
|
$12,562,740
|
90%
|
|
Working capital and
general corporate purposes
|
1,395,860
|
10%
|
|
Total
|
$13,958,600
|
100%
|
A significant
portion of the net proceeds of this offering will be used to fund
possible acquisitions of new companies in the markets in which we
operate, or may operate in the future, and to acquire additional
real estate development properties. We intend to acquire all or
substantially all of an acquisition target’s voting stock and
only in limited cases acquire less than 51% of the voting stock. We
have no such acquisition agreements or commitments in place at this
time.
We will use the
remainder of the net proceeds from this offering for working
capital and general corporate purposes, including amounts required
to pay officers’ salaries, professional fees, ongoing public
reporting costs, office-related expenses and other corporate
expenses, including interest and overhead.
Working capital may
also include up to approximately $312,100 which may be
used for our sales and marketing and/or product enhancement
efforts. We do not currently intend to make any additional equity
investments in subsidiary companies, unless we are requested to
participate in an arm’s-length, unaffiliated third party-led
investment transaction or otherwise required to participate in
order to maintain our majority ownership and/or
control in any such company.
The expected use of
net proceeds from this offering represents our intention based upon
our present plans and business conditions. We cannot predict with
certainty all of the particular uses for the proceeds of this
offering or the amounts that we will actually spend on the uses set
forth above. Accordingly, our management will have significant
flexibility in applying the net proceeds of this offering. The
timing and amount of our actual expenditures will be based on many
factors, including cash flows from operations and the anticipated
growth of our business. Pending their use, we intend to invest the
net proceeds of this offering in a variety of capital-preservation
investments, including short- and intermediate-term,
interest-bearing, investment-grade securities.
Our board of
directors will determine our future dividend policy based on our
result of operations, financial condition, capital requirements and
other circumstances. We have not previously declared or paid any
cash dividends on our common stock. We anticipate that we will
retain earnings to support operations and finance the growth of our
business, as described in this prospectus. Accordingly, it is not
anticipated that any cash dividends will be paid on our common
stock in the foreseeable future.
CAPITALIZATION
The following table
sets forth our cash and cash equivalents and total capitalization
as of March 31, 2020:
●
on an actual basis;
and
●
on an as adjusted
basis reflecting the receipt by us of the net proceeds from the
sale of 2,600,000 shares of common stock in this offering at an
assumed initial public offering price of $6.50 per
share, which is the midpoint of the range set forth on the cover
page of this prospectus, after deducting the estimated underwriting
discounts and commissions and estimated offering expenses payable
by us and excluding the exercise of the over-allotment option held
by the underwriter with respect to this offering, as if the
offering had occurred on March 31, 2020.
The following
information is illustrative only of our cash and cash equivalents
and capitalization following the completion of this offering and
will change based on the actual initial public offering price and
other terms of this offering determined at pricing. You should read
this table together with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”
and our consolidated financial statements and the related notes
appearing in this prospectus.
|
|
As of March 31,
2020
|
|
|
|
Actual
|
As
Adjusted
|
|
|
(Unaudited)
|
(Unaudited)
|
|
Cash and restricted
cash
|
$ 7,089,645
|
$ 21,048,245
|
|
Debt, net of debt
discount
|
6,133,378*
|
6,133,378*
|
|
Long-term debt, net
of current portion
|
4,731,607
|
4,731,607
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Common stock,
$0.001 par value
|
10,001
|
12,601
|
|
Additional paid-in
capital
|
54,266,987
|
68,222,987
|
|
Accumulated
deficit
|
(38,922,255)
|
(38,922,255)
|
|
Accumulated Other
Comprehensive Income
|
365,219
|
365,219
|
|
Stockholders’
equity
|
15,719,952
|
29,678,552
|
|
Non-controlling
interests
|
6,839,358
|
6,839,358
|
|
Total
stockholders’ equity
|
$ 22,559,310
|
$ 36,517,910
|
|
Total
capitalization
|
$ 27,290,917**
|
$ 41,249,517**
|
*Debt, net of debt
discount = Notes Payable + Accrued Interest
**Total
capitalization = Long-term debt + Total stockholders’
equity
DILUTION
If you invest in
our common stock in this offering, your ownership interest will be
immediately diluted to the extent of the difference between the
initial public offering price per share and the pro forma, as
adjusted net tangible book value per share of our common stock
immediately after this offering. Net tangible book value per share
is determined by dividing our total tangible assets less total
liabilities by the number of outstanding shares of common
stock.
As of March 31,
2020, we had a net tangible book value of $15,719,952 or $2.46 per
share of common stock (calculated based on 6,400,000 outstanding
shares after stock cancellation on June 24, 2020). Our pro forma
net tangible book value per share represents the amount of our
total tangible assets reduced by the amount of our total
liabilities and divided by the total number of shares of our common
stock outstanding as of March 31, 2020.
Investors
participating in this offering will incur immediate and substantial
dilution. After giving effect to the issuance and sale of 2,600,000
shares of our common stock in this offering at an assumed initial
public offering price of $6.50 per share, which is the
midpoint of the range set forth on the cover page of this
prospectus, and after deducting the estimated underwriting
discounts and commissions and estimated offering expenses payable
by us, our as adjusted net tangible book value as of March
31, 2020, would have been approximately
$29,678,552 or $3.30 per share of common
stock. This represents an immediate increase in the pro forma net
tangible book value of $0.84 per share to existing
stockholders and an immediate dilution of $3.20 per
share to investors purchasing shares of our common stock in this
offering. The following table illustrates this per share dilution
on a per share basis:
|
|
Amount
|
|
Assumed initial
public offering price
|
$6.50
|
|
Pro forma net
tangible book value before offering
|
2.46
|
|
Increase in pro
forma net tangible book value attributable to new
investors
|
0.84
|
|
Pro forma as
adjusted net tangible book value after offering
|
$3.30
|
|
Dilution in pro
forma net tangible book value to new investors
|
$3.20
|
Each $1.00 increase
(decrease) in the assumed initial public offering price of
$6.50 per share would increase (decrease) the pro
forma as adjusted dilution to new investors to $0.75
per share, assuming that the number of shares offered, as set forth
on the cover page of this prospectus, remains the same, after
deducting estimated underwriting discounts and commissions and
estimated offering expenses. Similarly, each increase of 100,000
shares in the number of shares of common stock offered would
increase the as further adjusted net tangible book value, as
adjusted to give effect to this offering, to approximately $0.03
per share and decrease the dilution to new investors to
$0.02 per share, assuming the assumed initial public
offering price remains the same and after deducting estimated
underwriting discounts and commissions and estimated offering
expenses. Each decrease of 100,000 shares in the number of shares
of common stock offered would decrease the as adjusted net tangible
book value, as adjusted to give effect to this offering, to
approximately $0.03 per share and increase the dilution to new
investors to $0.02 per share, assuming the assumed
initial public offering price remains the same and after deducting
estimated underwriting discounts and commissions and estimated
offering expenses. If the underwriter exercises its over-allotment
option in full to purchase 390,000 additional shares of common
stock from us in this offering to cover over-allotments, if any,
the pro forma as adjusted net tangible book value per share after
the offering would be $3.40 per share, the increase in
the pro forma net tangible book value per share to existing
stockholders would be $0.94 per share and the dilution
per share to new investors purchasing common stock in this offering
would be $3.10 per share.
The following table
illustrates, on an as adjusted basis as of March 31,
2020, the differences between the number of shares of common
stock purchased from us, the total consideration paid, and the
average price per share paid by existing stockholders and new
investors purchasing shares of our common stock in this offering
based on an assumed initial public offering price of
$6.50 per share, which is the midpoint of the range
set forth on the cover page of this prospectus, before deducting
underwriting discounts and commissions and estimated offering
expenses.
|
|
Shares
Purchased
|
Total
Consideration
|
Average Price
Per
|
||
|
|
Number
|
Percent
|
Amount
|
Percent
|
Share
|
|
Existing
stockholders
|
6,400,000
|
71.1%
|
$ 15,719,952
|
48.2%
|
$ 2.46
|
|
New
investors
|
2,600,000
|
28.9%
|
$ 16,900,000
|
51.8%
|
$ 6.50
|
|
Total
|
9,000,000
|
100.0%
|
$ 32,619,952
|
100.0%
|
|
The number of
shares of common stock shown above to be outstanding after this
offering is based on 6,400,000 shares of our common
stock outstanding as of March 31, 2020, and excludes
an additional 500,000 shares of our common stock reserved for
future issuance under our 2018 Incentive Compensation
Plan.
In addition, if the
underwriter exercises its over-allotment option to purchase
additional shares in full, the number of shares held by new
investors would increase to 2,990,000, or 31.8% of the
total number of shares of our common stock outstanding after this
offering.
To the extent that
stock options are exercised, new options are issued under our 2018
Incentive Compensation Plan or we issue additional shares of common
stock in the future, there will be further dilution to investors
participating in this offering. In addition, we may choose to raise
additional capital because of market conditions or strategic
considerations, even if we believe that we have sufficient funds
for our current or future operating plans. If we raise additional
capital through the sale of equity or convertible debt securities,
the issuance of these securities could result in further dilution
to our stockholders.
The tables and calculations above are based on
6,400,000 shares of common stock outstanding as
of March 31, 2020,
which excludes:
●
500,000
shares of our common stock reserved for future issuance pursuant to
the exercise of stock options or other equity-based awards under
our 2018 Incentive Compensation Plan; and
●
390,000
common stock issuable upon exercise of underwriter’s
over-allotment option.
To
the extent that options are issued and exercised, new investors
will experience further dilution.
Pursuant
to an agreement entered into by us on June 24, 2020 with our
stockholders HFE Holdings Limited and Chan Heng Fai, HFE Holdings
Limited surrendered 3,600,000 shares of our common stock to the
treasury of our company, and Chan Heng Fai surrendered 1,000 shares
of our common stock to the treasury of our company, and all such
shares were cancelled. No consideration was exchanged in connection
with the surrender of the shares. As a result, the total number of
outstanding shares of our common stock before this offering was
reduced to 6,400,000 shares from 10,001,000
shares.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and accompanying notes and the
information contained in other sections of this prospectus,
particularly under the headings “Risk Factors” and
“Business.” It contains forward-looking statements that
involve risks and uncertainties, and is based on the beliefs of our
management, as well as assumptions made by, and information
currently available to, our management. Our actual results could
differ materially from those anticipated by our management in these
forward-looking statements as a result of various factors,
including those discussed below and in this prospectus,
particularly under the heading “Risk
Factors.”
Business
Overview
We are a
diversified holding company principally engaged through our
subsidiaries in property development, digital transformation
technology and biohealth activities with operations in the United
States, Singapore, Hong Kong, Australia and
South Korea. We manage our three principal businesses
primarily through our 49.1%-owned subsidiary,
Singapore eDevelopment Limited, a public company
traded on the Singapore Stock Exchange. Through this subsidiary
(and indirectly, through other public and private U.S. and Asian
subsidiaries), we are actively developing two significant real
estate projects near Houston, Texas and in Frederick, Maryland in
our property development segment. We have designed applications for
enterprise messaging and e-commerce software platforms in the
United States and Asia in our digital transformation technology
business unit. Our recent foray into the biohealth segment includes
research to treat neurological and immune-related diseases,
nutritional chemistry to create a natural sugar alternative,
research regarding innovative products to slow the spread of
disease, and natural foods and supplements.
We
opportunistically identify global businesses for acquisition,
incubation and corporate advisory services, primarily related to
our existing operating business segments. We also have ownership
interests outside of Singapore eDevelopment, including an indirect
16.8% equity interest in Holista CollTech Limited, a
public Australian company that produces natural food ingredients,
and an indirect 13.1% equity interest in Vivacitas
Oncology Inc., a U.S.-based biopharmaceutical company, but neither
of which company has material asset value relative to our principal
businesses. Under the guidance of Chan Heng Fai, our founder,
Chairman and Chief Executive Officer, who is also our largest
stockholder, we have positioned ourselves as a participant in these
key markets through a series of strategic transactions. Our growth
strategy is both to pursue acquisition opportunities that we can
leverage on our global network using our capital and management
resources and to accelerate the expansion of our organic
businesses.
We generally
acquire majority and/or control stakes in innovative and promising
businesses that are expected to appreciate in value over time. Our
emphasis is on building businesses in industries where our
management team has in-depth knowledge and experience, or where our
management can provide value by advising on new markets and
expansion. We have at times provided a range of global capital and
management services to these companies in order to gain access to
Asian markets. We have historically favored businesses that improve
an individual’s quality of life or that improve the
efficiency of businesses through technology in various industries.
We believe our capital and management services provide us with a
competitive advantage in the selection of strategic acquisitions,
which creates and adds value for our company and our
stockholders.
Our
Revenue Model
Our total revenue
for the three months ended March 31, 2020 and the years ended
December 31, 2019 and 2018 were $2,965,171, $24,257,953 and
$20,380,940, respectively. Our net income for the three months
ended March 31, 2020 was $2,214,999 and net losses for the years
ended December 31, 2019 and 2018 were $8,053,428 and $7,490,568,
respectively.
We currently
recognize revenue from the sale of our subdivision development
properties, the sale of our biohealth products and the rendering of
digital transformation technology services through consulting fees.
Sales of real properties accounted for approximately 100%of our
total revenue in the first three months of 2020, sales of
properties accounted for approximately 94%, sales of biohealth
products accounted for approximately 6% and digital transformation
technology consulting fees accounted for 0% of our total revenue in
2019. Sales of properties accounted for approximately 87%, sales of
biohealth products accounted for approximately 12%, digital
transformation technology consulting fees accounted for
approximately 1% of our total revenue in 2018.
From a geographical
perspective, we recognized 100%, 100% and 98% of our total revenue
in the first three months of 2020 and the years ended December 31,
2019 and 2018, respectively, in the United
States.
We believe that, on
an ongoing basis, revenue generated from our property development
business will decline as a percentage of our total revenue as we
expect to experience greater revenue contribution from our digital
transformation technology, biohealth businesses and future business
acquisitions.
Financial
Impact of the COVID-19 Pandemic
Real Estate Projects
The extent to which
the COVID-19 pandemic may impact our business will depend on future
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. From March through June 2020, we
continued to sell lots at our Ballenger Run project (in Maryland)
for the construction of town homes to NVR. To date, sales of such
town homes by NVR are up in 2020 compared to the first half of
2019. Such town 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 of sales staff and see the town 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.
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. To date, we have experienced a
slowdown in the planned construction of a clubhouse at the
Ballenger Run project. We believe this delay was largely caused in
part by policies requiring lower numbers of contractors working in
indoor spaces. To date, this aspect of the project has fallen
behind schedule by approximately one to two
weeks.
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).
In addition, Houston and its surrounding areas have been
economically impacted by the decline in energy prices in 2020.
Unlike our Ballenger Run project, our Black Oak project may include
our involvement in single family rental home
development.
On April 6, 2020,
SeD Development Management LLC, one of our subsidiaries, entered
into a term note with M&T 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 six months of
principal and interest deferred. Beginning in November 2020, SeD
Development Management LLC will make 18 equal monthly payments of
principal and interest with the final payment due in April 2022.
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. SeD Development Management LLC may apply to M&T
Bank for forgiveness of the PPP Term Note, with the amount which
may be forgiven equal to the sum of payroll costs, covered rent and
mortgage obligations, and covered utility payments incurred by SeD
Development Management LLC during the eight-week period beginning
upon receipt of PPP Term Note funds, calculated in accordance with
the terms of the CARES Act. During the relevant eight-week term,
our payroll did not experience any material change from prior
periods.
On June 18, 2020,
Alset iHome Inc. (formerly known as SeD Home Inc. and then SeD Home
& REITs Inc.) entered into a Loan Agreement with M&T Bank.
Pursuant to this Loan Agreement, M&T Bank provided a
non-revolving loan to Alset iHome Inc. in an aggregate amount of up
to $2,990,000, as described in “Liquidity and Capital
Resources” below. It is intended that this loan will be
utilized to commence our residential
initiatives.
Our subsidiaries
are reviewing plans for potential additional fundraising to fund
single family rental operations and the acquisition of additional
real estate projects.
Other Business Activities
The COVID-19
pandemic may adversely impact our potential to expand our business
activities in ways that are difficult to assess or predict. The
COVID-19 pandemic continues to evolve. The COVID-19 pandemic has
impacted, and may continue to impact, the global supply of certain
goods and services in ways that may impact the sale of products to
consumers that we, or companies we may invest in or partner with,
will attempt to make. The COVID-19 pandemic may prevent us from
pursuing otherwise attractive opportunities.
Impact on Staff
Most of our U.S.
staff works out of our Bethesda, Maryland office. At our office in
Texas, we received a 50% rent abatement for the month of May
2020.
Our U.S. staff has
shifted to mostly working from home since March 2020, but this has
had minimal impact on our operations to date. Our staff in
Singapore and Hong Kong has been able to work from home when needed
with minimal impact on our operations, however our staff’s
ability to travel between our Hong Kong and Singapore offices has
been significantly limited, and our staff’s travel between
the U.S. and non-U.S. offices has been suspended since March 2020.
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.
Matters
that May or Are Currently Affecting Our
Business
In addition to the
matters described above, the primary challenges and trends that
could affect or are affecting our financial results
include:
●
Our ability to
improve our revenue through cross-selling and revenue-sharing
arrangements among our diverse group of companies;
●
Our ability to
identify complementary businesses for acquisition, obtain
additional financing for these acquisitions, if and when needed,
and profitably integrate them into our existing
operation;
●
Our ability to
attract competent, skilled technical and sales personnel for each
of our businesses at acceptable prices to manage our overhead;
and
●
Our ability to
control our operating expenses as we expand each of our businesses
and product and service offerings.
Summary
of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The Common Control
Transactions resulted in the following basis of accounting for the
financial reporting periods: The acquisitions of Heng Fai
Enterprises and Global eHealth were accounted for prospectively as
of October 1, 2018 and they did not represent a change in reporting
entity.
ASC 805-50-45
defines the transfer of a business among entities under common
control at carrying amount with retrospective adjustment of prior
period financial statements when reporting entity is changed. ASC
250 defines a change in the reporting entity as a change that
results in financial statements that, in effect, are those of a
different reporting entity. Our management believed that the
acquisitions of Hengfai International and LVAM led to change in the
reporting entities and the acquisitions of Heng Fai Enterprises and
Global eHealth did not.
Our
consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States
of America (“U.S. GAAP”). The consolidated financial
statements include all accounts of the Company and its majority
owned and controlled subsidiaries. The Company consolidates
entities in which it owns more than 50% of the voting common stock
and controls operations. All intercompany transactions and balances
among consolidated subsidiaries have been eliminated.
Use of Estimates and Critical Accounting Estimates and
Assumptions
The preparation of
financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during
the reporting periods. Significant estimates made by management
include, but are not limited to, allowance for doubtful accounts,
recoverability and useful lives of property, plant and equipment,
valuation of real estate assets, allocation of development costs
and capitalized interest to sold lots, the valuation allowance of
deferred taxes, contingencies and equity compensation. Actual
results could differ from those estimates.
Revenue Recognition and Cost of Sales
The following
represents a disaggregation of our revenue recognition policies by
segment:
Property
Development
●
Property Sales. The
Company's main business is land development. The Company purchases
land and develops it into residential communities. The developed
lots are sold to builders (customers) for the construction of new
homes. The builders enter a sales contract with the Company before
they take the lots. The prices and timeline are determined and
agreed upon in the contract. The builders do the inspections to
make sure all conditions and requirements in contracts are met
before purchasing the lots. A detailed breakdown of the five-step
process for the revenue recognition of the Ballenger and Black Oak
projects, which represented approximately 94% and 85% of the
Company’s revenue in the years ended on December 31, 2019 and
2018, respectively, 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 per lot is fixed and
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 at a point in time when title is
transferred. The Company does not have further performance
obligations or continuing involvement once title is
transferred.
●
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 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.
●
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 an area method, which uses the
size of the lots compared to the total project area and allocates
costs based on their size.
Digital
Transformation Technology
● Software Development Income.
Revenue is recognized when (or as) the Company transfers promised
goods or services to its customers in amounts that reflect the
consideration to which the Company expects to be entitled to in
exchange for those goods or services, which occurs when (or as) the
Company satisfies its contractual obligations and transfers over
control of the promised goods or services to its customers. We
generate revenue from a project involving provision of services and
web/software development for customers. In respect to the provision
of services, the agreements are less than one year with a
cancellation clause and customers are typically billed on a monthly
basis.
Biohealth
● Product Direct Sales. The
Company’s net sales consist of product sales.
The Company's performance obligation is to transfer
its products to its third-party independent distributors
(“Distributors”). The Company generally recognizes
revenue when product is shipped to its Distributors.
The Company’s
Distributors may receive distributor allowances, which are
comprised of discounts, rebates and wholesale commission payments
from the Company. Distributor allowances resulting from the
Company’s sales of its products to its Distributors are
recorded against net sales because the distributor allowances
represent discounts from the suggested retail price.
In
addition to distributor allowances, the Company compensates its
sales leader Distributors with leadership incentives for services
rendered, relating to the development, retention, and management of
their sales organizations. Leadership Incentives are payable based
on achieved sales volume, which are recorded in general and
administrative expenses. The Company recognizes revenue when it
ships products. The Company receives the net sales price in cash or
through credit card payments at the point of
sale.
If
a Distributor returns a product to the Company on a timely basis,
they may obtain a replacement product from the Company for such
returned products. In addition, the Company maintains a buyback
program pursuant to which it will repurchase products sold to a
Distributor who has decided to leave the business. Allowances for
product returns, primarily in connection with the Company’s
buyback program, are provided at the time the sale is recorded.
This accrual is based upon historical return rates for each country
and the relevant return pattern, which reflects anticipated returns
to be received over a period of up to 12 months following the
original sale.
● Annual
Membership. The Company collects an annual membership fee from
its Distributors. The fee is fixed, paid in full at the time
joining the membership and not refundable. The Company’s
performance obligation is to provide members to purchase products,
access to certain back office services, receive commissions and
attend corporate events. The obligation is satisfied over time. The
Company recognizes revenue associated with the membership over the
one-year period of the membership. Before the membership fee is
recognized as revenue, it is recorded as deferred
revenue.
Real Estate Assets
Real estate assets
are recorded at cost, except when acquired real estate assets meet
the definition of a business combination in accordance with ASC
805, “Business Combinations,” which 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.
We capitalized
interest from the third-party borrowings of $526,297 and $415,844
and capitalized construction costs of $8,483,030 and $8,262,297 for
the years ended December 31, 2019 and 2018,
respectively.
For the three
months ended March 31, 2020 and 2019, we capitalized interest from
the third-party borrowings of $0 and $43,454 and capitalized
construction costs of $2,366,908 and $1,206,008,
respectively.
On December 31,
2019, total real estate property under development was $23.9
million, including:
● land
held for development in the amount of $14.3 million (consisting of
$6.9 million for Black Oak, $6.9 million for Ballenger Run and $0.5
million for our Perth project);
● capitalized
development costs in the amount of $5.7 million (consisting of $0.3
million for Black Oak and $5.4 million for Ballenger Run);
and
● capitalized
finance costs were $3.9 million.
On March 31, 2020,
total real estate property under development was $23.9 million,
including:
● land
held for development in the amount of $13.8 million (consisting of
$6.9 million for Black Oak, $6.4 million for Ballenger Run and $0.5
million for our Perth project);
● capitalized
development costs in the amount of $6.1 million (consisting of $0.7
million for Black Oak and $5.4 million for Ballenger Run);
and
● capitalized
finance costs were $4 million.
For the year ended
December 31, 2018, Black Oak project recognized a real estate
impairment of approximately $1.5 million from the sale of 124 lots
to Houston LD, LLC.
On June 30, 2019,
the Company recorded approximately $3.9 million of impairment on
the Black Oak project.
On December 31,
2019, Black Oak recognized additional real estate impairment of
approximately $1.3 million.
On March 31, 2020,
the capitalized construction costs were as
follows:
|
|
Ballenger Run
|
Black Oak
|
Perth Project
|
Total
|
|
Land
held for development
|
$ 6,458,177
|
$ 6,886,937
|
$ 446,895
|
$ 13,792,009
|
|
Capitalized
development Costs
|
|
|
|
|
|
Hard
Construction Costs
|
20,466,423
|
8,620,370
|
|
29,086,793
|
|
Engineering
|
2,993,909
|
1,777,554
|
|
4,771,463,
|
|
Consultation
|
389,278
|
141,287
|
|
530,565
|
|
Project
Management
|
3,202,550
|
800,505
|
|
4,003,055
|
|
Legal
|
335,106
|
235,961
|
|
571,067
|
|
Taxes
|
1,105,291
|
556,789
|
|
1,662,080
|
|
Other
Services
|
520,544
|
138,042
|
45,550
|
704,136
|
|
BAN
reimbursement
|
|
(5,230,828)
|
|
(5,230,828)
|
|
Impairment
Reserve
|
|
(4,988,461)
|
|
(4,988,461)
|
|
Construction
- Sold Lots
|
(23,604,274)
|
(1,364,805)
|
|
(24,969,079)
|
|
Total
capitalized development costs
|
$ 5,408,827
|
$ 686,414
|
$ 45,550
|
$ 6,140,791
|
|
|
|
|
|
|
|
Capitalized
finance costs
|
|
|
|
$ 3,967,856
|
|
|
|
|
|
|
|
Total
property under development
|
|
|
|
$ 23,900,656
|
On December 31,
2019, the capitalized construction costs were as
follows:
|
|
Ballenger Run
|
Black Oak
|
Perth Project
|
Total
|
|
Land
held for development
|
$ 6,886,163
|
$ 6,886,937
|
$ 510,241
|
$ 14,283,341
|
|
Capitalized
construction Costs
|
|
|
|
|
|
Hard
construction costs
|
18,857,552
|
8,354,986
|
|
27,212,538
|
|
Engineering
|
2,890,373
|
1,804,034
|
|
4,694,407
|
|
Consultation
|
330,387
|
105,267
|
|
435,654
|
|
Project
management
|
3,042,600
|
800,505
|
|
3,843,105
|
|
Legal
|
327,011
|
234,106
|
|
561,117
|
|
Taxes
|
1,092,247
|
556,194
|
|
1,648,441
|
|
Other
services
|
488,717
|
29,398
|
48,874
|
566,989
|
|
BAN
reimbursement
|
|
(5,230,828)
|
|
(5,230,828)
|
|
Impairment
reserve
|
|
(4,988,461)
|
|
(4,988,461)
|
|
Construction
- Sold Lots
|
(21,713,668)
|
(1,364,805)
|
|
(23,078,473)
|
|
Total
capitalized development costs
|
$ 5,315,220
|
$ 300,395
|
$ 48,874
|
$ 5,664,489
|
|
|
|
|
|
|
|
Capitalized
finance costs
|
|
|
|
$ 3,936,874
|
|
|
|
|
|
|
|
Total
property under development
|
|
|
|
$ 23,884,704
|
Through March
31, 2020, there were no sales from the Perth project. In
addition, no sales agreement had been signed for this
project.
On
January 18, 2019, Black Oak sold 124 lots based on its Purchase and
Sale Agreement with Houston LD, LLC signed on July 3, 2018. The
purchase price was $6,175,000. An impairment of real estate of
approximately $1.5 million related to this sale was recorded on
December 31, 2018. The revenue was recognized in January 2019, when
the sale was closed, and the margin was 0% as a result of the
impairment recorded in FY 2018.
On June 30, 2019,
the Company recorded approximately $3.9 million of impairment on
the Black Oak project.
During the year
ended December 31, 2019, Black Oak recognized an additional real
estate impairment of approximately $1.3
million.
Results
of Operations
Summary
of Statements of Operations for the Three Months Ended March 31,
2020 and 2019
|
|
Three Months Ended
|
|
|
|
March
31,
2020
|
March
31,
2019
|
|
Revenue
|
$ 2,965,171
|
$ 11,771,320
|
|
Operating
Expenses
|
3,305,836
|
12,103,338
|
|
Other
Income
|
2,555,664
|
730,647
|
|
Net
Income
|
2,214,999
|
394,917
|
Revenue
The
following table sets forth period-over-period changes in revenues
for each of our reporting segments:
|
|
Three Months
Ended March 31,
|
Change
|
||
|
|
2020
|
2019
|
Dollars
|
Percentage
|
|
Property
development
|
$ 2,954,389
|
$ 11,318,595
|
(8,364,206)
|
-74%
|
|
Biohealth
|
10,782
|
445,093
|
(434,311)
|
-98%
|
|
Digital
transformation technology
|
-
|
-
|
-
|
-
|
|
Other
|
-
|
7,632
|
(7,632)
|
-100%
|
|
Total
revenue
|
$ 2,965,171
|
$ 11,771,320
|
(8,806,149)
|
-75%
|
Revenue was
$2,965,171 for the three months ended March 31, 2020, compared to
$11,771,320 for the three months ended March 31, 2019. An increase
in property sales from the Ballenger Project and first sale of a
section of Black Oak Project in the first three months of 2019
contributed to higher revenue in that period. Pursuant to a lot
purchase agreement dated July 3, 2018, 150 CCM Black Oak Ltd sold
124 lots located in the Company’s Black Oak project to
Houston LD, LLC for a total purchase price of $6,175,000. As for
our Ballenger 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.
Revenues from our
biohealth segment come from the direct sales by iGalen Inc.
(formerly known as iGalen USA, LLC), which is 100% owned by iGalen
International Inc., Singapore eDevelopment’s 53%-owned
subsidiary. During the three months ended March 31, 2020 and 2019,
the revenues from iGalen Inc. were $10,782 and $445,093,
respectively. The decrease was mainly due to the slow sales of
current products and delay of the new product’s
promotion.
The category
described as “Other” includes corporate and financial
services and new venture businesses. "Other" includes certain costs
that are not allocated to the reportable segments, primarily
consisting of unallocated corporate overhead costs, including
administrative functions not allocated to the reportable segments
from global functional expenses.
The financial
services and new venture businesses are small and diversified, and
accordingly they are not separately addressed as one independent
category. In the three months ended March 31, 2020 and 2019, the
revenue from other businesses was $0 and $7,632, respectively,
generated by fund management
services.
Operating
Expenses
The following table sets forth period-over-period
changes in cost of sales for each of our reporting
segments:
|
|
Three Months
Ended March 31,
|
Change
|
||
|
|
2020
|
2019
|
Dollars
|
Percentage
|
|
Property
development
|
$ 2,380,820
|
$ 10,438,253
|
(8,057,433)
|
-77%
|
|
Biohealth
|
2,883
|
120,548
|
(117,665)
|
-98%
|
|
Digital
transformation technology
|
-
|
-
|
-
|
-
|
|
Other
|
-
|
-
|
-
|
-
|
|
Total cost of
sales
|
$ 2,383,703
|
$ 10,558,801
|
(8,175,098)
|
-77%
|
Cost of sales
decreased from $10,558,801 in the three months ended March 31, 2019
to $2,383,701 in the three months ended March 31, 2020, as a result
of the decrease in sales in the Ballenger Run and Black Oak
projects. Capitalized construction expenses, finance costs and land
costs are allocated to sales. We anticipate the total cost of sales
to increase as revenue increases.
The gross margin
decreased from $1,212,519 to $581,468 in the three months ended
March 31, 2019 and 2020, respectively. Our Ballenger Run project
gross margin decreased from $710,716 to $458,015 in the three
months ended March 31, 2019 and 2020, respectively, due to the
decrease in the sales. The gross margin from sale of Black Oak
section one lots was approximately $0 after real estate impairment
of $1.5 million was recorded in 2018.
The
following table sets forth period-over-period changes in operating
expenses for each of our reporting segments
|
|
Three Months
Ended March 31,
|
Change
|
||
|
|
2020
|
2019
|
Dollars
|
Percentage
|
|
Property
development
|
$ 277,056
|
$ 238,006
|
39,050
|
16%
|
|
Biohealth
|
132,791
|
526,001
|
(393,210)
|
-75%
|
|
Digital
transformation technology
|
18,228
|
96,652
|
(78,424)
|
-81%
|
|
Other
|
494,058
|
683,878
|
(189,820)
|
-28%
|
|
Total
operating expenses
|
$ 922,133
|
$ 1,544,537
|
(622,404)
|
-40%
|
Other
Income (Expense)
In the three months
ended March 31, 2020, the Company had other income of $2,555,664
compared to other income of $730,647 in the three months ended
March 31, 2019. The change from unrealized gain (loss) on
securities investment and foreign exchange transactions explained
the volatility in these two periods. In the three months ended
March 31, 2020 and 2019, the unrealized gain on securities
investment was $484,362 and $734,599, respectively. Foreign
exchange transaction gain was $2,118,952 in the three months ended
March 31, 2020, compared to $211,998 loss in the three months ended
March 31, 2019.
Net
Income (Loss)
In the three months
ended March 31, 2020, the Company had net income of $2,214,999
compared to net income of $394,917 in the three months ended March
31, 2019.
Liquidity
and Capital Resources
Our real estate
assets have increased to $23,900,656 as of March 31, 2020 from
$23,884,704 as of December 31, 2019. This increase primarily
reflects a higher increase in the capitalized costs related to the
construction in progress and impairment recorded on the Black Oak
project than in the cost of sales. Our cash has decreased from
$2,883,318 as of December 31, 2019 to $2,178,577 as of March 31,
2020. Our liabilities declined from $13,649,449 at December 31,
2019 to $13,351,633 at March 31, 2020. Our total assets have
increased to $35,910,943 as of March 31, 2020 from $35,872,780 as
of December 31, 2019 due to the increase in restricted cash and
note receivables.
On November 23,
2015, SeD Maryland Development, LLC and Union Bank (formerly Xenith
Bank and The Bank of Hampton Roads) entered into a Construction
Loan Agreement, as amended by the Loan Modification Commitment
Letter, as further amended by the Loan Modification Commitment
Letter, dated as of August 30, 2017 and as further amended by the
Third Loan Modification Agreement, dated as of September 18, 2017
(the “Union Bank Revolving Loan”). The Union Bank
Revolving Loan had a balance of approximately $13,899 and the
credit limit of $11 million as of December 31, 2018. At December
31, 2017, the Union Bank Revolving Loan balance was approximately
$8.3 million and credit limit was $11.0 million. As a condition of
the Union Bank Revolving Loan, we were required to
maintain a minimum of $2,600,000 in an interest-bearing account
maintained by the lender as additional security for the loans.
The loan from Union Bank was repaid in
January 2019 and the agreement between Union Bank and SeD Maryland
Development was terminated on April 17, 2019.
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 rate on 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 up to
$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 the L/C is drawn down. The loan 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 Loan Agreement is secured by a
$2,600,000 collateral fund and a Deed of Trust issued to the Lender
on the property owned by SeD Maryland.
On June 18, 2020, Alset iHome
Inc. (previously known as SeD Home Inc. and then SeD
Home & REITs Inc.), entered into a Loan Agreement with M&T
Bank. Pursuant to this Loan Agreement, M&T Bank provided a
non-revolving loan to Alset iHome Inc. in an aggregate amount of up
to $2,990,000. Repayment of this loan is secured by a deed of trust
issued to the Lender on the property owned by certain subsidiaries
of Alset iHome Inc. The maturity date of this loan is May 1, 2022.
Certain subsidiaries of our company are the guarantors of this
loan.
Currently the Black
Oak project does not have any financing from third parties. On July
20, 2018, 150 CCM Black Oak Ltd. was
reimbursed $4,592,079 from the Harris County Improvement District
No. 17 for previous expenses incurred by 150
CCM Black Oak Ltd. in the development and
installation of infrastructure within the Black Oak project. The
future development timeline of Black Oak project is
based on multiple limiting conditions, such as the amount of the
funds raised from capital market, the loans from third party
financial institutions, and the government reimbursements. The
development proceed in stages and expenses will be contingent on
the amount of funding we will receive.
On November 29,
2016, Alset iHome Inc. entered into three $500,000
bonds for a total of $1.5 million that were to incur annual
interest at 8% and the principal was paid in full on November 29,
2019.
During the year
ended on December 31, 2017, Chan Heng
Fai provided non-interest loans of $7,156,680 for the
general operations of the Company. The loans are interest free, not
tradable, unsecured, and repayable on demand. On October 15, 2018,
a formal lending agreement between the Singapore eDevelopment Ltd
and Chan Heng Fai was executed.
Under the agreement, Chan Heng
Fai provides a lending credit limit of approximately $10
million for Singapore eDevelopment Ltd with an interest rate of 6%
per annum for the outstanding borrowed amount, which commenced
retroactively from January 1, 2018. The loans are still not
tradable, unsecured and repayable on demand. As of March 31, 2020
and December 31, 2019, the outstanding principal balance of the
Related Party Loan was $4,006,810 and $4,246,604, respectively.
Chan Heng Fai confirmed through a
letter that he would not demand the repayment within a year.
Interest started to accrue on January 1, 2018 at 6% per annum.
During the three months ended March 31, 2020 and 2019, the interest
expenses were $61,841 and $104,769, respectively. As of March 31,
2020 and December 31, 2019, the accrued interest total was $831,816
and $822,405, respectively.
On May 1, 2018,
Rajen Manicka, CEO and one of the directors of iGalen International
Inc. which holds 100% of iGalen Inc., provided a loan of
approximately $367,246 to iGalen Inc. (the “2018 Related
Party Loan”). The term of this loan is ten years. The 2018
Related Party Loan has an interest rate of 4.7% per annum. On March
8 and March 27, 2019, iGalen borrowed an additional $150,000 and
$30,000, respectively, from Rajen Manicka (the “2019 March
Related Party Loan”), with the same terms as the 2018 Related
Party Loan. As of March 31, 2020 and December 31, 2019, the total
outstanding principal balance of the 2018 and 2019 March Related
Party Loans was $546,397 and $546,397, respectively, and was
included in the Notes Payable – Related Parties balance on
the Company’s Consolidated Balance Sheets. During the three
months ended March 31, 2020 and 2019, the Company incurred $3,850
and $4,086 of interest expense,
respectively.
On August 13, 2019,
iGalen International Inc., which holds 100% of iGalen Inc.,
borrowed $250,000 from Decentralized Sharing Services, Inc., a
company whose sole shareholder and director is Chan Heng Fai, our
CEO. The term of the loan is 12 months, with an interest rate of
10% per annum. In addition, Decentralized Sharing Services, Inc.
received the right to receive 3% of any revenue received by iGalen
International Inc. for 99 years. During the three months
ended March 31, 2020, the Company incurred $6,164 of interest
expense and $0 from the right to receive 3% of revenue. The amount
outstanding on the loan as of March 31, 2020 and December 31, 2019
was $250,000 and $250,000, respectively. The accrued interest was
$15,822 and $9,589 as of March 31, 2020 and December 31, 2019. The
loan principal of $250,000 was paid off in June
2020.
On November 3,
2019, iGalen Inc. borrowed $160,000 from iGalen Funding Inc., a
company whose directors and shareholders include two members of the
Board of iGalen Inc. The term of the loan was 6 months, with an
interest rate of 10% per annum. During the three months ended March
31, 2020, the Company incurred $3,945 of interest expense. The
amount outstanding on the loan as of March 31, 2020 and December
31, 2019 was $160,000 and $160,000, respectively. The accrued
interest was $6,532 as of March 31, 2020 and $2,542 as of December
31, 2019. The expiration date was extended to November 3, 2020
after 6 months.
From January to
March 2020, the Company sold 10,000 shares of HotApp Blockchain to
international investors for a total of $5,000, which was booked as
additional paid-in capital. The Company held 500,821,889 shares of
the total outstanding shares of 506,898,576 before the sale. After
the sale, the Company still owns approximately 99% of HotApp
Blockchain’s total outstanding
shares.
Summary
of Statements of Operations for the Year ended December 31, 2019
and 2018
|
|
Year ended
December 31,
|
|
|
|
2019
|
2018
|
|
Revenue
|
$ 24,257,953
|
$ 20,380,940
|
|
Operating
Expenses
|
31,724,155
|
24,611,252
|
|
Other
Expense
|
(152,126)
|
(3,163,507)
|
|
Net
Loss
|
8,053,428
|
(7,490,568)
|
Revenue
The following table
sets forth period-over-period changes in revenues for each of our
reporting segments:
|
|
Years ended
December 31,
|
Change
|
||
|
|
2019
|
2018
|
Dollars
|
Percentage
|
|
Property
development
|
$ 22,855,446
|
$ 17,675,034
|
$ 5,180,412
|
29%
|
|
Biohealth
|
1,371,298
|
2,532,852
|
(1,161,554)
|
-46%
|
|
Digital
transformation technology
|
-
|
140,652
|
(140,652)
|
-100%
|
|
Other
|
31,209
|
32,402
|
(1,193)
|
-4%
|
|
Total
revenue
|
$ 24,257,953
|
$ 20,380,940
|
$ 3,877,013
|
19%
|
Revenue was
$24,257,953 for the year ended December 31, 2019, compared to
$20,380,940 for the year ended December 31, 2018. This increase in
revenue was primarily attributable to the property development
segment, specifically, an increase in property sales from the
Ballenger Project and the first sale in Black Oak Project. Property
sales were $22,855,446 in the year ended December 31, 2019 and
$17,675,034 in the year ended December 31, 2018. Revenue from
biohealth, digital transformation technology and other businesses
collectively decreased by approximately $1.3 million in the year
ended December 31, 2019 over the year ended December 31,
2018.
Operating
Expenses
The following table sets forth period-over-period
changes in cost of sales for each of our reporting
segments:
|
|
Years ended
December 31,
|
Change
|
||
|
|
2019
|
2018
|
Dollars
|
Percentage
|
|
Property
development
|
$ 19,510,275
|
$ 14,777,546
|
$ 4,732,729
|
32%
|
|
Biohealth
|
458,482
|
682,026
|
(223,544)
|
-33%
|
|
Digital
transformation technology
|
-
|
74,129
|
(74,129)
|
-100%
|
|
Other
|
-
|
-
|
-
|
-
|
|
Total cost of
sales
|
$ 19,968,757
|
$ 15,533,701
|
$ 4,435,056
|
29%
|
Cost of sales
increased to $19,968,757 for the year ended December 31, 2019 from
$15,533,701 for the year ended December 31, 2018. This change was
primarily driven by the property development segment, specifically,
due to the increase in sales from the Ballenger Run project and
Black Oak project. Capitalized construction expenses are allocated
to the sales. We anticipate that the total cost of sales will
increase as revenue increases.
The following table
sets forth period-over-period changes in operating expenses for
each of our reporting segments:
|
|
Years ended
December 31,
|
Change
|
||
|
|
2019
|
2018
|
Dollars
|
Percentage
|
|
Property
development
|
$ 6,064,563
|
$ 2,206,093
|
$ 3,858,470
|
175%
|
|
Biohealth
|
2,791,963
|
2,846,048
|
(54,085)
|
-2%
|
|
Digital
transformation technology
|
284,158
|
518,175
|
(234,017)
|
-45%
|
|
Other
|
2,614,714
|
3,507,235
|
(892,521)
|
-25%
|
|
Total
operating expenses
|
$ 11,755,398
|
$ 9,077,551
|
$ 2,677,847
|
29%
|
Operating expenses
increased to $11,755,398 for the year ended December 31, 2019 from
$9,077,551 for the year ended December 31, 2018. This change was
largely caused by an impairment reserve of approximately $1.5
million for Black Oak section one sale, mainly due to several
factors, such as high finance costs from the third-party financial
institution for the development of section one, high closing costs,
oversight and management fees for section one and high accumulated
internal interest from years 2014 to 2016. At the same time, the
biohealth operating expenses remained on a similar level and
digital transformation technology decreased.
Other
Income (Expense)
In the years ended
December 31, 2019 and 2018, the Company had other expense of
$152,126 and $3,163,507, respectively. In 2018, the unrealized loss
of $3,366,958 on investment in securities at fair value was the
major contributor to this expense. In 2019, the unrealized gain of
$320,032 in investment on securities at fair value was recorded in
Other Comprehensive Income. The other expenses in 2019 primarily
consisted of the foreign exchange transactions loss of $341,415.
The Company had foreign exchange transaction gain of $691,099 in
2018. The effect of foreign exchange rate changes on the
intercompany loans, which mostly consist of loans from Singapore to
the United States, is the reason for the significant fluctuation of
foreign exchange transaction Gain or Loss.
During 2019, the
interest expense of $358,203 from the loan Chan Heng Fai made to
the Company was the main contributor to the total interest expense.
Chan Heng Fai’s loan started to accrue interest on January 1,
2018 but has not been paid off yet. In 2017, Chan Heng Fai’s
loan was interest free.
Net
Loss
Net loss increased
from $7,490,568 in the year ended December 31, 2018 to $8,049,716
in the year ended December 31, 2019. Approximately $5.2 million of
impairment recorded on Black Oak project is the major reason for
this increased loss in
2019.
Liquidity
and Capital Resources
Our real estate
assets have decreased to $23,884,704 as of December 31, 2019 from
$38,911,184 as of December 31, 2018. This decrease primarily
reflects a higher increase in the cost of sales than in the
capitalized costs related to the construction in progress. Our cash
has increased from $1,387,209 as of December 31, 2018 to $2,883,318
as of December 31, 2019. Our liabilities declined from $19,500,842
at December 31, 2018 to $13,649,449 at December 31, 2019. Our total
assets have decreased to $35,872,780 as of December 31, 2019 from
$48,702,456 as of December 31, 2018.
Summary
of Cash Flows for the Three Months Ended March 31, 2020 and 2019
|
|
Three Months
Ended March 31,
|
|
|
|
2020
|
2019
|
|
Net
cash (used in) provided by operating activities
|
$ (129,004)
|
$ 5,937,581
|
|
Net
cash provided by investing activities
|
$ 101,963
|
$ -
|
|
Net
cash used in financing activities
|
$ (174,899)
|
$ (1,818,880)
|
Cash
Flows from Operating Activities
Net cash used in
operating activities was $129,004 in the first three months of
2020, as compared to net cash provided by operating activities of
$5,937,581 in the year 2019. The lower sales and more property
development expenses explain the increased cash flow used in
operating activities. We received approximately $3 million from
sales in the Ballenger Run project and invested approximately $2.4
million in land development projects of both Ballenger Run and
Black Oak during the three months ended March 31,
2020.
Cash Flows from Investing
Activities
In 2020, we
received $303,349 from the liquidation of Global Opportunity Fund.
We also invested $200,000 on a promissory party note of a related
party.
Cash
Flows from Financing Activities
Net cash used in
financing activities was $174,899 and $1,818,880 for the three
months ended March 31, 2020 and 2019, respectively. During the
three months ended March 31, 2020, we received cash proceeds of
$5,000 from the sale of our HotApp shares to individual investors.
The Company also distributed $197,400 to one minority interest
investor and borrowed $17,501 from related party. During three
months ended March 31, 2019, we received cash proceeds of $184,500
from the sale of our HotApp shares to individual investors, repaid
remaining $13,899 back to the Union Bank loan and repaid
approximately $2 million of related party
loans.
Summary of Cash Flows for the Years ended
December 31, 2019 and 2018
|
|
2019
|
2018
|
|
Net
cash provided by operating activities
|
$ 5,958,434
|
$ 8,025,640
|
|
Net
cash used in investing activities
|
$ (130,632)
|
$ (85,645)
|
|
Net
cash used in financing activities
|
$ (3,986,857)
|
$ (6,593,932)
|
Cash
Flows from Operating Activities
Net cash provided
by operating activities was $8.0 million in 2018, as compared to
$6.0 million provided in 2019. This decrease was primarily due to
the cash reimbursement of $4.6 million we received in 2018 from
district for Black Oak previous construction costs. Cash spending
on real estate construction were $8.4 and $8.6 during years ended
December 31, 2019 and 2018, respectively. With the partial
completion of phase one of the Black Oak project, development speed
was adjusted with the market need and development costs decreased
as well. Cash used in biohealth segment operating activities were
$1.2 million and $1.6 million during the years ended December 31,
2019 and 2018, respectively. Cash spending on other businesses was
similar in both periods.
Cash Flows from Investing
Activities
In 2018, we
invested $55,000 in a joint venture called Sweet Sense Inc. for the
development, manufacture, and global distribution of the new sugar
substitute. In 2019, our investment in the joint venture was
$36,000 and we spent $91,000 to acquire this joint
venture.
Cash
Flows from Financing Activities
Net cash used in
financing activities was $6.6 million in 2018, as compared to net
cash of $4 million used in 2019. In 2018, we borrowed $1.6 million
from a related party for operations and at the same time, repaid
$8.3 million of the Union Bank Revolving Loan. In 2019 we
repaid $3.6 million of related party loan, distributed $1.1 million
to one minority investor and repaid $1.5 million of bonds.
Additionally, we received $1.9 million from issuance of common
shares.
Real
Property Financing Arrangements
Through Singapore
eDevelopment, we have three property development projects.
Ballenger Run and Black Oak projects are the major projects. The
following tables show our forecasts of the phases of the
developments and costs for each phase of
development:
|
Ballenger
Run
|
Estimated
Construction Costs
|
Expected
Completion Date
|
|
Phase
1
|
$13,786,000
|
Completed
|
|
Phase
2
|
10,210,000
|
Completed
|
|
Phase
3
|
10,170,000
|
December
2020
|
|
Phase
4
|
3,460,000
|
July
2021
|
|
Phase
5
|
1,690,000
|
December
2021
|
|
Total
|
$39,316,000
|
|
The timing set
forth above reflects our current plan for the development of our
Black Oak project; however, we are presently exploring alternate
plans for Black Oak, which could lead to an expansion of the depth
and breadth of our involvement in this project, depending on market
interest, the outcome of discussions with potential partners and
the availability of capital. Should we expand or otherwise alter
our plans at the Black Oak project, the later stages of such
project may have different time frames and
costs.
Our Perth project
in Australia is relatively small, representing approximately 2% of
our total projects included in the estimated property costs and
forecasted revenue, and the development plan of this project is
contingent on the local market. We have been monitoring the local
market, which has seen no significant improvement to date, and we
will consider development once it is more confident in the
market.
Black
Oak
Black Oak is a
162-acre land infrastructure and subdivision project situated in
Magnolia, Texas, north of Houston. This project is owned by certain
subsidiaries of Singapore eDevelopment.
On July 20, 2018,
150 CCM Black Oak Ltd received $4,592,079 in reimbursement for
previous construction costs incurred in the land development. Of
this amount, $1,650,000 will remain on deposit in the District's
Capital Projects Fund for the benefit of 150 CCM Black Oak Ltd and
will be released upon receipt of the evidence of (a) execution of a
purchase agreement between 150 CCM Black Oak Ltd and a home builder
with respect to the Black Oak development and (b) completion,
finishing and making ready for home construction of at least 105
unfinished lots in the Black Oak development. In 2019, $1,112,861
was released to reimburse the construction costs leaving a balance
of $90,394 on December 31, 2019. In the first three months of 2020,
the remaining balance was released leaving $0 on March 31,
2020.
Ballenger
Run
In November 2015,
through LiquidValue Development, we completed the
$15.65 million acquisition of Ballenger Run, a 197-acre land
subdivision 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 (the “Lot Purchase
Agreements”).
On November 23,
2015, SeD Maryland Development, LLC and Union Bank (formerly Xenith
Bank and The Bank of Hampton Roads) entered into a Construction
Loan Agreement, as amended by the Loan Modification Commitment
Letter, as further amended by the Loan Modification Commitment
Letter, dated as of August 30, 2017 and as further amended by the
Third Loan Modification Agreement, dated as of September 18, 2017
(the “Union Bank Revolving Loan”). The Union Bank
Revolving Loan closed simultaneous with the settlement on the land
on November 23, 2015, and provided (i) for a maximum of $11 million
outstanding; (ii) maturity on December 31, 2019; and (iii) an
$800,000 letter of credit facility, with an annual rate of 15% on
all issued letters of credit. On March 31, 2020 and
2019, the principal balances were $0 and $13,899,
respectively. As part of the transaction, we 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. The unamortized debt discounts were $0 on both March
31, 2020 and December 31, 2019.
The
loan was secured by a deed of trust on the property, a minimum
$2,600,000 of collateral cash, and a Limited Guaranty Agreement
with SeD Ballenger. In September 2017, SeD Maryland Development,
LLC and the Union Bank modified the related Revolving Credit Note,
which increased the original principal amount from $8,000,000 to
$11,000,000 and extended the maturity date of the loan and letter
of credit to December 31, 2019.
The Union Bank
Revolving Loan was intended 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. On April 17, 2019, SeD Maryland
Development LLC and Union Bank terminated the
agreement.
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 is 1.5% per annum on the face amount of the L/C.
Other standard lender fees will apply in the event the 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 $2.6 million collateral fund and a Deed of
Trust issued to the Lender on the property owned by SeD
Maryland.
LIBOR
is expected to be discontinued after 2021. Our line of credit
agreement provides procedures for determining a replacement or
alternative rate in the event that LIBOR is unavailable. However,
there can be no assurances as to whether such replacement or
alternative rate will be more or less favorable than LIBOR. We
intend to monitor the developments with respect to the potential
phasing out of LIBOR after 2021 and will work with our lenders to
ensure any transition away from LIBOR will have minimal impact on
our financial condition. We, however, can provide no assurances
regarding the impact of the discontinuation of LIBOR on the
interest rate that we would be required to pay or on our financial
condition.
As of March
31, 2020 and December 31, 2019, the principal balance of the
loan was $0. During 2019, as part of the transaction,
the Company incurred loan origination fees and closing fees in the
amount of $381,823 and capitalized them into
construction in process.
Equity
Security Investments
Investment Securities at Fair Value
The Company
commonly holds investments in equity securities with readily
determinable fair values, equity investments without readily
determinable fair values, investments accounted for under the
equity method, and investments at cost. Certain of the
Company’s investments in marketable equity securities and
other securities are long-term, strategic investments in companies
that are in various stages of development.
Prior to the
adoption of Financial Accounting Standards Board
(“FASB”) Accounting Standards Update
(“ASU”) 2016-01, Financial Instruments-Overall (Subtopic
825-10): Recognition and Measurement of Financial Assets and
Financial Liabilities, investments in equity securities
were classified as either 1) available-for-sale securities, stated
at fair value, and unrealized holding gains and losses, net
of related tax
effects, were recorded directly to accumulated other comprehensive
income (loss) or 2) trading securities, stated at fair value, and
unrealized holding gains and losses, net of related tax benefits,
were recorded directly to net income (loss). With the adoption of
ASU 2016-01, investments in equity securities are still
stated at fair value, quoted by market prices, but all unrealized
holding gains and losses are credited or charged to net income
(loss) based on fair value measurement as the respective reporting
date.
The Company
accounts for certain of its investments in equity securities in
accordance with ASU 2016-01 Financial Instruments—Overall (Subtopic
825-10): Recognition and Measurement of Financial Assets and
Financial Liabilities (“ASU 2016-01”). In
accordance with ASU 2016-01, the Company records all equity
investments with readily determinable fair values at fair value and
has elected the Fair Value Option (“FVO”) for certain
of its equity investments without readily determinable fair values,
utilizing a Black Scholes model for valuation. Unrealized holding
gains and losses in fair value are recognized as Other
Non-Operating Income, net in the Company’s Consolidated
Statements of Operation and Comprehensive Income.
Determining the
appropriate fair-value model and calculating the fair values of the
Company’s investments in equity securities requires
considerable judgment. Any change in the estimates used may cause
their values to be higher or lower than that reported. The
assumptions used in the model require significant judgment by
management and include the following: volatility, expected term,
risk-free interest rate, and dividends.
Due to the inherent
uncertainty of these estimates, these values may differ materially
from the values that would have been used had a ready market for
these investments existed.
The Company has
significant influence over Document Security Systems, Inc.
(“DSS”) as our Chief Executive Officer is the
beneficial owner of approximately 18.3% of the
outstanding shares of DSS and is the Chairman of the Board of
Directors of DSS. The Company did not have a controlling interest
and therefore the Company’s investment would be accounted for
under equity method accounting or could elect the fair value option
accounting.
The Company had
significant influence over Amarantus BioScience Holdings
(“AMBS”) as the Company is the beneficial owner of
approximately 19.5% of the common stock of AMBS. The
Company did not have a controlling interest and therefore the
Company’s investment would be accounted for under equity
method accounting or could elect the fair value option
accounting.
The Company had
significant influence over Holista CollTech Limited
(“Holista”) as the Company and its CEO are the
beneficial owner of approximately 16.8% of the
outstanding shares of Holista and our CEO has a position on the
Board of Directors of Holista. The Company did not have a
controlling interest and therefore the Company’s investment
would be accounted for under equity method accounting or could
elect the fair value option accounting.
The Company has
elected the fair value options for the equity securities noted
above that would otherwise be accounted for under the equity method
of accounting to better match the measurement of assets and
liabilities in the Consolidated Statements of Operations. AMBS,
Holista and DSS are publicly traded companies and fair value of
these equity investments is determined by the quoted stock prices.
On March 31, 2020 and December 31, 2019,
the fair value (calculated by market trading prices on the end
dates of the periods) of total held equity stock of Amarantus,
Holista and DSS were $3,455,658 and
$2,973,582, respectively.
The
Company accounts for certain of its investments in real estate
funds without readily determinable fair values in accordance with
ASU No. 2015-07, Fair Value Measurement (Topic 820): Disclosures
for Investments in Certain Entities That Calculate Net Asset Value
per Share (or Its Equivalent) (“ASC 820”). As of March
31, 2020 and December 31, 2019 the Company maintains an investment
in a real estate fund, The Global Opportunity Fund. This fund
invests primarily in the U.S. and met the criteria within ASC 820.
Chan Heng Fai, the Chairman and CEO of the Company, is also one of
the directors of the Global Opportunity Fund. The fair values of
the investments in this class have been estimated using the net
asset value of the Company’s ownership interest in Global
Opportunity Fund. The fund was closed during November 2019 and is
being liquidated. As of December 31, 2019, the Company recorded a
receivable $307,944 from the Global Opportunity Fund. These monies
were received on January 23, 2020.
The
Company invested $50,000 in a convertible promissory note of
Sharing Services, Inc. (“Sharing Services Convertible
Note”), a company quoted on the US OTC market. The value of
the convertible note was estimated by management using a
Black-Scholes valuation model.
On
March 2, 2020, the Company received warrants to purchase shares of
American Medical REIT Inc. (“AMRE”), a related party
private startup company, after lent $200,000 loan by a promissory
note. The Company holds a stock option to purchase 250,000 shares
of Vivacitas’ common stock at $1 per share at any time prior
to the date of public offering. As of March 31, 2020 and December
31, 2019, both AMRE and Vivacitas were private companies. Based on
the management’s analysis, the fair value of the warrants and
the stock option was de minimis as of March 31, 2020 and December
31, 2019.
The
changes in the fair values of the investment were recorded directly
to accumulated other comprehensive income (loss). Due to the
inherent uncertainty of these estimates, these values may differ
materially from the values that would have been used had a ready
market for these investments existed.
Investment Securities at Cost
The Company has a
holding of 13.1% in Vivacitas Oncology Inc.
(“Vivacitas”), a private company that is currently not
listed on an exchange, with a purchase cost of $200,128. Vivacitas
was acquired after the adoption of ASU 2016-01. The Company applied
ASC 321 and elected the measurement alternative for equity
investments that do not have readily determinable fair values and
do not qualify for the practical expedient in ASC 820 to estimate
fair value using the NAV per share. Under the alternative, they
measure Vivacitas at cost, less any impairment, plus or minus
changes resulting from observable price changes in orderly
transactions for an identical or similar investment of the same
issuer.
There has been no
indication of impairment or changes in observable prices via
transactions of similar securities and is still carried at a
cost.
Investment Securities under Equity Method
Accounting
Sweet Sense
Inc.
On April 25, 2018,
BioLife Sugar, Inc. ("BioLife"), a subsidiary consolidated under
Singapore eDevelopment, entered into joint venture agreement with
Quality Ingredients, LLC ("QI"). The agreement created an entity
called Sweet Sense, Inc. ("Sweet Sense"), which was 50% owned by
BioLife and 50% owned by QI. Management believes its
investment of 50% represents significant influence over Sweet Sense
and accounts for the investment under the equity method of
accounting. As of December 31, 2018, BioLife had contributed
$55,000 to the joint venture and recorded its proportionate share
losses totaling $49,687 recorded as loss
on investment in security by equity method in the Condensed
Consolidated Statements of Operations and Other Comprehensive Loss.
As of September 30, 2019, the total investment in joint venture was
equal to $91,000 and the proportionate losses totaled $76,118.
During the nine months ended September 30, 2019, the Company
recorded its proportionate share of losses of $30,166 as loss on
investment in security by equity method in the Condensed
Consolidated Statements of Operations and Other Comprehensive
Loss.
As of November 8,
2019, the total investment in joint venture was equal to $91,000
and the proportionate losses totaled $90,001. On November 8, 2019,
Impact BioMedical Inc., one of our subsidiaries, purchased 50% of
Sweet Sense from QI for $91,000. Consequently, Sweet Sense is now a
53.5%-owned subsidiary of our company, and therefore, is now
consolidated into the consolidated financial
statements.
VeganBurg International Pte. Ltd.
On February 5,
2020, SeD Capital Pte Ltd, a subsidiary of the Company, invested
$2,133 in VeganBurg International Pte. Ltd. (“VeganBurg
International”), a related party company, in exchange for 30%
ownership of such company. Chan Heng Fai, our founder, Chairman and
Chief Executive Officer, is a member of the Board of Directors of
VeganBurg International and has significant influence on such
company. VeganBurg International is focused on promoting
environmentally friendly, healthy plant-based burgers in the Asian
market.
Off-Balance
Sheet Arrangements
We do not have any
off-balance sheet arrangements that are reasonably likely to have a
current or future effect on our financial condition, revenues,
results of operations, liquidity or capital
expenditures.
Impact
of Inflation
We believe that
inflation has not had a material impact on our results of
operations for the three months ended March 31,
2020 or the years ended December 31, 2019 and
2018. We cannot assure you that future inflation will
not have an adverse impact on our operating results and financial
condition.
Impact
of Foreign Exchange Rates
The effect of
foreign exchange rate changes on the intercompany loans (under ASC
830), which mostly consist of loans from Singapore to the United
States and which were approximately $35.5 million,
$35.8 million and $41.1 million on March 31,
2020, December 31, 2019 and 2018,
respectively, are the reason for the significant fluctuation of
foreign currency transaction Gain or Loss on the Consolidated
Statements of Operations and Other Comprehensive Income. Because
the intercompany loan balances between Singapore and United States
will remain at approximately $40 million over the next year, we
expect this fluctuation of foreign exchange rates to still
significantly impact the results of operations in 2020, especially
given that the foreign exchange rate may and is expected to be
volatile. If the amount of intercompany loan is lowered in the
future, the effect will also be reduced. However, at this moment,
we do not expect to repay the intercompany loans in the short
term.
Emerging
Growth Company Status
We are an
“emerging growth company,” as defined in the JOBS Act,
and we may take advantage of certain exemptions from various
reporting requirements that are applicable to other public
companies that are not “emerging growth companies.”
Section 107 of the JOBS Act provides that an “emerging
growth company” can take advantage of the extended transition
period provided in Section 7(a)(2)(B) of the Securities Act
for complying with new or revised accounting standards. In other
words, an “emerging growth company” can delay the
adoption of certain accounting standards until those standards
would otherwise apply to private companies. We have elected to take
advantage of these exemptions until we are no longer an emerging
growth company or until we affirmatively and irrevocably opt out of
this exemption.
Controls
and Procedures
We are not
currently required to maintain an effective system of internal
controls as defined by Section 404 of the Sarbanes-Oxley Act. Only
in the event that we are deemed to be a large accelerated filer or
an accelerated filer would we be required to comply with the
independent registered public accounting firm attestation
requirement. Further, for as long as we remain an emerging growth
company as defined in the JOBS Act, we intend to take advantage of
certain exemptions from various reporting requirements that are
applicable to other public companies that are not emerging growth
companies including, but not limited to, not being required to
comply with the independent registered public accounting firm
attestation requirement.
Management is
responsible for the preparation and fair presentation of the
financial statements included in this prospectus. 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, 2019. 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 our
company’s internal control over financial reporting as of
December 31, 2019, management determined that our
company did not maintain effective controls over financial
reporting due to having a limited staff with U.S. GAAP and SEC
reporting experience. Management determined that the ineffective
controls over financial reporting constitute a material weakness.
To remediate such weaknesses, we plan to appoint additional
qualified personnel with financial accounting, GAAP and SEC
experience.
This prospectus
does not include an attestation report of our 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 SEC that permit us to provide only management’s
report in this prospectus.
BUSINESS
Our
Company
We are a
diversified holding company principally engaged through its
subsidiaries in property development, digital transformation
technology and biohealth activities with operations in the United
States, Singapore, Hong Kong, Australia and
South Korea. We manage our three principal businesses
primarily through our 49.1%-owned subsidiary,
Singapore eDevelopment Limited, a public company
traded on the Singapore Stock Exchange. Through this subsidiary
(and indirectly, through other public and private U.S. and Asian
subsidiaries), we are actively developing two significant real
estate projects near Houston, Texas and in Frederick, Maryland in
our property development segment. We have designed applications for
enterprise messaging and e-commerce software platforms in the
United States and Asia in our digital transformation technology
business unit. Our recent foray into the biohealth segment includes
research to treat neurological and immune-related diseases,
nutritional chemistry to create a natural sugar alternative,
research regarding innovative products to slow the spread of
disease, and natural foods and supplements. We opportunistically
identify global businesses for acquisition, incubation and
corporate advisory services, primarily related to our operating
business segments. We also have ownership interests outside of
Singapore eDevelopment, including an indirect 16.8%
equity interest in Holista CollTech Limited, a public Australian
company that produces natural food ingredients, and an indirect
13.1% equity interest in Vivacitas Oncology Inc., a
U.S.-based biopharmaceutical company but neither of which company
has material asset value relative to our principal businesses.
Under the guidance of Chan Heng Fai, our founder, Chairman and
Chief Executive Officer, who is also our largest stockholder, we
have positioned ourselves as a participant in these key markets
through a series of strategic transactions. Our growth strategy is
both to pursue acquisition opportunities that we can leverage on
our global network using our capital and management resources and
to accelerate the expansion of our organic businesses.
We generally
acquire majority and/or control stakes in innovative and promising
businesses that are expected to appreciate in value over time. Our
emphasis is on building businesses in industries where our
management team has in-depth knowledge and experience, or where our
management can provide value by advising on new markets and
expansion. We have at times provided a range of global capital and
management services to these companies in order to gain access to
Asian markets. We have historically favored businesses that improve
an individual’s quality of life or that improve the
efficiency of businesses through technology in various industries.
We believe our capital and management services provide us with a
competitive advantage in the selection of strategic acquisitions,
which creates and adds value for our company and our
stockholders.
We
intend at all times to operate our business in a manner as to not
become inadvertently subject to the regulatory requirements under
the Investment Company Act by, among other things, (i) utilizing
the net proceeds of this offering to purchase all or substantially
all of an acquisition target’s voting stock, and only in
limited cases purchase less than 51% of the voting stock; (ii)
monitoring our operations and our assets on an ongoing basis in
order to ensure that we own no less than a majority, or other
control, of Singapore eDevelopment and that Singapore
eDevelopment, in turn, owns no less than a majority, or other
control, of LiquidValue Development and other
such subsidiaries with significant assets and operations; and (iii)
limiting additional equity investments from the net proceeds of
this offering into affiliated companies including our
majority-owned and/or controlled operating
subsidiaries, except in special limited circumstances.
Additionally, we will continue to hire in-house management
personnel and employees with industry background and experience,
rather than retaining traditional investment portfolio managers to
oversee our group of companies.
Our
Current Operations
Property
Development Business
Our
real estate business is primarily conducted through our indirect
subsidiary, LiquidValue Development Inc., a
99.9%-owned U.S. subsidiary of Singapore eDevelopment, which owns,
operates and manages real estate development projects with a focus
on land subdivision developments (LiquidValue Development was
formerly known as “SeD Intelligent Home Inc.”).
We generally contract out all real estate development activities,
working with engineers, surveyors, architects and general
contractors through each phase, including planning, design and
construction. Once the contractors complete the land development,
we then sell the developed lots to builders for the construction of
new homes. Where possible, we attempt to pre-sell these lots before
they are fully developed. LiquidValue
Development’s main assets are two such subdivision
development projects, one near Houston, Texas (known as Black Oak),
and one in Frederick, Maryland (known as Ballenger
Run).
Houston, Texas
Property. Black Oak is a land infrastructure and subdivision
development project consisting of 162 acres, currently projected to
have approximately 550 to 600 units, as we are
presently attempting to revise the site plan at Black Oak to allow
for such number of residential lots. Through a partnership with 150
CCM Black Oak, Ltd., we had contracts to purchase seven contiguous
parcels of land. Our initial equity ownership in 150 CCM Black Oak,
Ltd. was $4.3 million for 60% ownership in the partnership. Since
then we have increased our ownership to 100%. We are presently in
negotiations with multiple builders, and we anticipate that our
involvement in this project will take approximately three to five
additional years to complete. On January 18, 2019, the first sale
of lots at Black Oak was completed and 124 lots were
sold.
The site plan at
Black Oak is being revised to allow for approximately 550 to
600 residential lots of varying sizes. Since February 2015,
we have completed several important phases of the project,
including property clearing, grading, pavement of roads and
compliance with the local improvement district to ensure
reimbursement of these costs. In addition to the recent sale of 124
lots, we are presently in negotiations with multiple builders for
lot takedowns or, in some cases, entire phases of the
project.
The estimated
construction costs and completion date for each phase are as
follows:
|
Black
Oak
|
Estimated
Construction Costs
|
Expected
Completion Date
|
|
Phase
1
|
$ 7,080,000
|
Completed
|
|
Phase
2
|
330,671
|
November
2020
|
|
Phase
3
|
422,331
|
March
2021
|
|
Phase
4
|
142,788
|
April
2022
|
|
Phase
5
|
3,268,790
|
January
2021
|
|
Total
|
$ 11,268,790
|
|
The
timing set forth above reflects our current plan for the
development of our Black Oak project; however, we are presently
exploring alternate plans for Black Oak, which could lead to an
expansion of the depth and breadth of our involvement in this
project, depending on market interest, the outcome of discussions
with potential partners and the availability of capital. Should we
expand or otherwise alter our plans at the Black Oak project, the
later stages of such project may have different time frames and
costs.
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 is held in escrow. 150 CCM Black Oak, Ltd. will
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
project was completed for $6,175,000 and the community
enhancement fee equal to $310,000 was delivered to escrow account.
An impairment of real estate of approximately $1.5
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
June 30, 2019, the Company recorded approximately $3.9 million of
impairment on the Black Oak project based on discounted estimated
future cash flows after updating the projection of market value of
the project.
On December 31,
2019, the Company recorded approximately $1.3 million of additional
impairment on the Black Oak project based on discounted estimated
future cash flows after updating the projected cost of the
project.
The
Black Oak project has applied for reimbursement of certain costs
for construction of roads, sewers, water and other basic
requirements. While we may be entitled to reimbursements from a
local improvement district, the amount and timing of such payments
is uncertain. The timing of such potential reimbursements will be
impacted by certain bond sales by the Harris County Improvement
District No.17 from time to time.
On July
20, 2018, 150 CCM Black Oak Ltd received $4,592,079 in
reimbursement for previous construction costs incurred in the land
development. Of this amount, $1,650,000 will remain on deposit in
the District's Capital Projects Fund for the benefit of 150
CCM Black Oak Ltd and will be released upon receipt of the
evidence of (a) execution of a purchase agreement between 150
CCM Black Oak Ltd and a home builder with respect to the
Black Oak development and (b) completion, finishing and making
ready for home construction of at least 105 unfinished lots in the
Black Oak development. In 2019, $1,112,861 was
released to reimburse the construction costs leaving a balance of
$90,394 on December 31, 2019. In the first three
months of 2020, the remaining balance was released, leaving $0 as
of March 31, 2020.
Frederick,
Maryland Property. In November
2015, through LiquidValue Development, we acquired
Ballenger Run, a land subdivision development consisting of 197
acres, for $15.65 million. This property is presently zoned for 479
entitled residential lots and 210 entitled multi-family units. We
anticipate that our involvement in this project will take
approximately three years from the date of this prospectus. We
expect to generate approximately $69 million (prior to costs) in
revenue from Ballenger Run through the sale of the developed lots
based on current sales agreements. However, there can be no
assurance that this level of revenue will be attained, should we
fail to attain certain goals, to meet certain conditions or if
market prices for this development unexpectedly begin to
drop.
On
May 28, 2014, the RBG Family, LLC entered into an 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 (“SeD Maryland”) 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 (the “Lot Purchase Agreements”).
SeD
Maryland’s acquisition of the 197 acres was funded in part
from a $5.6 million deposit from 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. SeD
Maryland is 83.55% owned by SeD Ballenger and 16.45% by
CNQC.
Our
indirect subsidiary SeD Development Management, LLC is the manager
of Ballenger Run pursuant to a Management Agreement dated as of
July 15, 2015, by and between SeD Maryland and SeD Development
Management, LLC (the “Management Agreement”). Under the
Management Agreement, SeD Development Management, LLC manages,
operates and administers SeD Maryland’s day-to-day
operations, business and affairs, subject to the supervision of SeD
Maryland, and shall have only such functions and authority as SeD
Maryland may delegate to it. For performing these services, SeD
Development Management, LLC is entitled to a base management fee of
five percent of the gross revenue (including reimbursements) of
Ballenger Run. The base management fee is earned and paid in
monthly installments of $38,650, subject to adjustment after gross
revenue is determined. SeD Development Management, LLC may also
earn incentive compensation of 20% of any profit distributions to
SeD Maryland above a 30% pre-tax internal rate of
return.
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 (the
“Project Development and Management Agreement”).
Pursuant to that agreement, MacKenzie Development Company, LLC
assigned its rights and obligations to this agreement to Adams
Aumiller Properties, LLC on September 9, 2017. Pursuant to the
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 have been sold. The monthly aggregate fee
will then adjust 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 the
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. Finally, SeD Maryland will
also pay a fee of $50,000 upon the sale of certain portions of the
parcel.
We
anticipate that the completion of our involvement in this project
will take approximately three years from the date of this
prospectus.
Revenue
from Ballenger Run is anticipated to come from three main
sources:
●
sale
of 479 entitled and constructed residential lots to
NVR;
●
sale
of the lot for the 210 entitled multi-family units;
and
●
sale
of 479 front foot benefit assessments.
The estimated
construction costs and completion date for each phase are as
follows:
On November 23, 2015, SeD Maryland and Union Bank
(formerly Xenith Bank and The Bank of Hampton Roads) entered into a
Construction Loan Agreement, as amended by the Loan Modification
Commitment Letter, as further amended by the Loan Modification
Commitment Letter, dated as of August 30, 2017 and as further
amended by the Third Loan Modification Agreement, dated as of
September 18, 2017 (the “Union Bank Revolving Loan”).
The Union Bank Revolving Loan closed simultaneous with the
settlement on the land on November 23, 2015, and provided (i) for a
maximum of $11 million outstanding; (ii) maturity on December 31,
2019; and (iii) an $800,000 letter of credit facility, with an
annual rate of 15% on all issued letters of credit. On
March 31, 2020 and
2019, the principal balances were $0 and $13,899,
respectively. As part of the transaction, we 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. The unamortized debt discounts were $0 on both
March 31, 2020 and
December 31, 2019.
The
loan was secured by a deed of trust on the property, $2,600,000 of
collateral cash, and a Limited Guaranty Agreement with SeD
Ballenger. In September 2017, SeD Maryland and the Union Bank
modified the related Revolving Credit Note, which increased the
original principal amount from $8,000,000 to $11,000,000 and
extended the maturity date of the loan and letter of credit to
December 31, 2019.
The
Union Bank Revolving Loan was intended 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.
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 current outstanding Letters
of Credit (L/C). The L/C collateral was released in June, 2019,
when all L/Cs were transferred to the M&T Bank L/C
Facility.
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 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 loan 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 Loan Agreement is secured by $2.6 million collateral fund and a
Deed of Trust issued to the Lender on the property owned by SeD
Maryland.
As
of March 31, 2020 and December 31, 2019, the principal
balance of the loan was $0, respectively. As part of
the transaction during 2019, we incurred loan
origination fees and closing fees in the amount of $381,823 and
capitalized them into construction in process.
The proceeds from the Land
Development Loan and Letter of Credit Facility will be used in
connection with the Ballenger Run project, including the
development of certain single-family lots. The Loan Agreement
contains standard representations and warranties. LiquidValue
Development Inc. will serve as the guarantor to the Land
Development Loan and Letter of Credit Facility and has executed an
Environmental Indemnification Agreement in favor of the
Lender.
Expenses from Ballenger Run include 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 $55 and $56
million. We may also encounter expenses which we have not
anticipated, or which are higher than presently
anticipated.
We
are currently in the third of five phases for
completion of this project.
Sale of Residential Lots to NVR
The residential lots were contracted for sale
under the Lot Purchase Agreements with NVR. NVR is a home builder
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 iHome Inc.
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
|
|
Single
Family Detached Large
|
85
|
|
Single
Family Detached Small
|
89
|
|
Single
Family Detached Neo Traditional
|
33
|
|
Single
Family Attached 28’ Villa
|
121
|
|
Single
Family Attached 20’ End Unit
|
46
|
|
Single
Family Attached 16’ Internal Unit
|
105
|
|
Total
|
479
|
There are five different types of Lot Purchase
Agreements, which have generally the same terms except for the
price and unit details for each type of lot. Under the Lot Purchase
Agreements, NVR has agreed to purchase 30 available lots per
quarter. The Lot Purchase Agreements 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 survey, grading, utilities
installation, paving, and other infrastructure and engineering. The
sale of 13 model lots to NVR began in May 2017. NVR has begun
marketing lots and has commenced sales. In the event NVR does not
purchase the lots under the Lot Purchase Agreements, SeD Maryland
would be entitled to keep the NVR deposit and terminate the Lot
Purchase Agreements. Should SeD Maryland breach a Lot Purchase
Agreement, 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 Lot Purchase Agreements, and NVR would be able to seek
specific performance of the Lot Purchase Agreements, as well as any
other rights available at law or in equity. 27 lots
were sold in the three months ended March 31,
2020, compared to 123 lots sold in the year ended December 31,
2019.
On December 31,
2018, SeD Maryland entered into the Third Amendment to the Lot
Purchase Agreement (the “Third Amendment”) for
Ballenger Run with NVR. Pursuant to the Third Amendment, SeD
Maryland and NVR agreed that the number of certain lots that SeD
Maryland will sell to NVR (the 28 feet wide villa lots) would be
increased from the previously agreed 85 lots to a total of 121
lots. This property was previously zoned for 443 entitled
residential lots, 210 entitled multi-family units and 200 entitled
continuing care retirement community units approved for 20 years
from the date of a Developers Rights and Responsibilities
Agreement, dated as of October 8, 2014, as amended on September 6,
2016. SeD Maryland received the required zoning approval to change
the number of lots in July 2019. As a result of this Third
Amendment and the receipt of the required government approval, we
now plan to develop 479 entitled residential lots, 210 entitled
multi-family units and no continuing care retirement community
units at the Ballenger location.
SeD
Maryland and NVR agreed that NVR would pay SeD Maryland a $100,000
increase in the current deposit for the purchase of lots within
five business days of the Third Amendment, and that an additional
increase in the deposit in the amount of $220,000
would be made once the needed approvals are received. The
required approvals was submitted to NVR in April, 2020 and the
deposit was received. Such deposits are
non-refundable.
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
Through LiquidValue Development and
its subsidiaries, we have established a front foot benefit
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
will 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. Front
foot benefit assessments are subject to amendment by regulatory
agencies, legislative bodies, and court rulings, and any changes to
front foot benefit assessments could cause us to reassess these
projections.
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.
K-6 Grade School Site
In
connection with getting the necessary approvals for the Ballenger
Project, we agreed to transfer 30 acres of land that abut the
development for the construction of a local K-6 grade school. We
will not be involved in the construction of the
school.
Potential
Future Projects
In addition to these two main projects, we are
embarking on residential construction activities in partnership
with U.S. homebuilders, and have commenced discussions to acquire
smaller U.S. residential construction projects. These projects may
be within both the for-sale and for-rent markets. We
consider projects in diverse regions across the United States, and
maintain longstanding relationships with local owners, brokers,
attorneys and lenders to source projects. We will continue to focus
on off-market deals and raise appropriate financing for attractive
development opportunities. We believe these initiatives will
provide a set of solutions to stabilize the long term revenue
associated with property development in the United States and
create new ancillary service opportunities and revenue from this
business.
Our property
development business is headquartered in Bethesda, Maryland. For
the three months ended March 31, 2020 and years ended December 31,
2019 and 2018, our property development business accounted for
100%, 94% and 87% of our total revenues,
respectively.
American
Medical REIT Inc.
In addition to our
majority-owned and/or controlled real estate projects, we have
recently been involved in the creation of a real estate company in
which we will hold a minority position. On March 3, 2020, our
subsidiary LiquidValue Asset Management Pte Ltd.
(“LVAM”) entered into a binding term sheet with DSS
Securities Inc., AMRE Asset Management, Inc. (“AAMI”)
and American Medical REIT Inc. (“AMRE”). It was agreed
that LVAM would acquire a 35% ownership interest in AAMI. DSS
Securities Inc. agreed to acquire 52.5% of AAMI. AMRE Tennessee,
LLC, an entity controlled by an officer and director of AAMI, will
own 12.5% of the remaining outstanding shares of AAMI. LVAM is a
Singapore limited company. LVAM is an 82% owned subsidiary of
Singapore eDevelopment Limited. DSS Securities Inc. is a subsidiary
of Document Security Systems, Inc. Chan Heng Fai is the Chairman of
the Board of Document Security Systems, Inc. and its largest
shareholder, with shares owned both personally and through our
company’s subsidiaries.
AAMI currently has
a 93% equity interest in AMRE. AAMI is a real estate investment
trust management company that advises AMRE in its financing
strategies, policy-making, and capital structure. AMRE provides
financing solutions to market-dominant medical operators through
acquisition and lease-back of their licensed patient treatment
facilities. AMRE targets hospitals (both critical access and
specialty surgical), Physician Group Practices, Ambulatory Surgical
Centers, and other licensed medical treatment facilities. AMRE
intends to qualify as a “real estate investment trust”
for federal income tax purposes. As of March 31, 2020 AMRE had not
acquired any real estate or other non-cash
assets.
In connection with
the term sheet, on March 3, 2020, DSS Securities Inc. entered into
a Promissory Note whereby DSS Securities Inc. lent AMRE the
principal amount of $800,000 (the “DSS Securities
Note”). The DSS Securities Note matures on March 3, 2022 and
accrues interest at the rate of 8.0% per annum. The DSS Securities
Note also provides DSS Securities Inc. an option to provide AMRE
with an additional $800,000 on the same terms and conditions as the
DSS Securities Note, including the issuance of warrants as
described below.
Also, in connection
with the term sheet, on March 3, 2020, LVAM entered into a
Promissory Note whereby LVAM lent AMRE the principal amount of
$200,000 (the “LVAM Note”). The LVAM Note matures on
March 3, 2022 and accrues interest at the rate of 8.0% per annum.
The LVAM Note also provides LVAM an option to provide AMRE with an
additional $200,000 on the same terms and conditions as the LVAM
Note, including the issuance of warrants as described
below.
As further
incentive to enter into the promissory notes, AMRE issued DSS
Securities Inc. warrants to purchase 160,000 shares of AMRE common
stock (the “DSS Securities Warrants”). The DSS
Securities Warrants have an exercise price of $5.00 per share,
subject to adjustment as set forth in the DSS Securities Warrants,
and expire on March 3, 2024. Similarly, AMRE issued LVAM warrants
to purchase 20,000 shares of AMRE common stock (the “LVAM
Warrants”). The LVAM Warrants have an exercise price of $5.00
per share, subject to adjustment as set forth in the LVAM Warrants,
and expire on March 3, 2024.
Pursuant to the DSS
Securities Warrants and the LVAM Warrants, if AMRE files a
registration statement with the Securities and Exchange Commission
for an initial public offering of AMRE’s common stock and the
price per share offered to the public is less than $10.00 per
share, the exercise price of the DSS Securities Warrants and the
LVAM Warrants will be adjusted downward to 50% of the initial
public offering price. These warrants also grant piggyback
registration rights as set forth in the respective
warrant.
The AAMI
shareholders, LVAM, DSS Securities Inc. and AMRE Tennessee, also
entered into a stockholders’ agreement dated as of March 3,
2020 (the “AAMI Stockholders’ Agreement”),
regarding their ownership of AAMI’s common stock to govern
certain aspects of the relationship between the stockholders and
provide for certain rights and obligations with respect to such
ownership. Pursuant to the AAMI Stockholders’ Agreement, the
portion of the Subscription Shares issued to AMRE Tennessee, LLC
(the “Tennessee Shares”) are subject to forfeiture,
such that if a specified employee of AMRE is separated from
employment with AMRE within three years of the date of the AAMI
Stockholders’ Agreement, the Tennessee Shares will be
returned to AAMI’s treasury; if such employee remains
employed with AMRE at such anniversary, the Tennessee Shares will
no longer be subject to forfeiture. The AAMI Stockholders’
Agreement also provides for certain distributions to the
parties.
We anticipate that
AAMI’s 93% equity interest in AMRE will be reduced in the
near future as AMRE raises funds to implement its business
plans.
The Board of
Directors and management of each of AMRE and AAMI includes several
individuals affiliated with our company, including our Chief
Executive Officer Chan Heng Fai, who serves as a member of the
Board of each of AMRE and AAMI. The Board of Directors of AAMI also
includes Lui Wai Leung Alan, our Co-Chief Financial Officer, and an
additional employee of Singapore eDevelopment. Rongguo Wei, our
other Co-Chief Financial Officer, serves as Treasurer of
AAMI.
In addition, Chan
Tung Moe serves as AAMI’s Vice President, as well as a member
of its Board and as Director of Corporate Development and a member
of the Board of AMRE. Chan Tung Moe is Co-Chief Executive Officer
and a member of the Board of LiquidValue Development Inc., as well
as serving as Chief Executive Officer- International and a member
of the Board of Alset iHome Inc. Chan Tung Moe is the son of our
Chief Executive Officer, Chan Heng Fai. Conn Flannigan, serves as
Secretary and General Counsel and as a member of the Board of AMRE
and Secretary of AAMI. Conn Flannigan is a member of the Boards of
certain of our subsidiaries, including LiquidValue Development Inc.
and Alset iHome Inc., and has previously served as an officer of
several of our subsidiaries. Chan Tung Moe and Conn Flannigan will
each be compensated at a rate of $120,000 per annum for their
services to AMRE, however they will initially only be paid at a
rate of $90,000 per annum until such time as AMRE raises additional
funds, at which time they will be paid the deferred portion of
their compensation.
Digital
Transformation Technology
Our digital
transformation technology business unit is committed to enabling
enterprises to engage in a digital transformation by providing
consulting, implementation and development services with various
technologies including blockchain, e-commerce, social media and
payment solutions. We commenced our technology business in 2015
through HotApp Blockchain, Inc., a 99.9% owned subsidiary of
Singapore eDevelopment. Its technology platform focuses on
business-to-business, or B2B, solutions, such as communications and
workflow, through instant messaging, international calling, social
media, e-commerce and payment systems and direct marketing. Using
its platform, consumers can discover and build their own
communities based on interests, location or their existing
networks. The HotApp platform tools empower these communities to
share their ideas and information across the multiple channels. As
these communities grow, they provide the critical mass that
attracts enterprises. The system is designed to ultimately help
enterprises and community users to transform their business models
in a more effective manner.
HotApp Blockchain
Subsidiary. Through HotApp, we have successfully implemented
several strategic platform developments for clients, including a
mobile front-end solution for network marketing, a hotel e-commerce
platform for a company in Asia and a real estate agent management
platform in China. We have also enhanced our technological
capability from mobile application development to include
architectural design, allowing mobile-friendly front-end solutions
to integrate with software platforms. HotApp’s main digital
assets at the present time are its applications. HotApp’s
emphasis will be on developing solutions and providing
services.
In February 2017,
HotApp entered into a revenue-sharing agreement with iGalen Inc.
Under the agreement, HotApp customized a secure app for iGalen
Inc.’s communication and management system. The app enables
mobile friendly backend access for iGalen Inc. members, among other
functions. HotApp is continuing to improve this secure app. In
particular, HotApp intends to utilize blockchain supply logistics
to improve its functions (the original iGalen app did not utilize
the latest distributed ledger technology). Once the improvements to
this technology are completed, and initially utilized by iGalen,
HotApp intends to then attempt to sell similar services to other
companies engaged in network marketing. This app can be modified to
meet the specific needs of any network marketing company. We
believe that these technologies will, among other benefits, make it
easier for network marketing companies to securely and effectively
manage their systems of compensation. Our current plan is to
commence sales of this technology in the
first quarter of 2021.
In addition to the
development of technology for sales purposes, HotApp also recently
launched a new enterprise and intends to expand its activities to
include the development and commercialization of other
blockchain-related technologies. One area we are presently
exploring is providing technology consulting for security token
offerings (“STO”). Such services, which have not yet
commenced commercially, would include STO white paper development,
technology design and web development. HotApp has no plans to
launch its own token offering, but rather may develop technologies
that could facilitate such offerings by other
companies.
We believe that the
increasing acceptance of distributed ledger technologies by
potential customers will benefit us. The growth of network
marketing throughout the world would impact our technologies that
target that industry. In this rapidly evolving field, however,
technology is advancing quickly and it is possible that our
competitors could create products that gain market acceptance
before our products.
Biohealth
Business
With populations
aging and a growing focus on healthcare issues, biohealth science
has become increasingly vital. We recently entered the biomedical
and healthcare market by forming our biohealth division, which is
engaged in developing, researching, testing, manufacturing,
licensing and distributing (through retail, direct selling, network
marketing and e-commerce) biohealth products and services. We
strive to leverage our scientific know-how and intellectual
property rights to provide solutions to pending healthcare issues.
By tapping into the scientific expertise of our subsidiaries and
collaborating partners, we are undertaking a concerted effort in
the research and development, drug discovery and development for
the prevention, inhibition and treatment of neurological, oncology
and immune-related diseases.
Global BioLife Inc.
Our indirect subsidiary Global BioLife Inc. has biomedical
intellectual property which was assigned to it by one of the other
shareholders in Global BioLife (such other shareholder is owned by
the chief scientist for the project). Most significantly, this
intellectual property portfolio includes patents for our universal
therapeutic drug platform, “Linebacker,” which has
demonstrated promising results in treating a range of diseases
including neurological, anti-microbial, anti-viral and oncology
diseases. Unlike the traditional approach to treat individual
diseases with specific drugs, the Linebacker platform seeks to
offer a breakthrough therapeutic option for multiple diseases.
Linebacker is designed to work by inhibiting a cascade of
inflammatory responses responsible for many diseases. Its design is
in direct contrast to the traditional approach of targeting
individual diseases with specific drugs. Charles River Laboratories
International, Inc., which an independent company that provides
services to help pharmaceutical and biotechnology companies,
government agencies and leading academic institutions around the
globe, has performed the studies needed for our Linebacker research
and drug development efforts. Linebacker is presently in the
development phase.
Through Global
BioLife, we have established a collaboration with U.S.-based Chemia
Corporation to develop specialized fragrances to counter
mosquito-borne diseases such as Zika and Dengue, among other
medical applications. The 3F mosquito fragrance product, which is
made from specialized oils sourced from botanicals that mosquitos
avoid, has shown promising results in repelling mosquitos in
laboratory testing. Global BioLife is seeking to commercialize this
product. In addition to the 3F mosquito fragrance, Global BioLife
is working with Chemia to develop additional 3F functional
fragrances for other applications.
We have also
developed a low-calorie, low glycemic level, natural modified sugar
through Global BioLife. The product, “Laetose,” is a
functional sugar with from 30% to 50% lower calorie count than
regular sugar, possesses low glycemic properties, and also
mitigates inflammation. This product is at the commercialization
stage. We are presently seeking to license Laetose.
Planned Reorganization of Certain Biohealth
Activities
On
March 12, 2020, two of Singapore eDevelopment’s subsidiaries,
Global BioMedical Pte Ltd, a Singapore corporation
(“GBM”), and Impact BioMedical Inc., a Nevada
corporation and wholly owned subsidiary of GBM (“Impact
BioMedical”), entered into a binding term sheet (the
“Impact Term Sheet”) with Document Security Systems,
Inc. (“DSS”) and DSS BioHealth Security, Inc., a wholly
owned subsidiary of DSS (“DBHS”). Pursuant to the
Impact Term Sheet, DBHS will acquire Impact BioMedical. Impact
BioMedical owns 90.9% of Global BioMedical, Inc., which in turn
owns 70% of Global BioLife Inc., our main biohealth entity, which
holds our company’s interests in the Linebacker, 3F and
Laetose projects. Upon the completion of this transaction, our
ownership interest in these biohealth projects will be reduced, and
our ownership interest in DSS will be
increased.
On
April 27, 2020, Singapore eDevelopment, GBM, DSS and DBHS entered
into a share exchange agreement (the “DSS Share Exchange
Agreement”) that provided further details regarding this
planned transaction in which DBHS will acquire all of the
outstanding capital stock of Impact BioMedical (the “Impact
Shares”) through a share exchange, with Impact BioMedical
becoming a direct wholly owned subsidiary of
DBHS.
The
aggregate consideration for the Impact Shares to be issued to GBM
by DSS will be the following: (i) 14,500,000 newly issued shares of
the common stock of DSS (the “DSS Common Stock”),
nominally valued at $3,132,000, or $0.216 per share; and (ii)
46,868 newly issued shares of the convertible preferred stock of
DSS (“DSS Convertible Preferred Stock”) with a stated
value of $46,868,000, or $1,000 per share, for a total
consideration valued at $50 million. The DSS Convertible Preferred
Stock will be convertible into shares of common stock of DSS,
subject to a 19.9% beneficial ownership conversion limitation
(“blocker”) based on the total outstanding shares of
common stock of DSS beneficially owned by GBM. Holders of the DSS
Convertible Preferred Stock will have no voting rights, except as
required by applicable law, and no dividends will accrue or be
payable on the DSS Convertible Preferred Stock. The holders of DSS
Convertible Preferred Stock will be entitled to a liquidation
preference at a liquidation value of $1,000 per share, and DSS will
have the right to redeem all or any portion of the then outstanding
shares of DSS Convertible Preferred Stock, pro rata among all
holders, at a redemption price per share equal to such liquidation
value per share.
Prior
to the execution of the Share Exchange Agreement, Impact
BioMedical’s ownership of a suite of antiviral and medical
technologies was valued through an independent valuation that was
completed by Destum Partners. Because the valuation was higher than
the previously agreed value, the Purchase Price was capped at a
value of $50 million.
The
closing of the purchase and sale of the Impact Shares contemplated
under the DSS Share Exchange Agreement is subject to a number of
conditions, including both DSS and Singapore eDevelopment having
obtained approvals from their respective shareholders and receipt
by DSS of audited financial statements of Impact BioMedical, which
were included in DSS’s proxy statement soliciting the vote of
its shareholders.
On
June 26, 2020, the shareholders of Singapore eDevelopment approved
this transaction.
A
special meeting of the stockholders of DSS will be held on Monday,
August 10, 2020 to approve the issuance of shares of DSS Common
Stock and DSS Convertible Preferred Stock in connection with the
acquisition of Impact BioMedical, pursuant to the DSS Share
Exchange Agreement.
The
Share Exchange Agreement contains customary representations,
warranties and covenants of the parties, as well as certain
indemnification provisions.
The
Share Exchange Agreement may be terminated prior to the closing on
certain conditions, including by mutual written consent of the
parties; by one party in the event of breach, inaccuracy in or
failure to perform any representation, warranty, covenant or
agreement made by the counterparties that would give rise to the
failure of the conditions precedent to closing that has not been
cured after written notice to the counterparties; or if certain
other conditions as set forth in the Share Exchange Agreement shall
not have been, or it becomes apparent that any of such conditions
will not be, fulfilled by the date that is 180 days after the date
of the Share Exchange Agreement; or in the event that (i) any law
that makes consummation of the transactions contemplated by Share
Exchange Agreement illegal or otherwise prohibited or (ii) a
government authority issues an order restraining or enjoining the
transactions contemplated by the Share Exchange Agreement, and such
order becomes final and non-appealable.
DSS
owns 9.25% of the issued and outstanding stock of Singapore
eDevelopment.
DSS
is a global company involved in the development and delivery of
better products and technology to individuals and industry. DSS
operates nine business lines through subsidiaries located around
the globe. Of the nine business lines, four have historically been
the core business lines of DSS:
●
Premier
Packaging Corporation (included in its DSS Packaging and Printing
Group) operates in the paper board folding carton, smart packaging
and document security printing markets.
●
Plastic
Printing Professionals, Inc. (included in its DSS Plastics Group)
operates in the security printing and plastic ID systems
market.
These
two companies develop, manufacture and sell paper and plastic
products designed to protect valuable information from counterfeit,
unauthorized scanning, copying, and digital imaging, and to provide
intelligent, interactive, augmented packaging for the
consumer.
●
DSS
Digital Inc. (included in its DSS Digital Group) researches,
develops, markets and sells DSS’s digital products worldwide;
their primary product is AuthentiGuard®, which is a brand
authentication application that integrates DSS’s counterfeit
deterrent technologies with proprietary digital data security-based
solutions.
●
DSS
Technology Management, Inc. (included in its DSS Technology
Management) manages, licenses and acquires intellectual property,
or IP, assets for the purpose of monetizing these assets through a
variety of value-enhancing initiatives, including, but not limited
to, investments in the development and commercialization of
patented technologies, licensing, strategic partnerships and
commercial litigation.
In
addition to these four core business lines, DSS established five
new wholly owned subsidiaries in 2019 and early
2020:
1.
DSS
Blockchain Security, Inc. intends to specialize in the development
of blockchain security technologies for tracking and tracing
solutions for supply chain logistics and cyber securities across
global markets.
2.
Decentralized
Sharing Systems, Inc. seeks to provide services to assist companies
in the new business model of the peer-to-peer decentralized sharing
marketplaces and direct marketing. Direct marketing or network
marketing is designed to sell products or services directly to the
public through independent distributors, rather than selling
through the traditional retail market.
3.
DSS
Securities, Inc. has been established to develop or to acquire
assets in the securities trading or management arena, and to pursue
two parallel streams of digital asset exchanges in multiple
jurisdictions: (i) securitized token exchanges, focusing on
digitized assets from different vertical industries; and (ii)
utilities token exchanges, focusing on “blue-chip”
utility tokens from solid businesses.
4.
DSS
BioHealth Security, Inc. will seek to invest in or to acquire
companies related to the biohealth and biomedical field, including
businesses focused on the research to advance drug discovery and
development for the prevention, inhibition, and treatment of
neurological, oncological and immuno-related diseases. This new
division will place special focus on open-air defense initiatives,
which curb transmission of air-borne infectious diseases such as
tuberculosis and influenza, among others.
5.
DSS
Secure Living, Inc. intends to develop top of the line advanced
technology for energy efficiency, high quality of life living
environments and home security for everyone, for new construction
and renovations of residential single and multifamily living
facilities.
Aside
from Decentralized Sharing Systems, Inc., the activities in these
newly created subsidiaries have been minimal or in various start-up
or organizational phases.
iGalen International and
Holista CollTech. In connection with our expansion into
biohealth activities, we formed iGalen International Inc., in which
we own a 53% ownership stake and acquired a 16.8%
ownership interest in Holista CollTech, both of which companies
source and distribute patented dietary supplements and other health
products. Holista CollTech focuses on providing customers with
scientifically enhanced, engineered and tested natural health
supplements and consumer products. With business primarily in
Australia and Malaysia, Holista CollTech operates in three consumer
segments – healthy food ingredients, dietary supplements and
collagen. We research, develop, market and distribute
health-oriented products to address the growing needs of natural
medicine. We offer a suite of food ingredients including
low-glycemic index baked goods, low sodium salt, low-fat fried
foods and low-calorie and low-GI sugars. Holista CollTech produces
cosmetic-grade sheep (ovine) collagen using patented extraction
methods from Australia. In addition, iGalen Inc. has a longstanding
agreement with Holista CollTech to source all of its products
exclusively from Holista CollTech. iGalen Inc.’s primary
product, Uncarb is a natural carbohydrate optimizer that is
intended to remove excess carbohydrates, thereby improving blood
sugar regulation and achieving better blood lipid profiles and
sustained weight loss.
Recently,
we expanded our biohealth segment to the Korean market through one
of the subsidiaries of Health Wealth Happiness Pte. Ltd., HWH World
Inc (“HWH World”). HWH World, similar to iGalen Inc.,
will operate based on a direct sale model of health
supplements.
Holista CollTech
also recently launched its new low-glycemic index (GI) bread and
noodle products. The product’s main ingredients are locally
sourced and blended according to halal and kosher standards. The
noodle product is supported by Diabetes Canada, with a GI of 38,
well below the usual 60 to 65 for noodles. The product stems from
our support for fighting diabetes and obesity, particularly in
Asia.
Vivacitas Oncology.
We have an indirect equity interest of 13.1% at
December 31, 2019 and March 31, 2020, in
Vivacitas Oncology Inc., which focuses on developing medications
for cancer patients. We have a close partnership with Vivacitas and
its management, an experienced research team and a distinguished
medical advisory board. Vivacitas seeks to bring more effective and
less toxic chemotherapies to the market for treatment of the most
aggressive and intractable cancers. At the present time, Vivacitas
has three programs: (i) one program has completed three clinical
studies, including two Phase I and one Phase II studies; (ii) one
program for a potential palliative treatment has completed three
Phase III studies; and (iii) one program is in the planning stages
of a 2b/3 clinical study.
Our
financial statements do not consolidate Holista
CollTech and Vivacitas Oncology, and we do not manage their
operations.
Other Business Activities
In
addition to our three principal business activities, we generally
oversee several smaller other business activities at the present
time which we believe complement our three principal
businesses.
LiquidValue
Asset Management Pte. Ltd. ("LVAM") managed investments in
the Global Systematic Multi-Strategy Fund (the "GSMS Fund") and
Global Opportunity Fund. LVAM is a registered fund management
company regulated by the Monetary Authority of Singapore. Launched
in June 2016, the GSMS Fund adopts an "all-weather" strategy that
seeks to produce consistent risk-adjusted returns regardless of
market volatility. It employs a systematic approach focusing on
liquid exchange traded securities that are diversified across asset
classes, geographical regions and time frames. On February 1, 2017,
LVAM invested $300,000 in Global Opportunity Fund, a mutual fund
registered in the Cayman Islands. Both funds ceased operation in
October 2019. LVAM also invested in AMRE and AAMI. See additional
details in “American Medical REIT, Inc.” in Potential
Future Projects.
BMI Capital
Partners. Singapore eDevelopment's wholly-owned Hong Kong
subsidiary, BMI Capital Partners International Limited is a
boutique consultancy with a special focus on grooming clients to
become eligible to seek a stock exchange listing and offers debt
restructuring services. We have also been in negotiations with
various potential clients seeking business incubation, including
capital market opportunities in China. Recently, for example, we
have secured projects which include a feasibility study for a Hong
Kong firm to explore capital market options such as a potential
public listing on the Hong Kong Stock Exchange and a consultancy
contract to restructure a U.S. OTC-listed medical
company.
As
of March 31, 2020 and December 31, 2019 and 2018, the
value of our interests in the other business activities described
above represented less than 15% of the value of our
total assets.
Sales
and Marketing
We focus our
corporate marketing efforts on increasing brand awareness,
communicating the advantages of our various platforms and
generating qualified leads for our sales team. Our corporate
marketing plan is designed to continually elevate awareness of our
brand and generate demand for our offerings. We rely on a number of
channels in this area, including digital advertising, email
marketing, social media, affiliate marketing and broad-based media,
as well as through various strategic partnerships. We maintain our
website at http://www.hfenterp.com, and our various operating
subsidiaries maintain individual websites, many of which are
accessible through our main website.
Each of our
businesses has developed a field sales force in their geographic
markets. These sales force teams are responsible for identifying
and managing individual sales opportunities in their respective
regions.
Competition
The businesses in
which we participate, property development, digital transformation
technology and biohealth, are each highly competitive. Competition
is based upon several factors, including price, reputation, quality
and brand recognition. Existing and future competitors may
introduce products and services in the same markets we serve, and
competing products or services may have better performance, lower
prices, better functionality and broader acceptance than our
products. Our competitors may also add features to their products
or services similar to features that presently differentiate our
product and service offerings from theirs. This competition could
result in increased sales and marketing expenses, thereby
materially reducing our operating margins, and could harm our
ability to increase, or cause us to lose, market share. Some of our
competitors and potential competitors supply a wide variety of
products and services, and have well-established relationships with
our current and prospective customers.
Most, if not all,
of our current and potential competitors may have significantly
greater resources or better competitive positions in certain
product segments, geographic regions or user demographics than we
do. These factors may allow our competitors to respond more
effectively than us to new or emerging technologies and changes in
market conditions. By way of example, in our property development
business, some of our competitors already have the advantage of
having created vertically integrated businesses, while other
competitors have broader and deeper relationships with sources of
financing. Other competitors in our property development
business may have more substantial ties and experience in
geographical areas in which we operate.
Our competitors may
develop products, features or services that are similar to ours or
that achieve greater acceptance, may undertake more far-reaching
and successful product development efforts or marketing campaigns,
or may adopt more aggressive pricing policies. This is particularly
relevant for our digital transformation technology business.
Certain competitors could use strong or dominant positions in one
or more markets to gain competitive advantage against us in our
target market or markets. As a result, our competitors may acquire
and engage customers or generate revenue at the expense of our own
efforts.
Protection
of Proprietary Technology
We rely on a
combination of patent, trademark, copyright and trade secret laws
in the United States and other jurisdictions, as well as
confidentiality procedures and contractual provisions, to protect
our proprietary information, technology and brands.
We protect our
proprietary information and technology, in part, by generally
requiring our employees to enter into agreements providing for the
maintenance of confidentiality and the assignment of rights to
inventions made by them while employed by us. We also may enter
into non-disclosure and invention assignment agreements with
certain of our technical consultants to protect our confidential
and proprietary information and technology. We cannot assure you
that our confidentiality agreements with our employees and
consultants will not be breached, that we will be able to
effectively enforce these agreements, that we will have adequate
remedies for any breach of these agreements, or that our trade
secrets and other proprietary information and technology will not
be disclosed or will otherwise be protected.
We also rely on
contractual and license agreements with third parties in connection
with their use of our technology and services. There is no
guarantee that such parties will abide by the terms of such
agreements or that we will be able to adequately enforce our
rights. Protection of confidential information, trade secrets and
other intellectual property rights in the markets in which we
operate and compete is highly uncertain and may involve complex
legal questions. We cannot completely prevent the unauthorized use
or infringement of our confidential information or intellectual
property rights as such prevention is inherently difficult. Costly
and time-consuming litigation could be necessary to enforce and
determine the scope of our confidential information and
intellectual property protection.
Government
Regulation
Like many similarly
diversified companies, our operations are subject to routine
regulation by governmental agencies. Much of this regulation will
affect us indirectly, inasmuch as, and to the extent that, it
affects our customers more directly. A summary of the laws and
regulations that might affect our customers is set forth
below.
Property Development
Business. The development of
our real estate projects will require us 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, we have spent
approximately $42,356 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, 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.
Digital Transformation
Technology Business. Companies conducting business on the
internet are subject to a number of foreign and domestic laws and
regulations. In addition, laws and regulations relating to user
privacy, freedom of expression, content, advertising, information
security and intellectual property rights are being debated and
considered for adoption by many countries throughout the world.
Online businesses face risks from some of the proposed legislation
that could be passed in the future.
The adoption of any
laws or regulations that adversely affect the growth, popularity or
use of the internet, including laws impacting internet neutrality,
could decrease the demand for our services and increase our cost of
doing business. As we expand internationally, government regulation
concerning the internet, and in particular, network neutrality, may
be nascent or non-existent. Within such a regulatory environment,
coupled with potentially significant political and economic power
of local network operators, we could experience discriminatory or
anti-competitive practices that could impede our growth, cause us
to incur additional expense or otherwise negatively affect our
business.
In the United
States, laws relating to the liability of providers of online
services for activities of their users and other third parties are
currently being tested by a number of claims, which include actions
for libel, slander, invasion of privacy and other tort claims,
unlawful activity, copyright and trademark infringement, and other
theories based on the nature and content of the materials searched,
the ads posted, or the content generated by users. Certain
foreign jurisdictions are also testing the liability of providers
of online services for activities of their users and other third
parties. Any court ruling that imposes liability on providers
of online services for activities of their users and other third
parties could harm our licensees’ businesses, and thus,
indirectly, our business.
Biohealth Business.
Our businesses are subject to varying degrees of governmental
regulation in the countries in which operations are conducted, and
the general trend is toward increasingly stringent regulation. In
the United States, the drug, device and cosmetic industries have
long been subject to regulation by various federal and state
agencies, primarily as to product safety, efficacy, manufacturing,
advertising, labeling and safety reporting. The exercise of broad
regulatory powers by the U.S. Food and Drug Administration, or FDA,
continues to result in increases in the amounts of testing and
documentation required for FDA approval of new drugs and devices
and a corresponding increase in the expense of product
introduction. Similar trends are also evident in major markets
outside of the United States. The new medical device regulatory
framework and the new privacy regulations in Europe are examples of
such increased regulation.
The costs of human
health care have been and continue to be a subject of study,
investigation and regulation by governmental agencies and
legislative bodies around the world. In the United States,
attention has been focused on drug prices and profits and programs
that encourage doctors to write prescriptions for particular drugs,
or to recommend, use or purchase particular medical devices. Payers
have become a more potent force in the market place and increased
attention is being paid to drug and medical device pricing,
appropriate drug and medical device utilization and the quality and
costs of health care generally. The regulatory agencies under whose
purview we operate have administrative powers that may subject it
to actions such as product withdrawals, recalls, seizure of
products and other civil and criminal sanctions. In some cases, our
subsidiaries may deem it advisable to initiate product
recalls.
In addition,
business practices in the health care industry have come under
increased scrutiny, particularly in the United States, by
government agencies and state attorneys general, and resulting
investigations and prosecutions carry the risk of significant civil
and criminal penalties.
Further, we rely on
global supply chains, and production and distribution processes,
that are complex, are subject to increasing regulatory
requirements, and may be faced with unexpected changes that may
affect sourcing, supply and pricing of materials used in our
products. These processes also are subject to lengthy regulatory
approvals.
As described above,
certain of our businesses are subject to compliance with laws and
regulations of U.S. federal and state governments, non-U.S.
governments, their respective agencies and/or various
self-regulatory organizations or exchanges relating to, among other
things, disclosure and the privacy of client information, and any
failure to comply with these regulations could expose us to
liability and/or damage our reputation. Our businesses have
operated for many years within a legal framework that requires us
to monitor and comply with a broad range of legal and regulatory
developments that affect our activities. However, additional
legislation, changes in rules promulgated by self-regulatory
organizations or changes in the interpretation or enforcement of
existing laws and rules, either in the United States or elsewhere,
may directly affect our mode of operation and
profitability.
Rigorous legal and
compliance analysis of our businesses is endemic to our culture and
risk management. Management of each of our businesses supervise our
compliance personnel, who are responsible for addressing all
regulatory and compliance matters that affect our activities. We
strive to maintain a culture of compliance through the use of
policies and procedures, including a code of ethics, electronic
compliance systems, testing and monitoring, communication of
compliance guidance and employee education and training. Our
compliance policies and procedures address a variety of regulatory
and compliance matters such as the handling of material non-public
information, personal securities trading, marketing practices,
gifts and entertainment, valuation of investments, recordkeeping,
potential conflicts of interest, the allocation of corporate
opportunities, collection of fees and expense
allocation.
We also monitor the
information barriers that we maintain between the public and
private sides of our businesses. We believe that our various
businesses’ access to the intellectual knowledge and contacts
and relationships that reside throughout our firm benefits all of
our businesses. To maximize that access without compromising
compliance with our legal and contractual obligations, our
compliance group oversees and monitors the communications between
groups that are on the private side of our information barrier and
groups that are on the public side, as well as between different
public side groups. Our compliance group also monitors contractual
obligations that may be impacted and potential conflicts that may
arise in connection with these inter-group
discussions.
Facilities
We manage our
worldwide business from our principal executive offices located in
Bethesda, Maryland, in a leased space of approximately 2,059 square
feet, under a lease expiring in December 2020. We also maintain
offices in Singapore, Magnolia, Texas and Hong Kong through leased
spaces aggregating approximately 7,529 square feet, under leases
expiring on various dates from October 2020 to May 2021. We have
temporary office space in South Korea. The leases have rental rates
ranging from $2,409 to $10,814 per month. Our total rent expense
under these office leases was approximately $293,486 and $315,426
in 2019 and 2018, respectively. We expect total rent expense to be
approximately $290,152 under office leases in 2020. We believe our
present office space and locations are adequate for our current
operations and for near-term planned
expansion.
Employees
As of July
30, 2020, we had a total of 20 full-time
employees. In addition to our full-time employees, we occasionally
hire part-time employees and independent contractors to assist us
in various operations, including property development, research and
product development and production.
Our future success
will depend in part on our ability to attract, retain and motivate
highly qualified technical and sales personnel for whom competition
is intense. Our employees are not represented by any collective
bargaining unit. We believe our relations with employees and
contractors are good.
Legal
Proceedings
On September 27,
2019, iGalen International Inc., one of our majority-owned
subsidiaries, and iGalen Inc., its wholly-owned subsidiary, filed a
complaint in the Superior Court of the State of California, County
of San Diego, Central Division, against Gara Group, Inc., a
Delaware corporation, and certain affiliated or related entities,
including the Chief Executive Officer of the Gara Group
(collectively these entities are referred to herein as the
“Gara Group”). A similar complaint had been filed in
Utah on September 26, 2019, but subsequently re-filed in
California. The complaint, as amended on October 24, 2019,
enumerates causes of action for breach of contract, breach of
covenant of good faith and fair dealing and intentional
interference with economic relations.
iGalen Inc. and
Gara Group are parties to a Specialized Services Agreement, dated
March 29, 2017 (the “Specialized Services Agreement”).
iGalen Inc. contracted with Gara Group to provide for services that
include, among other things, (i) product fulfillment; (ii) software
development and maintenance of an onsite “Platform,”
which includes a company website and interactive portal referred to
as the “Back Office”; and (iii) managing iGalen’s
social media sites. The Gara Group had previously claimed that
iGalen Inc. owed Gara Group certain amounts, including (i) $125,000
for “Back Office Fees”; (ii) $150,000 for
“Speaking Fees”; and (iii) $67,299 for services related
to iGalen’s merchant account, back office, and shipping
fulfillment, invoiced on August 28 and 31, and September 15, 2019.
iGalen Inc.’s amended complaint notes that no provision in
the Specialized Services Agreement allows for the particular
“Back Office Fees” of $125,000 and that no provision in
the Specialized Services Agreement allows for the so-called
“Speaking Fees” of $150,000. Gara Group cut off
services to iGalen following iGalen’s indication that it was
disputing the amounts owed. iGalen’s amended complaint notes
that the actions of Gara Group and Mr. Gara have caused, and
continue to cause, iGalen to suffer substantial harm by, among
other things, making it so iGalen was unable to communicate with
distributors via its website and Back Office, fulfill orders made
by distributors, or pay commission to distributors. iGalen is
seeking damages.
On October 10,
2019, Gara Group filed a complaint in the Superior Court of the
State of California, County of San Diego, Central Division against
iGalen International Inc., iGalen Inc., Singapore eDevelopment
Limited, Chan Heng Fai, Dr. Rajen Manicka and David Price, an
executive of iGalen Inc. Gara Group’s complaint for damages
asserts that the Gara Group is entitled to general damages of
$9,000,000 and liquidated damages of $50,000,000. iGalen Inc.
intends to vigorously contest this matter. No trial date has been
set as of the date of this prospectus.
In addition, from
time to time, during the normal course of our businesses, we may be
subject to various litigation claims and legal disputes, including
in the area of intellectual property (e.g., trademarks, copyrights
and patents). Our intellectual property rights extend to our
technology, business processes and the content on our website. We
use the intellectual property of third parties in marketing and
providing our services through contractual and other rights.
Despite our efforts, from time to time, third parties may allege
that we have violated their intellectual property
rights.
Although the
results of claims, lawsuits and proceedings in which we may be
involved cannot be predicted with certainty, we do not currently
believe that the final outcome of the matters discussed above will
have a material adverse effect on our business, financial condition
or results of operations. However, defending and prosecuting any
such claims is costly and may impose a significant burden on our
management and employees. In addition, we may receive unfavorable
preliminary or interim rulings in the course of litigation, and
there can be no assurances that favorable final outcomes will be
obtained. With regard to intellectual property matters which may
arise, if we are unable to obtain an outcome which sufficiently
protects our rights, successfully defends our use or allows us time
to develop non-infringing technology and content or to otherwise
alter our business practices on a timely basis in response to the
claims against us, our business, prospects and competitive position
may be adversely affected.
MANAGEMENT
Executive
Officers, Directors and Key Employees
The following table
sets forth the names and ages of our executive officers, directors,
director nominees and key employees, and their positions with us,
as of July 30, 2020:
|
Name
|
Age
|
Position(s)
|
|
Chan Heng
Fai
|
75
|
Founder, Chairman
of the Board and Chief Executive Officer
|
|
Lui Wai Leung
Alan
|
49
|
Co-Chief Financial
Officer
|
|
Rongguo
Wei
|
48
|
Co-Chief Financial
Officer
|
|
Ang Hay Kim
Aileen
|
60
|
Executive
Director
|
|
Wong Tat
Keung
|
49
|
Director
Nominee
|
|
Charles
MacKenzie
|
49
|
Chief Development
Officer and Director
Nominee
|
|
John
Thatch
|
58
|
Director
Nominee
|
|
Robert
Trapp
|
65
|
Director
Nominee
|
|
Michael
Gershon
|
48
|
Chief Legal
Officer
|
The principal
occupations for the past five years of each of our executive
officers, directors, director nominees and key employees are as
follows:
Executive Officers and Directors
Chan Heng Fai founded HF Enterprises
Inc. and has served as our Chairman of the Board and Chief
Executive Officer since inception. Mr. Chan is an expert in banking
and finance, with 45 years of experience in these industries. He
has restructured numerous companies in various industries and
countries during the past 40 years. Mr. Chan has served as the
Chief Executive Officer of our subsidiary Singapore eDevelopment
Limited since April 2014. Mr. Chan joined the Board of Directors of
Singapore eDevelopment Limited in May 2013. From 1995 to 2015, Mr.
Chan served as Managing Chairman of Hong Kong-listed Zensen
Enterprises Limited (formerly Heng Fai Enterprises Limited), an
investment holding company. Mr. Chan had previously served as a
member of the Board of Zensen Enterprises Limited since September
1992. Mr. Chan was formerly the Managing Director of SingHaiyi
Group Ltd., a public Singapore property development, investment and
management company (“SingHaiyi”), from March 2003 to
September 2013, and the Executive Chairman of China Gas Holdings
Limited, an investor and operator of the city gas pipeline
infrastructure in China from 1997 to 2002.
Mr. Chan has served
as a non-executive director of Document Security Systems, Inc.
since January 2017 and as Chairman of the Board since March 2019.
Mr. Chan has served as a member of the Board of Directors of
OptimumBank Holdings, Inc. since June 2018. He has also served as a
non-executive director of our indirect subsidiary LiquidValue
Development since January 2017. Mr. Chan has also served as a
non-executive director of Holista CollTech Ltd., since July 2013.
Mr. Chan has served as a non-executive director of Singapore
eDevelopment’s 99.98%-owned subsidiary HotApp Blockchain Inc.
since October 2014.
Mr.
Chan was formerly a director of Global Medical REIT Inc., a
healthcare facility real estate company, from December 2013 to July
2015. He also served as a director of Skywest Ltd., a public
Australian airline company from 2005 to 2006. Additionally, from
November 2003 to September 2013, he was a Director of SingHaiyi.
Mr. Chan served as a member of the Board of Directors of RSI
International Systems, Inc., the developer of RoomKeyPMS, a
web-based property management system, from June 2014 to February
2019.
Mr.
Chan has committed that the majority of his time will be devoted to
managing the affairs of our company; however, Mr. Chan may engage
in other business ventures, including other technology-related
businesses.
As the
founder, Chairman, Chief Executive Officer and our largest
stockholder, Mr. Chan leads the board and guides our company. Mr.
Chan brings extensive property development and digital
transformation technology knowledge to our company and a deep
background in growth companies, emerging markets, mergers and
acquisitions, and capital market activities. His service as
Chairman and Chief Executive Officers creates a critical link
between management and the board.
Lui Wai Leung Alan has been our Co-Chief
Financial Officer since March 2018. Mr. Lui has been the Chief
Financial Officer of Singapore eDevelopment since November 2016 and
served as its Acting Chief Financial Officer since June 2016.
Mr. Lui has served as an Executive Director of Singapore
eDevlopment since July 2020. Mr. Lui has served as a
director of BMI Capital Partners International Ltd, a Hong Kong
investment consulting company, since October 2016. He has also
served as a director of LiquidValue Asset Management Pte Limited, a
Singapore fund management company, since April 2018. Both companies
are wholly owned subsidiaries of Singapore eDevelopment. Mr. Lui
has served as the Co-Chief Financial Officer of LiquidValue
Development since December 2017 and has served as the
Co-Chief Financial Officer of Alset iHome Inc. since
October 2017. Mr. Lui has served as Chief Financial Officer of
HotApp Blockchain Inc. since May 2016 and has served as a director
of one of HotApp’s subsidiaries since July 2016. From June
1997 through March 2016, Mr. Lui served in various executive roles
at Zensen Enterprises Limited (formerly known as Heng Fai
Enterprises Limited), a Hong Kong-listed company, 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. Mr. Lui is a certified practicing accountant in
Australia and received a Bachelor’s degree in Business
Administration from the Hong Kong Baptist University.
Rongguo Wei has been our Co-Chief
Financial Officer since March 2018. Mr. Wei has served as the Chief
Financial Officer of LiquidValue Development 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. As the Chief Financial Officer of 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
2016, Mr. Wei worked for several different U.S. multinational and
private companies including serving as Controller at American Silk
Mill, LLC, a textile manufacturing and distribution company, from
August 2014 to July 2016, serving as a Senior Financial Analyst at
Air Products & Chemicals, Inc., a manufacturing company, from
January 2013 to June 2014, and serving as a Financial/Accounting
Analyst at First Quality Enterprise, Inc., a personal products
company, from 2011 to 2012. Mr. Wei served as a member of the Board
Directors of Amarantus Bioscience Holdings, Inc., a biotech
company, from February to May 2017, and has served as Chief
Financial Officer of that company from February 2017 until November
2017. Before Mr. Wei came to the United States, he worked as an
equity analyst at 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’s degree from Beihang
University.
Ang Hay Kim Aileen has been our
Executive Director since March 2018. Ms. Ang has more than 20 years
of experience in finance and treasury, legal, human resources and
office administration. She is the Senior Vice President, Corporate
Services of Singapore eDevelopment, a position she has held since
2013 and a director of various indirect subsidiaries of our
company. She also holds a Cert-in-CEHA (Singapore real estate
industry certificate) and operates her own real estate business,
Ideal Realty Pte Ltd., since 2015. Ms. Ang was General Manager,
Corporate Services of Singapore Exchange listed Singxpress Ltd.
(now known as SingHaiyi Group Ltd.) from 2002 to 2013. She was
Senior Sales Director, Resale Division with DTZ Property Network
Pte. Ltd., a Singapore real estate company, from 2005 to
2011.
Ms. Ang’s
day-to-day operational leadership of our various businesses and her
knowledge of property development and the real estate business make
her well-qualified as a member of the Board.
Wong Tat Keung has agreed to join the
Board of Directors of our company upon the closing of this
offering. Since 2010, Mr. Wong has served as the director of Aston
Wong CPA Limited. He has been an independent non-executive director
of Singapore eDevelopment since January 2017. Mr. Wong has been an
independent non-executive director of Roma Group Limited, a
valuation and technical advisory firm, since March 2016, and has
served as an independent non-executive director of Lerthai Group
Limited, a property, investment, management and development
company, since December 2018. Previously, he served as the director
and sole proprietor of Aston Wong & Co., a registered certified
public accounting firm, from January 2006 to February 2010. From
January 2005 to December 2005, he was a Partner at Aston Wong, Chan
& Co., Certified Public Accountants. From April 2003 to
December 2004, he served at Gary Cheng & Co., Certified Public
Accountants as Audit Senior. He served as an Audit Junior to
Supervisor of Hui Sik Wing & Co., certified public accountants
from April 1993 to December 1999. He served as an independent
non-executive director of SingHaiyi from July 2009 to July 2013 and
ZH Holdings from December 2009 to July 2015. Mr. Wong is a
Certified Public Accountant admitted to practice in Hong Kong. He
is a Fellow Member of Association of Chartered Certified
Accountants and an Associate Member of the Hong Kong Institute of
Certified Public Accountants. He holds a Master in Business
Administration degree (financial services) from the University of
Greenwich, London, England.
Mr. Wong
demonstrates extensive knowledge of complex, cross-border
financial, accounting and tax matters highly relevant to our
business, as well as working experience in internal corporate
controls, making him well-qualified to serve as an independent
member of the board.
Charles MacKenzie has agreed to join the
Board of Directors of our company upon the closing of this
offering. Mr. MacKenzie was appointed our Chief Development Officer
in December 2019. Mr. MacKenzie has served as a member of the Board
of Directors of LiquidValue Development since December 2017. He has
served as Chief Executive Officer-United States of Alset iHome Inc.
since April 2020 and has served as the Chief Development Officer
for SeD Development Management, a subsidiary of Alset iHome Inc.,
since July 2015. Mr. MacKenzie also serves as a member of the Board
of Directors of Alset iHome Inc. since October 2017. He was
previously the Chief Development Officer for Inter-American
Development (IAD), a subsidiary of Heng Fai Enterprises Limited
(now known as Zensen Enterprises Limited) from April 2014 to June
2015. Mr. MacKenzie was 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 received a B.A. and graduate
degree from St. Lawrence University, where he served on Board of
Trustees from 2003 to 2007.
Mr.
MacKenzie’s extensive knowledge of real estate and ability to
assist our company in expanding its business qualify him to serve
as a member of the Board.
John "JT" Thatch has agreed to join the
Board of Directors of our company upon the closing of this
offering. Mr. Thatch is an accomplished entrepreneur who has
started, owned and operated several businesses in various
industries, public and private. The companies include a wide
variety of sectors including retail, wholesale, educational
services, finance, real estate management and technology companies.
Currently, Mr. Thatch is the Chief Executive Officer and a director
of Sharing Services Global Corporation, a publicly traded holding
company focused in the direct selling and marketing industry. He
has served in this role since March 2018. He is also a principal of
Superior Wine & Spirits, LLC, a Florida-based company that
imports, wholesales and distributes wine and liquor, a position he
has held since February 2016. Mr. Thatch served as Chief Executive
Officer of Universal Education Strategies, Inc. from January 2009
until December 2015, an organization consisting of six companies
that specialized in the development and sales of educational online
products and services. From 2000 to 2005, he was the Chief
Executive Officer of Onscreen Technologies, Inc., currently listed
on Nasdaq as CUI Global, Inc., a developer of cutting-edge thermal
management technologies for integrated LED technologies, circuits
and superconductors. Mr. Thatch was responsible for all aspects of
the company including board and shareholder communications, public
reporting and compliance with Sarbanes-Oxley, structuring and
managing the firm’s financial operations, and expansion
initiatives for all corporate products and services. He also
currently serves as the lead independent board member of Document
Security Systems Inc., a NYSE-listed company. He has had this
position since May 2019 and serves on several of that
company’s committees.
Mr. Thatch’s
public company financial and management experience in the strategic
growth and development of various companies qualify him to serve as
a member of the Board. Mr. Thatch will be an independent
director.
Robert Trapp has agreed to join the
Board of Directors of our company upon the closing of this
offering. Mr. Trapp has 36 years of cross-cultural business
experience with both public and privately-owned companies in Asia,
the United States and Canada, in a diverse range of industries
including hospitality, finance, property, mining, software, biotech
and consumer goods. Mr. Trapp is the Chief Executive Officer of BMI
Capital International LLC, a FINRA broker-dealer, a position he has
held since June 2015. Mr. Trapp also served as General Manager of
SeD Development Management LLC, a subsidiary of Singapore
eDevelopment, a position he held from September 2015 to February
2018. In addition, Mr. Trapp presently serves on the Board of
Directors of several of the subsidiaries of Singapore eDevelopment.
Mr. Trapp has served on the Board of Directors of Avant Diagnostics
Inc., since November 2017. Previously, Mr. Trapp served on the
Board of Directors of Amarantus Bioscience Holdings Inc. from
February 2017 until May 2017 and on the Board of Directors of
HotApp International Inc. from December 2014 until June 2015. Mr.
Trapp served as President and Director at Master of Real Estate
LLC, a subsidiary of Zensen Enterprises Limited (formerly
known as Heng Fai Enterprises Limited), a company listed on the
Hong Kong Stock Exchange, from August 2014 to August 2015 and
served as Senior Vice-President with Inter-American Management LLC,
a property management subsidiary of Zensen Enterprises Limited,
from October 2013 to August 2015. Mr. Trapp served as a Director of
eBanker USA.com, a subsidiary of Zensen Enterprises Limited, from
August 1998 to August 2015, and served as General Manager and Rep
Director with Hotel Plaza Miyazaki, a subsidiary of eBanker
USA.com, from September 2009 to May 2013. Mr. Trapp holds a
Bachelor of Commerce degree from the University of Calgary and a
Bachelor of Applied Arts in Hospitality & Tourism Management
from Ryerson University in Toronto, Canada.
Mr. Trapp’s
hands-on experience in operational management, administration,
financial management, marketing, and regulatory compliance in
diverse industries qualifies him to serve as a member of the
Board.
Key Employees
Michael Gershon has been our Chief Legal
Officer since October 2018. Mr. Gershon has served as Chief Legal
Officer of our subsidiary SeD Development Management LLC since
April 2019 and from February 2017 until April 2019 served as
Associate Corporate Counsel of that subsidiary. Prior to joining
our company, Mr. Gershon served as an attorney adviser with the
Division of Corporation Finance at the U.S. Securities and Exchange
Commission from November 2015 until November 2016 and served as an
associate at the law firm of Wuersch & Gering LLP from August
2004 until January 2015. Mr. Gershon received a B.A. degree in
economics from Boston College and a J.D. from Georgetown University
Law Center.
Status
as a Controlled Company
Chan Heng Fai,
through HFE Holdings Limited controls a majority of the combined
voting power of all classes of our voting stock. As a result, we
qualify as a “controlled company” within the meaning of
the listing standards of Nasdaq, and we have elected not to comply
with certain Nasdaq corporate governance requirements. Therefore,
we do not have a majority of independent directors serving on our
board and have individuals serving on our compensation committee
that do not qualify as independent according to Nasdaq listing
standards and the rules and regulations of the SEC. Following this
offering, we intend to utilize certain of these exemptions. As a
result, we will not have a majority of independent directors on our
board of directors.
The
“controlled company” exemption does not modify the
independence requirements for the audit committee, and we will
comply with the requirements of the SEC and Nasdaq Marketplace
Rules requiring that our audit committee be composed exclusively of
independent directors, subject to the phase-in provisions of the
applicable listing requirements and the SEC’s rules, which
permit up to one committee member that does not satisfy the
applicable independence requirements for up to one year after the
date of the offering. Nominations and corporate governance
functions will initially be managed by our full Board.
Our board of
directors has determined that Mr. Wong and Mr. Thatch are
independent within the meaning of Nasdaq
Rule 5605(a)(2).
We
are in the process of identifying other qualified independent
directors.
Board
of Directors and Corporate Governance
When considering
whether directors have the experience, qualifications, attributes
and skills to enable the Board of Directors to satisfy its
oversight responsibilities effectively in light of our business and
structure, the Board of Directors focuses primarily on the
information discussed in each of the directors’ individual
biographies as set forth above.
The Board of
Directors periodically reviews relationships that directors have
with our company to determine whether the directors are
independent. Directors are considered
“independent” as long as they do not accept any
consulting, advisory or other compensatory fee (other than director
fees) from us, are not an affiliated person of our company or our
subsidiaries (e.g., an officer or a greater than 10% stockholder)
and are independent within the meaning of applicable United States
laws, regulations and the Nasdaq Capital Market listing rules. In
this latter regard, the Board of Directors uses the Nasdaq
Marketplace Rules (specifically, Section 5605(a)(2) of such rules)
as a benchmark for determining which, if any, of our directors are
independent, solely in order to comply with applicable SEC
disclosure rules.
The Board of
Directors has determined that, of our director nominees, only Mr.
Wong and Mr. Thatch are independent within the meaning of the
Nasdaq Marketplace Rule cited above. Each of Chan Heng
Fai, Ms. Ang, Mr. MacKenzie and Mr. Trapp are either current
or former officers or employees of our company or its subsidiaries,
together with Mr. Chan’s beneficial ownership of more than
10% of our outstanding common stock, preclude them from being
considered independent within the meaning of the Nasdaq Listing
Rule.
Board
Committees
Upon the closing of
this offering, our Board of Directors will have an Audit Committee
and Compensation Committee. The Audit Committee will be initially
composed of Mr. Wong (as Chairman), and Mr. Thatch.
Our Audit Committee
and Compensation Committee will each comply with the listing
requirements of the Nasdaq Marketplace Rules. At least one member
of the Audit Committee will be an “audit committee financial
expert,” as that term is defined in Item 407(d)(5)(ii) of
Regulation S-K, and each member will be “independent”
as that term is defined in Rule 5605(a) of the Nasdaq Marketplace
Rules. Our Board of Directors has determined that each of Mr.
Wong and Mr. Thatch are independent.
Code
of Ethics
We have adopted a
written code of ethics that applies to all of our directors,
officers and employees in accordance with the rules of the Nasdaq
Capital Market and the SEC. Prior to the closing of this offering,
we will post a copy of our code of ethics, and intend to post
amendments to this code, or any waivers of its requirements, on our
company website.
Conflicts
of Interest
We comply with
applicable state law with respect to transactions (including
business opportunities) involving potential conflicts.
Applicable state corporate law requires that all
transactions involving our company and any director or
executive officer (or other entities with which they are
affiliated) are subject to full disclosure and approval of the
majority of the disinterested independent members of our Board of
Directors, approval of the majority of our stockholders or the
determination that the contract or transaction is intrinsically
fair to us. More particularly, our policy is to have any related
party transactions (i.e.,
transactions involving a director, an officer or an affiliate of
our company) be approved solely by a majority of the disinterested
independent directors serving on the Board of Directors. Upon the
closing of this offering, we intend to maintain a Board of
Directors consisting of a majority of independent directors.
Indemnification
of Directors and Executive Officers
Section 145 of
the Delaware General Corporation Law provides for, under certain
circumstances, the indemnification of our officers, directors,
employees and agents against liabilities that they may incur in
such capacities. Below is a summary of the circumstances in which
such indemnification is provided.
In general, the
statute provides that any director, officer, employee or agent of a
corporation may be indemnified against expenses (including
attorneys’ fees), judgments, fines and amounts paid in
settlement, actually and reasonably incurred in a proceeding
(including any civil, criminal, administrative or investigative
proceeding) to which the individual was a party by reason of such
status. Such indemnity may be provided if the indemnified
person’s actions resulting in the liabilities: (i) were
taken in good faith; (ii) were reasonably believed to have
been in or not opposed to our best interests; and (iii) with
respect to any criminal action, such person had no reasonable cause
to believe the actions were unlawful. Unless ordered by a
court, indemnification generally may be awarded only after a
determination of independent members of the Board of Directors or a
committee thereof, by independent legal counsel or by vote of the
stockholders that the applicable standard of conduct was met by the
individual to be indemnified.
The statutory
provisions further provide that to the extent a director, officer,
employee or agent is wholly successful on the merits or otherwise
in defense of any proceeding to which he or she was a party, he or
she is entitled to receive indemnification against expenses,
including attorneys’ fees, actually and reasonably incurred
in connection with the proceeding.
Indemnification in
connection with a proceeding by us or in our right in which the
director, officer, employee or agent is successful is permitted
only with respect to expenses, including attorneys’ fees
actually and reasonably incurred in connection with the
defense. In such actions, the person to be indemnified must
have acted in good faith, in a manner believed to have been in our
best interests and must not have been adjudged liable to us, unless
and only to the extent that the Court of Chancery or the court in
which such action or suit was brought shall determine upon
application that, despite the adjudication of liability, in view of
all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expense which the Court
of Chancery or such other court shall deem
proper. Indemnification is otherwise prohibited in connection
with a proceeding brought on our behalf in which a director is
adjudged liable to us, or in connection with any proceeding
charging improper personal benefit to the director in which the
director is adjudged liable for receipt of an improper personal
benefit.
Delaware law
authorizes us to reimburse or pay reasonable expenses incurred by a
director, officer, employee or agent in connection with a
proceeding in advance of a final disposition of the matter. Such
advances of expenses are permitted if the person furnishes to us a
written agreement to repay such advances if it is determined that
he or she is not entitled to be indemnified by us.
The
statutory section cited above further specifies that any provisions
for indemnification of or advances for expenses does not exclude
other rights under our certificate of incorporation, bylaws,
resolutions of our stockholders or disinterested directors, or
otherwise. These indemnification provisions continue for a person
who has ceased to be a director, officer, employee or agent of the
corporation and inure to the benefit of the heirs, executors and
administrators of such persons.
The
statutory provision cited above also grants us the power to
purchase and maintain insurance policies that protect any director,
officer, employee or agent against any liability asserted against
or incurred by him or her in such capacity arising out of his or
her status as such. Such policies may provide for indemnification
whether or not the corporation would otherwise have the power to
provide for it.
At
present, we do not maintain directors’ and officers’
liability insurance in order to limit the exposure to liability for
indemnification of directors and officers, including liabilities
under the Securities Act; however, we are in the process of
obtaining such insurance.
EXECUTIVE
COMPENSATION
Summary
Compensation Table
The following table
sets forth the cash and non-cash compensation awarded to or earned
by: (i) each individual who served as the principal executive
officer and principal financial officer of our company during the
years ended December 31, 2019 and 2018; and (ii) each other
individual that served as an executive officer of our company at
the conclusion of the years ended December 31, 2019 and 2018 and
who received more than $100,000 in the form of salary and bonus
during such year. While our company was not incorporated until
March 7, 2018, we have included the information for certain
individuals who were employed and compensated by Singapore
eDevelopment or its subsidiaries. Such compensation was paid solely
for services rendered to such subsidiary. For purposes of this
prospectus, these individuals are collectively the “named
executive officers” of our company.
|
Name and
Position
|
Years
|
Salary
($)
|
Bonus
|
Stock
Awards
|
Option
Awards
|
Non-equity
Incentive Plan Compensation
|
Non-qualified
Deferred Compensation Earnings
|
All Other
Compensation
|
Total
($)
|
|
Chan Heng
Fai
|
2019
|
0
|
-
|
-
|
-
|
-
|
-
|
-
|
0
|
|
Chairman and Chief
Executive Officer
|
2018
|
77,793
|
-
|
-
|
-
|
-
|
-
|
-
|
77,793
|
|
Lui Wai Leung
Alan
|
2019
|
119,666
|
-
|
-
|
-
|
-
|
-
|
-
|
119,666
|
|
Co-Chief Financial
Officer
|
2018
|
113,422
|
-
|
-
|
-
|
-
|
-
|
-
|
113,422
|
|
Rongguo
Wei
|
2019
|
118,800
|
-
|
-
|
-
|
-
|
-
|
-
|
118,800
|
|
Co-Chief Financial
Officer
|
2018
|
118,800
|
-
|
-
|
-
|
-
|
-
|
-
|
118,800
|
|
Charles
MacKenzie
|
2019
|
-
|
-
|
-
|
-
|
-
|
-
|
240,000(1)
|
240,000(1)
|
|
Chief
Development Officer
|
2018
|
-
|
-
|
-
|
-
|
-
|
-
|
240,000(1)
|
240,000(1)
|
_____________
(1) Our Chief Development Officer and
director nominee Charles MacKenzie is compensated by a subsidiary
of our company pursuant to a consulting agreement in connection
with our subsidiary’s real estate projects. Mr. MacKenzie has
served as our Chief Development Officer since December of
2019.
Employment
and Consulting Agreements
We have not entered
into any written employment or consulting agreements with any
officer, director, employee or consultant, but expect to do so
prior to the closing of this offering.
Outstanding
Equity Awards at Fiscal Year End
No stock options or
other equity awards were granted to any of our named executive
officers during the year ended December 31,
2019.
2018
Incentive Compensation Plan
Under our 2018
Incentive Compensation Plan (the “Plan”), adopted by
our board of directors and holders of a majority of our outstanding
shares of common stock in September 2018, 500,000 shares of common
stock (subject to certain adjustments) are reserved for issuance
upon exercise of stock options and grants of other equity awards.
The Plan is designed to serve as an incentive for attracting and
retaining qualified and motivated employees, officers, directors,
consultants and other persons who provide services to us. The
compensation committee of our board of directors administers and
interprets the Plan and is authorized to grant stock options and
other equity awards thereunder to all eligible employees of our
company, including non-employee consultants to our company and
directors.
The Plan provides
for the granting of “incentive stock options” (as
defined in Section 422 of the Code), non-statutory stock options,
stock appreciation rights, restricted stock, restricted stock
units, deferred stock, dividend equivalents, bonus stock and awards
in lieu of cash compensation, other stock-based awards and
performance awards. Options may be granted under the Plan on such
terms and at such prices as determined by the compensation
committee of the board, except that the per share exercise price of
the stock options cannot be less than the fair market value of our
common stock on the date of the grant. Each option will be
exercisable after the period or periods specified in the stock
option agreement, but all stock options must be exercised within
ten years from the date of grant. Options granted under the Plan
are not transferable other than by will or by the laws of descent
and distribution. The compensation committee of the board has the
authority to amend or terminate the Plan, provided that no
amendment shall be made without stockholder approval if such
stockholder approval is necessary to comply with any tax or
regulatory requirement. Unless terminated sooner, the Plan will
terminate ten years from its effective date. The Plan also provides
that no participant may receive stock options or other awards under
the Plan that in the aggregate equal more than 30% of all options
or awards issued over the life of the Plan. To date, we have not
issued any stock options to officers, directors or employees. The
compensation committee intends to grant stock options to key
employees and non-executive directors of our company.
Director
Compensation
Following the
closing of this offering, we intend to compensate each non-employee
director through annual stock option grants and by paying a
quarterly cash fee. Currently, our directors do not receive
salaries or fees for serving on our board of directors, nor do they
receive any compensation for serving on committees. Chan Heng Fai has been compensated by our
subsidiary, Singapore eDevelopment, for his services as an officer
and director of that company and Aileen Ang has been compensated by
Singapore eDevelopment for her services as an officer. Our director
nominee Wong Tat Keung is currently compensated by Singapore
eDevelopment for his services as a director of that company. Our
Chief Development Officer and director nominee Charles MacKenzie is
compensated by a subsidiary of our company pursuant to a consulting
agreement in connection with our subsidiary’s real estate
projects. Our board of directors will review director compensation
annually and adjust it according to then current market conditions
and good business practices.
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
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. In addition, once we
become a public company, if a related person transaction will
compromise the independence of one of our directors, our audit
committee may recommend that our board of directors reject the
transaction if it could affect our ability to comply with
securities laws and regulations or Nasdaq listing
requirements.
Each transaction
described in “Certain Relationships and Related Party
Transactions” was entered into prior to the adoption of our
audit committee charter and the foregoing policy
proposal.
Transactions
and Relationships with Directors, Officers and 5%
Stockholders
100% of the
ownership interest in Hengfai International Pte. Ltd. was
transferred from Chan Heng Fai (an officer and director of our
company) to HF Enterprises Inc. in exchange for 8,500,000 shares of
our common stock to be held by HFE Holdings Limited. Hengfai
International Pte. Ltd., a Singapore limited company, is the sole
stockholder of Hengfai Business Development Pte. Ltd., which is the
owner of 761,150,294 ordinary shares of Singapore eDevelopment Ltd.
and warrants to purchase 359,834,471 ordinary shares of Singapore
eDevelopment Ltd.
Chan Heng Fai
transferred 100% of the ownership interest in Global eHealth
Limited to HF Enterprises Inc. in exchange for 1,000,000 shares of
our common stock to be held by HFE Holdings Limited. Global eHealth
Limited, a Hong Kong company, is the owner of 46,226,673 ordinary
shares, or 16.8%, of Holista
CollTech Limited.
Chan Heng Fai
transferred 100% of the ownership interest in Heng Fai Enterprises
Pte. Ltd.to HF Enterprises Inc. in exchange for 500,000 shares of
our common stock to be held by HFE Holdings Limited. Heng Fai
Enterprises Pte. Ltd., a Singapore limited company, owns 2,480,000
shares of common stock or 13.1% at December 31, 2019 and March 31,
2020, of Vivacitas Oncology Inc.
In addition to the 10,000,000 shares issued as
described above, 1,000 shares of our common stock were initially
issued at our incorporation. Pursuant to an
agreement entered into by us on June 24, 2020 with our stockholders
HFE Holdings Limited and Chan Heng Fai, HFE Holdings Limited
surrendered 3,600,000 shares of our common stock to the treasury of
our company, and Chan Heng Fai surrendered 1,000 shares of our
common stock to the treasury of our company, and all such shares
were cancelled. No consideration was exchanged in connection with
the surrender of the shares. As a result, the total number of
outstanding shares of our common stock before this offering was
reduced to 6,400,000 shares from 10,001,000
shares.
Loan from Chan Heng Fai
On July 27, 2020,
our founder, Chairman, and Chief Executive Officer, Chan Heng Fai,
agreed to loan us $1,200,000 Singapore Dollars (approximately
$900,000 U.S. Dollars), which we will use to exercise warrants to
purchase 30,000,000 shares of Singapore eDevelopment. We will issue
our founder a two-year, interest-free promissory note for such
loan.
Personal Guarantees by Directors
On December 31,
2017, certain directors of Singapore eDevelopment provided personal
guarantees amounting to approximately $5,500,000 to secure external
loans and borrowings from financial institutions for Singapore
eDevelopment.
Compensation of Key Management Personnel - Directors’
Interests in Employee Share Option Plan
During 2018,
options to purchase 530,667 shares of Singapore eDevelopment were
forfeited due to the resignation of two directors of Singapore
eDevelopment. As of December 31, 2019 and 2018, options to purchase
1,061,333 shares of Singapore eDevelopment were outstanding,
respectively.
LiquidValue Asset Management Pte. Ltd. Sale of
Shares
On May 8, 2019, SeD
Capital Pte. Ltd. entered into a sale and purchase agreement to
sell 522,000 ordinary shares (representing approximately 18% of the
ownership) in LiquidValue Asset Management Pte. Ltd. to LiquidValue
Development Pte. Ltd. (“LVD”) for a cash of $46,190.
Chan Heng Fai is the owner of LVD. $29,329 was recorded as
additional paid-in-capital.
Revenue from a Related Party
On
March 1, 2018, the Company’s subsidiary HotApp International
Ltd. entered into an Outsource Technology Development Agreement
with Document Security Systems, Inc. (“DSS”) which
could be terminated by either party on 30-days’ notice. The
purpose of such agreement was to facilitate DSS’ development
of a software application to be included as part of DSS’
AuthentiGuard® Technology suite. Under this agreement, DSS
agreed to pay $23,000 per month for access to HotApp International
Ltd.’s software programmers. This agreement was terminated on
July 31, 2018. Chan Heng Fai is a member of our Board of Directors
and, through his control of our majority stockholder, the
beneficial owner of a majority of our common stock. Chan Heng Fai
is also the Chairman of the Board of DSS and a stockholder of
DSS.
Sale of HotApp Blockchain to DSS Asia
On
October 25, 2018, HIP, a wholly owned subsidiary of HotApp
Blockchain, entered into an equity purchase agreement (the
“HotApps Purchase Agreement”) with DSS Asia, a Hong
Kong subsidiary of DSS International, pursuant to which HIP agreed
to sell to DSS Asia all of the issued and outstanding shares of
HotApps Information Technology Co. Ltd., also known as Guangzhou
HotApps, a wholly owned subsidiary of HIP. Guangzhou HotApps is
primarily engaged in engineering work for software development, as
well as, a number of outsourcing projects related to real estate
and lighting. Chan Heng Fai is the CEO of DSS Asia and DSS
International.
iGalen Inc. Affiliates
iGalen Philippines
and iGalen SDN are related party entities which are owned by Dr.
Rajen Manicka and are not owned by our company. iGalen Inc.
provides use of its platform to collect sale revenue and payment of
expenses for these entities without service fees. iGalen SDN has a
consulting agreement to provide accounting, administration and
other logistic services to iGalen with a monthly fee $4,000. The
Company incurred expenses of $12,000 for the three months ended
March 31, 2020 and 2019. During the years ended on December 31,
2019 and 2018, the Company incurred $48,000, respectively. On March
31, 2020 and December 31, 2019, iGalen owed $375,548 and $416,812,
respectively to iGalen Philippines and iGalen
SDN.
Medi Botanics Sdn
Bhd, a subsidiary of Holista CollTech, is only raw material and
product suppliers of iGalen. Dr. Rajen Manicka is the controlling
shareholder and a director of both Medi Botanics Sdn Bhd and
Holista CollTech. Medi Botanics Sdn Bhd supplied $0 and $31,886 raw
materials and products to iGalen in the three months ended March
31, 2020 and 2019, respectively. Medi Botanics Sdn Bhd supplied
$480,821 and $758,888 raw materials and products to iGalen in the
years ended December 31, 2019 and 2018, respectively. On both,
March 31, 2020 and December 31, 2019, iGalen owed $956,300 to this
entity.
Investment in the Global Opportunity Fund
On February 1,
2017, the Company invested $300,000 in Global Opportunity Fund, a
mutual fund registered in the Cayman Islands. Chan Heng Fai is one
of the directors of this fund. LiquidValue Asset Management Pte.
Ltd., one of the subsidiaries of our company, is the investment
manager of the fund and receives a management fee from the fund at
2% per annum of the aggregated net asset value of the investments
and a performance fee of 20%. As of December 31, 2019, the Company
recorded a receivable $307,944 from the Global Opportunity Fund. In
the three months ended on March 31, 2020 and 2019, the management
fee and performance fee charged to the Fund were $0 and $3,150,
respectively. On March 31, 2020 and December 31, 2019, the Fund
owed accrued management and performance fee receivable $0 and
$15,484 respectively. On January
23, 2020, we received $307,944 as a result of the liquidation of
Global Opportunity Fund.
Management Fees
150 CCM Black Oak
Ltd 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 is 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.
As of January 1,
2018, outstanding management fees payable to Arete and AREI are
$314,630 and $48,000, respectively and included in Accounts Payable
and Accrued Expenses. 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, 150 CCM Black Oak Ltd paid Arete $300,000 and AREI
$30,000 to fulfil the commitments.
MacKenzie Equity
Partners, owned by Charles MacKenzie, who serves as our Chief
Development Officer, a director of LiquidValue Development, an officer
of certain of our subsidiaries, and is a nominee to join our Board,
has had a consulting agreement with Singapore eDevelopment via SeD
Development Management since 2015. Pursuant to the terms of the
agreement, as amended on January 1, 2018, SeD Development
Management paid a monthly fee of $15,000 with an additional $5,000
per month to be paid when the property development cash flow
milestones have been met. Since January 2019, SeD Development
Management has paid a monthly consulting fee of $20,000. Singapore
eDevelopment incurred expenses of $60,000 and $60,000 for the three
months ended March 31, 2020 and 2019, respectively, which were
capitalized as part of Real Estate on the balance sheet as the
services relate to property and project management. As of March 31,
2020 and December 31, 2019, there was no outstanding balance due to
this entity.
Consulting Services
A
law firm owned by Conn Flanigan, a director of LiquidValue
Development, a 99.99%-owned subsidiary of Singapore eDevelopment,
performs consulting services for that company. Singapore
eDevelopment incurred expenses of $0 and $5,799 for the three
months ended March 31, 2020 and 2019, respectively. As of March 31,
2020 and December 31, 2019, there was no outstanding balance due to
this entity.
Rajen Manicka, the
Chief Executive Officer of Holista CollTech and Co-founder of
iGalen International Inc., performs consulting services for iGalen
Inc. iGalen Inc. incurred expenses of $0 and $60,000 for the three
months ended March 31, 2020 and 2019, respectively. On both, March
31, 2020 and December 31, 2019, iGalen owed this related party fees
for consulting services in the amount of $671,403. The
consulting services from Rajen Manicka were terminated on December
31, 2019.
Notes Payable
During the year
ended on December 31, 2017, a director of the Company lent
non-interest loans of $7,156,680, for the general operations of
Singapore eDevelopment. The loans are interest free, not tradable,
unsecured, and repayable on demand. On October 15, 2018, a formal
lending agreement between Singapore eDevelopment Ltd and Chan Heng
Fai was executed. Under the agreement, Chan Heng Fai provides a
lending credit limit of approximately $10 million for Singapore
eDevelopment Ltd with an interest rate of 6% per annum for the
outstanding borrowed amount, which commenced retroactively from
January 1, 2018. The loans are still not tradable, unsecured and
repayable on demand. As of
March 31, 2020 and December 31, 2019
the outstanding principal balance of the loan is $4,006,810 and
$4,246,604, respectively. Chan Heng Fai confirmed through a letter
that he would not demand the repayment within a year. Interest
started to accrue on January 1, 2018 at 6% per annum. During the
three months ended on March 31, 2020 and 2019, the interest expenses were $61,841 and
$104,769, respectively. During the years ended December 31, 2019
and 2018, the interest expenses were $358,203 and $357,048,
respectively. As of March 31, 2020 and December 31, 2019, the accrued interest total
was $831,816 and $822,405, respectively.
Prior to this
offering, Chan Heng Fai also provided an interest free short-term
loan to our company for general operations. As of March 31, 2020
and December 31, 2019, the loan balance was
$178,400.
On May 1, 2018,
Rajen Manicka, CEO and one of the directors of iGalen International
Inc. which holds 100% of iGalen LLC, provided a loan of
approximately $367,246 to iGalen LLC (the “2018 Rajen
Loan”). The term of this loan is ten years. The Loan has an
interest rate of 4.7% per annum. On March 8, March 27 and April 23,
2019, iGalen borrowed an additional $150,000, $30,000 and $50,000
respectively, from Rajen Manicka, totaling $230,000 (the
“2019 Rajen Loan”). The 2019 Rajen Loan is interest
free, not tradable, unsecured, and repayable on demand. As of March
31, 2020 and December 31, 2019, the total outstanding principal
balance of the 2018 and 2019 March Rajen Loan were $546,397 and
$546,397 respectively, and included in the Notes Payable –
Related Parties balance on our Consolidated Balance Sheets. During
the three months ended March 31, 2020 and 2019, we incurred $3,850
and $4,086 of interest expense, respectively. During the years
ended December 31, 2019 and 2018, the Company incurred $14,550 and
$15,560 of interest expense, respectively.
On August 13, 2019,
iGalen International Inc., which holds 100% of iGalen Inc.,
borrowed $250,000 from Decentralized Sharing Services, Inc., a
company whose sole shareholder and director is Chan Heng Fai, our
CEO. The term of the loan is 12 months, with an interest rate of
10% per annum. In addition, Decentralized Sharing Services, Inc.
received the right to receive 3% of any revenue received by iGalen
International Inc. for 99 years. During the three months
ended March 31, 2020, we incurred $6,164 of interest expense and $0
from the right to receive 3% of revenue. During the year ended
December 31, 2019 the Company incurred $9,589 of interest expense
and $0 from the right to receive 3% of revenue. The amount
outstanding on the loan as of March 31, 2020 and December 31, 2019
was $250,000 and $250,000, respectively. The accrued interest was
$15,822 and $9,589 as of March 31, 2020 and December 31, 2019. The
principal of the loan of $250,000 was paid off in June
2020.
On November 3,
2019, iGalen Inc. borrowed $160,000 from iGalen Funding Inc., a
company whose directors and shareholders include two members of the
Board of iGalen Inc. The term of the loan is 6 months, with an
interest rate of 10% per annum. During the three months ended March
31, 2020 the Company incurred $3,945 of interest expense. During
the year ended December 31, 2019 the Company incurred $2,542 of
interest expense. The amount outstanding on the loan as of March
31, 2020 and December 31, 2019 was $160,000 and $160,000,
respectively. The accrued interest was $6,532 and $2,542 as of
March 31, 2020 and December 31, 2019. The expiration date was
extended to November 3, 2020 after 6 months.
Note Receivable from a related party company
On March 2, 2020,
LiquivdValue Asset Management Pte. Ltd. (“LiquidValue”)
received a $200,000 Promissory Note from American Medical REIT Inc.
(“AMRE”), a company which is 36.1% owned by
LiquidValue. Chan Heng Fai and Alan Lui from Singapore eDevelopment
Limited are directors of AMRE. The note carries interest of 8% and
is payable in two years. LiquidValue also received warrants to
purchase AMRE shares at the exercise price $5.00 per share. The
amount of the warrants equals to the note principle divided by the
exercise price. If AMRE conducts initial public offering in the
future and the IPO price is less than $10.00 per share, the
exercise price shall be adjusted downward to 50% of the IPO price.
As of March 31, 2020, the fair market value of the warrants was
$0.
AMRE and AAMI
On March 3, 2020,
our subsidiary LiquidValue Asset Management Pte Ltd.
(“LVAM”) entered into a binding term sheet with DSS
Securities Inc., AMRE Asset Management, Inc. (“AAMI”)
and American Medical REIT Inc. (“AMRE”). It was agreed
that LVAM would acquire a 35% ownership interest in AAMI. DSS
Securities Inc. agreed to acquire 52.5% of AAMI. AMRE Tennessee,
LLC, an entity controlled by an officer and director of AAMI, will
own 12.5% of the remaining outstanding shares of AAMI. LVAM is a
Singapore limited company. LVAM is an 82% owned subsidiary of
Singapore eDevelopment Limited. DSS Securities Inc. is a subsidiary
of Document Security Systems, Inc. Chan Heng Fai is the Chairman of
the Board of Document Security Systems, Inc. and its largest
shareholder, with shares owned both personally and through our
company’s subsidiaries. AAMI currently has a 93% equity
interest in AMRE.
In connection with
the term sheet, on March 3, 2020, DSS Securities Inc. entered into
Promissory Notes whereby DSS Securities Inc. lent AMRE the
principal amount of $800,000 and LVAM lent AMRE the principal
amount of $200,000. These notes matures on March 3, 2022 and each
accrues interest at the rate of 8.0% per annum. For additional
information on this investment, see the description of American
Medical REIT Inc. on page 61.
The Board of
Directors and management of each of AMRE and AAMI includes several
individuals affiliated with our company, including our Chief
Executive Officer Chan Heng Fai, who serves as a member of the
Board of each of AMRE and AAMI. The Board of Directors of AAMI also
includes Lui Wai Leung Alan, our Co-Chief Financial Officer, and an
additional employee of Singapore eDevelopment. Rongguo Wei, our
other Co-Chief Financial Officer, serves as Treasurer of
AAMI.
In addition, Chan
Tung Moe serves as AAMI’s Vice President, as well as serving
as a member of its Board and as Director of Corporate Development
and a member of the Board of AMRE. Chan Tung Moe is Co-Chief
Executive Officer and a member of the Board of LiquidValue
Development Inc., as well as serving as Chief Executive Officer-
International and a member of the Board of Alset iHome Inc. Chan
Tung Moe is the son of our Chief Executive Officer, Chan Heng Fai.
Conn Flannigan, serves as Secretary and General Counsel and as a
member of the Board of AMRE and Secretary of AAMI. Conn Flannigan
is a member of the Boards of certain of our subsidiaries, including
LiquidValue Development Inc. and Alset iHome Inc., and has
previously served as an officer of several of our subsidiaries.
Chan Tung Moe and Conn Flannigan will each be compensated at a rate
of $120,000 per annum for their services to AMRE, however they will
initially only be paid at a rate of $90,000 per annum until such
time as AMRE raises additional funds, at which time they will be
paid the deferred portion of their
compensation.
Planned Reorganization of Certain Biohealth
Activities
On March 12, 2020,
two of Singapore eDevelopment’s subsidiaries, Global
BioMedical Pte Ltd, a Singapore corporation (“GBM”),
and Impact BioMedical Inc., a Nevada corporation and wholly owned
subsidiary of GBM (“Impact BioMedical”), entered into a
binding term sheet (the “Impact Term Sheet”) with
Document Security Systems, Inc. (“DSS”) and DSS
BioHealth Security, Inc., a wholly owned subsidiary of DSS
(“DBHS”). Pursuant to the Impact Term Sheet, DBHS will
acquire Impact BioMedical. Impact BioMedical owns 90.9% of Global
BioMedical, Inc., which in turn owns 70% of Global BioLife Inc.,
our main biohealth entity, which holds our company’s
interests in the Linebacker, 3F and Laetose projects. Upon the
completion of this transaction, our ownership interest in these
biohealth projects will be reduced, and our ownership interest in
DSS will be increased.
On April 27, 2020,
Singapore eDevelopment, GBM, DSS and DBHS entered into a share
exchange agreement that provided further details regarding this
planned transaction in which DBHS will acquire all of the
outstanding capital stock of Impact BioMedical through a share
exchange, with Impact BioMedical becoming a direct wholly owned
subsidiary of DBHS.
Our Chief Executive
Officer Chan Heng Fai is also the Chairman of the Board of Document
Security Systems, Inc. and its largest shareholder, with shares
owned both personally and through our company’s
subsidiaries.
See “Planned
Reorganization of Certain Biohealth Activities” on page 64
for additional details related to this planned
transaction.
Indemnification Agreements
We
intend to enter into an indemnification agreement with each of our
directors and executive officers. The indemnification agreements
and our certificate of incorporation and bylaws require us to
indemnify our directors and executive officers to the fullest
extent permitted by Delaware law. See “Management –
Indemnification of Directors and Executive
Officers.”
PRINCIPAL
STOCKHOLDERS
The following table
and accompanying footnotes set forth certain information with
respect to the beneficial ownership of our common stock as of
July 30, 2020, referred to in the table below as the
“Beneficial Ownership Date,” and as adjusted to reflect
the sale of shares of our common stock offered by this prospectus,
by:
●
each person who is
known to be the beneficial owner of 5% or more of the outstanding
shares of our common stock;
●
each member of our
board of directors, director nominees and each of our named
executive officers individually; and
●
all of our
directors, director nominees and executive officers as a
group.
Beneficial
ownership is determined in accordance with the rules of the SEC. In
computing the number of shares beneficially owned by a person and
the percentage ownership of that person, shares of common stock
subject to stock options or warrants held by that person that are
currently exercisable or exercisable within 60 days of the
Beneficial Ownership Date and shares of restricted stock subject to
vesting until the occurrence of certain events, including the
closing of this offering, are deemed outstanding, but are not
deemed outstanding for computing the percentage ownership of any
other person (however, neither the stockholder nor the directors
and officers listed below own any stock options or warrants to
purchase shares of our common stock at the present time). The
percentages of beneficial ownership are based on
6,400,000 shares of common stock outstanding as of the
Beneficial Ownership Date and 9,000,000 shares of
common stock outstanding immediately after this offering, assuming
that the underwriter will not exercise its option to purchase up to
390,000 additional shares of our common stock from us
in full.
To our knowledge,
except as set forth in the footnotes to this table and subject to
applicable community property laws, each person named in the table
has sole voting and investment power with respect to the shares set
forth opposite such person’s name. Except as otherwise
indicated, the address of each of the persons in this table is c/o
HF Enterprises Inc., 4800 Montgomery Lane, Suite 210, Bethesda,
Maryland 20814.
______________
(1)
Represents shares
of common stock owned of record by HFE Holdings Limited, of which
Chan Heng Fai has sole voting and investment power
with respect to such shares.
DESCRIPTION
OF CAPITAL STOCK
The following description summarizes important terms of our capital
stock. For a complete description, you should refer to our
certificate of incorporation and bylaws, forms of which are
incorporated by reference to the exhibits to the registration
statement of which this prospectus is a part, as well as the
relevant portions of the Delaware law. References to our
certificate of incorporation and bylaws are to our certificate of
incorporation and our bylaws, respectively, each of which will
become effective upon completion of this offering.
General
Our authorized
capital stock consists of 20,000,000 shares of common stock with a
$0.001 par value per share, and 5,000,000 shares of preferred
stock with a $0.001 par value per share, all of which shares
of preferred stock will be undesignated. Our board of directors may
establish the rights and preferences of the preferred stock from
time to time. As of July 30, 2020, there were
6,400,000 shares of common stock issued and
outstanding, held of record by one stockholder, HFE Holdings
Limited (an entity beneficially owned by Chan Heng Fai) and no
shares of preferred stock were issued or outstanding.
Common
Stock
Each holder of our
common stock is entitled to one vote for each share on all matters
to be voted upon by the stockholders and there are no cumulative
rights. Subject to any preferential rights of any outstanding
preferred stock, holders of our common stock are entitled to
receive ratably the dividends, if any, as may be declared from time
to time by the board of directors out of legally available funds.
If there is a liquidation, dissolution or winding up of our
company, holders of our common stock would be entitled to share in
our assets remaining after the payment of liabilities and any
preferential rights of any outstanding preferred
stock.
Holders of our
common stock have no preemptive or conversion rights or other
subscription rights, and there are no redemption or sinking fund
provisions applicable to the common stock. All outstanding shares
of our common stock will be fully paid and non-assessable. The
rights, preferences and privileges of the holders of our common
stock are subject to, and may be adversely affected by, the rights
of the holders of shares of any series of preferred stock which we
may designate and issue in the future.
Preferred
Stock
Under the terms of
our certificate of incorporation, our board of directors is
authorized to issue shares of preferred stock in one or more series
without stockholder approval. Our board of directors has the
discretion to determine the rights, preferences, privileges and
restrictions, including voting rights, dividend rights, conversion
rights, redemption privileges and liquidation preferences, of each
series of preferred stock.
The purpose of
authorizing our board of directors to issue preferred stock and
determine its rights and preferences is to eliminate delays
associated with a stockholder vote on specific issuances. The
issuance of preferred stock, while providing flexibility in
connection with possible future acquisitions and other corporate
purposes, will affect, and may adversely affect, the rights of
holders of common stock. It is not possible to state the actual
effect of the issuance of any shares of preferred stock on the
rights of holders of common stock until the board of directors
determines the specific rights attached to that preferred stock.
The effects of issuing preferred stock could include one or more of
the following:
●
restricting
dividends on the common stock;
●
diluting the voting
power of the common stock;
●
impairing the
liquidation rights of the common stock; or
●
delaying or
preventing changes in control or management of our
company.
We have no present
plans to issue any shares of preferred stock.
Effect
of Certain Provisions of our Charter and Bylaws and the Delaware
Anti-Takeover Statute
Certain provisions
of Delaware law, our certificate of incorporation and our bylaws
contain provisions that could have the effect of delaying,
deferring or discouraging another party from acquiring control of
us. These provisions, which are summarized below, may have the
effect of discouraging coercive takeover practices and inadequate
takeover bids. These provisions are also designed, in part, to
encourage persons seeking to acquire control of us to first
negotiate with our board of directors. We believe that the benefits
of increased protection of our potential ability to negotiate with
an unfriendly or unsolicited acquirer outweigh the disadvantages of
discouraging a proposal to acquire us because negotiation of these
proposals could result in an improvement of their
terms.
No cumulative voting
The Delaware
General Corporation Law provides that stockholders are not entitled
to the right to cumulate votes in the election of directors unless
our certificate of incorporation provides otherwise. Our
certificate of incorporation and bylaws prohibit cumulative voting
in the election of directors.
Undesignated preferred stock
The ability to
authorize undesignated preferred stock makes it possible for our
board of directors to issue one or more series of preferred stock
with voting or other rights or preferences that could impede the
success of any attempt to change control. These and other
provisions may have the effect of deferring hostile takeovers or
delaying changes in control or management of our
company.
Calling of special meetings of stockholders
Our charter
documents provide that a special meeting of stockholders may be
called only by resolution adopted by our board of directors,
chairman of the board of directors or chief executive officer or
upon the written request of stockholders owning at least 33.3% of
the outstanding common stock. Stockholders owning less than such
required amount may not call a special meeting, which may delay the
ability of our stockholders to force consideration of a proposal or
for holders controlling a majority of our capital stock to take any
action, including the removal of directors.
Requirements for advance notification of stockholder nominations
and proposals
Our bylaws
establish advance notice procedures with respect to stockholder
proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of
the board of directors or a committee of the board of directors.
However, our bylaws may have the effect of precluding the conduct
of certain business at a meeting if the proper procedures are not
followed. These provisions may also discourage or deter a potential
acquirer from conducting a solicitation of proxies to elect the
acquirer’s own slate of directors or otherwise attempting to
obtain control of our company.
Section 203 of the Delaware General Corporation
Law
Upon completion of
this offering, we will be subject to the provisions of Section 203
of the Delaware General Corporation Law. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in a
“business combination” with an “interested
stockholder” for a three-year period following the time that
this stockholder becomes an interested stockholder, unless the
business combination is approved in a prescribed manner. Under
Section 203, a business combination between a corporation and
an interested stockholder is prohibited unless it satisfies one of
the following conditions:
●
before the
stockholder became interested, our board of directors approved
either the business combination or the transaction which resulted
in the stockholder becoming an interested stockholder;
●
upon consummation
of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining
the voting stock outstanding, shares owned by persons who are
directors and also officers, and employee stock plans, in some
instances, but not the outstanding voting stock owned by the
interested stockholder; or
●
at or after the
time the stockholder became interested, the business combination
was approved by our board of directors and authorized at an annual
or special meeting of the stockholders by the affirmative vote of
at least two-thirds of the outstanding voting stock which is not
owned by the interested stockholder.
Section 203
defines a business combination to include:
●
any merger or
consolidation involving the corporation and the interested
stockholder;
●
any sale, transfer,
lease, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the
corporation;
●
subject to
exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder;
●
subject to
exceptions, any transaction involving the corporation that has the
effect of increasing the proportionate share of the stock of any
class or series of the corporation beneficially owned by the
interested stockholder; and
●
the receipt by the
interested stockholder of the benefit of any loans, advances,
guarantees, pledges or other financial benefits provided by or
through the corporation.
In general,
Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting
stock of the corporation and any entity or person affiliated with
or controlling or controlled by the entity or person.
Choice of Forum
Our certificate of
incorporation provides that, unless we consent in writing to the
selection of an alternative forum, the Court of Chancery of the
State of Delaware will be the sole and exclusive forum for (i) any
derivative action or proceeding brought on our behalf, (ii) any
action asserting a claim of breach of a fiduciary duty owed by our
directors, officers or other employees to us or to our
stockholders, (iii) any action asserting a claim against us or any
director, officer or other employee arising pursuant to any
provision of the Delaware General Corporation Law, our certificate
of incorporation or bylaws or (iv) any action asserting a claim
governed by the internal affairs doctrine, in all cases
to the fullest extent permitted by law and subject to the court
having personal jurisdiction over the indispensable parties named
as defendants; provided that these provisions of our certificate of
incorporation will not apply to suits brought to enforce a duty or
liability created by the Exchange Act, or any other claim for which
the federal courts have exclusive jurisdiction. Our certificate of
incorporation further provides that the federal district courts of
the United States of America will be the exclusive forum for
resolving any complaint asserting a cause of action arising under
the Securities Act, unless we consent in writing to the selection
of an alternative forum.
Limitations
of Liability and Indemnification
See “Certain
Relationships and Related Party Transactions - Indemnification
Agreements.”
Exchange
Listing
We intend to list
our common stock for trading on the Nasdaq Capital Market under the
symbol HFEN.
Transfer
Agent and Registrar
Upon the completion of this offering, the
transfer agent and registrar for our common stock will be Direct
Transfer, Raleigh, North Carolina.
SHARES
ELIGIBLE FOR FUTURE SALE
Prior to this
offering, there has not been a public market for shares of our
common stock. Future sales of substantial amounts of shares of our
common stock, including shares issued upon the exercise of options
which may be granted, in the public market after our initial public
offering, or the possibility of these sales occurring, could cause
the prevailing market price for our common stock to fall or impair
our ability to raise equity capital in the future.
We will have
9,000,000 shares of common stock outstanding
immediately after the completion of this offering based on the
number of shares outstanding on July 30, 2020 and
assuming no exercise of options after such date (or
9,390,000 shares if the underwriter exercises its
over-allotment option to purchase additional shares in full). Of
those shares, the 2,600,000 shares of common stock sold in the
offering (or 2,990,000 shares if the underwriter exercises its
over-allotment option to purchase additional shares in full) will
be freely transferable without restriction, unless purchased by
persons deemed to be our “affiliates” as that term is
defined in Rule 144 under the Securities Act. Any shares
purchased by an affiliate may not be resold except pursuant to an
effective registration statement or an applicable exemption from
registration, including an exemption under Rule 144
promulgated under the Securities Act. The remaining
6,400,000 shares of common stock to be outstanding
immediately following the completion of this offering are
“restricted,” which means they were originally sold in
offerings that were not registered under the Securities Act.
Restricted shares may be sold through registration under the
Securities Act or under an available exemption from registration,
such as provided through Rule 144, which rules are summarized
below. Taking into account the lock-up agreements described below,
and assuming the underwriter does not release any stockholders from
the lock-up agreements, the restricted shares of our common stock
will be available for sale in the public market as
follows:
●
2,600,000 shares
will be eligible for sale immediately upon completion of this
offering; and
●
6,400,000
shares will become eligible for sale, subject to the provisions of
Rule 144 or Rule 701, upon the expiration of lock-up
agreements not to sell such shares entered into between the
underwriter and such stockholders beginning six months after the
effectiveness of this prospectus.
Rule
144
In general, under
Rule 144 of the Securities Act, as in effect on the date of
this prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned restricted stock for at least three
months, will be entitled to sell in any three-month period a number
of shares that does not exceed the greater of:
●
1% of the number of
shares of common stock then outstanding (90,000 shares
immediately after this offering or 93,900 shares if
the underwriter’s over-allotment option to purchase
additional shares is exercised in full); or
●
the average weekly
trading volume of our common stock on Nasdaq during the four
calendar weeks immediately preceding the date on which the notice
of sale is filed with the SEC.
Subject to the
lock-up agreements described above, our affiliates who have
beneficially owned shares of our common stock for at least nine
months, including the holding period of any prior owner other than
one of our affiliates, will be entitled to sell within any
three-month period a number of shares that does not exceed the
greater of:
●
1% of the number of
shares of our common stock then outstanding, which will equal
approximately 90,000 shares immediately after this
offering; and
●
the average weekly
trading volume in our common stock on Nasdaq during the four
calendar weeks preceding the date of filing of a Notice of Proposed
Sale of Securities Pursuant to Rule 144 with respect to the
sale.
Sales pursuant to
Rule 144 are subject to requirements relating to manner of
sale, notice and availability of current public information about
us. A person (or persons whose shares are aggregated) who is not
deemed to be an affiliate of ours for 90 days preceding a
sale, and who has beneficially owned restricted stock for at least
one year is entitled to sell such shares without complying with the
manner of sale, public information, volume limitation or notice
provisions of Rule 144. Rule 144 will not be available to
any stockholders until we have been subject to the reporting
requirements of the Exchange Act for 90 days.
Rule
701
Rule 701 under the
Securities Act, as in effect on the date of this prospectus,
permits resale of shares in reliance upon Rule 144 but without
compliance with certain restrictions of Rule 144, including the
holding period requirement. Most of our employees, executive
officers, directors or consultants who purchased shares under a
written compensatory plan or contract may be entitled to rely on
the resale provisions of Rule 701, but all holders of Rule 701
shares are required to wait until 90 days after the date of this
prospectus before selling their shares. However, substantially all
Rule 701 shares are subject to lock up agreements as described
below and under the section “Underwriting” included in
this prospectus and will become eligible for sale upon the
expiration of the restrictions set forth in those
agreements.
Lock-Up
Agreements
Our directors,
executive officers and holders of 5% or more of our outstanding
shares following this offering will enter into lock-up agreements
with the representative prior to the commencement of this offering
pursuant to which each of these persons or entities will agree not
to sell or otherwise dispose of any common stock or securities
convertible into or exercisable or exchangeable for shares of
common stock for a period of six months after the effectiveness of
this prospectus, subject to certain exceptions. See
“Underwriting” for a description of these lock-up
provisions.
UNDERWRITING
Subject to the
terms and conditions set forth in the underwriting agreement
between us and the underwriters named below, for whom WestPark
Capital is acting as the representative (the
“Representative”), we have agreed to sell to the
underwriters, and each underwriter has severally agreed to
purchase, the number of shares of our common stock listed next to
its name in the following table:
|
Underwriter
|
Number of
Shares
|
|
WestPark
Capital
|
|
|
|
|
|
Total
|
2,600,000
|
Under the terms of
the underwriting agreement, the underwriters are committed to
purchase all of the shares offered by this prospectus (other than
the shares subject to the underwriters’ option to purchase
additional shares), if the underwriters buy any of such shares. The
underwriters’ obligation to purchase the shares is subject to
satisfaction of certain conditions, including, among others, the
continued accuracy of representations and warranties made by us in
the underwriting agreement, delivery of legal opinions and the
absence of any material changes in our assets, business or
prospects after the date of this prospectus.
The underwriters
initially propose to offer the common stock directly to the public
at the public offering price set forth on the front cover page of
this prospectus and to certain dealers at such offering price less
a concession not to exceed $____ per share. After the initial
public offering of the shares of our common stock, the offering
price and other selling terms may be changed by the underwriters.
Over-Allotment
Option
We have granted to
the underwriters an option to purchase up to 390,000 additional
shares of our common stock at the same price per share as they are
paying for the shares shown in the table above. The underwriters
may exercise this option in whole or in part at any time within 60
days after the date of the underwriting agreement. To the extent
the underwriters exercise this option, each underwriter will be
committed, so long as the conditions of the underwriting agreement
are satisfied, to purchase a number of additional shares
proportionate to that underwriters’ initial commitment as
indicated in the table at the beginning of this section plus, in
the event that any underwriter defaults in its obligation to
purchase shares under the underwriting agreement, certain
additional shares.
Underwriting
Commissions and Discounts and Expenses
The following table
shows the per share and total underwriting discounts and
commissions we will pay to the underwriters. These amounts are
shown assuming both no exercise and full exercise of the
underwriters’ option to purchase additional shares of our
common stock.
|
|
|
Total
|
|
|
|
Per
Share
|
No
Exercise
|
Full
Exercise
|
|
Public offering
price
|
$
|
$
|
$
|
|
Underwriting
discounts and commissions to be paid by us:
|
$
|
$
|
$
|
|
Total
|
$
|
$
|
$
|
|
Proceeds, before
expenses, to us
|
$
|
$
|
$
|
We estimate that
the total expenses of the offering payable by us, excluding
underwriting discounts and commissions, will be approximately
$1,140,829, including a 3% unaccountable expense allowance. We have
agreed to reimburse the underwriters for certain of their expenses,
including fees of counsel in connection with filing with FINRA, in
an amount not to exceed $75,000. A non-refundable retainer of
$50,000 has been previously paid to the
representative.
As additional
compensation to the underwriter, upon consummation of this
offering, we will issue to the underwriter or its designees a
warrant to purchase an aggregate number of shares of our common
stock equal to 10% of the number of shares of common stock issued
in this offering, at an exercise price per share equal to 120% of
the initial public offering price (the “Underwriter
Warrant”). The Underwriter Warrant and the underlying shares
of common stock will not be exercised, sold, transferred, assigned,
or hypothecated or be the subject of any hedging, short sale,
derivative, put or call transaction that would result in the
effective economic disposition of the Underwriter Warrant by any
person for a period of 180 days from the effective date of the
registration statement for this offering in accordance with FINRA
Rule 5110. The Underwriter Warrant will expire on the
third anniversary of the effective date of the
registration statement for this offering.
Right
of First Refusal
In connection with
this offering, we granted the Representative a right of first
refusal for a period of three years following the closing of this
offering or until an offering occurs which the Representative
declined, to effect a proposed U.S. public offering of any debt or
equity securities (other than bank debt or similar financing) by us
or any of our majority owned or controlled U.S. subsidiaries, on
terms as favorable as previously offered in writing by a reputable
investment banker, subject to certain
exceptions.
Stabilization
In accordance with
Regulation M under the Exchange Act, the underwriters may engage in
activities that stabilize, maintain or otherwise affect the price
of our common stock, including short sales and purchases to cover
positions created by short positions, stabilizing transactions,
syndicate covering transactions, penalty bids and passive market
making.
|
●
|
Short positions
involve sales by the underwriters of shares in excess of the number
of shares the underwriters are obligated to purchase, which creates
a syndicate short position. The short position may be either a
covered short position or a naked short position. In a covered
short position, the number of shares involved in the sales made by
the underwriters in excess of the number of shares they are
obligated to purchase is not greater than the number of shares that
they may purchase by exercising their option to purchase additional
shares. In a naked short position, the number of shares involved is
greater than the number of shares in their option to purchase
additional shares. The underwriters may close out any short
position by either exercising their option to purchase additional
shares or purchasing shares in the open market.
|
|
●
|
Stabilizing
transactions permit bids to purchase the underlying security as
long as the stabilizing bids do not exceed a specific maximum
price.
|
|
●
|
Syndicate covering
transactions involve purchases of our common stock in the open
market after the distribution has been completed to cover syndicate
short positions. In determining the source of shares to close out
the short position, the underwriters will consider, among other
things, the price of shares available for purchase in the open
market as compared to the price at which they may purchase shares
through the underwriters’ option to purchase additional
shares. If the underwriters sell more shares than could be covered
by the underwriters’ option to purchase additional shares,
thereby creating a naked short position, the position can only be
closed out by buying shares in the open market. A naked short
position is more likely to be created if the underwriters are
concerned that there could be downward pressure on the price of the
shares in the open market after pricing that could adversely affect
investors who purchase in the offering.
|
|
●
|
Penalty bids permit
the representative to reclaim a selling concession from a syndicate
member when the common stock originally sold by the syndicate
member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
|
|
●
|
In passive market
making, market makers in our common stock who are underwriters or
prospective underwriters may, subject to limitations, make bids for
or purchase shares of our common stock until the time, if any, at
which a stabilizing bid is made.
|
These activities
may have the effect of raising or maintaining the market price of
our common stock or preventing or retarding a decline in the market
price of our common stock. As a result of these activities, the
price of our common stock may be higher than the price that might
otherwise exist in the open market. These transactions may be
effected on Nasdaq or otherwise and, if commenced, may be
discontinued at any time.
Neither we nor any
of the underwriters make any representation or prediction as to the
direction or magnitude of any effect that the transactions
described above may have on the price of our common stock. In
addition, neither we nor any of the underwriters make any
representation that the Representative will engage in these
stabilizing transactions or that any transaction, once commenced,
will not be discontinued without notice.
Indemnification
We have agreed to
indemnify the underwriter against all losses, claims, damages,
expenses and liabilities, as the same are incurred (including the
reasonable fees and expenses of counsel), relating to or arising
out of the offering, undertaken in good faith.
Discretionary
Accounts
The underwriters
have informed us that they do not expect to make sales to accounts
over which they exercise discretionary authority in excess of 5% of
the shares of our common stock being offered in this
offering.
IPO
Pricing
Prior to the
completion of this offering, there has been no public market for
our common stock. The initial public offering price has been
negotiated between us and the Representative. Among the factors
considered in these negotiations are: the history of, and prospects
for, us and the industry in which we compete; our past and present
financial performance; an assessment of our management; the present
state of our development; the prospects for our future earnings;
the prevailing conditions of the applicable United States
securities market at the time of this offering; previous trading
prices for our common stock in the private market and market
valuations of publicly traded companies that we and the
Representative believe to be comparable to us.
Lock-Up
Agreements
We have agreed that
for a period of six months after the date of the effectiveness of
this prospectus, we will not, without the prior written consent of
the Representative, which may be withheld or delayed in its sole
discretion:
|
●
|
offer, pledge,
sell, contract to sell, contract to purchase, or purchase any
option or contract to sell, grant any option, right or warrant for
the sale of, lend or otherwise dispose of or transfer, directly or
indirectly, any of our common stock or any securities convertible
into or exercisable or exchangeable for our common stock, or file
any registration statement under the Securities Act with respect to
any of the foregoing; or
|
|
●
|
enter into any swap
or other arrangement that transfers to another, in whole or in
part, directly or indirectly, any of the economic consequences of
ownership of any of our common stock,
|
whether any such
transaction described above is to be settled by delivery of shares
of our common stock or such other securities, in cash or otherwise.
The prior sentence will not apply to (i) the shares to be sold
pursuant to the underwriting agreement, (ii) any shares of our
common stock issued by us upon the exercise of an option or other
security outstanding on the date hereof, (iii) such issuances of
options or grants of restricted stock or other equity-based awards
under our 2018 Incentive Compensation Plan and the issuance of
shares issuable upon exercise of any such equity-based awards, and
(iv) the filing by us of registration statements on Form
S-8.
Each of our
stockholders, directors and our executive officers has agreed that
for a period ending six months after the date of the effective of
this prospectus, none of them will, without the prior written
consent of the Representative which may be withheld or delayed in
the Representative’s sole discretion:
|
●
|
offer, pledge,
sell, contract to sell, contract to purchase, or purchase any
option or contract to sell, grant any option, right or warrant for
the sale of, lend or otherwise dispose of or transfer, directly or
indirectly, any shares of our common stock, or any securities
convertible into or exercisable or exchangeable for our common
stock owned directly by such director or executive officer or with
respect to which such director or executive officer has beneficial
ownership; or
|
|
●
|
enter into any swap
or other arrangement that transfers to another, in whole or in
part, directly or indirectly, any of the economic consequences of
ownership of our common stock, whether any such transaction
described above is to be settled by delivery of our common stock or
such other securities, in cash or otherwise.
|
Notwithstanding the
prior sentence, subject to applicable securities laws and the
restrictions contained in our charter, our directors and executive
officers may transfer our securities: (i) pursuant to the exercise
or conversion of our securities, including, without limitation,
options and warrants; (ii) as a bona fide gift or gifts, provided
that the donee or donees thereof agree to be bound in writing by
the restrictions set forth above; (iii) to any trust for the direct
or indirect benefit of such director or executive officer or the
immediate family of such director or executive officer, provided
that the trustee of the trust agrees to be bound in writing by the
restrictions set forth above; (iv) pursuant to any transfer
required under any benefit plans or our charter or bylaws; (v) as
required by participants in our 2018 Incentive Compensation Plan
stock incentive plan in order to reimburse or pay federal income
tax and withholding obligations in connection with vesting of
restricted stock grants or the exercise of stock options or
warrants; or (vi) in or in connection with any merger,
consolidation, combination or sale of all or substantially all of
our assets or in connection with any tender offer or other offer to
purchase at least 50% of our common stock.
Notwithstanding
the foregoing, nothing shall prevent our directors or executive
officers from, or restrict their ability to, (i) purchase our
securities in a public or private transaction, or (ii) exercise or
convert any options, warrants or other convertible securities
issued to or held by such director or executive officer, including
those granted under our 2018 Incentive Compensation
Plan.
Other
Relationships
WestPark Capital
may in the future provide us and our affiliates with investment
banking and financial advisory services for which Westpark Capital
may in the future receive customary fees. WestPark Capital, as the
Representative, may release, or authorize us to release, as the
case may be, the common stock and other securities subject to the
lock-up agreements described above in whole or in part at any time
with or without notice.
Electronic
Distribution
A prospectus in
electronic format may be made available on the websites maintained
by one or more of the underwriters or selling group members, if
any, participating in the offering. The Representative may allocate
a number of shares to the underwriters and selling group members,
if any, for sale to their online brokerage account holders. Any
such allocations for online distributions will be made by the
representative on the same basis as other allocations.
Listing
In connection with
this offering, we intend to apply to have our common stock listed
on the Nasdaq Capital Market under the symbol HFEN. There is no
assurance, however, that our common stock will be listed on the
Nasdaq Capital Market or any other national securities
exchange.
Transfer
Agent and Registrar
The transfer agent
and registrar for our common stock is Direct Transfer, Raleigh,
North Carolina.
INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Section 145 of
the Delaware General Corporation Law, as amended, authorizes us to
indemnify any director or officer under certain prescribed
circumstances and subject to certain limitations against certain
costs and expenses, including attorney’s fees actually and
reasonably incurred in connection with any action, suit or
proceeding, whether civil, criminal, administrative or
investigative, to which a person is a party by reason of being one
of our directors or officers if it is determined that such person
acted in accordance with the applicable standard of conduct set
forth in such statutory provisions. Our certificate of
incorporation contains provisions relating to the indemnification
of director and officers and our bylaws extend such indemnities to
the full extent permitted by Delaware law. We may also
purchase and maintain insurance for the benefit of any director or
officer, which may cover claims for which we could not indemnify
such persons.
Insofar as
indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling us
pursuant to the foregoing provisions, or otherwise, we have been
advised that in the opinion of the SEC, such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable.
Olshan Frome
Wolosky LLP, New York, New York, as our counsel, will pass upon the
validity of the issuance of the shares of our common stock being
offered by this prospectus. Manatt, Phelps & Phillips, LLP,
Costa Mesa, California, is acting as counsel for the underwriter in
connection with this offering.
The consolidated
financial statements of HF Enterprises Inc. as of December 31,
2019 and 2018 included in this prospectus
and in this registration statement have been so included in
reliance on the report of Rosenberg Rich Baker Berman, P.A., an
independent registered public accounting firm, appearing elsewhere
herein and in this registration statement, given on the authority
of said firm as experts in auditing and accounting.
We have filed with
the SEC a registration statement on Form S-1 (including the
exhibits, schedules and amendments to the registration statement)
under the Securities Act with respect to the shares of our common
stock offered by this prospectus. This prospectus does not
contain all the information set forth in the registration
statement. For further information with respect to us and the
shares of our common stock to be sold in this offering, we refer
you to the registration statement. Statements contained in
this prospectus as to the contents of any contract, agreement or
other documents to which we make reference are not necessarily
complete. In each instance, we refer you to the copy of such
contract, agreement or other document filed as an exhibit to the
registration statement.
Following this
offering, we will be subject to the reporting and information
requirements of the Exchange Act and, as a result, we will file
annual, quarterly and current reports, and other information with
the SEC. You may read and copy this information at the Public
Reference Room of the SEC located at 100 F Street, N.E.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for
further information on the operation of the Public Reference Room.
Copies of all or any part of the registration statement may be
obtained from the SEC’s offices upon payment of fees
prescribed by the SEC. The SEC maintains an internet site that
contains periodic and current reports, information statements and
other information regarding issuers that file electronically with
the SEC. The address of the SEC’s website is
http://www.sec.gov.
We will provide a
copy of our annual report to stockholders, including our audited
consolidated financial statements, at no charge upon written
request sent to HF Enterprises Inc., 4800 Montgomery Lane, Suite
210, Bethesda, Maryland 20814. Our corporate website is located at
http://www.hfenterp.com. The information on, or that can be
accessed through, our website is not incorporated by reference into
this prospectus and should not be considered to be a part of this
prospectus.
HF Enterprises Inc. and Subsidiaries
Table of Contents
For the Three Months Ended March 31, 2020 and 2019
|
Condensed
Consolidated Balance Sheets
|
F-1
|
|
|
|
|
Condensed
Consolidated Statements of Operations and Other Comprehensive
Loss
|
F-2
|
|
|
|
|
Condensed
Consolidated Statements of Stockholders’ Equity
|
F-3
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows
|
F-4
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
F-5 -
F-35
|
HF Enterprises Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
|
|
March 31, 2020
|
December 31, 2019
|
|
Assets:
|
( Unaudited)
|
|
|
Current
Assets:
|
|
|
|
Cash
|
$2,178,577
|
$2,883,318
|
|
Restricted
Cash
|
4,911,068
|
4,447,678
|
|
Account
Receivables, Net
|
53,302
|
170,442
|
|
Other
Receivables
|
355,022
|
681,677
|
|
Note
Receivables - Related Party
|
201,333
|
-
|
|
Prepaid
Expenses
|
218,792
|
175,886
|
|
Inventory
|
131,261
|
116,698
|
|
Investment
in Securities at Fair Value
|
3,484,299
|
3,015,698
|
|
Investment
in Securities at Cost
|
200,128
|
200,128
|
|
Investment
in Securities at Equity Method
|
2,133
|
-
|
|
Deposits
|
70,208
|
70,208
|
|
Total
Current Assets
|
11,806,123
|
11,761,733
|
|
|
|
|
|
Real
Estate
|
|
|
|
Properties
under Development
|
23,900,656
|
23,884,704
|
|
Operating
Lease Right-Of-Use Asset
|
128,436
|
146,058
|
|
Property
and Equipment, Net
|
75,728
|
80,285
|
|
Total
Assets
|
$35,910,943
|
$35,872,780
|
|
|
|
|
|
Liabilities
and Stockholders' Equity:
|
|
|
|
Current
Liabilities:
|
|
|
|
Accounts
Payable and Accrued Expenses
|
$4,198,116
|
$4,002,022
|
|
Accrued
Interest - Related Parties
|
854,170
|
834,536
|
|
Deferred
Revenue
|
308,864
|
258,594
|
|
Builder
Deposits
|
1,073,820
|
890,069
|
|
Operating
Lease Liability
|
109,810
|
58,865
|
|
Note
Payable
|
137,601
|
157,105
|
|
Note
Payable- Related Parties
|
410,000
|
410,000
|
|
Income
Tax Payable
|
420,327
|
420,327
|
|
Total
Current Liabilities
|
7,512,708
|
7,031,518
|
|
Long-Term
Liabilities:
|
|
|
|
Builder
Deposits
|
1,086,439
|
1,555,200
|
|
Operating
Lease Liability
|
20,879
|
91,330
|
|
Notes
Payable - Related Parties
|
4,731,607
|
4,971,401
|
|
Total
Liabilities
|
13,351,633
|
13,649,449
|
|
|
|
|
|
Stockholders'
Equity:
|
|
|
|
Preferred
Stock, $0.001 par value; 5,000,000 shares authorized, none
issued
|
|
-
|
|
Common
Stock, $0.001 par value; 20,000,000 shares authorized;
10,001,000
|
|
|
|
shares
issued and outstanding on March 31, 2020 and December 31, 2019,
respectively
|
10,001
|
10,001
|
|
Additional
Paid In Capital
|
54,266,987
|
54,263,717
|
|
Accumulated
Deficit
|
(38,922,255)
|
(40,494,115)
|
|
Accumulated
Other Comprehensive Income
|
365,219
|
1,468,269
|
|
Total
Stockholders' Equity
|
15,719,952
|
15,247,872
|
|
Non-controlling
Interests
|
6,839,358
|
6,975,459
|
|
Total
Stockholders' Equity
|
22,559,310
|
22,223,331
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
$35,910,943
|
$35,872,780
|
See accompanying notes to condensed consolidated financial
statements.
HF Enterprises Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Other
Comprehensive Income
For the Three Months Ended March 31, 2020 and 2019
(Unaudited)
|
|
2020
|
2019
|
|
Revenue
|
|
|
|
Property
Sales
|
$2,954,389
|
$11,318,595
|
|
Biohealth
Product Sales
|
10,782
|
445,093
|
|
Others
|
-
|
7,632
|
|
|
2,965,171
|
11,771,320
|
|
Operating
Expenses
|
|
|
|
Cost
of Sales
|
2,383,703
|
10,558,801
|
|
General
and Administrative
|
920,124
|
1,462,450
|
|
Research
and Development
|
2,009
|
82,087
|
|
|
3,305,836
|
12,103,338
|
|
|
|
|
|
Loss
From Operations
|
(340,665)
|
(332,018)
|
|
|
|
|
|
Other
Income (Expense)
|
|
|
|
Interest
Income
|
7,810
|
15,266
|
|
Interest
Expense
|
(60,931)
|
(104,769)
|
|
Gain
on Disposal of Subsidiary
|
-
|
299,255
|
|
Foreign
Exchange Transaction Gain (Loss)
|
2,118,952
|
(211,998)
|
|
Unrealized
Gain on Securities Investment
|
484,362
|
734,599
|
|
Loss
on Investment on Security by Equity Method
|
-
|
(3,206)
|
|
Other
Income
|
5,471
|
1,500
|
|
|
2,555,664
|
730,647
|
|
|
|
|
|
Net
Income from Continuing Operations Before Income Taxes
|
2,214,999
|
398,629
|
|
|
|
|
|
Income
Tax Benefit (Expense)
|
-
|
-
|
|
|
|
|
|
Net
Income from Continuing Operations
|
2,214,999
|
398,629
|
|
|
|
|
|
Loss
from Discontinued Operations, Net of Tax
|
-
|
(3,712)
|
|
Net
Income
|
2,214,999
|
394,917
|
|
|
|
|
|
Net
Income Attributable to Non-Controlling Interest
|
643,139
|
50,766
|
|
|
|
|
|
Net
Income Attributable to Common Stockholders
|
$1,571,860
|
$344,151
|
|
|
|
|
|
Other
Comprehensive Income (Loss), Net
|
|
|
|
Unrealized
Gain (Loss) on Securities Investment
|
(12,599)
|
16,902
|
|
Foreign
Currency Translation Adjustment
|
(1,674,021)
|
107,456
|
|
Comprehensive
Income
|
528,379
|
519,275
|
|
|
|
|
|
Comprehensive
Income Attributable to Non-controlling Interests
|
59,569
|
89,180
|
|
|
|
|
|
Comprehensive
Income Attributable to Common Stockholders
|
$468,810
|
$430,095
|
|
|
|
|
|
Net
Income (Loss) Per Share - Basic and Diluted
|
|
|
|
Continuing
Operations
|
$0.16
|
$0.03
|
|
Discontinued
Operations
|
$-
|
$(0.00)
|
|
Net
Income Per Share
|
$0.16
|
$0.03
|
|
|
|
|
|
Weighted
Average Common Shares Outstanding - Basic and Diluted
|
10,001,000
|
10,001,000
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial
statements.
|
|
|
HF Enterprises Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’
Equity
For the Three Months Ended March 31, 2020 and 2019
(Unaudited)
HF Enterprises Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2020 and 2019
(Unaudited)
|
|
2020
|
2019
|
|
|
|
|
|
Cash Flows
From Operating Activities
|
|
|
|
Net Income
from Continuing Operations
|
$2,214,999
|
$398,629
|
|
Adjustments to
reconcile net income to net cash from operating
activities:
|
|
|
|
Depreciation
|
5,942
|
7,149
|
|
Amortization
of Right -Of - Use Asset
|
70,671
|
18,790
|
|
Gain on
Disposal of Subsidiary
|
-
|
(299,255)
|
|
Foreign
Exchange Transaction (Gain) Loss
|
(2,118,952)
|
211,998
|
|
Unrealized
Loss on Security Investment
|
(484,362)
|
(734,599)
|
|
Changes in
Operating Assets and Liabilities
|
|
|
|
Real
Estate
|
15,952
|
8,141,988
|
|
Trade
Receivables
|
349,175
|
15,664
|
|
Prepaid
Expense
|
(40,805)
|
(28,702)
|
|
Deferred
Revenue
|
50,270
|
(20,995)
|
|
Inventory
|
(20,590)
|
86,498
|
|
Accounts
Payable and Accrued Expenses
|
167,740
|
(1,579,005)
|
|
Accrued
Interest - Related Parties
|
19,634
|
104,769
|
|
Operating
Lease Liability
|
(73,668)
|
(20,903)
|
|
Builder
Deposits
|
(285,010)
|
(388,938)
|
|
Net Cash (Used
in) Provided by Continuing Operating Activities
|
(129,004)
|
5,913,088
|
|
Net Cash
Provided by Discontinued Operating Activities
|
-
|
24,493
|
|
Net Cash (Used
in) Provided by Operating Activities
|
(129,004)
|
5,937,581
|
|
|
|
|
|
Cash Flows
From Investing Activities
|
|
|
|
Purchase of
Fixed Assets
|
(1,386)
|
-
|
|
Proceeds from
Global Opportunity Fund Liquidation
|
303,349
|
-
|
|
Promissory
Note from Related Party
|
(200,000)
|
-
|
|
Net Cash
Provided by Continuing Investing Activities
|
101,963
|
-
|
|
Net Cash Used
in Discontinued Investing Activities
|
-
|
-
|
|
Net Cash
Provided by Investing Activities
|
101,963
|
-
|
|
|
|
|
|
Cash Flows
From Financing Activities
|
|
|
|
Proceeds from
Sale of Subsidiary Shares
|
5,000
|
184,500
|
|
Repayments of
Note Payable
|
-
|
(13,899)
|
|
Distribution
to Minority Shareholder
|
(197,400)
|
-
|
|
Net Proceeds
from (Repayment to) Notes Payable - Related
Parties
|
17,501
|
(1,989,481)
|
|
Net Cash Used
in Continuing Financing Activities
|
(174,899)
|
(1,818,880)
|
|
Net Cash
Provided by Discontinued Financing Activities
|
-
|
-
|
|
Net Cash Used
in Financing Activities
|
(174,899)
|
(1,818,880)
|
|
|
|
|
|
Net (Decrease)
Increase in Cash and Restricted Cash
|
(201,940)
|
4,118,701
|
|
Effects of
Foreign Exchange Rates on Cash
|
(39,411)
|
(15,028)
|
|
|
|
|
|
Cash and
Restricted Cash - Beginning of Year
|
7,330,996
|
5,508,198
|
|
Cash and
Restricted Cash- End of Period
|
$7,089,645
|
$9,611,871
|
|
|
|
|
|
Supplementary
Cash Flow Information
|
|
|
|
Cash Paid For
Interest
|
$4,181
|
$2,705
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
|
|
|
1.
|
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Nature of Operations
HF
Enterprises Inc. (the “Company” or “HFE”)
was incorporated in the State of Delaware on March 7, 2018 and
1,000 shares of common stock was issued to Chan Heng Fai, the
founder, Chairman and Chief Executive Officer of the Company. HFE
is a diversified holding company principally engaged in property
development, digital transformation technology, biohealth and other
related business activities with operations in the United States,
Singapore, Hong Kong, and Australia. The Company manages its
principal businesses primarily through its subsidiary, Singapore
eDevelopment Ltd. (“SeD Ltd”), a company publicly
traded on the Singapore Stock Exchange.
On
October 1, 2018, Chan Heng Fai transferred his 100% interest in
Hengfai International Pte. Ltd. (“Hengfai
International”) to HF Enterprises Inc. in exchange for
8,500,000 shares of the Company’s common stock. Hengfai
International holds a 100% interest in Hengfai Business Development
Pte. Ltd. (“Hengfai Business Development”). Both
Hengfai International and Hengfai Business Development are holding
companies with no business operations. Hengfai Business Development
holds 761,185,294 shares and 359,834,471 warrants of SeD Ltd, or
65.4% as of March 31, 2020 and December 31, 2019, of the
outstanding shares of SeD Ltd, which is the primary operating
company of HFE.
Also,
on October 1, 2018, Chan Heng Fai transferred his 100% ownership
interest in Heng Fai Enterprises Pte. Ltd. (“Heng Fai
Enterprises”) and Global eHealth Limited (“Global
eHealth”) to HF Enterprises Inc. in exchange for 500,000 and
1,000,000 shares of the Company’s common stock, respectively.
Both Heng Fai Enterprises and Global eHealth are holding companies
with no business operations.
The
contributions to HFE on October 1, 2018 of Hengfai International,
Heng Fai Enterprises, and Global eHealth from Chan Heng Fai
represented transactions under common control.
The
Company has four operating segments based on the products and
services offered. These include our three principal businesses
– property development, digital transformation technology and
biohealth – as well as a fourth category consisting of
certain other business activities.
Property Development
The
Company’s property development segment is comprised of SeD
Intelligent Home Inc. (“SeD Intelligent Home”) and SeD
Perth Pty Ltd.
In
2014, Singapore eDevelopment Ltd. commenced operations developing
property projects and participating in third-party property
development projects. SeD Intelligent Home Inc., a 99.9%-owned
subsidiary of Singapore eDevelopment, owns, operates and manages
real estate development projects with a focus on land subdivision
developments.
Development
activities are generally contracted out, including planning, design
and construction, as well as other work with engineers, surveyors,
architects and general contractors. The developed lots are then
sold to builders for the construction of new homes. SeD Intelligent
Home’s main assets are two subdivision development projects,
one near Houston, Texas, known as Black Oak, consisting of 162
acres and currently projected to have approximately 512 units, and
one in Frederick, Maryland, known as Ballenger Run, consisting of
197 acres and currently projected to have approximately 689
units.
Digital Transformation Technology
The
Company’s digital transformation technology segment is
comprised of HotApp Blockchain Inc. and its
subsidiaries.
The
Company’s digital transformation technology business is
involved in mobile application product development and other
businesses, providing information technology services to end-users,
service providers and other commercial users through multiple
platforms. This technology platform consists of instant messaging
systems, social media, e-commerce and payment systems, direct
marketing platforms, e-real estate, brand protection and
counterfeit and fraud detection. HotApp Blockchain Inc.
(“HotApp Blockchain" or “HotApp”), a 99.9%-owned
subsidiary of Singapore eDevelopment, focuses on business-to-
business solutions such as enterprise messaging and workflow.
Through HotApp, the Company has successfully implemented several
strategic platform developments for clients, including a mobile
front-end solution for network marketing, a hotel e-commerce
platform for Asia and a real estate agent management platform in
China.
On
October 25, 2018, HotApps International Pte. Ltd.
(“HIP”) entered into an Equity Purchase Agreement with
DSS Asia Limited (“DSS Asia”), a Hong Kong subsidiary
of DSS International Inc. (“DSS International”),
pursuant to which HIP agreed to sell to DSS Asia all of the issued
and outstanding shares of HotApps Information Technology Co. Ltd.,
also known as Guangzhou HotApps Technology Ltd. (“Guangzhou
HotApps”). The transaction closed on January 14, 2019. Chan
Heng Fai is the CEO of DSS Asia and DSS International. See Note 13
– Discontinued Operations and Note 10 – Related Party
Transactions.
Biohealth
The
Company’s biohealth segment is comprised of Singapore
BioMedical Pte. Ltd. and Health Wealth Happiness Pte.
Ltd.
The
Company’s biohealth business is committed to both funding
research and developing and selling products that promote a healthy
lifestyle. The entities within this segment are focusing on
research in three main areas: (i) development of a universal
therapeutic drug platform; (ii) a new sugar substitute; and (iii) a
multi-use fragrance. Global BioLife established a joint venture,
Sweet Sense, Inc., with Quality Ingredients, LLC for the
development, manufacture, and global distribution of the new sugar
substitute. On November 8, 2019, Impact BioMedical Inc., a
subsidiary of the Company, purchased 50% of Sweet Sense Inc. from
Quality Ingredients, LLC for $91,000. Sweet Sense Inc. is now an
81.8% owned subsidiary of Singapore eDevelopment.
Currently,
all revenues from our biohealth segment come from the direct sales
by iGalen Inc. (formerly known as iGalen USA, LLC), which is 100%
owned by iGalen International Inc., Singapore eDevelopment’s
53%-owned subsidiary. During the three months ended March 31, 2020
and 2019, the revenues from iGalen Inc. were $10,782 and $445,093,
respectively.
In
October 2019, the Company expanded its biohealth segment to Korean
market through one of the subsidiaries of Health Wealth Happiness
Pte. Ltd., HWH World Inc. (“HWH World”). HWH World,
similarly to iGalen Inc., operates based on a direct sale model of
health supplements. HWH World is at the beginning stage of
operations and didn’t recognize any revenue during the three
months ended March 31, 2020.
Other Business Activities
In
addition to the segments identified above, the Company provides
corporate strategy and business development services, asset
management services, corporate restructuring and leveraged buy-out
expertise. These service offerings build relationships with
promising companies for potential future collaboration and
expansion. We believe that our other business activities complement
our three principal businesses.
The
Company’s other business activities segment is primarily
comprised of Singapore eDevelopment Ltd, SeD Capital Pte. Ltd., BMI
Capital Partners International Limited and Singapore Construction
& Development Pte. Ltd.
|
2.
|
GOING CONCERN
|
The
accompanying financial statements have been prepared on the basis
that the Company is a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal
course of business. The Company has experienced net losses over the
past three months. As of and for the three months ended March 31,
2020, the Company had an accumulated deficit of $38,922,255 and a
loss of $340,665 from operations, and net cash used in operating
activities of $129,004.
As a
result, these conditions may raise substantial doubt regarding our
ability to continue as a going concern twelve months from the date
of issuance of our financial statements. However, the Company
expects to have high volume of cash in hand and strong operating
cash inflows for at least the next twelve months. As of March 31,
2020, the Company had cash and restricted cash of $7,089,645
compared to $7,330,996 as of December 31, 2019. Approximately 40%
of the restricted cash is available to use for the Company’s
operations. The Company has an $8 million credit line from
Manufacturers and Traders Trust Company (“M&T
Bank”) and the loan balance with M&T Bank was $0 as of
March 31, 2020. Management has evaluated the conditions in relation
to the Company’s ability to meet its obligations and plans to
continue borrowing funds from third party financial institutions in
order to meet the operating cash requirements. Funding the
Company’s operations is our first priority, before repaying
related party debtors. Therefore, available cash will be used to
fund the Company’s operations before related party debtor
repayments. At same time management will concurrently work with the
related party debtors on a plan to repay the related party loans,
which are repayable on demand.
During
the three months ended March 31, 2020, the revenue from lot sales
was approximately $3 million. Furthermore, the Company had not
defaulted on any principal and interest repayment on its loans and
borrowings and had repaid its floating rate loan during the year.
The Company had obtained a letter of financial support from Chan
Heng Fai, the chairman and CEO of the Company. He committed to
provide any additional funding required by the Company and would
not demand repayment within the next twelve months from the date of
issuance of our 2020 interim financial
statements.
As a
result of management’s plans, high volume cash in bank
accounts, cash receipts from the sale of properties in three months
ended on March 31, 2020, availability of $8 million line of credit
under M&T Bank loan agreement and the support from the
director, the Company believes the initial conditions which raised
substantial doubt regarding the ability to continue as a going
concern have been alleviated. Therefore, the accompanying
consolidated financial statements have been prepared assuming that
the Company will continue as a going
concern.
|
3.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of Presentation and Principles of Consolidation
The Company’s condensed consolidated financial statements
have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S.
GAAP”) and following the requirements of the Securities and
Exchange Commission ("SEC") for interim reporting. As permitted
under those rules, certain footnotes or other financial information
that are normally required by U.S. GAAP can be condensed or
omitted. These interim financial statements have been prepared on
the same basis as the Company's annual financial statements and, in
the opinion of management, reflect all adjustments, consisting only
of normal recurring adjustments, which are necessary for a fair
statement of the Company's financial information. These interim
results are not necessarily indicative of the results to be
expected for the year ending December 31, 2020 or any other interim
period or for any other future year. These unaudited condensed
consolidated financial statements should be read in conjunction
with the Company's audited consolidated financial statements and
the notes thereto for the year ended December 31, 2019, as filed
with the SEC.
The balance sheet as of December 31, 2019 has been derived from
audited financial statements at that date but does not include all
of the information required by U.S. GAAP for complete financial
statements.
The condensed consolidated financial statements include all
accounts of the Company and its majority owned and controlled
subsidiaries. The Company consolidates entities in which it owns
more than 50% of the voting common stock and controls operations.
All intercompany transactions and balances among consolidated
subsidiaries have been eliminated.
The Company's condensed consolidated financial statements include
the financial position, results of operations and cash flows of the
following entities as of March 31, 2020 and December 31, 2019, and
for the three months periods ended March 31, 2020 and 2019 as
follows:
|
|
|
|
Attributable interest
|
|
|||||
|
|
|
|
as of,
|
|
|||||
|
Name of subsidiary consolidated under HFE
|
State or other jurisdiction
of
incorporation or
organization
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
||
|
|
|
|
%
|
|
|
%
|
|
||
|
Hengfai International Pte.
Ltd
|
Singapore
|
|
|
100
|
|
|
|
100
|
|
|
Hengfai Business Development Pte.
Ltd
|
Singapore
|
|
|
100
|
|
|
|
100
|
|
|
Heng Fai Enterprises Pte.
Ltd.
|
Singapore
|
|
|
100
|
|
|
|
100
|
|
|
Global eHealth
Limited
|
Hong Kong
|
|
|
100
|
|
|
|
100
|
|
|
Singapore eDevelopment
Limited
|
Singapore
|
|
|
65.4
|
|
|
|
65.4
|
|
|
Singapore Construction &
Development Pte. Ltd.
|
Singapore
|
|
|
65.4
|
|
|
|
65.4
|
|
|
Art eStudio Pte.
Ltd.
|
Singapore
|
|
|
33.36
|
*
|
|
|
33.36
|
*
|
|
Singapore Construction Pte.
Ltd.
|
Singapore
|
|
|
65.4
|
|
|
|
65.4
|
|
|
Global BioMedical Pte.
Ltd.
|
Singapore
|
|
|
65.4
|
|
|
|
65.4
|
|
|
SeD BioLife International,
Inc.
|
United States of
America
|
|
|
65.4
|
|
|
|
65.4
|
|
|
SeD BioMedical International,
Inc.
|
United States of
America
|
|
|
65.4
|
|
|
|
65.4
|
|
|
Global BioMedical,
Inc.
|
United States of
America
|
|
|
59.45
|
|
|
|
59.45
|
|
|
Global BioLife,
Inc.
|
United States of
America
|
|
|
41.62
|
*
|
|
|
41.62
|
*
|
|
SeD Investment Pte.
Ltd.
|
Singapore
|
|
|
65.4
|
|
|
|
65.4
|
|
|
Health Wealth Happiness Pte.
Ltd.
|
Singapore
|
|
|
65.4
|
|
|
|
65.4
|
|
|
iGalen International
Inc.
|
United States of
America
|
|
|
34.38
|
*
|
|
|
34.38
|
*
|
|
iGalen Inc. (f.k.a iGalen USA
LLC)
|
United States of
America
|
|
|
34.38
|
*
|
|
|
34.38
|
*
|
|
SeD Capital Pte.
Ltd.
|
Singapore
|
|
|
65.4
|
|
|
|
65.4
|
|
|
LiquidValue Asset Management Pte.
Ltd. (f.k.a. HengFai Asset Management Pte.
Ltd.)
|
Singapore
|
|
|
53.6
|
|
|
|
53.6
|
|
|
SeD Home
Limited
|
Hong Kong
|
|
|
65.4
|
|
|
|
65.4
|
|
|
SeD Reits Management Pte.
Ltd.
|
Singapore
|
|
|
65.4
|
|
|
|
65.4
|
|
|
Global TechFund of Fund Pte.
Ltd.
|
Singapore
|
|
|
65.4
|
|
|
|
65.4
|
|
|
Singapore eChainLogistic Pte.
Ltd.
|
Singapore
|
|
|
65.4
|
|
|
|
65.4
|
|
|
BMI Capital Partners International
Limited
|
Hong Kong
|
|
|
65.4
|
|
|
|
65.4
|
|
|
SeD Perth Pty.
Ltd.
|
Australia
|
|
|
65.4
|
|
|
|
65.4
|
|
|
SeD Home International,
Inc.
|
United States of
America
|
|
|
65.4
|
|
|
|
65.4
|
|
|
SeD Intelligent Home
Inc.
|
United States of
America
|
|
|
65.39
|
|
|
|
65.39
|
|
|
SeD Home & REITs Inc. (f.k.a.
SeD Home Inc.)
|
United States of
America
|
|
|
65.39
|
|
|
|
65.39
|
|
|
SeD USA, LLC
|
United States of
America
|
|
|
65.39
|
|
|
|
65.39
|
|
|
150 Black Oak GP,
Inc.
|
United States of
America
|
|
|
65.39
|
|
|
|
65.39
|
|
|
SeD Development USA
Inc.
|
United States of
America
|
|
|
65.39
|
|
|
|
65.39
|
|
|
150 CCM Black Oak,
Ltd.
|
United States of
America
|
|
|
65.39
|
|
|
|
65.39
|
|
|
SeD Texas Home,
LLC
|
United States of
America
|
|
|
65.39
|
|
|
|
65.39
|
|
|
SeD Ballenger,
LLC
|
United States of
America
|
|
|
65.39
|
|
|
|
65.39
|
|
|
SeD Maryland Development,
LLC
|
United States of
America
|
|
|
54.63
|
|
|
|
54.63
|
|
|
SeD Development Management,
LLC
|
United States of
America
|
|
|
55.58
|
|
|
|
55.58
|
|
|
SeD Builder,
LLC
|
United States of
America
|
|
|
65.39
|
|
|
|
65.39
|
|
|
HotApp Blockchain
Inc.
|
United States of
America
|
|
|
65.39
|
|
|
|
65.39
|
|
|
HotApps International Pte.
Ltd.
|
Singapore
|
|
|
65.39
|
|
|
|
65.39
|
|
|
HotApp International
Limited
|
Hong Kong
|
|
|
65.39
|
|
|
|
65.39
|
|
|
HWH International,
Inc.
|
United States of
America
|
|
|
65.4
|
|
|
|
65.4
|
|
|
Health Wealth & Happiness
Inc.
|
United States of
America
|
|
|
65.4
|
|
|
|
65.4
|
|
|
HWH Multi-Strategy Investment,
Inc.
|
United States of
America
|
|
|
65.4
|
|
|
|
65.4
|
|
|
Impact BioMedical
Inc
|
United States of
America
|
|
|
65.4
|
|
|
|
65.4
|
|
|
Biolife Sugar,
Inc.
|
United States of
America
|
|
|
41.16
|
*
|
|
|
41.16
|
*
|
|
Happy Sugar,
Inc.
|
United States of
America
|
|
|
41.16
|
*
|
|
|
41.16
|
*
|
|
Sweet Sense
Inc.
|
United States of
America
|
|
|
53.5
|
|
|
|
53.5
|
|
|
SeDHome Rental
Inc.
|
United States of
America
|
|
|
65.39
|
|
|
|
65.39
|
|
|
SeD REIT Inc.
|
United States of
America
|
|
|
65.39
|
|
|
|
65.39
|
|
|
Crypto Exchange
Inc.
|
United States of
America
|
|
|
65.39
|
|
|
|
65.39
|
|
|
HWH World Inc.
|
United States of
America
|
|
|
65.39
|
|
|
|
65.39
|
|
|
HWH World Pte.
Ltd.
|
Singapore
|
|
|
65.39
|
|
|
|
65.39
|
|
|
UBeauty Limited
|
Hong Kong
|
|
|
65.4
|
|
|
|
65.4
|
|
|
WeBeauty Korea
Inc.
|
Korea
|
|
|
65.4
|
|
|
|
65.4
|
|
|
HWH World
Limited
|
Hong Kong
|
|
|
65.4
|
|
|
|
65.4
|
|
|
HWH World Inc.
|
Korea
|
|
|
65.4
|
|
|
|
65.4
|
|
|
Global Sugar Solutions
Inc.
|
United States of
America
|
|
|
52.3
|
|
|
|
52.3
|
|
*Although
the Company indirectly holds percentage of shares of these entities
less than 50%, the subsidiaries of the Company directly hold more
than 50% of shares of these entities. They are still consolidated
into the Company.
Use of Estimates
The
preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during
the reporting periods. Significant estimates made by management
include, but are not limited to, allowance for doubtful accounts,
valuation of real estate assets, allocation of development costs
and capitalized interest to sold lots, fair value of the investments, the
valuation allowance of deferred taxes, and contingencies. Actual
results could differ from those estimates.
In our
property 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.
Cash
The
Company considers all highly liquid investments with a maturity of
three months or less at the date of acquisition to be cash
equivalents. Cash and cash equivalents include cash on hand and at
the bank and short-term deposits with financial institutions that
are readily convertible to a known amount of cash and are subject
to an insignificant risk of changes in values. There were no cash
equivalents as of March 31, 2020 and December 31,
2019.
Restricted Cash
As a
condition to the loan agreement with the Manufacturers and Traders
Trust Company (“M&T Bank”), the Company is required
to maintain a minimum of $2,600,000 in an interest-bearing account
maintained by the lender as additional security for the loans. The
fund is required to remain as collateral for the loan until the
loan is paid off in full and the loan agreement terminated. The
Company also has an escrow account with M&T Bank to deposit
partial revenue from lot sales. The fund in the escrow account is
specifically used for the payment of the loan from M&T Bank.
The fund is required to remain in the escrow account for the loan
payment until the loan agreement terminates. As of March 31, 2020
and December 31, 2019, the total balance of these two accounts was
$4,787,284 and $4,229,149, respectively.
As a
condition to the loan agreement with National Australian Bank
Limited in conjunction with the Perth project, an Australian real
estate development project, the Company is required to maintain
Australian Dollar 50,000, in a non-interest-bearing account. As of
March 31, 2020 and December 31, 2019, the account balance was
$30,717 and $35,068, respectively. These funds will remain as
collateral for the loans until paid in full.
On July
20, 2018, 150 CCM Black Oak Ltd received $4,592,079 in district
reimbursement payments 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
150 CCM Black Oak Ltd and will be released upon receipt of the
evidence of: (a) the execution of a purchase agreement between 150
CCM Black Oak Ltd 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. After entering the purchase agreement with Houston LD,
LLC, the above requirements were met. The amount of the deposit
will be released to the Company by presenting the invoices paid for
land development. After releasing funds to the Company, the amount
on deposit was $0 and $90,394 on March 31, 2020 and December 31,
2019, respectively.
As a
condition to use the credit card services for the Company’s
bio product direct sale business, provided by Global Payroll
Gateway, Ltd. (“GPG”), a financial service company, the
Company is required to deposit 10% revenue from the direct sales to
a non-interest-bearing GPG reserve account with a maximum amount of
$200,000. The Company is allowed to temporarily use the money in
this deposit account upon request and pay back on a short-term
basis. As of both, March 31, 2020 and December 31, 2019, the
balance in the reserve account was $93,067. The fund will not be
fully refunded to the Company until the service agreement with GPG
terminates.
Accounts Receivable and Allowance for Doubtful
Accounts
Accounts
receivable are stated at amounts due from buyers, contractors, and
all third parties, net of an allowance for doubtful accounts. The
Company monitors its accounts receivable balances on a monthly
basis to ensure that they are collectible. On a quarterly basis,
the Company uses its historical experience to estimate its
allowance for doubtful accounts receivable. The Company’s
allowance for doubtful accounts represents an estimate of the
losses expected to be incurred based on specifically identified
accounts as well as nonspecific amount, when determined
appropriate. Generally, the amount of the allowance is primarily
decided by division management’s historical experience, the
delinquency trends, the resolution rates, the aging of receivables,
the credit quality indicators and financial health of specific
customers. As of March 31, 2020 and December 31, 2019, the
allowance was $0.
Inventories
Inventories
are stated at the lower of cost or net realizable value. Cost is
determined using the first-in, first-out method and includes all
costs in bringing the inventories to their present location and
condition. Net realizable value is the estimated selling price in
the ordinary course of business less the estimated costs necessary
to make the sale. As of March 31, 2020 and December 31, 2019,
inventory consisted of finished goods from both HWH World Inc. and
iGalen. The Company continuously evaluates the need for reserve for
obsolescence and possible price concessions required to write-down
inventories to net realizable value.
Investment Securities
Investment Securities at Fair Value
The
Company holds investments in equity securities with readily
determinable fair values, equity investments without readily
determinable fair values, investments accounted for under the
equity method, and investments at cost.
Prior
to the adoption of Financial Accounting Standards Board
(“FASB”) Accounting Standards Update
(“ASU”) 2016-01, Financial Instruments-Overall (Subtopic
825-10): Recognition and Measurement of Financial Assets and
Financial Liabilities, investments in equity securities were
classified as either 1) available-for-sale securities, stated at
fair value, and unrealized holding gains and losses, net of related
tax effects, were recorded directly to accumulated other
comprehensive income (loss) or 2) trading securities, stated at
fair value, and unrealized holding gains and losses, net of related
tax benefits, were recorded directly to net income (loss). With the
adoption of ASU 2016-01 on January 1, 2018, investments in equity
securities are still stated at fair value, quoted by market prices,
but all unrealized holding gains and losses are credited or charged
to net income (loss) based on fair value measurement as the
respective reporting date.
The
Company accounts for certain of its investments in equity
securities in accordance with ASU 2016-01 Financial Instruments—Overall (Subtopic
825- 10): Recognition and Measurement of Financial Assets and
Financial Liabilities (“ASU 2016-01”). In
accordance with ASU 2016-01, the Company records all equity
investments with readily determinable fair values at fair value and
has elected the Fair Value Option (“FVO”) for certain
of its equity investments without readily determinable fair values,
utilizing a Black Scholes model for valuation. Unrealized holding
gains and losses in fair value are recognized as Other
Non-Operating Income, net in the Company’s Consolidated
Statements of Operation and Comprehensive
Income.
Determining
the appropriate fair-value model and calculating the fair values of
the Company’s investments in equity securities requires
considerable judgment. Any change in the estimates used may cause
their values to be higher or lower than that reported. The
assumptions used in the model require significant judgment by
management and include the following: volatility, expected term,
risk-free interest rate, and dividends. Due to the inherent
uncertainty of these estimates, these values may differ materially
from the values that would have been used had a ready market for
these investments existed.
The
Company has elected the fair value option for the equity securities
noted below that would otherwise be accounted for under the equity
method of accounting. Amarantus BioScience Holdings
(“AMBS”), Holista CollTech Limited
(“Holista”), and Document Securities Systems Inc.
(“DSS”) are publicly traded companies and fair value is
determined by quoted stock prices. The Company has significant
influence but does not have a controlling interest in these
investments, and therefore, the Company’s investment could be
accounted for under the equity method of accounting or elect fair
value accounting.
●
The Company has
significant influence over DSS as our CEO is the beneficial owner
of approximately 39.1% of the outstanding shares of DSS and is a
member of the Board of Directors of DSS.
●
The Company has
significant influence over AMBS as the Company is the beneficial
owner of approximately 19.5% of the common shares of
AMBS.
●
The Company has
significant influence over Holista as the Company and its CEO are
the beneficial owner of approximately 18.8% of the outstanding
shares of Holista, and our CEO holds a position on Holista's Board
of Directors.
The
Company accounts for certain of its investments in real estate
funds without readily determinable fair values in accordance with
ASU No. 2015-07, Fair Value
Measurement (Topic 820): Disclosures for Investments in Certain
Entities That Calculate Net Asset Value per Share (or Its
Equivalent) (“ASC 820”). As of March 31, 2020
and December 31, 2019 the Company maintains an investment in a real
estate fund, The Global Opportunity Fund. This fund invests
primarily in the U.S. and met the criteria within ASC 820. Chan
Heng Fai, the Chairman and CEO of the Company, is also one of the
directors of the Global Opportunity Fund. The fair values of the
investments in this class have been estimated using the net asset
value of the Company’s ownership interest in Global
Opportunity Fund. The fund was closed during November 2019 and is
being liquidated. As of December 31, 2019, the Company recorded a
receivable $307,944 from the Global Opportunity Fund. These monies
were received on January 23, 2020.
The Company invested $50,000 in a convertible promissory note of
Sharing Services, Inc. (“Sharing Services Convertible
Note”), a company quoted on the US OTC market. The value of
the convertible note was estimated by management using a
Black-Scholes valuation model.
On
March 2, 2020, the Company received warrants to purchase shares of
American Medical REIT Inc. (“AMRE”), a related party
private startup company, after lent $200,000 loan by a promissory
note. See details at Note 10 - Related Party Transactions, Note
Receivable from a Related Party Company. The Company holds a stock
option to purchase 250,000 shares of Vivacitas’ common stock
at $1 per share at any time prior to the date of public offering.
As of March 31, 2020 and December 31, 2019, both AMRE and Vivacitas
were private companies. Based on the management’s analysis,
the fair value of the warrants and the stock option was de minimis
as of March 31, 2020 and December 31, 2020.
The
changes in the fair values of the investment were recorded directly
to accumulated other comprehensive income (loss). Due to the
inherent uncertainty of these estimates, these values may differ
materially from the values that would have been used had a ready
market for these investments existed.
Investment Securities at Cost
The
Company has an equity holding in Vivacitas Oncology Inc.
(“Vivacitas”), a private company that is currently not
listed on an exchange. Vivacitas was acquired after the adoption of
ASU 2016-01. The Company applied ASC 321 and elected the
measurement alternative for equity investments that do not have
readily determinable fair values and do not qualify for the
practical expedient in ASC 820 to estimate fair value using the NAV
per share. Under the alternative, we measure Vivacitas at cost,
less any impairment, plus or minus changes resulting from
observable price changes in orderly transactions for an identical
or similar investment of the same issuer.
There
has been no indication of impairment or changes in observable
prices via transactions of similar securities and investment is
still carried at cost as of March 31, 2020.
Investment Securities under Equity Method Accounting
Sweet Sense Inc.
BioLife
Sugar, Inc. (“BioLife’), a subsidiary consolidated
under SeD Ltd., entered into a joint venture agreement on April 25,
2018 with Quality Ingredients, LLC (“QI”). The
agreement created an entity called Sweet Sense, Inc. (“Sweet
Sense”) which was 50% owned by BioLife and 50% owned by QI.
Management believed that we had significant influence over Sweet
Sense and it was appropriate to account for this investment under
the equity method accounting.
On
November 8, 2019, Impact BioMedical Inc., a subsidiary of the
Company, purchased 50% of Sweet Sense from QI for $91,000 and
recorded a loss from acquisition $90,001. As of November 8, 2019,
the total investment in joint venture was equal to $91,000 and the
proportionate losses totaled $90,001. The transaction was not in
the scope of ASC 805 Business Combinations since the acquisition
was accounted for an asset purchase instead of a business
combination. As an asset acquisition, the Company recorded the
transaction at cost and applied ASC 730 to expense in-process
research and development cost, the major cost of Sweet Sense.
Consequently, Sweet Sense was an 81.8% owned subsidiary of SeD Ltd,
and therefore, was consolidated into the Company’s condensed
consolidated financial statements as of March 31, 2020 and December
31, 2019.
VeganBurg International Pte. Ltd.
On February 5,
2020, SeD Capital Pte Ltd, a subsidiary of the Company, invested
$2,133 in VeganBurg International Pte. Ltd. (“VeganBurg
International”), a related party company, in exchange for 30%
ownership of such company. Chan Heng Fai, our founder, Chairman and
Chief Executive Officer, is a member of the Board of Directors of
VeganBurg International and has significant influence on such
company. VeganBurg International is focused on promoting
environmentally friendly, healthy plant-based burgers in the Asian
market.
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 and finance expenses from third-party
borrowings of $0 and $43,454 for the three months ended March 31,
2020 and 2019, respectively. The Company capitalized construction
costs of $2,366,908 and $1,206,008 for the three months ended March
31, 2020 and 2019, respectively.
The
Company’s policy is to obtain an independent third-party
valuation for each major project in the United Sates to identify
potential triggering events for impairment. Management may use
market comparison method to value other relatively small projects,
such as the project in Perth, Australia. In addition to the annual
assessment of potential triggering events in accordance with ASC
360 – Property Plant and
Equipment (“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.
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, the Company
incurred a loss of approximately $1.5 million from this sale and
recognized a real estate impairment of approximately $1.5 million
for the year ended December 31, 2018.
On June
30, 2019, the Company recorded approximately $3.9 million of
impairment on the Black Oak project based on discounted estimated
future cash flows after updating the projection of market value of
the project.
On
December 31, 2019, the Company recorded approximately $1.3 million
of additional impairment on the Black Oak project based on
discounted estimated future cash flows after updating the projected
cost of the project.
Properties under development
Properties
under development are properties being constructed for sale in the
ordinary course of business, rather than to be held for the
Company’s own use, rental or capital
appreciation.
Equipment
Property
and equipment are recorded at cost, less depreciation. Repairs and
maintenance are expensed as incurred. Expenditures incurred as a
consequence of acquiring or using the asset, or that increase the
value or productive capacity of assets are capitalized (such as
removal, and restoration costs). When property and equipment is
retired, sold, or otherwise disposed of, the asset’s carrying
amount and related accumulated depreciation are removed from the
accounts and any gain or loss is included in operations.
Depreciation is computed by the straight-line method (after
considering their respective estimated residual values) over the
estimated useful lives of the respective assets as
follows:
|
Office
and computer equipment
|
3 - 5
years
|
|
Furniture
and fixtures
|
3 - 5
years
|
|
Vehicles
|
10
years
|
|
Leasehold
Improvements
|
Remaining
life of the lease
|
The
Company reviews the carrying value of property and equipment for
impairment whenever events and circumstances indicate that the
carrying value of an asset may not be recoverable from the
estimated future cash flows expected to result from its use and
eventual disposition. In cases where undiscounted expected future
cash flows are less than the carrying value, an impairment loss is
recognized equal to an amount by which the carrying value exceeds
the fair value of assets. The factors considered by management in
performing this assessment include current operating results,
trends, and prospects, as well as the effects of obsolescence,
demand, competition, and other economic factors.
Revenue Recognition and Cost of Sales
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 the Company
expects to be entitled to receive in exchange for these goods or
services. The provisions of ASC 606 include a five-step process by
which the determination of revenue recognition, depicting the
transfer of goods or services to customers in amounts reflecting
the payment to which the Company expects to be entitled in exchange
for those goods or services. ASC 606 requires the Company 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, performance obligations are satisfied.
The
following represents the Company’s revenue recognition
policies by Segments:
Property Development
Property Sales
The
Company's main business is land development. The Company purchases
land and develops it into residential communities. The developed
lots are sold to builders (customers) for the construction of new
homes. The builders enter a sales contract with the Company before
they take the lots. The prices and timeline are determined and
agreed upon in the contract. The builders do the inspections to
make sure all conditions and requirements in contracts are met
before purchasing the lots. A detailed breakdown of the five-step
process for the revenue recognition of the Ballenger and Black Oak
projects, which represented approximately 100% and 96%,
respectively, of the Company’s revenue in the three months
ended on March 31, 2020 and 2019, 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 per lot is fixed and 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 or a group of lots 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 at a point in time when title is
transferred. The Company does not have further performance
obligations or continuing involvement once title is
transferred.
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 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.
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.
Biohealth
Product Direct Sales
The
Company’s net sales consist of product sales. The Company's
performance obligation is to transfer its products to its
third-party independent distributors (“Distributors”).
The Company generally recognizes revenue when product is shipped to
its Distributors.
The
Company’s Distributors may receive distributor allowances,
which are comprised of discounts, rebates and wholesale commission
payments from the Company. Distributor allowances resulting from
the Company’s sales of its products to its Distributors are
recorded against net sales because the distributor allowances
represent discounts from the suggested retail price.
In
addition to distributor allowances, the Company compensates its
sales leader Distributors with leadership incentives for services
rendered, relating to the development, retention, and management of
their sales organizations. Leadership Incentives are payable based
on achieved sales volume, which are recorded in general and
administrative expenses. The Company recognizes revenue when it
ships products. The Company receives the net sales price in cash or
through credit card payments at the point of
sale.
If a
Distributor returns a product to the Company on a timely basis,
they may obtain a replacement product from the Company for such
returned products. In addition, the Company maintains a buyback
program pursuant to which it will repurchase products sold to a
Distributor who has decided to leave the business. Allowances for
product returns, primarily in connection with the Company’s
buyback program, are provided at the time the sale is recorded.
This accrual is based upon historical return rates for each country
and the relevant return pattern, which reflects anticipated returns
to be received over a period of up to 12 months following the
original sale.
Annual Membership
The
Company collects an annual membership fee from its Distributors.
The fee is fixed, paid in full at the time joining the membership
and not refundable. The Company’s performance obligation is
to provide members to purchase products, access to certain back
office services, receive commissions and attend corporate events.
The obligation is satisfied over time. The Company recognizes
revenue associated with the membership over the one-year period of
the membership. Before the membership fee is recognized as revenue,
it is recorded as deferred revenue.
Shipping and Handling
Shipping
and handling services relating to product sales are recognized as
fulfillment activities. Shipping and handling expenses were $0 and
$60,394 for the three months ended March 31, 2020 and 2019,
respectively. Shipping and handling costs paid by the Company are
included in general and administrative expenses.
Other Businesses
Mutual Fund Management Service Income
Revenue
is recognized when (or as) the Company performs services to its
customers in amounts that reflect the consideration to which the
Company expects to be entitled to in exchange for those services,
which occurs when (or as) the Company satisfies its contractual
obligations and performs services to its
customers.
The
Company generates revenue from providing management services for
mutual fund customers. In respect to the provision of services, the
agreements are less than one year with a cancellable clause and
customers are typically billed on a monthly
basis.
Remaining performance obligations
As of
March 31, 2020 and December 31, 2019, there were no remaining
performance obligations or continuing involvement, as all service
obligations within the other business activities segment have been
completed.
Advertising
Costs
incurred for advertising for the Company are charged to operations
as incurred. Advertising expenses for the three months ended March
31, 2020 and 2019 were $0 and $44,276,
respectively.
Foreign currency
Functional and reporting currency
Items
included in the financial statements of each entity in the Company
are measured using the currency of the primary economic environment
in which the entity operates (“functional currency”).
The financial statements of the Company are presented in U.S.
dollars (the “reporting currency”).
The
functional and reporting currency of the Company is the United
States dollar (“U.S. dollar”). The financial records of
the Company’s subsidiaries located in Singapore, Hong Kong,
Australia and South Korea are maintained in their local currencies,
the Singapore Dollar (S$), Hong Kong Dollar (HK$), Australian
Dollar (“AUD”) and South Korean Won
(“KRW”), which are also the functional currencies of
these entities.
Transactions in foreign currencies
Transactions
in currencies other than the functional currency during the year
are converted into functional currency at the applicable rates of
exchange prevailing when the transactions occurred. Transaction
gains and losses are recognized in the statement of
operations.
The
majority of the Company’s foreign currency transaction gains
or losses come from the effects of foreign exchange rate changes on
the intercompany loans between Singapore entities and U.S.
entities. The Company recorded $2,118,952 gain on foreign exchange
during the three months ended on March 31, 2020 and a $211,998 loss
during the three months ended on March 31, 2019. The foreign
currency transactional gains and losses are recorded in
operations.
Translation of consolidated entities’ financial
statements
Monetary
assets and liabilities denominated in currencies other than the
functional currency are translated into the functional currency at
the rates of exchange ruling at the balance sheet date. The
Company’s entities with functional currency of Singapore
Dollar, Hong Kong Dollar, AUD and KRW, translate their operating
results and financial positions into the U.S. dollar, the
Company’s reporting currency. Assets and liabilities are
translated using the exchange rates in effect on the balance sheet
date. Revenue, expense, gains and losses are translated using the
average rate for the year. Translation adjustments are reported as
cumulative translation adjustments and are shown as a separate
component of comprehensive income (loss).
For the
three months ended on March 31, 2020, the Company recorded other
comprehensive loss from translation of $1,674,021, and a $107,456
gain in the three months ended March 31, 2019, in accumulated other
comprehensive loss.
Earnings (loss) per share
The
Company presents basic and diluted earnings (loss) per share data
for its ordinary shares. Basic earnings (loss) per share is
calculated by dividing the profit or loss attributable to ordinary
shareholders of the Company by the weighted-average number of
ordinary shares outstanding during the year, adjusted for treasury
shares held by the Company.
Diluted
earnings (loss) per share is determined by adjusting the profit or
loss attributable to ordinary shareholders and the weighted-average
number of ordinary shares outstanding, adjusted for treasury shares
held, for the effects of all dilutive potential ordinary shares,
which comprise convertible securities, such as stock options,
convertible bonds and warrants. Due to the limited operations of
the Company, there are no potentially dilutive securities
outstanding on March 31, 2020 and 2019.
Fair Value Measurements
ASC
820, Fair Value Measurement and
Disclosures, defines fair value as the exchange price that
would be received for an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market
participants on the measurement date. This topic also establishes a
fair value hierarchy which requires classification based on
observable and unobservable inputs when measuring fair value. There
are three levels of inputs that may be used to measure fair
value:
Level 1: Observable
inputs such as quoted prices (unadjusted) in an active market for
identical assets or liabilities.
Level
2: Inputs other than quoted prices that are observable, either
directly or indirectly. These include quoted prices for similar
assets or liabilities in active markets and quoted prices for
identical or similar assets or liabilities in markets that are not
active.
Level
3: Unobservable inputs that are supported by little or no market
activity; therefore, the inputs are developed by the Company using
estimates and assumptions that the Company expects a market
participant would use, including pricing models, discounted cash
flow methodologies, or similar techniques.
The
carrying value of the Company’s financial instruments,
including cash and cash equivalents, accounts receivable and
accounts payable and accrued expenses approximate fair value
because of the short-term maturity of these financial instruments.
The liabilities in connection with the conversion and make-whole
features included within certain of the Company’s convertible
notes payable and warrants are each classified as a level 3
liability.
Non-controlling interests
Non-controlling
interests represent the equity in subsidiary not attributable,
directly or indirectly, to owners of the Company, and are presented
separately in the consolidated statements of operation and
comprehensive income, and within equity in the Consolidated Balance
Sheets, separately from equity attributable to owners of the
Company.
On
March 31, 2020 and December 31, 2019, the aggregate non-controlling
interests in the Company were $6,839,358 and $6,975,459
respectively.
Recent Accounting Pronouncements
Accounting pronouncement adopted
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842)
(“ASU 2016-02”) which supersedes ASC Topic 840, Leases.
ASU 2016-02 requires lessees to recognize a right-of-use asset and
a lease liability on their balance sheets for all the leases with
terms greater than twelve months. Based on certain criteria, leases
will be classified as either financing or operating, with
classification affecting the pattern of expense recognition in the
income statement. For leases with a term of twelve months or less,
a lessee is permitted to make an accounting policy election by
class of underlying asset not to recognize lease assets and lease
liabilities. If a lessee makes this election, it should recognize
lease expense for such leases generally on a straight-line basis
over the lease term. ASU 2016-02 is effective for fiscal years
beginning after December 15, 2019 for emerging growth companies,
and interim periods within those years, with early adoption
permitted. In transition, lessees and lessors are required to
recognize and measure leases at the beginning of the earliest
period presented using a modified retrospective approach. In July
2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842):
Targeted Improvements” that allows entities to apply the
provisions of the new standard at the effective date (e.g. January
1, 2019), as opposed to the earliest period presented under the
modified retrospective transition approach (January 1, 2017) and
recognize a cumulative-effect adjustment to the opening balance of
retained earnings in the period of adoption. The modified
retrospective approach includes a number of optional practical
expedients primarily focused on leases that commenced before the
effective date of Topic 842, including continuing to account for
leases that commence before the effective date in accordance with
previous guidance, unless the lease is modified. 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. As a lessor of one home,
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 March 31, 2020 were $128,436 and $130,689,
respectively. 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 July
2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260), Distinguishing
Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic
815): (Part I) Accounting for Certain Financial Instruments with
Down Round Features, (Part II) Replacement of the Indefinite
Deferral for Mandatorily Redeemable Financial Instruments of
Certain Nonpublic Entities and Certain Mandatorily Redeemable
Noncontrolling Interests with a Scope Exception (“ASU
2017-11”). ASU 2017-11 is intended to simplify the accounting
for financial instruments with characteristics of liabilities and
equity. Among the issues addressed are: (i) determining whether an
instrument (or embedded feature) is indexed to an entity’s
own stock; (ii) distinguishing liabilities from equity for
mandatorily redeemable financial instruments of certain nonpublic
entities; and (iii) identifying mandatorily redeemable
noncontrolling interests. The Company adopted ASU 2017-11 on
January 1, 2019 and determined that this ASU does not have a
material impact on the condensed consolidated financial
statements.
In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure
Framework: Changes to the Disclosure Requirements for Fair Value
Measurement (“ASU 2018-13”). ASU 2018-13 is
intended to improve the effectiveness of fair value measurement
disclosures. ASU 2018-13 is effective for fiscal years beginning
after December 15, 2019, and interim periods within those fiscal
years. Early adoption is permitted. The Company determined that ASU
2018-13 has no material impact on its condensed consolidated
financial statements.
Accounting pronouncement being evaluated
In
December 2019, The FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the
Accounting for Income Taxes. The amendments in this Update
simplify the accounting for income taxes by removing certain
exceptions to the general principles in Topic 740. The amendments
also improve consistent application of and simplify GAAP for other
areas of Topic 740 by clarifying and amending existing guidance.
For public business entities, the amendments in this Update are
effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2020. The Company is currently
evaluating the impact of ASU 2020-04.
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.
|
4.
|
CONCENTRATIONS
|
The
Company maintains cash balances at various financial institutions
in different countries. These balances are usually secured by the
central banks’ insurance companies. At times, these balances
may exceed the insurance limits. As of March 31, 2020 and December
31, 2019, uninsured cash and restricted cash balances were
$5,870,133 and $5,905,134, respectively.
For the
three months ended March 31, 2020, one customer accounted for 100%
of the Company’s property and development revenue. For the
three months ended March 31, 2019, two customers accounted for
approximately 55% and 45% of the Company’s property and
development revenue.
For the
three months ended March 31, 2020, no revenue was recognized by the
Company’s Other Business Segment. One customer accounted for
100% of the Company’s Other Business Segment revenue during
three months ended March 31, 2019.
As of
March 31, 2020, and December 31, 2019, one customer accounted for
80% of the Company’s Other Business Segment accounts
receivable and the second customer accounted for approximately
20%.
During
three months ended on March 31, 2019 one related party supplier
provided 100% of the biohealth segment raw material. There was no
purchase of raw material from this related party during three
months ended on March 31, 2020.
|
5.
|
SEGMENTS
|
Operating
segments are defined as components of an enterprise about which
separate financial information is available that is evaluated
regularly by the chief operating decision maker, or
decision–making group, in deciding how to allocate resources
and in assessing performance. The Company’s chief operating
decision-maker is the CEO. The Company operates in and reports four
business segments: property development, digital transformation
technology, biohealth, and other business activities. The
Company’s reportable segments are determined based on the
services they perform and the products they sell, not on the
geographic area in which they operate. The Company’s chief
operating decision maker evaluates segment performance based on
segment revenue. Costs excluded from segment income (loss) before
taxes and reported as “Other” consist of corporate
general and administrative activities which are not allocable to
the four reportable segments.
The
following table summarizes the Company’s segment information
for the following balance sheet dates presented, and for the three
months ended March 31, 2020 and 2019:
|
|
Property Development
|
Digital Transformation Technology
|
Biohealth Business
|
Other
|
Total
|
|
Three Months Ended March 31, 2020
|
|
|
|
|
|
|
Revenue
|
$2,954,389
|
$-
|
$10,782
|
$-
|
$2,965,171
|
|
Cost of
Sales
|
(2,380,820)
|
-
|
(2,883)
|
-
|
(2,383,703)
|
|
Gross
Margin
|
573,569
|
-
|
7,899
|
-
|
581,468
|
|
Operating
Expenses
|
(277,056)
|
(18,228)
|
(132,791)
|
(494,058)
|
(922,133)
|
|
Operating
Income (Loss)
|
296,513
|
(18,228)
|
(124,892)
|
(494,058)
|
(340,665)
|
|
Other Income
(Expense)
|
7,539
|
(92,477)
|
193
|
2,640,409
|
2,555,664
|
|
Net Income
(Loss) Before Income Tax
|
304,052
|
(110,705)
|
(124,699)
|
2,146,351
|
2,214,999
|
|
|
Property Development
|
Digital Transformation Technology
|
Biohealth Business
|
Other
|
Total
|
|
Three Months ended March 31, 2019
|
|
|
|
|
|
|
Revenue
|
$11,318,595
|
$-
|
$445,093
|
$7,632
|
$11,771,320
|
|
Cost of
Sales
|
(10,438,253)
|
-
|
(120,548)
|
-
|
(10,558,801)
|
|
Gross
Margin
|
880,342
|
-
|
324,545
|
7,632
|
1,212,519
|
|
Operating
Expenses
|
(238,006)
|
(96,652)
|
(526,001)
|
(683,878)
|
(1,544,537)
|
|
Operating
Income (Loss)
|
642,336
|
(96,652)
|
(201,456)
|
(676,246)
|
(332,018)
|
|
Other Income
(Expense)
|
16,688
|
301,435
|
(13,535)
|
426,059
|
730,647
|
|
Net Income
(Loss) Before Income Tax
|
659,024
|
204,783
|
(214,991)
|
(250,187)
|
398,629
|
|
March 31,
2020
|
|
|
|
|
|
|
Cash and
Restricted Cash
|
$5,231,600
|
$51,769
|
$465,320
|
$1,340,956
|
$7,089,645
|
|
Total
Assets
|
29,537,646
|
151,872
|
1,043,404
|
5,178,021
|
35,910,943
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
|
|
|
|
|
Cash and
Restricted Cash
|
$5,439,318
|
$55,752
|
$497,401
|
$1,338,525
|
$7,330,996
|
|
Total
Assets
|
29,857,615
|
155,854
|
1,088,362
|
4,770,949
|
35,872,780
|
|
6.
|
REAL ESTATE ASSETS
|
As of
March 31, 2020 and December 31, 2019, real estate assets consisted
of the following:
|
|
March 31,
2020
|
December 31,
2019
|
|
|
|
|
|
Construction
in Progress
|
$10,108,647
|
$9,601,364
|
|
Land
Held for Development
|
13,792,009
|
14,283,340
|
|
Total
Real Estate Assets
|
$23,900,656
|
$23,884,704
|
|
|
|
|
|
7.
|
PROPERTY AND EQUIPMENT
|
As of
March 31, 2020 and December 31, 2019, property and equipment
consisted of the following:
The
Company recorded depreciation expense of $5,942 and $7,149 during
the three months ended March 31, 2020 and 2019,
respectively.
|
8.
|
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 $64,000,000, 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. As of March 31, 2020 and December 31, 2019,
amounts held on deposit from NVR were $2,160,259 and $2,445,269,
respectively.
|
9.
|
NOTES PAYABLE
|
As of
March 31, 2020 and December 31, 2019, notes payable consisted of
the following:
|
|
March
31,
2020
|
December
31,
2019
|
|
Union Bank
Loan
|
-
|
-
|
|
M&T Bank
Loan
|
-
|
-
|
|
Australia
Loan
|
137,601
|
157,105
|
|
Total notes
payable
|
$137,601
|
$157,105
|
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%. The interest rate at
December 31, 2018 was 6.125%. Beginning December 1, 2015, interest
only payments were due on the outstanding principal balance. The
entire unpaid principal and interest sum was due and payable on
November 22, 2018, with the option of one twelve-month extension
period. The loan is secured by a deed of trust on the property,
$2,600,000 of collateral cash, and a Limited Guaranty Agreement
with SeD Ballenger. The Company also had an $800,000 letter of
credit from the Union Bank. The letter of credit was due on
November 22, 2018 and bore interest at 15%. In September 2017, SeD
Maryland Development LLC and the Union Bank modified the Revolving
Credit Note, which increased the original principal amount from
$8,000,000 to $11,000,000 and extended the maturity date of the
loan and letter of credit to December 31, 2019. Accordingly, this
change in terms of the Union Bank Loan was accounted for as a
modification in accordance with ASC 470 –
Debt.
On
April 17, 2019, the Union Bank Loan was paid off and SeD Maryland
Development LLC and Union Bank terminated the Revolving Credit
Note. After termination, the collateral cash was released and all
L/Cs were transferred to the M&T Bank L/C
Facility.
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 rate on 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 up to
$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 loan 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 Loan Agreement is
secured by $2,600,000 collateral fund and a Deed of Trust issued to
the Lender on the property owned by SeD Maryland. As of March 31,
2020, the outstanding balance of the revolving loan 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.
Australia Loan
On January 7, 2017, SeD Perth Pty Ltd (“SeD Perth”)
entered into a loan agreement with National Australian Bank Limited
(the “Australia Loan”) for the purpose of funding land
development. The loan facility provides SeD Perth with access to
funding of up to approximately $460,000 and matures on December 31,
2018. The Australia Loan is secured by both the land under
development and a pledged deposit of $35,276. This loan is
denominated in AUD. Personal guarantees amounting to approximately
$500,000 have been provided by our CEO, Chan Heng Fai and by Rajen
Manicka, the CEO of Holista CollTech and Co-founder of iGalen Inc.
The interest rate on the Australia Loan is based on the weighted
average interest rates applicable to each of the business markets
facility components as defined within the loan agreement, ranging
from 4.85% to 5.57% per annum for the three months ended March 31,
2020 and from 5.97% to 6.64% per annum for the months ended March
31, 2019. On September 7, 2017 the Australia Loan was amended to
reduce the maximum borrowing capacity to approximately $179,000. On
February 6, 2019 and March 24, 2020, the terms of the Australia
Loan were further amended to reflect an extended maturity date of
March 31, 2020 and September 30, 2020, respectively. This was
accounted for as a debt modification. The Company did not pay fees
to the National Australian Bank Limited for the modification of the
loan agreement.
|
10.
|
RELATED PARTY TRANSACTIONS
|
Personal Guarantees by Directors
As of
both March 31, 2020 and December 31, 2019, a director of the
Company had provided personal guarantees amounting to approximately
$5,500,000 to secure external loans from financial institutions for
HFE and the consolidated entities.
Sale of HotApp Blockchain to DSS Asia
On
October 25, 2018, HIP, a wholly-owned subsidiary of HotApp
Blockchain, Inc., entered into an equity purchase agreement (the
“HotApps Purchase Agreement”) with DSS Asia, a Hong
Kong subsidiary of DSS International, pursuant to which HIP agreed
to sell to DSS Asia all of the issued and outstanding shares of
HotApps Information Technology Co. Ltd., also known as Guangzhou
HotApps, a wholly-owned subsidiary of HIP. Guangzhou HotApps is
primarily engaged in engineering work for software development, as
well as, a number of outsourcing projects related to real estate
and lighting. Chan Heng Fai is the CEO of DSS Asia and DSS
International. For further details on this transaction, refer to
Note 14 – Discontinued
Operations.
Sale of 18% of LiquidValue Asset Management Pte. Ltd.
On May
8, 2019, SeD Capital Pte. Ltd. entered into a sale and purchase
agreement to sell 522,000 ordinary shares (representing
approximately 18% of the ownership) in LiquidValue Asset Management
Pte. Ltd. to LiquidValue Development Pte. Ltd. (“LVD”)
for a cash of $46,190. Chan Heng Fai is the owner of
LVD.
Notes Payable
During the year ended on December 31, 2017, a director of the
Company lent non-interest loans of $7,156,680, for the general
operations of the Company. The loans are interest free, not
tradable, unsecured, and repayable on demand. On October 15, 2018,
a formal lending agreement between the Singapore eDevelopment
Limited and Chan Heng Fai was executed. Under the agreement, Chan
Heng Fai provides a lending credit limit of approximately $10
million for Singapore eDevelopment Limited with interest rate 6%
per annum for the outstanding borrowed amount, which commenced
retroactively from January 1, 2018. The loans are still not
tradable, unsecured and repayable on demand. As of March 31,
2020 and December 31, 2019 the
outstanding principal balance of the loan is $4,006,810 and
$4,246,604, respectively. Chan Heng Fai confirmed through a letter
that he would not demand the repayment within a year. Interest
started to accrue on January 1, 2018 at 6% per annum. During the
three months ended on March 31, 2020 and 2019, the interest expenses were $61,841 and
$104,769, respectively. As of March 31, 2020 and December 31, 2019, the accrued interest total
was $831,816 and $822,405, respectively.
Chan
Heng Fai provided interest-free due on demand advance to HF
Enterprise for the general operations. On March 31, 2020 and
December 31, 2019, the outstanding balance was $178,400 and
$178,400, respectively.
On May
1, 2018, Rajen Manicka, CEO and one of the directors of iGalen
International Inc., which holds 100% of iGalen Inc., provided a
loan of approximately $367,246 to iGalen Inc. (the “2018
Rajen Loan”). The term of this loan is ten years. The Loan
has an interest rate of 4.7% per annum. On March 8, March 27 and
April 23, 2019, iGalen borrowed additional monies of $150,000,
$30,000 and $50,000, respectively, from Rajen Manicka, total
$230,000 (the “2019 Rajen Loan”). The 2019 Rajen Loan
is interest free, not tradable, unsecured, and repayable on demand.
As of March 31, 2020 and December 31, 2019, the total outstanding
principal balance of the loans was $546,397 and $546,397,
respectively, and was included in the Notes Payable – Related
Parties balance on the Company’s Condensed Consolidated
Balance Sheets. During the three months ended March 31, 2020 and
2019, the Company incurred $3,850 and $4,086 of interest expense,
respectively.
On
August 13, 2019, iGalen International Inc., which holds 100% of
iGalen Inc., borrowed $250,000 from Decentralized Sharing Services,
Inc., a company whose sole shareholder and director is Chan Heng
Fai, our CEO. The term of the loan is 12 months, with an interest
rate of 10% per annum. In addition, Decentralized Sharing Services,
Inc. received the right to receive 3% of any revenue received by
iGalen International Inc. for 99 years. During the three months
ended March 31, 2020 the Company incurred $6,164 of interest
expense and $0 from the right to receive 3% of revenue. The amount
outstanding on the loan as of March 31, 2020 and December 31, 2019
was $250,000 and $250,000, respectively. The accrued interest was
$15,822 and $9,589 as of March 31, 2020 and December 31, 2019. The
principal of loan $250, 000 was paid off in June 2020.
On
November 3, 2019, iGalen Inc. borrowed $160,000 from iGalen Funding
Inc., a company whose directors and shareholders include two
members of the Board of iGalen Inc. The term of the loan is 6
months, with an interest rate of 10% per annum. During the three
months ended March 31, 2020 the Company incurred $3,945 of interest
expense. The amount outstanding on the loan as of March 31, 2020
and December 31, 2019 was $160,000 and $160,000, respectively. The
accrued interest was $6,532 and $2,542 as of March 31, 2020 and
December 31, 2019. The expiration date was extended November 3,
2020 after 6 months.
Shares issued in exchange agreement with Chairman and
CEO
Hengfai International Pte. Ltd
On October 1, 2018, 100% of the ownership interest in Hengfai
International Pte. Ltd. (“Hengfai International”) was
transferred from Chan Heng Fai, our founder, Chairman and CEO to HF
Enterprises Inc. in exchange for 8.5 million shares of the Company.
Hengfai International holds 100% of Hengfai Business Development
Pte. Ltd. (“Hengfai Business Development”), which holds
761,185,294 shares of SeD Ltd and 359,834,471 warrants. Both
Hengfai International and Hengfai Business Development are holding
companies without any business
operations.
Heng Fai Enterprises Pte. Ltd.
On October 1, 2018, 100% of the ownership interest in Heng Fai
Enterprises Pte. Ltd. (“Heng Fai Enterprises”) was
transferred from Chan Heng Fai, our founder, Chairman and CEO to HF
Enterprises Inc. in exchange for 500,000 shares of the Company.
Heng Fai Enterprises holds 2,730,000 shares (13.72% as of September
30, 2019 and 14.2% as of December 31, 2018). Of Vivacitas Oncology
Inc., a U.S.-based biopharmaceutical company. Heng Fai Enterprises
cost to purchase these Vivacitas shares was $200,128, which is
recorded at cost by the Company because it does not have a readily
determinable fair value as it is a private US company. Heng Fai
Enterprises is a holding company without any business
operations.
Global eHealth Limited
On October 1, 2018, 100% of Global eHealth Limited (“Global
eHealth”) was transferred from Chan Heng Fai, a director of
the Company, to the Company in exchange for 1,000,000 shares of the
Company. There was no other consideration exchange in conjunction
with this transaction. Global eHealth holds 46,226,673 shares
(19.8%) of Holista CollTech Limited, a public Australian company
that produces natural food ingredients. Global eHealth is a holding
company without any business operations.
Management Fees
MacKenzie
Equity Partners, owned by Charles MacKenzie, a Director of the
Company's subsidiary SeD Intelligent Home Inc., has had 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. Since January of 2019,
the Company has paid a monthly fee of $20,000 for these consulting
services. The Company incurred expenses of $60,000 and $60,000 for
the three months ended March 31, 2020 and 2019, respectively, which
were capitalized as part of Real Estate on the Company’s
Consolidated Balance Sheet as the services relate to property and
project management. As of March 31, 2020, and December 31, 2019
there was no outstanding balance due to this
entity.
Consulting Services
A law
firm owned by Conn Flanigan, a Director of SeD Intelligent Home,
performs consulting services for SeD Intelligent Home and some
subsidiaries of the Company. The Company incurred expenses of $0
and $5,799 for the three months ended March 31, 2020 and 2019,
respectively. As of March 31, 2020, and December 31, 2019 there was
no outstanding balance due to this entity.
Rajen
Manicka, the CEO of Holista CollTech and Co-founder of iGalen
International Inc., performs consulting services for iGalen Inc.
iGalen Inc. incurred expenses of $0 and $60,000 for the three
months ended March 31, 2020 and 2019, respectively. On both, March
31, 2020 and December 31, 2019, iGalen owed this related party fees
for consulting services in the amount of $671,403. The
consulting agreement with Rajen Manicka was terminated on January
1, 2020.
iGalen Inc. Affiliates
iGalen
Philippines and iGalen SDN are related party entities which are
owned by Dr. Rajen Manicka and are not owned by the Company. iGalen
Inc. provides use of its platform to collect sale revenue and
payment of expenses for these entities without service fees. iGalen
SDN has a consulting agreement to provide accounting,
administration and other logistic services to iGalen with a monthly
fee of $4,000. The Company incurred expenses of $12,000 for the
three months ended March 31, 2020 and 2019. On March 31, 2020 and
December 31, 2019, iGalen owed $375,548 and $416,812, respectively
to iGalen Philippines and iGalen SDN.
Medi
Botanics Sdn Bhd, a subsidiary of Holista CollTech, is only raw
material and product suppliers of iGalen. Dr. Rajen Manicka is the
controlling shareholder and a director of both Medi Botanics Sdn
Bhd and Holista CollTech. Medi Botanics Sdn Bhd supplied $0 and
$31,886 raw materials and products to iGalen in the three months
ended March 31, 2020 and 2019, respectively. On both, March 31,
2020 and December 31, 2019, iGalen owed $956,300 to this
entity.
Investment in the Global Opportunity Fund
On
February 1, 2017, the Company invested $300,000 in Global
Opportunity Fund (“Fund”), a mutual fund registered in
the Cayman Islands and Chan Heng Fai is one of the directors of
this fund. This Fund was closed during November 2019 and is being
liquidated. LiquidValue Asset Management Pte. Ltd., one of the
subsidiaries of the Company, is the investment manager of the Fund
and receives a management fee from the Fund at 2% per annum of the
aggregated net asset value of the investments and a performance fee
of 20%. As of December 31, 2019, the Company recorded a receivable
$307,944 from the Global Opportunity Fund. In the three months
ended on March 31, 2020 and 2019, the management fee and
performance fee charged to the Fund were $0 and $3,150,
respectively. On March 31, 2020 and December 31, 2019, the Fund
owed accrued management and performance fee receivable $0 and
$15,484 respectively. On January
23, 2020, the Company received $307,944 as a result of the
liquidation of Global Opportunity Fund.
Investment in VeganBurg International Pte. Ltd.
On February 5, 2020, SeD Capital Pte Ltd, a
subsidiary of the Company, invested $2,133 in VeganBurg
International Pte. Ltd. (“VeganBurg International”), a
related party company, in exchange for 30% ownership of such
company. Chan Heng Fai, our founder, Chairman and Chief Executive
Officer, is a member of the Board of Directors of VeganBurg
International and has significant influence on such company.
VeganBurg International is focused on promoting environmentally
friendly, healthy plant-based burgers in the Asian
market.
Note Receivable from a related party company
On
March 2, 2020 LiquivdValue Asset Management Pte. Ltd.
(“LiquidValue”) received a $200,000 Promissory Note
from American Medical REIT Inc. (“AMRE”), a company
which is 36.1% owned by LiquidValue. Chan Heng Fai and Alan Lui
from Singapore eDevelopment Limited are directors of American
Medical REIT Inc. The note carries interests of 8% and is payable
in two years. LiquidValue also received warrants to purchase AMRE
shares at the Exercise Price $5.00 per share. The amount of the
warrants equals to the note principle divided by the Exercise
Price. If AMRE goes to IPO in the future and IPO price is less than
$10.00 per share, the Exercise Price shall be adjusted downward to
fifty percent (50%) of the IPO price. As of March 31, 2020, the
fair market value of the warrants was $0.
|
11.
|
EQUITY
|
The
Company is authorized to issue 20,000,000 common shares and
5,000,000 preferred shares, both at a par value $0.001 per share.
At March 31, 2020 and December 31, 2019, there were 10,001,000
common shares issued and outstanding.
HotApp Blockchain, Inc. Sale of Shares
From
January to March, 2020, the Company sold 10,000 shares of HotApp
Blockchain to international investors with the amount of $5,000,
which was booked as addition paid-in capital. The Company held
500,821,889 shares of the total outstanding shares 506,898,576
before the sale. After the sale, the Company still owns
approximately 99% of HotApp Blockchain’s total outstanding
shares.
From
January to March, 2019, the Company sold 301,500 shares of HotApp
Blockchain to international investors with the amount of $184,500,
which was booked as addition paid-in capital. The Company held
500,821,889 shares of the total outstanding shares 506,898,576
before the sale. After the sale, the Company still owns
approximately 99% of HotApp Blockchain’s total outstanding
shares.
Distribution to Minority Shareholders
From
January to March, 2020, SeD Maryland Development LLC Board approved
the payment distribution plan to members and paid $197,400 in
distribution to the minority shareholder. There was no
distribution to members during the three months ended on March 31,
2019.
|
12.
|
ACCUMULATED OTHER COMPREHENSIVE INCOME
|
Following
is a summary of the changes in the balances of accumulated other
comprehensive income, net of tax:
|
|
Unrealized Gains and Losses on Security Investment
|
Foreign Currency Translations
|
Change in Minority Interest
|
Total
|
|
Balance
at January 1, 2020
|
$(59,888)
|
$1,613,125
|
$(84,968)
|
$1,468,269
|
|
|
|
|
|
|
|
Other
Comprehensive Income
|
(8,240)
|
(1,094,810)
|
|
(1,103,049)
|
|
|
|
|
|
|
|
Balance
at March 31, 2020
|
$(68,128)
|
$518,315
|
$(84,968)
|
$365,219
|
|
|
Unrealized Gains and Losses on Security Investment
|
Foreign Currency Translations
|
Total
|
|
Balance
at January 1, 2019
|
$(23,779)
|
$1,606,567
|
$1,582,788
|
|
|
|
|
|
|
Other
Comprehensive Income
|
11,681
|
74,263
|
85,944
|
|
|
|
|
|
|
Balance
at March 31, 2019
|
$(12,098)
|
$1,680,830
|
$1,668,732
|
|
13.
|
DISCONTINUED OPERATIONS
|
On
October 25, 2018, HotApps International Pte. Ltd.
(“HIP”) entered into an Equity Purchase Agreement with
DSS Asia Limited (“DSS Asia”), a Hong Kong subsidiary
of DSS International Inc. (“DSS International”),
pursuant to which HIP agreed to sell to DSS Asia all of the issued
and outstanding shares of HotApps Information Technology Co. Ltd.,
also known as Guangzhou HotApps Technology Ltd. (“Guangzhou
HotApps”). Guangzhou HotApps was a wholly owned subsidiary of
HIP, which was primarily engaged in engineering work for software
development, mainly voice over internet protocol. Guangzhou HotApps
was also involved in a number of outsourcing projects, including
projects related to real estate and lighting.
The
parties to the Equity Purchase Agreement agreed that the purchase
price for this transaction would be $100,000, which would be paid
in the form of a two-year, interest free, unsecured, demand
promissory note in the principal amount of $100,000, and that such
note would be due and payable in full in two years. As of March 31,
2020 and December 31, 2019, the outstanding receivable of this
promissory note was $100,000. The closing of the Equity Purchase
Agreement was subject to certain conditions; these conditions were
met and the transaction closed on January 14, 2019.
The
composition of assets and liabilities included in discontinued
operations was as follows:
|
|
March 31,
2020
|
January 14,
2019
|
|
Assets
|
|
|
|
Current
Assets
|
|
|
|
Cash
|
$-
|
$31,060
|
|
Deposit
and other receivable
|
-
|
5,136
|
|
Total
Current Assets
|
-
|
36,196
|
|
|
|
|
|
Fixed
assets, net
|
-
|
1,717
|
|
Total
Assets
|
$-
|
$37,913
|
|
|
|
|
|
Liabilities and
Stockholders' Deficit
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
Accounts
payable and accrued expenses
|
$-
|
$202,848
|
|
Total
Current Liabilities
|
-
|
202,848
|
|
|
|
|
|
Total
Liabilities
|
$-
|
$202,848
|
|
|
|
|
The
aggregate financial results of discontinued operations were as
follows:
The
cash flows attributable to the discontinued operations are as
follows:
|
|
Three
Months
Ended
March 31,
2020
|
Three
Months
Ended
March 31,
2019
|
|
Operating
|
$-
|
$24,493
|
|
Investing
|
-
|
-
|
|
Financing
|
-
|
-
|
|
Net
cash (outflows)/inflows
|
$-
|
$24,493
|
|
14.
|
INVESTMENTS MEASURED AT FAIR VALUE
|
Financial
assets measured at fair value on a recurring basis are summarized
below and disclosed on the consolidated balance sheet as of March
31, 2020 and December 31, 2019:
|
|
|
Fair Value Measurement
Using
|
|
||
|
|
Amount at Cost
|
Level 1
|
Level 2
|
Level 3
|
Amount at Fair Value
|
|
March 31, 2020
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Investment
securities- Fair Value Option
|
$3,457,056
|
$3,455,658
|
$-
|
$-
|
$3,455,658
|
|
Investment
securities- Trading
|
16,016
|
15,035
|
-
|
-
|
15,035
|
|
Convertible
note receivable
|
50,000
|
-
|
-
|
13,606
|
13,606
|
|
Warrants
- AMRE
|
-
|
-
|
-
|
-
|
-
|
|
Stock
Option - Vivacitas
|
-
|
-
|
-
|
-
|
-
|
|
Total
Investment in securities at Fair Value
|
$3,523,072
|
$3,470,693
|
$-
|
$13,606
|
$3,484,299
|
|
|
|
Fair Value Measurement
Using
|
|
||
|
|
Amount at Cost
|
Level 1
|
Level 2
|
Level 3
|
Amount at Fair Value
|
|
December 31, 2019
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Investment
securities- Fair Value Option
|
$3,457,056
|
$2,973,582
|
$-
|
$-
|
$2,973,582
|
|
Investment
securities- Trading
|
16,016
|
15,907
|
-
|
-
|
15,907
|
|
Convertible
note receivable
|
50,000
|
-
|
-
|
26,209
|
26,209
|
|
Stock
Option - Vivacitas
|
-
|
-
|
-
|
-
|
-
|
|
Total
Investment in securities at Fair Value
|
$3,523,072
|
$2,989,489
|
$-
|
$26,209
|
$3,015,698
|
Unrealized gain on investment securities for the three months
ended March 31, 2020 and 2019
was $484,362 and $734,599, respectively.
For U.S. trading stocks, we use Bloomberg Market stock prices as
the share prices to calculate fair value. For overseas stock, we
use the stock price from local stock exchange to calculate fair
value. The following chart shows details of the fair value of
equity security investment at March 31, 2020 and December 31, 2019,
respectively.
|
|
Share price
|
Shares
|
Market Value
|
|
|
|
3/31/2020
|
3/31/2020
|
Valuation
|
|
|
|
|
|
|
|
|
DSS (Related Party)
|
0.198
|
500,000
|
99,000
|
Investment
in Securities at Fair Value
|
|
|
|
|
|
|
|
AMBS (Related Party)
|
0.012
|
20,000,000
|
234,000
|
Investment
in Securities at Fair Value
|
|
|
|
|
|
|
|
Holista (Related Party)
|
0.068
|
46,226,673
|
3,122,658
|
Investment
in Securities at Fair Value
|
|
|
|
|
|
|
|
Others
|
|
|
15,035
|
Investment
in Securities at Fair Value
|
|
|
|
|
|
|
|
|
|
Total Level 1 Equity Securities
|
3,470,693
|
|
|
|
|
|
|
|
|
Vivacitus (Related Party)
|
N/A
|
2,480,000
|
200,128
|
Investment
in Securities at Cost
|
|
|
|
|
|
|
|
|
|
Total Equity Securities
|
3,670,821
|
|
|
|
Share price
|
Shares
|
Market Value
|
|
|
|
12/31/2019
|
12/31/2019
|
Valuation
|
|
|
|
|
|
|
|
|
DSS (Related Party)
|
0.301
|
500,000
|
150,500
|
Investment
in Securities at Fair Value
|
|
|
|
|
|
|
|
AMBS (Related Party)
|
0.013
|
20,000,000
|
262,000
|
Investment in Securities at Fair Value
|
|
|
|
|
|
|
|
Holista (Related Party)
|
0.055
|
46,226,673
|
2,561,082
|
Investment
in Securities at Fair Value
|
|
|
|
|
|
|
|
Others
|
|
|
15,907
|
Investment
in Securities at Fair Value
|
|
|
|
|
|
|
|
|
|
Total Level 1 Equity Securities
|
2,989,489
|
|
|
|
|
|
|
|
|
Vivacitus (Related Party)
|
N/A
|
2,480,000
|
200,128
|
Investment
in Securities at Cost
|
|
|
|
|
|
|
|
|
|
Total Equity Securities
|
3,189,617
|
|
Other investments consist of a $50,000 investment in a convertible
promissory note of Sharing Services, Inc. (“Sharing Services
Convertible Note”), a company quoted on the US OTC market.
The value of the convertible note was estimated by management using
a Black-Scholes valuation model.
The
table below provides a summary of the changes in fair value,
including net transfers in and/or out of all financial assets
measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) during the three months ended March
31, 2020 and 2019:
|
|
Total
|
|
Balance at January
1, 2020
|
$26,209
|
|
Total
losses
|
(12,603)
|
|
Purchases, sales,
and settlements
|
-
|
|
Balance
at March 31, 2020
|
$13,606
|
|
|
Total
|
|
Balance at January
1, 2019
|
$78,723
|
|
Total
losses
|
(5,439)
|
|
Purchases, sales,
and settlements
|
-
|
|
Balance
at March 31, 2019
|
$73,284
|
The
fair value of the Sharing Services
Convertible Note as of March 31, 2020 and December 31, 2019
was calculated using a Black-Scholes valuation model valued with
the following weighted average assumptions:
|
|
March
31,
2020
|
December
31,
2019
|
|
|
|
|
|
Dividend
yield
|
0.00%
|
0.00%
|
|
Expected
volatility
|
191.21%
|
159.88%
|
|
Risk free interest
rate
|
1.51%
|
1.61%
|
|
Contractual term
(in years)
|
2.51
|
2.76
|
|
Exercise
price
|
$0.15
|
$0.15
|
Changes
in the observable input values would likely cause material changes
in the fair value of the Company’s Level 3 financial
instruments. A significant increase (decrease) in this likelihood
would result in a higher (lower) fair value
measurement.
On
March 2, 2020, the Company received warrants to purchase shares of
AMRE, a related party private startup company, after lent $200,000
loan by a promissory note. See details at Note 10 - Related Party
Transactions, Note Receivable from a Related Party Company. The
Company holds a stock option to purchase 250,000 shares of
Vivacitas’ common stock at $1 per share at any time prior to
the date of public offering. As of March 31, 2020 and December 31,
2019, both AMRE and Vivacitas were private companies. Based the
management’s analysis, the fair value of the warrants and the
stock option were $0 as of March 31, 2020; the fair value of the
stock option was $0 as of December 31, 2019.
|
15.
|
COMMITMENTS AND CONTINGENCIES
|
Lots Sales Agreement
On
November 23, 2015, SeD Maryland Development LLC completed the
$15,700,000 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 a
$15,000,000 assignable real estate sales contract with NVR, by
which RBG Family, LLC would facilitate the sale of the 197 acres of
Ballenger Run to NVR. On December 10, 2014, NVR assigned this
contract to SeD Maryland Development, LLC through execution of an
assignment and assumption agreement and entered into a series of
lot purchase agreements by which NVR would purchase 443 subdivided
residential lots from SeD Maryland Development, LLC. Through
December 31, 2019, NVR has purchased 123 lots. In the three months
ended on March 31, 2020, NVR purchased 27 additional
lots.
On July 20, 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.
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
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 will convert the 5.9 acre CCRC parcel
to 36 lots (the 28 feet wide villa lot) and sell to NVR. SeD
Maryland pursued the required zoning approval to change the number
of such lots from 85 to 121, which was approved in July
2019.
On July 3, 2018, 150 CCM Black Oak entered into a Purchase and Sale
Agreement with Houston LD, LLC for the sale of 124 lots located at
its Black Oak project. Pursuant to the Purchase and Sale 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 is currently held in escrow.
150 CCM Black Oak will apply these funds exclusively towards an
amenity package on the property. The closing of the transactions
contemplated by the Purchase and Sale 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 Purchase and Sale Agreement”) for these 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 in Magnolia, Texas was
completed.
Royalty Fees
The Company has royalty commitments for the license and sale rights
of certain nutraceutical products that include both fixed and
variable royalty payments through 2022. The fixed royalty
commitments are $15,000 per month. Variable royalty payments vary
from $1.00 per unit sold to $0.20 per unit sold depending on sales
volume. The Exclusive Sublicensing Agreement was terminated on
January 8, 2019.
Litigation with Gara Group
On September 27, 2019, iGalen International Inc., one of our
majority-owned subsidiaries, and iGalen Inc., its wholly-owned
subsidiary, filed a complaint in the Superior Court of the State of
California, County of San Diego, Central Division, against Gara
Group, Inc., a Delaware corporation, and certain affiliated or
related entities, including the Chief Executive Officer of the Gara
Group (collectively these entities are referred to herein as the
“Gara Group”). A similar complaint had been filed in
Utah on September 26, 2019, but subsequently re-filed in
California. The complaint, as amended on October 24, 2019,
enumerates causes of action for breach of contract, breach of
covenant of good faith and fair dealing and intentional
interference with economic relations.
iGalen Inc. and Gara Group are parties to a Specialized Services
Agreement, dated March 29, 2017 (the “Specialized Services
Agreement”). iGalen Inc. contracted with Gara Group to
provide for services that include, among other things, (i) product
fulfillment; (ii) software development and maintenance of an onsite
“Platform,” which includes a company website and
interactive portal referred to as the “Back Office”;
and (iii) managing iGalen’s social media sites. The Gara
Group had previously claimed that iGalen Inc. owed Gara Group
certain amounts, including (i) $125,000 for “Back Office
Fees”; (ii) $150,000 for “Speaking Fees”; and
(iii) $67,299 for services related to iGalen’s merchant
account, back office, and shipping fulfillment, invoiced on August
28 and 31, and September 15, 2019. iGalen Inc.’s amended
complaint notes that no provision in the Specialized Services
Agreement allows for the particular “Back Office Fees”
of $125,000 and that no provision in the Specialized Services
Agreement allows for the so-called “Speaking Fees” of
$150,000. Gara Group cut off services to iGalen following
iGalen’s indication that it was disputing the amounts owed.
iGalen’s amended complaint notes that the actions of Gara
Group and Mr. Gara have caused, and continue to cause, iGalen to
suffer substantial harm by, among other things, making it so iGalen
was unable to communicate with distributors via its website and
Back Office, fulfill orders made by distributors, or pay commission
to distributors. iGalen is seeking damages.
On October 10, 2019, Gara Group filed a complaint in the Superior
Court of the State of California, County of San Diego, Central
Division against iGalen International Inc., iGalen Inc., Singapore
eDevelopment Limited, Chan Heng Fai, Dr. Rajen Manicka and David
Price, an executive of iGalen Inc. Gara Group’s complaint for
damages asserts that the Gara Group is entitled to general damages
of $9,000,000 and liquidated damages of $50,000,000. iGalen Inc.
intends to vigorously contest this matter. No trial date has been
set. The Company is unable to assess the risk of loss at this time,
but does not believe the outcome will have a material effect on our
financial statements.
In addition, from time to time, during the normal course of our
businesses, we may be subject to various litigation claims and
legal disputes, including in the area of intellectual property
(e.g., trademarks, copyrights and patents). Our intellectual
property rights extend to our technology, business processes and
the content on our website. We use the intellectual property of
third parties in marketing and providing our services through
contractual and other rights. Despite our efforts, from time to
time, third parties may allege that we have violated their
intellectual property rights.
Although the results of claims, lawsuits and proceedings in which
we may be involved cannot be predicted with certainty, we do not
currently believe that the final outcome of the matters discussed
above will have a material adverse effect on our business,
financial condition or results of operations. However, defending
and prosecuting any such claims is costly and may impose a
significant burden on our management and employees. In addition, we
may receive unfavorable preliminary or interim rulings in the
course of litigation, and there can be no assurances that favorable
final outcomes will be obtained. With regard to intellectual
property matters which may arise, if we are unable to obtain an
outcome which sufficiently protects our rights, successfully
defends our use or allows us time to develop non-infringing
technology and content or to otherwise alter our business practices
on a timely basis in response to the claims against us, our
business, prospects and competitive position may be adversely
affected.
Promissory Note from Azure
Pursuant
to a Secured Promissory Note dated as of August 13, 2018, on
October 13, 2019 Azure Holdings, LLC, was obligated to pay our
subsidiary, 150 CCM Black Oak Ltd, $140,000 in principal, plus
accrued interest at the rate of 2.5% per annum through October 13,
2019. Azure Holdings, LLC failed to pay the amount
due. Effective as of October 13, 2019, the interest rate
increased to a default rate of 18% per annum. The Company has
subsequently had numerous communications with Azure Holdings, LLC
regarding the payment of this Secured Promissory Note, and attempts
to set a schedule for Azure Holdings, LLC to repay the amount due.
We have not yet commenced litigation against either Azure Holdings,
LLC or the guarantor of this Secured Promissory Note, but may do so
in the immediate future. Based on current situation, the
management has not believed that the collection from Azure is
probable. As of March 31, 2020 and December 31, 2019, $156,163 and
$149,697 were due to 150 CCM Black Oak Ltd,
respectively.
|
16.
|
DIRECTORS AND EMPLOYEES’ BENEFITS
|
HFE Stock Option Plans
The
Company reserves 500,000 shares of common stock under the Incentive
Compensation Plan for high-quality executives and other employees,
officers, directors, consultants and other persons who provide
services to the Company or its related entities. This plan is meant
to enable such persons to acquire or increase a proprietary
interest in the Company in order to strengthen the mutuality of
interests between such persons and the Company’s
shareholders, and providing such persons with performance
incentives to expand their maximum efforts in the creation of
shareholder value. As of March 31, 2020 and December 31, 2019,
there have been no options granted.
Singapore eDevelopment Stock Option Plans
On
November 20, 2013, SeD Ltd approved a Stock Option Plan (the
“2013 Plan”). Employees, executive directors, and
non-executive directors (including the independent directors) are
eligible to participate in the 2013 Plan.
The
following tables summarize stock option activity under the 2013
Plan for the three months ended March 31, 2020:
|
|
|
Weighted Average
|
|
||
|
|
Options
for
|
|
|
Remaining
|
Aggregate
|
|
|
Common
Shares
|
Exercise
Price
|
Grant-Date Fair
Value
|
Contractual
Term
|
Intrinsic
Value
|
|
Outstanding as of
December 31, 2019
|
1,061,333
|
$0.09
|
$
|
4.00
|
$-
|
|
Granted
|
-
|
-
|
|
|
|
|
Exercised
|
-
|
-
|
|
|
|
|
Forfeited,
cancelled, expired
|
-
|
-
|
|
|
|
|
Outstanding as of
March 31, 2020
|
1,061,333
|
$0.09
|
|
3.75
|
$-
|
|
Vested and
exercisable at March 31, 2020
|
1,061,333
|
$0.09
|
|
3.75
|
$-
|
|
17.
|
SUBSEQUENT EVENTS
|
The
Company evaluated the events and transactions subsequent to March
31, 2020, the balance sheet date, through July
30, 2020, the date the consolidated
financial statements were available to be
issued.
NVR deposit
Based on the Agreement between SeD Maryland Development LLC and
NVR, Inc. dated December 10, 2014 and subsequently amended on
December 31, 2018, SeD Maryland Development LLC was obliged to
provide NVR Inc. with a notice of approval of improvement plans for
CCRC parcel. The notice was sent in April 2020 and SeD Maryland
Development, LLC received a deposit of $220,000.
M&T Bank Loan
On June 18, 2020, SeD Home & REITs Inc. (“SeD
Home”), a wholly-owned subsidiary of SeD Intelligent Home
Inc. (the “Company”), entered into a Loan Agreement
with Manufacturers and Traders Trust Company (“M&T
Bank”), a New York banking corporation (the
“Lender”).
Pursuant to the Loan Agreement, the Lender provided a non-revolving
loan to SeD Home in an aggregate amount of up to $2,990,000 (the
“Loan”). The line of credit bears interest rate
on LIBOR plus 375 basis points. Repayment of the Loan is secured by a Deed of
Trust issued to the Lender on the property owned by certain
subsidiaries of SeD Home. The maturity date of this Loan is July 1,
2022. The Company and one of its subsidiaries are guarantors of
this Loan.
Paycheck Protection Program Loan
On April 6, 2020, the Company entered into a term note with M&T
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 six months of principal
and interest deferred. Beginning in November 2020, the Company
will make 18 equal monthly payments of principal and interest with
the final payment due in April 2022. 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 M&T
Bank for forgiveness of the PPP Term Note, with the amount which
may be forgiven equal to the sum of payroll costs, covered rent and
mortgage obligations, and covered utility payments incurred by the
Company during the eight-week period beginning upon receipt of PPP
Term Note funds, 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.
COVID-19
Since the beginning of 2020 there is an outbreak of the novel
strain of coronavirus (“COVID-19”), which has spread to
over 200 countries, including United States. COVID-19 was declared
a global pandemic in March, 2020 and worldwide mitigation and
measures were recommended. The impact of the outbreak is
evolving and is adversely affecting global economic activities and
contributes to significant instability in financial
markets. While the impact related to current situation cannot
be estimated at this time, it is possible that changes in the fair
values of various investments could materially adversely affect our
future financial statements.
Cancellation of Outstanding Stocks
On June
24, 2020, HFE Holdings Limited, a Hong Kong company and the
shareholder of the Company, agreed that 3,600,000 of the common
shares of the Company it owned was cancelled and returned to the
treasury of the Company. Chan Heng Fai agreed that 1,000 of the
common shares of the Company he owned was cancelled and returned to
the treasury of the Company. After these cancellations, the sole
issued and outstanding of the common stock of the Company is
6,400,000 shares, held by HFE Holdings Limited.
Name Changes of Certain Subsidiaries
Boards of Directors and Stockholders of certain subsidiaries of the
Company approved recent changes of those subsidiaries’ names.
On July 7, 2020 SeD Home & REITs Inc. changed its name to Alset
iHome Inc. and on July 8, 2020 SeD Intelligent Home Inc. changed
its name to LiquidValue Development Inc. Boards of Directors of
both companies believe that these new names better reflect the
nature of the anticipated operations of those
entities.
Changes of ownership percentage of SeD Ltd
From May 11, 2020 to July 13, 2020, SeD Ltd issued 385,575,662
common shares. 42,778,600 common shares were
granted to employees under SeD Ltd Performance Share Plan and
342,797,062 common shares were issued by exercising
warrants. The Company’s ownership changed from 65.4%
as of March 31, 2020 to 49.1% as of July 30,
2020.
Planned Reorganization of Certain Biohealth Activities
On March 12, 2020, two of Singapore eDevelopment’s
subsidiaries, Global BioMedical Pte Ltd, a Singapore corporation
(“GBM”), and Impact BioMedical Inc., a Nevada
corporation and wholly owned subsidiary of GBM (“Impact
BioMedical”) entered into a binding term sheet (the
“Impact Term Sheet”) with Document Security Systems,
Inc. (“DSS”) and DSS BioHealth Security, Inc., a wholly
owned subsidiary of DSS (“DBHS”). Pursuant to the
Impact Term Sheet, DBHS will acquire Impact BioMedical.
Impact BioMedical owns 90.9% of Global BioMedical, Inc., which in
turn owns 70% of Global BioLife Inc., our main biohealth entity,
which holds our company’s interests in the Linebacker, 3F and
Laetose projects. Upon the completion of this transaction,
our ownership interest in these biohealth projects will be diluted,
and our ownership interest in DSS will be increased.
On April 27, 2020, Singapore eDevelopment, GBM, DSS and DBHS
entered into a share exchange agreement (the “DSS Share
Exchange Agreement”) that provided further details regarding
this planned transaction in which DBHS will acquire of all of the
outstanding capital stock of Impact BioMedical (the “Impact
Shares”) through a share exchange, with Impact BioMedical
becoming a direct wholly owned subsidiary of DBHS.
The aggregate consideration for the Impact Shares will be the
following to be issued to GBM by DSS: (i) 14,500,000 newly issued
shares of the common stock of DSS (the “DSS Common
Stock”), nominally valued at $3,132,000, or $0.216 per share;
and (ii) 46,868 newly issued shares of the convertible preferred
stock of DSS (“DSS Convertible Preferred Stock”) with a
stated value of $46,868,000, or $1,000 per share, for a total
consideration valued at $50 million. The DSS Convertible Preferred
Stock will be convertible into shares of common stock of DSS,
subject to a 19.9% beneficial ownership conversion limitation
(“blocker”) based on the total issued outstanding
shares of common stock of DSS beneficially owned by GBM. Holders of
the DSS Convertible Preferred Stock will have no voting rights,
except as required by applicable law or regulation, and no
dividends will accrue or be payable on the DSS Convertible
Preferred Stock. The Holders of DSS Convertible Preferred Stock
will be entitled to a liquidation preference at a liquidation value
of $1,000 per share, and DSS will have the right to redeem all or
any portion of the then outstanding shares of DSS Convertible
Preferred Stock, pro rata among all holders, at a redemption price
per share equal to such liquidation value per share.
Prior to the execution of the Share Exchange Agreement, Impact
BioMedical’s ownership of a suite of antiviral and medical
technologies was valued through a required independent valuation
that was completed by Destum Partners. Because the valuation was
higher than the previously agreed value, the Purchase Price was
capped at a value of $50 million.
The closing of the purchase and sale of the Impact Shares
contemplated under the DSS Share Exchange Agreement is subject to a
number of conditions, including both DSS and Singapore eDevelopment
having obtained approvals from their respective shareholders and
receipt by DSS of audited financial statements of Impact
BioMedical, which will be included in DSS’s proxy statement
soliciting the vote of its shareholders.
On June 26, 2020, the shareholders of Singapore eDevelopment
approved this transaction.
A special meeting of the stockholders of DSS will be held on August
10, 2020 to approve the issuance of shares of DSS Common Stock and
DSS Convertible Preferred Stock in connection with the acquisition
of Impact BioMedical, pursuant to the DSS Share Exchange
Agreement.
The Share Exchange Agreement contains customary representations,
warranties and covenants of the parties as well as certain
indemnification provisions.
The Share Exchange Agreement may be terminated prior to the closing
on certain conditions, including by mutual written consent of the
parties; by one party in the event of breach, inaccuracy in or
failure to perform any representation, warranty, covenant or
agreement made by the counterparties that would give rise to the
failure of the conditions precedent to closing that has not been
cured after written notice to the counterparties; or if certain
other conditions as set forth in the Share Exchange Agreement shall
not have been, or it becomes apparent that any of such conditions
will not be, fulfilled by the date that is 180 days after the date
of the Share Exchange Agreement; or in the event that (i) any law
that makes consummation of the transactions contemplated by Share
Exchange Agreement illegal or otherwise prohibited or (ii) a
government authority issues an order restraining or enjoining the
transactions contemplated by the Share Exchange Agreement, and such
order becomes final and non-appealable.
DSS owns 9.25% of the issued and outstanding stock of Singapore
eDevelopment.
Loan from Chan Heng Fai
On July
27, 2020, our founder, Chairman, and Chief Executive Officer, Chan
Heng Fai, agreed to loan the Company $1,200,000 Singapore Dollars
(approximately $900,000 U.S. Dollars), which we will use to
exercise warrants to purchase 30,000,000 shares of Singapore
eDevelopment. We will issue our founder a two-year, interest-free
promissory note for such loan.
HF Enterprises Inc. and Subsidiaries
Table of Contents
For the Years Ended December 31, 2019 and 2018
|
Consolidated
Balance Sheets
|
F-38
|
|
|
|
|
Consolidated
Statements of Operations and Other Comprehensive Loss
|
F-39
|
|
|
|
|
Consolidated
Statements of Stockholders’ Equity
|
F-40
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
F-41
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
F-42 -
F-81
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of
Directors and
Stockholders of HF
Enterprises Inc.
Opinion
on the Consolidated Financial Statements
We have audited the
accompanying consolidated balance sheets of HF Enterprises Inc.
(the Company) as of December 31, 2019 and 2018, and the related
consolidated statements of operations and other comprehensive loss,
stockholders’ equity, and cash flows for each of the years in
the two-year period ended December 31, 2019, and the related notes
(collectively referred to as the consolidated financial
statements). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of
the Company as of December 31, 2019 and 2018, and the results of
its operations and its cash flows for each of the years in the
two-year period ended December 31, 2019, in conformity with
accounting principles generally accepted in the United States of
America.
Basis
for Opinion
These consolidated
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s consolidated 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
audits 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 consolidated 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 audits, 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 audits included
performing procedures to assess the risks of material misstatement
of the consolidated 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 consolidated financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the consolidated
financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ Rosenberg Rich
Baker Berman P.A.
July 30,
2020
We have served as
the Company’s auditor since 2018.
Somerset, New
Jersey
HF Enterprises Inc. and Subsidiaries
Consolidated Balance Sheets
|
|
December 31,
|
December 31,
|
|
|
2019
|
2018
|
|
Assets:
|
|
|
|
Current
Assets:
|
|
|
|
Cash
|
$2,883,318
|
$1,387,209
|
|
Restricted
Cash
|
4,447,678
|
4,120,989
|
|
Account
Receivables, Net
|
170,442
|
564,759
|
|
Other
Receivables
|
681,677
|
-
|
|
Prepaid
Expenses
|
175,886
|
140,442
|
|
Inventory
|
116,698
|
198,817
|
|
Investment
in Securities at Fair Value
|
3,015,698
|
3,026,766
|
|
Investment
in Securities at Cost
|
200,128
|
200,128
|
|
Investment
in Securities by Equity Method
|
-
|
9,052
|
|
Deposits
|
70,208
|
23,603
|
|
Current
Assets of Discontinued Operations
|
-
|
14,317
|
|
Total
Current Assets
|
11,761,733
|
9,686,082
|
|
|
|
|
|
Real
Estate
|
|
|
|
Properties
under Development
|
23,884,704
|
38,774,936
|
|
Real Estate
Held For Sale
|
-
|
136,248
|
|
Total
Real Estate
|
23,884,704
|
38,911,184
|
|
|
|
|
|
Operating
Lease Right-Of-Use Asset
|
146,058
|
-
|
|
|
|
|
|
Property and
Equipment, Net
|
80,285
|
103,425
|
|
Non-Current
Assets of Discontinued Operations
|
-
|
1,765
|
|
Total
Assets
|
$35,872,780
|
$48,702,456
|
|
|
|
|
|
Liabilities
and Stockholders' Equity:
|
|
|
|
Current
Liabilities:
|
|
|
|
Accounts
Payable and Accrued Expenses
|
$4,002,022
|
$4,394,853
|
|
Accrued
Interest - Related Parties
|
834,536
|
476,063
|
|
Deferred
Revenue
|
258,594
|
84,998
|
|
Builder
Deposits
|
890,069
|
1,296,062
|
|
Operating
Lease Liability
|
58,865
|
-
|
|
Note
Payable
|
157,105
|
13,899
|
|
Note
Payable- Related Parties
|
410,000
|
-
|
|
Income
Tax Payable
|
420,327
|
-
|
|
Bonds
Payable, Net of Debt Discount of $43,651 on December 31,
2018
|
-
|
1,456,349
|
|
Current
Liabilities of Discontinued Operations
|
-
|
174,606
|
|
Total
Current Liabilities
|
7,031,518
|
7,896,830
|
|
Long-Term
Liabilities:
|
|
|
|
Builder
Deposits
|
1,555,200
|
2,582,780
|
|
Note
Payable
|
-
|
158,036
|
|
Operating
Lease Liability
|
91,330
|
|
|
Notes
Payable - Related Parties
|
4,971,401
|
8,863,196
|
|
Total
Liabilities
|
13,649,449
|
19,500,842
|
|
|
|
|
|
Stockholders'
Equity:
|
|
|
|
Preferred
Stock, $0.001 par value; 5,000,000 shares authorized, none
issued
|
-
|
-
|
|
Common Stock,
$0.001 par value; 20,000,000 shares authorized;
10,001,000
|
|
|
|
shares issued
and outstanding on December 31, 2019 and 2018,
respectively
|
10,001
|
10,001
|
|
Additional
Paid In Capital
|
54,263,717
|
53,717,424
|
|
Accumulated
Deficit
|
(40,494,115)
|
(35,263,650)
|
|
Accumulated
Other Comprehensive Income
|
1,468,269
|
1,582,788
|
|
Total
Stockholders' Equity
|
15,247,872
|
20,046,563
|
|
Non-controlling
Interests
|
6,975,459
|
9,155,051
|
|
Total
Stockholders' Equity
|
22,223,331
|
29,201,614
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
$35,872,780
|
$48,702,456
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements.
|
|
|
HF Enterprises Inc. and Subsidiaries
Consolidated Statements of Operations and Other Comprehensive
Loss
For the Years Ended December 31, 2019 and 2018
|
|
2019
|
2018
|
|
Revenue
|
|
|
|
Property
Sales
|
$22,855,446
|
$17,675,034
|
|
Biohealth
Product Sales
|
1,371,298
|
2,532,852
|
|
Digital
Transformation Technology
|
-
|
140,652
|
|
Others
|
31,209
|
32,402
|
|
|
24,257,953
|
20,380,940
|
|
Operating
Expenses
|
|
|
|
Cost of
Sales
|
19,968,757
|
15,533,701
|
|
General and
Administrative
|
6,274,911
|
7,160,473
|
|
Research and
Development
|
108,394
|
461,752
|
|
Inventory
Written Off
|
141,265
|
-
|
|
Impairment of
Real Estate
|
5,230,828
|
1,455,326
|
|
|
31,724,155
|
24,611,252
|
|
|
|
|
|
Loss From
Operations
|
(7,466,202)
|
(4,230,312)
|
|
|
|
|
|
Other Income
(Expense)
|
|
|
|
Interest
Income
|
52,145
|
59,346
|
|
Interest
Expense
|
(372,902)
|
(509,208)
|
|
Gain on
Disposal of Subsidiary
|
299,255
|
-
|
|
Foreign
Exchange Transaction (Loss) Gain
|
(341,415)
|
691,099
|
|
Unrealized
Gain (Loss) on Securities Investment
|
320,032
|
(3,366,958)
|
|
Realized Gain
on Security Investment
|
7,944
|
-
|
|
Loss on
Investment on Security by Equity Method
|
(44,053)
|
(45,948)
|
|
Loss on
Acquisition
|
(90,001)
|
-
|
|
Other
Income
|
16,869
|
8,162
|
|
|
(152,126)
|
(3,163,507)
|
|
|
|
|
|
Net Loss
from Continuing Operations Before Income
Taxes
|
(7,618,328)
|
(7,393,819)
|
|
|
|
|
|
Income Tax
Expense
|
(431,388)
|
-
|
|
|
|
|
|
Net Loss from
Continuing Operations
|
(8,049,716)
|
(7,393,819)
|
|
|
|
|
|
Loss from
Discontinued Operations, Net of Tax
|
(3,712)
|
(96,749)
|
|
Net
Loss
|
(8,053,428)
|
(7,490,568)
|
|
|
|
|
|
Net Loss
Attributable to Non-Controlling Interest
|
(2,822,963)
|
(2,500,698)
|
|
|
|
|
|
Net Loss
Attributable to Common Stockholders
|
$(5,230,465)
|
$(4,989,870)
|
|
|
|
|
|
Other
Comprehensive Income (Loss), Net
|
|
|
|
Unrealized
Loss on Securities Investment
|
(55,213)
|
(34,408)
|
|
Foreign
Currency Translation Adjustment
|
10,028
|
(513,435)
|
|
Comprehensive
Loss
|
(8,098,613)
|
(8,038,411)
|
|
|
|
|
|
Comprehensive
Loss Attributable to Non-controlling Interests
|
(2,836,998)
|
(2,669,927)
|
|
|
|
|
|
Comprehensive
Loss Attributable to Common Stockholders
|
$(5,261,615)
|
$(5,368,484)
|
|
|
|
|
|
Net Loss Per
Share - Basic and Diluted
|
|
|
|
Continuing
Operations
|
$(0.52)
|
$(0.50)
|
|
Discontinued
Operations
|
$(0.00)
|
$(0.01)
|
|
Net Loss Per
Share
|
$(0.52)
|
$(0.51)
|
|
|
|
|
|
Weighted
Average Common Shares Outstanding - Basic and
Diluted
|
10,001,000
|
10,001,000
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements.
|
|
|
HF Enterprises Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
For the Years Ended December 31, 2019 and 2018
|
|
Preferred Stock
|
Common Stock
|
|
|
|
|
|
||
|
|
Shares
|
Par Value $0.001
|
Shares
|
Par Value $0.001
|
Additional Paid in Capital
|
Accumulated Other Comprehensive Income
|
Accumulated Deficit
|
Non-controlling Interests
|
Total Stockholders Equity
|
|
Balance at
January 1, 2018
|
|
|
10,001,000
|
$10,001
|
$51,324,448
|
$3,923,236
|
$(32,235,615)
|
$11,723,524
|
$34,745,594
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of
Minority Interest
|
|
|
|
|
(135,661)
|
|
|
75,661
|
(60,000)
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from Selling Subsidiary Equity
|
|
|
|
57,707
|
|
|
25,793
|
83,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency Translations
|
|
|
|
|
|
(354,834)
|
|
(158,600)
|
(513,434)
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
Gains Reclassification
|
|
|
|
|
|
(1,961,835)
|
1,961,835
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
Loss on Investment
|
|
|
|
|
|
(23,779)
|
|
(10,629)
|
(34,408)
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued
in Exchange Agreements
|
|
|
|
|
2,470,930
|
|
|
|
2,470,930
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
(4,989,870)
|
(2,500,698)
|
(7,490,568)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
January 1, 2019
|
|
|
10,001,000
|
$10,001
|
$53,717,424
|
$1,582,788
|
$(35,263,650)
|
$9,155,051
|
$29,201,614
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary's
Issuance of Stock
|
|
|
|
|
1,214,184
|
|
|
642,367
|
1,856,551
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
Minority Interest
|
|
|
|
|
(885,693)
|
(84,968)
|
|
970,660
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from Selling Subsidiary Equity
|
|
|
|
217,801
|
|
|
115,228
|
333,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in Unrealized Loss on Investment
|
|
|
|
|
(36,109)
|
|
(19,104)
|
(55,213)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency Translations
|
|
|
|
|
|
6,558
|
|
3,470
|
10,028
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Dividend
Distribution
|
|
|
|
|
|
|
|
(1,069,250)
|
(1,069,250)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
|
|
|
|
(5,230,465)
|
(2,822,963)
|
(8,053,428)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2019
|
|
|
10,001,000
|
$10,001
|
$54,263,717
|
$1,468,269
|
$(40,494,115)
|
$6,975,459
|
$22,223,331
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial
statements.
|
|
|
|
|
|
|
|||
HF Enterprises Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2019 and 2018
|
|
2019
|
2018
|
|
|
|
|
|
Cash Flows
From Operating Activities
|
|
|
|
Net Loss from
Continuing Operations
|
$(8,049,716)
|
$(7,393,819)
|
|
Adjustments to
reconcile net income (loss) to net cash from operating
activities:
|
|
|
|
Depreciation
|
23,140
|
41,197
|
|
Loss on
Disposal of PP&E
|
-
|
8,303
|
|
Amortization
of Right -Of - Use Asset
|
73,872
|
-
|
|
Gain on
Disposal of Subsidiary
|
(299,255)
|
-
|
|
Loss on
Acquisition
|
90,001
|
-
|
|
Inventory
Written Off
|
141,265
|
|
|
Foreign
Exchange Transaction Gain (Loss)
|
341,415
|
(691,099)
|
|
Unrealized
Loss on Security Investment
|
(320,032)
|
3,366,958
|
|
Impairment of
Real Estate
|
5,230,828
|
1,455,326
|
|
Changes in
Operating Assets and Liabilities
|
|
|
|
Real
Estate
|
9,996,644
|
10,152,944
|
|
Trade
Receivables
|
(294,954)
|
321,325
|
|
Prepaid
Expense
|
16,043
|
19,610
|
|
Deferred
Revenue
|
173,596
|
(29,112)
|
|
Inventory
|
(56,809)
|
(134,964)
|
|
Accounts
Payable and Accrued Expenses
|
(393,712)
|
2,474,888
|
|
Accrued
Interest - Related Parties
|
358,473
|
-
|
|
Accrued Income
Tax
|
420,327
|
-
|
|
Operating
Lease Liability
|
(83,610)
|
-
|
|
Tenant
Security Deposits
|
-
|
(1,400)
|
|
Builder
Deposits
|
(1,433,573)
|
(1,477,876)
|
|
Net Cash
Provided by Continuing Operating Activities
|
5,933,943
|
8,112,281
|
|
Net Cash
Provided by (Used in) Discontinued Operating
Activities
|
24,491
|
(86,641)
|
|
Net Cash
Provided by Operating Activities
|
5,958,434
|
8,025,640
|
|
|
|
|
|
Cash Flows
From Investing Activities
|
|
|
|
Purchase of
Fixed Assets
|
(3,632)
|
(30,645)
|
|
Acquisition of
Joint Venture
|
(91,000)
|
-
|
|
Equity Method
Investment Contributions
|
(36,000)
|
(55,000)
|
|
Net Cash Used
in Continuing Investing Activities
|
(130,632)
|
(85,645)
|
|
Net Cash Used
in Discontinued Investing Activities
|
-
|
-
|
|
Net Cash Used
in Investing Activities
|
(130,632)
|
(85,645)
|
|
|
|
|
|
Cash Flows
From Financing Activities
|
|
|
|
Proceeds from
Issuance Common Shares
|
1,856,551
|
-
|
|
Proceeds from
Sale of Subsidiary Shares
|
333,029
|
83,500
|
|
Repayment of
Bond
|
(1,500,000)
|
-
|
|
Repayments of
Note Payable
|
(13,899)
|
(8,258,398)
|
|
Acquisition of
Minority Interest
|
-
|
(60,000)
|
|
Distribution
to Minority Shareholder
|
(1,069,250)
|
-
|
|
Net Proceeds
(Repayment to) from Notes Payable - Related
Parties
|
(3,593,288)
|
1,640,966
|
|
Net Cash Used
in Continuing Financing Activities
|
(3,986,857)
|
(6,593,932)
|
|
Net Cash
Provided by Discontinued Financing
Activities
|
-
|
-
|
|
Net Cash Used
in Financing Activities
|
(3,986,857)
|
(6,593,932)
|
|
|
|
|
|
Net Increase
in Cash and Restricted Cash
|
1,840,945
|
1,346,063
|
|
Effects of
Foreign Exchange Rates on Cash
|
(18,147)
|
25,094
|
|
|
|
|
|
Cash and
Restricted Cash - Beginning of Year
|
5,508,198
|
4,137,041
|
|
Cash and
Restricted Cash- End of Year
|
$7,330,996
|
$5,508,198
|
|
|
|
|
|
Supplementary
Cash Flow Information
|
|
|
|
Cash Paid For
Interest
|
$16,893
|
$418,067
|
|
Cash Paid For
Taxes
|
$-
|
$-
|
|
|
|
|
|
Supplemental
Disclosure of Non-Cash Investing and Financing
Activities
|
|
|
|
Amortization
of Debt Discount Capitalized
|
$381,823
|
$190,277
|
|
Stock Capital
Contribution
|
$-
|
$2,470,930
|
|
See
accompanying notes to consolidated financial
statements.
|
|
|
|
1.
|
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Nature of Operations
HF
Enterprises Inc. (the “Company” or “HFE”)
was incorporated in the State of Delaware on March 7, 2018 and
1,000 shares of common stock was issued to Chan Heng Fai, the
founder, Chairman and Chief Executive Officer (“CEO”)
of the Company. HFE is a diversified holding company principally
engaged in property development, digital transformation technology,
biohealth and other related business activities with operations in
the United States, Singapore, Hong Kong, and Australia. The Company
manages its principal businesses primarily through its subsidiary,
Singapore eDevelopment Limited (“SeD Ltd”), a company
publicly traded on the Singapore Stock Exchange which is 65.4% and
69.11% owned at December 31, 2019 and 2018,
respectively
On
October 1, 2018, Chan Heng Fai transferred his 100% interest in
Hengfai International Pte. Ltd. (“Hengfai
International”) to HF Enterprises Inc. in exchange for
8,500,000 shares of the Company’s common stock. Hengfai
International holds a 100% interest in Hengfai Business Development
Pte. Ltd. (“Hengfai Business Development”). Both
Hengfai International and Hengfai Business Development are holding
companies with no business operations. Hengfai Business Development
holds 761,185,294 shares and 359,834,471 warrants of SeD Ltd, or
65.4% and 69.11% as of December 31, 2019 and 2018, respectively, of
the outstanding shares of SeD Ltd, which is the primary operating
company of HFE.
Also,
on October 1, 2018, Chan Heng Fai transferred his 100% ownership
interest in Heng Fai Enterprises Pte. Ltd. (“Heng Fai
Enterprises”) and Global eHealth Limited (“Global
eHealth”) to HF Enterprises Inc. in exchange for 500,000 and
1,000,000 shares of the Company’s common stock, respectively.
Both Heng Fai Enterprises and Global eHealth are holding companies
with no business operations.
The
contributions to HFE on October 1, 2018 of Hengfai International,
Heng Fai Enterprises, and Global eHealth from Chan Heng Fai
represented transactions under common control.
The
Company has four operating segments based on the products and
services offered. These include our three principal businesses
– property development, digital transformation technology,
and biohealth – as well as a fourth category consisting of
certain other business activities.
Property Development
The
Company’s property development segment is comprised of SeD
Intelligent Home Inc. (“SeD Intelligent Home”) and SeD
Perth Pty Ltd.
In
2014, SeD Ltd commenced operations developing property projects and
participating in third-party property development projects. SeD
Intelligent Home, a 99.9%-owned subsidiary of SeD Ltd, owns,
operates and manages real estate development projects with a focus
on land subdivision developments.
Development
activities are generally contracted out, including planning, design
and construction, as well as other work with engineers, surveyors,
architects and general contractors. The developed lots are then
sold to builders for the construction of new homes. SeD Intelligent
Home’s main assets are two subdivision development projects,
one near Houston, Texas, known as Black Oak, consisting of 162
acres and currently projected to have approximately 550-600 units,
and one in Frederick, Maryland, known as Ballenger Run, consisting
of 197 acres and currently projected to have approximately 689
units.
Digital Transformation Technology
The
Company’s digital transformation technology segment is
comprised of HotApp Blockchain Inc. (“HotApp”) and its
subsidiaries.
The
Company’s digital transformation technology business is
involved in mobile application product development and other
businesses, providing information technology services to end-users,
service providers and other commercial users through multiple
platforms. This technology platform consists of instant messaging
systems, social media, e-commerce and payment systems, direct
marketing platforms, e-real estate, brand protection and
counterfeit and fraud detection. HotApp Blockchain, a 99.9%-owned
subsidiary of SeD Ltd, focuses on business-to-business solutions
such as enterprise messaging and workflow. Through HotApp, the
Company has successfully implemented several strategic platform
developments for clients, including a mobile front-end solution for
network marketing, a hotel e-commerce platform and a real estate
agent management platform.
On
October 25, 2018, HotApps International Pte. Ltd.
(“HIP”), a wholly-owned subsidiary of HotApp, entered
into an Equity Purchase Agreement with DSS Asia Limited (“DSS
Asia”), a Hong Kong subsidiary of DSS International Inc.
(“DSS International”), pursuant to which HIP agreed to
sell to DSS Asia all of the issued and outstanding shares of
HotApps Information Technology Co. Ltd., also known as Guangzhou
HotApps Technology Ltd. (“Guangzhou HotApps”). The
transaction closed on January 14, 2019. Chan Heng Fai is the CEO of
DSS Asia and DSS International. See Note 14 – Discontinued
Operations and Note 11 – Related Party
Transactions.
Biohealth
The
Company’s biohealth segment is comprised of Global BioMedical
Pte. Ltd. and Health Wealth Happiness Pte. Ltd.
The
Company’s biohealth business is committed to both funding
research and developing and selling products that promote a healthy
lifestyle. The entities within this segment are focusing on
research in three main areas: (i) development of a universal
therapeutic drug platform; (ii) a new sugar substitute; and (iii) a
multi-use fragrance. Global BioLife, Inc. a 63.6% owned subsidiary
of SeD Ltd, established a joint venture, Sweet Sense, Inc., with
Quality Ingredients, LLC for the development, manufacture, and
global distribution of the new sugar substitute. On November 8,
2019, Impact BioMedical Inc., a 100% owned subsidiary of SeD Ltd,
purchased 50% of Sweet Sense, Inc. from Quality Ingredients, LLC
for $91,000. Sweet Sense, Inc. is now an 81.8% owned subsidiary of
SeD Ltd.
Currently,
more than 90% revenue from our biohealth segment come from the
direct sales by iGalen Inc. (formerly known as iGalen USA, LLC),
which is 100% owned by iGalen International Inc., SeD Ltd’s
53% owned subsidiary. During the years ended December 31, 2019 and
2018, the revenue from iGalen Inc. was $1,371,298 and $2,532,852,
respectively.
In
October 2019, the Company expanded its biohealth segment to Korean
market through one of the subsidiaries of Health Wealth Happiness
Pte. Ltd., HWH World Inc (“HWH World”). HWH World,
similarly to iGalen Inc., operates based on a direct sale model of
health supplements. HWH World is at the beginning stage of
operations and didn’t recognize any revenue during year ended
December 31, 2019.
Other Business Activities
In
addition to the segments identified above, the Company provides
corporate strategy and business development services, asset
management services, corporate restructuring and leveraged buy-out
expertise. These service offerings build relationships with
promising companies for potential future collaboration and
expansion. We believe that our other business activities complement
our three principal businesses.
The
Company’s other business activities segment is primarily
comprised of Singapore eDevelopment Limited, SeD Capital Pte. Ltd.,
BMI Capital Partners International Limited and Singapore
Construction & Development Pte. Ltd.
|
2.
|
GOING CONCERN
|
The
accompanying financial statements have been prepared on the basis
that the Company is a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal
course of business. The Company has experienced net losses over the
past 12 months. As of and for the year ended December 31, 2019, the
Company had an accumulated deficit of $40,494,115, a comprehensive
loss of $8,098,613.
As a
result, these conditions may raise substantial doubt regarding our
ability to continue as a going concern for twelve months from the
date of issuance of our financial statements. However, the Company
expects to have a high volume of cash on hand and strong operating
cash inflows for at least the next twelve months. As of December
31, 2019, the Company had cash and restricted cash of $7,330,996,
compared to $5,508,198 as of December 31, 2018. Approximately 40%
of the restricted cash is available to use for the Company’s
operations. The Company has $8 million credit line from
Manufacturers and Traders Trust Company (“M&T
Bank”) and the loan balance with M&T Bank was $0 as of
December 31, 2019. Management has evaluated the conditions in
relation to the Company’s ability to meet its obligations and
plans to continue borrowing funds from third party financial
institutions in order to meet the operating cash requirements.
Funding the Company’s operations is our first priority,
before repaying related party debtors. Therefore, available cash
will be used to fund the Company’s operations before related
party debtor repayments. At same time management is concurrently
working with the related party debtors on a plan to repay the
related party loans, which are repayable on demand.
During
the year ended December 31, 2019, the revenue from property sales
was approximately $22.9 million and cash flows provided by
operating activities from property development was approximately
$7.6 million. Furthermore, the Company has not defaulted on any
principal and interest repayment on its loans and borrowings and
has repaid its floating rate loan during the year. The Company had
obtained a letter of financial support from Chan Heng Fai, the
chairman and CEO of the Company. If the need arises, he committed
to provide any additional funding required by the Company and would
not demand repayment within the next 12 months from the date of
issuance of our 2019 financial statements.
As a
result of management’s plans, the significant amount of cash
in the Company’s bank accounts, availability of $8 million
line of credit under M&T Bank loan agreement, favorable
operating cash flow from operations in the year ended on December
31, 2019 and the support from the chairman and CEO, the Company
believes that the initial conditions which raised substantial doubt
regarding the ability to continue as a going concern have been
alleviated. Therefore, the accompanying consolidated financial
statements have been prepared assuming that the Company will
continue as a going concern.
|
3.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of Presentation and Principles of Consolidation
The Company’s consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”)
and following the requirements of the Securities and Exchange
Commission ("SEC"). The consolidated financial statements include
all accounts of the Company and its majority owned and controlled
subsidiaries. The Company consolidates entities in which it owns
more than 50% of the voting common stock and controls operations.
All intercompany transactions and balances among consolidated
subsidiaries have been eliminated.
The Company's consolidated financial statements include the
financial position, results of operations and cash flows of the
following entities for the years ended on December 31, 2019 and
2018 as follows:
|
|
|
|
Attributable interest
|
|
|||||
|
|
|
|
as of,
|
|
|||||
|
Name of subsidiary consolidated under HFE
|
State or other jurisdiction
of
incorporation or
organization
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
||
|
|
|
|
%
|
|
|
%
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
Hengfai International Pte.
Ltd
|
Singapore
|
|
|
100
|
|
|
|
100
|
|
|
Hengfai Business Development Pte.
Ltd
|
Singapore
|
|
|
100
|
|
|
|
100
|
|
|
Heng Fai Enterprises Pte.
Ltd.
|
Singapore
|
|
|
100
|
|
|
|
100
|
|
|
Global eHealth
Limited
|
Hong Kong
|
|
|
100
|
|
|
|
100
|
|
|
Singapore eDevelopment
Limited
|
Singapore
|
|
|
65.4
|
|
|
|
69.11
|
|
|
Singapore Construction &
Development Pte. Ltd.
|
Singapore
|
|
|
65.4
|
|
|
|
69.11
|
|
|
Art eStudio Pte.
Ltd.
|
Singapore
|
|
|
33.36
|
*
|
|
|
35.25
|
*
|
|
Singapore Construction Pte.
Ltd.
|
Singapore
|
|
|
65.4
|
|
|
|
69.11
|
|
|
Global BioMedical Pte.
Ltd.
|
Singapore
|
|
|
65.4
|
|
|
|
69.11
|
|
|
SeD BioLife International,
Inc.
|
United States of
America
|
|
|
65.4
|
|
|
|
69.11
|
|
|
SeD BioMedical International,
Inc.
|
United States of
America
|
|
|
65.4
|
|
|
|
69.11
|
|
|
Global BioMedical,
Inc.
|
United States of
America
|
|
|
59.45
|
|
|
|
62.83
|
|
|
Global BioLife,
Inc.
|
United States of
America
|
|
|
41.62
|
*
|
|
|
43.98
|
*
|
|
SeD Investment Pte.
Ltd.
|
Singapore
|
|
|
65.4
|
|
|
|
69.11
|
|
|
Health Wealth Happiness Pte.
Ltd.
|
Singapore
|
|
|
65.4
|
|
|
|
69.11
|
|
|
iGalen International
Inc.
|
United States of
America
|
|
|
34.38
|
*
|
|
|
36.63
|
*
|
|
iGalen Inc. (f.k.a iGalen USA
LLC)
|
United States of
America
|
|
|
34.38
|
*
|
|
|
36.63
|
*
|
|
SeD Capital Pte.
Ltd.
|
Singapore
|
|
|
65.4
|
|
|
|
69.11
|
|
|
LiquidValue Asset Management Pte.
Ltd. (f.k.a. HengFai Asset Management Pte.
Ltd.)
|
Singapore
|
|
|
53.6
|
|
|
|
69.11
|
|
|
SeD Home
Limited
|
Hong Kong
|
|
|
65.4
|
|
|
|
69.11
|
|
|
SeD Reits Management Pte.
Ltd.
|
Singapore
|
|
|
65.4
|
|
|
|
69.11
|
|
|
Global TechFund of Fund Pte.
Ltd.
|
Singapore
|
|
|
65.4
|
|
|
|
69.11
|
|
|
Singapore eChainLogistic Pte.
Ltd.
|
Singapore
|
|
|
65.4
|
|
|
|
69.11
|
|
|
BMI Capital Partners International
Limited
|
Hong Kong
|
|
|
65.4
|
|
|
|
69.11
|
|
|
SeD Perth Pty.
Ltd.
|
Australia
|
|
|
65.4
|
|
|
|
69.11
|
|
|
SeD Home International,
Inc.
|
United States of
America
|
|
|
65.4
|
|
|
|
69.11
|
|
|
SeD Intelligent Home
Inc.
|
United States of
America
|
|
|
65.39
|
|
|
|
69.10
|
|
|
SeD Home, Inc.
|
United States of
America
|
|
|
65.39
|
|
|
|
69.10
|
|
|
SeD USA, LLC
|
United States of
America
|
|
|
65.39
|
|
|
|
69.10
|
|
|
150 Black Oak GP,
Inc.
|
United States of
America
|
|
|
65.39
|
|
|
|
69.10
|
|
|
SeD Development USA
Inc.
|
United States of
America
|
|
|
65.39
|
|
|
|
69.10
|
|
|
150 CCM Black Oak,
Ltd.
|
United States of
America
|
|
|
65.39
|
|
|
|
69.10
|
|
|
SeD Texas Home,
LLC
|
United States of
America
|
|
|
65.39
|
|
|
|
69.10
|
|
|
SeD Ballenger,
LLC
|
United States of
America
|
|
|
65.39
|
|
|
|
69.10
|
|
|
SeD Maryland Development,
LLC
|
United States of
America
|
|
|
54.63
|
|
|
|
57.73
|
|
|
SeD Development Management,
LLC
|
United States of
America
|
|
|
55.58
|
|
|
|
58.74
|
|
|
SeD Builder,
LLC
|
United States of
America
|
|
|
65.39
|
|
|
|
69.10
|
|
|
HotApp Blockchain
Inc.
|
United States of
America
|
|
|
65.39
|
|
|
|
69.10
|
|
|
HotApps International Pte.
Ltd.
|
Singapore
|
|
|
65.39
|
|
|
|
69.10
|
|
|
Guangzhou HotApps Technology
Ltd.
|
China
|
|
|
0
|
|
|
|
69.10
|
|
|
HotApp International
Limited
|
Hong Kong
|
|
|
65.39
|
|
|
|
69.10
|
|
|
HWH International,
Inc.
|
United States of
America
|
|
|
65.4
|
|
|
|
69.11
|
|
|
Health Wealth & Happiness
Inc.
|
United States of
America
|
|
|
65.4
|
|
|
|
69.11
|
|
|
HWH Multi-Strategy Investment,
Inc.
|
United States of
America
|
|
|
65.4
|
|
|
|
69.11
|
|
|
Impact BioMedical
Inc
|
United States of
America
|
|
|
65.4
|
|
|
|
69.11
|
|
|
Biolife Sugar,
Inc.
|
United States of
America
|
|
|
41.16
|
*
|
|
|
43.91
|
*
|
|
Happy Sugar,
Inc.
|
United States of
America
|
|
|
41.16
|
*
|
|
|
43.91
|
*
|
|
Sweet Sense
Inc.
|
United States of
America
|
|
|
53.5
|
|
|
|
22.99
|
*
|
|
SeDHome Rental
Inc.
|
United States of
America
|
|
|
65.39
|
|
|
|
69.10
|
|
|
SeD REIT Inc.
|
United States of
America
|
|
|
65.39
|
|
|
|
-
|
|
|
Crypto Exchange
Inc.
|
United States of
America
|
|
|
65.39
|
|
|
|
69.10
|
|
|
HWH World Inc.
|
United States of
America
|
|
|
65.39
|
|
|
|
69.10
|
|
|
HWH World Pte.
Ltd.
|
Singapore
|
|
|
65.39
|
|
|
|
69.10
|
|
|
UBeauty Limited
|
Hong Kong
|
|
|
65.4
|
|
|
|
-
|
|
|
WeBeauty Korea
Inc.
|
Korea
|
|
|
65.4
|
|
|
|
-
|
|
|
HWH World
Limited
|
Hong Kong
|
|
|
65.4
|
|
|
|
-
|
|
|
HWH World Inc.
|
Korea
|
|
|
65.4
|
|
|
|
-
|
|
|
Global Sugar Solutions
Inc.
|
United States of
America
|
|
|
52.3
|
|
|
|
|
|
*Although
the Company indirectly holds percentage of shares of these entities
less than 50%, the subsidiaries of the Company directly hold more
than 50% of shares of these entities. They are still consolidated
into the Company.
Use of Estimates
The
preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expense during
the reporting periods. Significant estimates made by management
include, but are not limited to, allowance for doubtful accounts,
valuation of real estate assets, allocation of development costs
and capitalized interest to sold lots, fair value of the
investments, the valuation allowance of deferred taxes, and
contingencies. Actual results could differ from those
estimates.
In our
property 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.
Reclassifications
Certain
amounts in the in the prior year financial statements have been
reclassified to conform to the current year
presentation.
Cash
The
Company considers all highly liquid investments with a maturity of
three months or less at the date of acquisition to be cash
equivalents. Cash and cash equivalents include cash on hand and at
the bank and short-term deposits with financial institutions that
are readily convertible to a known amount of cash and are subject
to an insignificant risk of changes in values. There were no cash
equivalents as of December 31, 2019 and 2018.
Restricted Cash
As a
condition of the loan agreement entered into in 2019 with the
Manufacturers and Traders Trust Company (“M&T
Bank”), the Company is required to maintain a minimum of
$2,600,000 in an interest-bearing account maintained by the lender
as additional security for the loans. This is required to remain as
collateral for the loan until the loan is repaid in full and the
loan agreement is terminated. The Company also has a required
escrow account with M&T Bank to deposit partial revenue from
lot sales. The funds in the escrow account are specifically to be
used to repay line of credit draws, when the escrowed funds are
available. The escrow account funds are required until the loan
agreement terminates. As of December 31, 2019 the total balance of
these two accounts was $4,229,149 which is a component of
Restricted Cash.
As a
condition of the loan agreement with National Australian Bank
Limited in conjunction with the Perth project, an Australian real
estate development project, the Company is required to maintain
$35,068 in a non-interest-bearing account. As of December 31, 2019
and 2018, the account balance was $35,068 and $35,148,
respectively. These funds will remain as collateral for the loan
until paid in full.
On July
20, 2018, 150 CCM Black Oak Ltd received $4,592,079 in
reimbursements 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 150
CCM Black Oak Ltd and will be released upon receipt of the evidence
of: (a) the execution of a purchase agreement between 150 CCM Black
Oak Ltd 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. After entering the purchase agreement with home
builder, Houston LD, LLC, the above requirements were met. The
amount of the deposit is released to the Company by presenting the
invoices paid for land development. After releasing funds to the
Company, the amount on deposit was $90,394 and $1,203,256 on
December 31, 2019 and 2018, respectively.
As a
condition to use the credit card services for the Company’s
bio product direct sale business, provided by Global Payroll
Gateway, Ltd. (“GPG”), a financial services company,
the Company is required to deposit 10% of the revenue from the
direct sales to a non-interest-bearing GPG reserve account with a
maximum amount of $200,000. The Company is allowed to temporarily
use the money in this deposit account upon request and repay on a
short-term basis. As of December 31, 2019 and 2018, the balance in
the reserve account was $93,067 and $156,303, respectively. The
fund will not be fully refunded to the Company until the service
agreement with GPG terminates.
Accounts Receivable and Allowance for Doubtful
Accounts
Accounts
receivable are stated at amounts due from buyers, contractors, and
third parties, net of an allowance for doubtful accounts. The
Company monitors its accounts receivable balances on a monthly
basis to ensure that they are collectible. On a quarterly basis,
the Company uses its historical experience to estimate its
allowance for doubtful accounts receivable. The Company’s
allowance for doubtful accounts represents an estimate of the
losses expected to be incurred based on specifically identified
accounts as well as a nonspecific amount, when determined
appropriate. Generally, the amount of the allowance is primarily
decided by division management’s historical experience, the
delinquency trends, the resolution rates, the aging of receivables,
the credit quality indicators, and financial health of specific
customers. As of December 31, 2019 and 2018, the allowance was
$0.
Inventory
Inventory
is stated at the lower of cost or net realizable value. Cost is
determined using the first-in, first-out method and includes all
costs in bringing the inventory to their present location and
condition. Net realizable value is the estimated selling price in
the ordinary course of business less the estimated costs necessary
to make the sale. As of December 31, 2019 and 2018, inventory
consisted of finished goods from both HWH World Inc. and iGalen.
The Company continuously evaluates inventory for potential
obsolescence and possible price concessions required to write-down
inventory to net realizable value. During the year ended December
31, 2019, the Company wrote off $141,265 of iGalen inventory. No
inventory was written off during the year ended December 31,
2018.
Investment Securities
The
Company holds investments in equity securities with readily
determinable fair values, equity investments without readily
determinable fair values, investments accounted for under the
equity method, and investments at cost.
Prior
to the adoption of Financial Accounting Standards Board
(“FASB”) Accounting Standards Update
(“ASU”) 2016-01, Financial Instruments-Overall (Subtopic
825-10): Recognition and Measurement of Financial Assets and
Financial Liabilities, investments in equity securities were
classified as either 1) available-for-sale securities, stated at
fair value, and unrealized holding gains and losses, net of related
tax effects, were recorded directly to accumulated other
comprehensive income (loss) or 2) trading securities, stated at
fair value, and unrealized holding gains and losses, net of related
tax benefits, were recorded directly to net income (loss). With the
adoption of ASU 2016-01, investments in equity securities are still
stated at fair value, quoted by market prices, but all unrealized
holding gains and losses are credited or charged to net income
(loss) based on fair value measurement as the respective reporting
date.
Investment in Securities at Fair Value
The
Company accounts for certain of its investments in equity
securities in accordance with ASU 2016-01 Financial Instruments—Overall (Subtopic
825- 10): Recognition and Measurement of Financial Assets and
Financial Liabilities (“ASU 2016-01”). In
accordance with ASU 2016-01, the Company records all equity
investments with readily determinable fair values at fair value and
has elected the Fair Value Option (“FVO”) for certain
of its equity investments without readily determinable fair values,
utilizing a Black Scholes model for valuation. Unrealized holding
gains and losses in fair value are recognized as Other
Non-Operating Income, net in the Company’s Consolidated
Statements of Operation and Comprehensive Loss.
Determining
the appropriate fair-value model and calculating the fair values of
the Company’s investments in equity securities requires
considerable judgment. Any change in the estimates used may cause
their values to be higher or lower than that reported. The
assumptions used in the model require significant judgment by
management and include the following: volatility, expected term,
risk-free interest rate, and dividends. Due to the inherent
uncertainty of these estimates, these values may differ materially
from the values that would have been used had a ready market for
these investments existed.
The
Company has elected the fair value option for the equity securities
noted below that would otherwise be accounted for under the equity
method of accounting. Amarantus BioScience Holdings
(“AMBS”), Holista CollTech Limited
(“Holista”), and Document Securities Systems Inc.
(“DSS”) are publicly traded companies and fair value is
determined by quoted stock prices. The Company has significant
influence but does not have a controlling interest in these
investments, and therefore, the Company’s investment could be
accounted for under the equity method of accounting or elect fair
value accounting.
●
The Company has
significant influence over DSS as our CEO is the beneficial owner
of approximately 39.1% of the outstanding shares of DSS and is a
member of the Board of Directors of DSS.
●
The Company has
significant influence over AMBS as the Company is the beneficial
owner of approximately 19.5% of the common shares of
AMBS.
●
The Company has
significant influence over Holista as the Company and its CEO are
the beneficial owner of approximately 18.8% of the outstanding
shares of Holista, and our CEO holds a position on Holista's Board
of Directors.
The
Company accounts for certain of its investments in real estate
funds without readily determinable fair values in accordance with
ASU No. 2015-07, Fair Value
Measurement (Topic 820): Disclosures for Investments in Certain
Entities That Calculate Net Asset Value per Share (or Its
Equivalent) (“ASC 820”). As of December 31, 2019
and 2018 the Company maintains an investment in a real estate fund,
The Global Opportunity Fund. This fund invested primarily in the
U.S. and met the criteria within ASC 820. Chan Heng Fai, the
Chairman and CEO of the Company, is also one of the directors of
the Global Opportunity Fund. The fair values of the investments in
this class have been estimated using the net asset value of the
Company’s ownership interest in Global Opportunity Fund. The
fund was closed during November 2019 and is being liquidated. As of
December 31, 2019, the Company recorded a receivable $303,349 from
the Global Opportunity Fund, which represents the monies to be
received upon liquidation. These monies were received on January
23, 2020. (See Subsequent Events Note 18.)
The Company invested $50,000 in a convertible promissory note of
Sharing Services, Inc. (“Sharing Services Convertible
Note”), a company quoted on the US OTC market. The value of
the convertible note was estimated by management using a
Black-Scholes valuation model.
The
Company holds a stock option to purchase 250,000 shares of
Vivacitas’ common stock at $1 per share at any time prior to
the date of public offering. As of December 31, 2019 and 2018,
Vivacitas was a private company. Based on the management’s
analysis, the fair value of the stock option was $0 as of December
31, 2019 and 2018, respectively.
The
changes in the fair values of the investment were recorded directly
to accumulated other comprehensive income (loss). Due to the
inherent uncertainty of these estimates, these values may differ
materially from the values that would have been used had a ready
market for these investments existed.
Investment in Securities at Cost
The
Company has an equity holding in Vivacitas Oncology Inc.
(“Vivacitas”), a private company that is currently not
listed on an exchange. Vivacitas was acquired after the adoption of
ASU 2016-01. The Company applied ASC 321 and elected the
measurement alternative for equity investments that do not have
readily determinable fair values and do not qualify for the
practical expedient in ASC 820 to estimate fair value using the NAV
per share. Under the alternative, we measure Vivacitas at cost,
less any impairment, plus or minus changes resulting from
observable price changes in orderly transactions for an identical
or similar investment of the same issuer.
There
has been no indication of impairment or changes in observable
prices via transactions of similar securities, and therefore,
Vivacitas is still carried at cost as of December 31,
2019.
Investment in Securities Under Equity Method
Accounting
BioLife
Sugar, Inc. (“BioLife’), a 63.6% owned subsidiary
consolidated under SeD Ltd., entered into a joint venture agreement
on April 25, 2018 with Quality Ingredients, LLC (“QI”).
The agreement created an entity called Sweet Sense, Inc.
(“Sweet Sense”) which is 50% owned by BioLife and 50%
owned by QI. Management believes its 50% investment represents
significant influence over Sweet Sense and accounts for the
investment under the equity method of accounting. As of December
31, 2018, BioLife contributed $55,000 to the joint venture and
recorded its proportionate share losses totaling $44,053 recorded
as loss on investment in security by equity method in the
Consolidated Statements of Operations and Other Comprehensive
Loss.
On
November 8, 2019, Impact BioMedical Inc., a subsidiary of the
Company, purchased 50% of Sweet Sense from QI for $91,000 and
recorded a loss from acquisition $90,001. As of November 8, 2019,
the total investment in joint venture was equal to $91,000 and the
proportionate losses totaled $90,001. The transaction was not in
the scope of ASC 805 Business Combinations since the acquisition
was accounted for an asset purchase instead of a business
combination. As an asset acquisition, the Company recorded the
transaction at cost and applied ASC 730 to expense in-process
research and development cost, the major cost of Sweet Sense.
Consequently, Sweet Sense was an 81.8% owned subsidiary of SeD Ltd,
and therefore, was consolidated into the Company’s
consolidated financial statements as of December 31,
2019.
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 and finance expenses from third-party
borrowings of $526,297 and $415,844 for the year ended December 31,
2019 and 2018, respectively. The Company capitalized construction
costs of $8,483,030 and $8,262,297 for the year ended December 31,
2019 and 2018, respectively.
The
Company’s policy is to obtain an independent third-party
valuation for each major project in the United Sates to identify
potential triggering events for impairment. Management may use the
market comparison method to value other relatively small projects,
such as the project in Perth, Australia. In addition to the annual
assessment of potential triggering events in accordance with ASC
360 – Property Plant and
Equipment (“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.
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, the Company
incurred a loss of approximately $1.5 million from this sale and
recognized a real estate impairment of approximately $1.5 million
for the year ended December 31, 2018.
On June
30, 2019, the Company recorded approximately $3.9 million of
impairment on the Black Oak project based on discounted estimated
future cash flows after updating the projection of market value of
the project.
On
December 31, 2019, the Company recorded approximately $1.3 million
of additional impairment on the Black Oak project based on
discounted estimated future cash flows after updating the projected
cost of the project.
Real Estate Held for Sale
Real
estate held for sale are acquired with the intention that they will
be sold in the ordinary course of business and are therefore stated
at the lower of cost or net realizable value. Related acquisition
expense, interest, and other related expenditures are capitalized
as part of the cost of properties for sale. Net realizable value
represents the estimated selling price, less costs to be incurred
to sell the property.
A
property is classified as “held for sale” when all of
the following criteria for a plan of sale have been
met:
(1)
management, having the authority to approve the action, commits to
a plan to sell the property;
(2) the
property is available for immediate sale in its present condition,
subject only to terms that are usual and customary;
(3) an
active program to locate a buyer and other actions required to
complete the plan to sell, have been initiated;
(4) the
sale of the property is probable and is expected to be completed
within one year or the property is under a contract to be
sold;
(5) the
property is being actively marketed for sale at a price that is
reasonable in relation to its current fair value; and
(6)
actions necessary to complete the plan of sale indicate that it is
unlikely that significant changes to the plan will be made or that
the plan will be withdrawn.
When
all of these criteria are met, the property is classified as
“held for sale.” As of December 31, 2018, real estate
held for sale represents the El Tesoro project in the amount of
$136,248. The property was sold in December of
2019.
Properties Under Development
Properties
under development are properties being constructed for sale in the
ordinary course of business, rather than to be held for the
Company’s own use, rental or capital
appreciation.
Equipment
Property
and equipment are recorded at cost, less depreciation. Repairs and
maintenance are expensed as incurred. Expenditures incurred as a
consequence of acquiring or using the asset, or that increase the
value or productive capacity of assets are capitalized (such as
removal and restoration costs). When property and equipment is
retired, sold, or otherwise disposed of, the asset’s carrying
amount and related accumulated depreciation are removed from the
accounts and any gain or loss is included in operations.
Depreciation is computed by the straight-line method (after
considering their respective estimated residual value) over the
estimated useful lives of the respective assets as
follows:
|
Office
and computer equipment
|
3 - 5
years
|
|
Furniture
and fixtures
|
3 - 5
years
|
|
Vehicles
|
10
years
|
|
Leasehold
Improvements
|
Remaining
life of the lease
|
The
Company reviews the carrying value of property and equipment for
impairment whenever events and circumstances indicate that the
carrying value of an asset may not be recoverable from the
estimated future cash flows expected to result from its use and
eventual disposition. In cases where undiscounted expected future
cash flows are less than the carrying value, an impairment loss is
recognized equal to an amount by which the carrying value exceeds
the fair value of assets. The factors considered by management in
performing this assessment include current operating results,
trends, and prospects, as well as the effects of obsolescence,
demand, competition, and other economic factors.
Revenue Recognition and Cost of Sales
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 the Company
expects to be entitled to receive in exchange for these goods or
services. The provisions of ASC 606 include a five-step process by
which the determination of revenue recognition, depicting the
transfer of goods or services to customers in amounts reflecting
the payment to which the Company expects to be entitled in exchange
for those goods or services. ASC 606 requires the Company 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, performance obligations are satisfied.
The
following represents the Company’s revenue recognition
policies by Segments:
Property Development
Property Sales
The
Company's main business is land development. The Company purchases
land and develops it into residential communities. The developed
lots are sold to builders (customers) for the construction of new
homes. The builders enter a sales contract with the Company before
they take the lots. The prices and timeline are determined and
agreed upon in the contract. The builders do the inspections to
make sure all conditions and requirements in contracts are met
before purchasing the lots. A detailed breakdown of the five-step
process for the revenue recognition of the Ballenger and Black Oak
projects, which represented approximately 94% and 85% of the
Company’s revenue in the years ended on December 31, 2019 and
2018, respectively, 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 per lot is fixed and 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 at a point in time when title is
transferred. The Company does not have further performance
obligations or continuing involvement once title is
transferred.
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 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 facilities and close the lot sales with NVR, which
inspects these water and sewer facilities 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 upon NVR’s sales of homes to
homeowners.
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 an area method, which
uses the size of the lots compared to the total project area and
allocates costs based on their size.
Biohealth
Product Direct Sales
The
Company’s net sales consist of product sales. The Company's
performance obligation is to transfer its products to its
third-party independent distributors (“Distributors”).
The Company generally recognizes revenue when product is shipped to
its Distributors.
The
Company’s Distributors may receive distributor allowances,
which are comprised of discounts, rebates and wholesale commission
payments from the Company. Distributor allowances resulting from
the Company’s sales of its products to its Distributors are
recorded against net sales because the distributor allowances
represent discounts from the suggested retail price.
In
addition to distributor allowances, the Company compensates its
sales leader Distributors with leadership incentives for services
rendered, relating to the development, retention, and management of
their sales organizations. Leadership Incentives are payable based
on achieved sales volume, which are recorded in general and
administrative expenses. The Company recognizes revenue when it
ships products. The Company receives the net sales price in cash or
through credit card payments at the point of
sale.
If a
Distributor returns a product to the Company on a timely basis,
they may obtain a replacement product from the Company for such
returned products. In addition, the Company maintains a buyback
program pursuant to which it will repurchase products sold to a
Distributor who has decided to leave the business. Allowances for
product returns, primarily in connection with the Company’s
buyback program, are provided at the time the sale is recorded.
This accrual is based upon historical return rates for each country
and the relevant return pattern, which reflects anticipated returns
to be received over a period of up to 12 months following the
original sale.
Annual Membership
The
Company collects an annual membership fee from its Distributors.
The fee is fixed, paid in full at the time joining the membership
and not refundable. The Company’s performance obligation is
to provide members to purchase products, access to certain back
office services, receive commissions and attend corporate events.
The obligation is satisfied over time. The Company
recognizes revenue associated with the membership over the one-year
period of the membership. Before the membership fee is recognized
as revenue, it is recorded as deferred revenue.
Shipping and Handling
Shipping
and handling services relating to product sales are recognized as
fulfillment activities. Shipping and handling expenses were
$183,528 and $304,307 for the years ended December 31, 2019 and
2018, respectively, and are included in general and administrative
expenses.
Digital Transformation Technology
Software Development Income
Revenue
is recognized when (or as) the Company transfers promised goods or
services to its customers in amounts that reflect the consideration
to which the Company expects to be entitled to in exchange for
those goods or services, which occurs when (or as) the Company
satisfies its contractual obligations and transfers over control of
the promised goods or services to its customers.
The
Company generates revenue from a project involving provision of
services and web/software development for customers. With respect
to the provision of services, the agreements are less than one year
with a cancellable clause and customers are typically billed on a
monthly basis.
Remaining performance obligations
As of
December 31, 2019 and 2018, there are no remaining performance
obligations or continuing involvement, as all projects within the
information technology segment have been completed.
Other Businesses
Mutual Fund Management Service Income
Revenue
is recognized when (or as) the Company performs services to its
customers in amounts that reflect the consideration to which the
Company expects to be entitled to in exchange for those services,
which occurs when (or as) the Company satisfies its contractual
obligations and performs services to its
customers.
The
Company generates revenue from providing management services for
mutual fund customers. In respect to the provision of services, the
agreements are less than one year with a cancellable clause and
customers are typically billed on a monthly
basis.
Remaining performance obligations
As of
December 31, 2019 and 2018, there were no remaining performance
obligations or continuing involvement, as all service obligations
within the other business activities segment have been
completed.
Advertising
Costs
incurred for advertising for the Company are charged to operations
as incurred. Advertising expenses for the years ended December 31,
2019 and 2018 were $165,850 and $206,313,
respectively.
Foreign currency
Functional and reporting currency
Items
included in the financial statements of each entity in the Company
are measured using the currency of the primary economic environment
in which the entity operates (“functional currency”).
The financial statements of the Company are presented in U.S.
dollars (the “reporting currency”).
The
functional and reporting currency of the Company is the United
States dollar (“U.S. dollar”). The financial records of
the Company’s subsidiaries located in Singapore, Hong Kong
and Australia are maintained in their local currencies, the
Singapore Dollar (S$), Hong Kong Dollar (HK$) and Australian Dollar
(“AUD”) and South Korean Won (“KRW”), which
are also the functional currencies of these
entities.
Transactions in foreign currencies
Transactions
in currencies other than the functional currency during the year
are converted into the functional currency at the applicable rates
of exchange prevailing when the transactions occurred. Transaction
gains and losses are recognized in the statement of
operations.
The
majority of the Company’s foreign currency transaction gains
or losses come from the effects of foreign exchange rate changes on
the intercompany loans between the Singapore entities and the U.S.
entities. The Company recorded a $341,415 loss on foreign exchange
during year ended December 31, 2019, compared to a $691,099 gain
during year ended December 31, 2018. Foreign currency transactional
gains and losses are recorded in operations.
Translation of consolidated entities’ financial
statements
Monetary
assets and liabilities denominated in currencies other than the
functional currency are translated into the functional currency at
the rates of exchange ruling at the balance sheet date. The
Company’s entities with functional currency of Singapore
Dollar, Hong Kong Dollar, AUD and KRW translate their operating
results and financial positions into the U.S. dollar, the
Company’s reporting currency. Assets and liabilities are
translated using the exchange rates in effect on the balance sheet
date. Revenue, expense, gains and losses are translated using the
average rate for the year. Translation adjustments are reported as
cumulative translation adjustments and are shown as a separate
component of comprehensive income (loss).
For the
year ended on December 31, 2019, the Company recorded other
comprehensive gain from translation of $10,029 compared to a
$513,435 loss in the year ended December 31, 2018, in accumulated
other comprehensive loss.
Income Taxes
USA Income Taxes
Income
tax expense represents the sum of the current tax expense and
deferred tax expense.
Income
tax for current and prior periods is recognized at the amount
expected to be paid to or recovered from the tax authorities, using
the tax rates and tax laws that have been enacted or substantially
enacted by the balance sheet date.
Deferred
income tax is provided in full, using the liability method, on
temporary differences at the balance sheet date between the tax
bases of assets and liabilities and their carrying amounts in the
financial statements.
Deferred
tax assets and liabilities are recognized for all temporary
differences, except:
●
Where
the deferred tax arises from the initial recognition of an asset or
liability in a transaction that is not a business combination and
at the time of the transaction affects neither the accounting
profit nor taxable profit or loss.
●
In
respect of temporary differences associated with investments in
subsidiaries, where the timing of the reversal of the temporary
differences can be determined and it is probable that the temporary
differences will not reverse in the foreseeable future;
and
●
In
respect of deductible temporary differences and carry-forward of
unutilized tax losses, if it is not probable that taxable profits
will be available against which those deductible temporary
differences and carry-forward of unutilized tax losses can be
utilized.
The
carrying amount of deferred tax assets is reviewed at each balance
sheet date and reduced to the extent that it is no longer probable
that sufficient taxable profit will be available to allow all or
part of the deferred tax asset to be utilized. Unrecognized
deferred tax assets are reassessed at each balance sheet date and
are recognized to the extent that it has become probable that
future taxable profit will allow the deferred tax asset to be
utilized.
Deferred
tax assets and liabilities are measured at the tax rates that are
expected to apply to the year when the asset is realized or the
liability is settled, based on tax rates and tax laws that have
been enacted or substantively enacted at the balance sheet
date.
Current
and deferred income tax are recognized as income or expense in the
profit or loss, except to the extent that the tax arises from a
business combination or a transaction which is recognized either in
other comprehensive income or directly in equity. Deferred tax
arising from a business combination is adjusted against goodwill on
acquisition.
Deferred
tax assets and liabilities are offset if there is a legally
enforceable right to offset current tax liabilities and assets and
they relate to income taxes levied by the same tax authorities on
the same taxable entity, or on different tax entities, provided
they intend to settle current tax liabilities and assets on a net
basis or their tax assets and liabilities will be realized
simultaneously.
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 2019 and 2018 tax returns remain open to
examination.
Income Taxes in other countries
Significant
judgement is involved in determining the income taxes mainly in
Singapore. There are certain transactions and computations for
which the ultimate tax determination is uncertain during the
ordinary course of business. The Company recognizes liabilities for
expected tax liabilities based on estimates of whether additional
taxes will be due. Where the final tax outcome of these matters is
different from the amounts that were initially recognized, such
differences will impact the income tax and deferred tax provisions
in the period in which such determination is made.
Earnings (loss) per share
The
Company presents basic and diluted earnings (loss) per share data
for its ordinary shares. Basic earnings (loss) per share is
calculated by dividing the profit or loss attributable to ordinary
shareholders of the Company by the weighted-average number of
ordinary shares outstanding during the year, adjusted for treasury
shares held by the Company.
Diluted
earnings (loss) per share is determined by adjusting the profit or
loss attributable to ordinary shareholders and the weighted-average
number of ordinary shares outstanding, adjusted for treasury shares
held, for the effects of all dilutive potential ordinary shares,
which comprise convertible securities, such as stock options,
convertible bonds and warrants. Due to the limited operations of
the Company, there are no potentially dilutive securities
outstanding on December 31, 2019 and 2018.
Fair Value Measurements
ASC
820, Fair Value Measurement and
Disclosures, defines fair value as the exchange price that
would be received for an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market
participants on the measurement date. This topic also establishes a
fair value hierarchy which requires classification based on
observable and unobservable inputs when measuring fair value. There
are three levels of inputs that may be used to measure fair
value:
Level 1: Observable
inputs such as quoted prices (unadjusted) in an active market for
identical assets or liabilities.
Level
2: Inputs other than quoted prices that are observable, either
directly or indirectly. These include quoted prices for similar
assets or liabilities in active markets and quoted prices for
identical or similar assets or liabilities in markets that are not
active.
Level
3: Unobservable inputs that are supported by little or no market
activity; therefore, the inputs are developed by the Company using
estimates and assumptions that the Company expects a market
participant would use, including pricing models, discounted cash
flow methodologies, or similar techniques.
The
carrying value of the Company’s financial instruments,
including cash and cash equivalents, accounts receivable and
accounts payable and accrued expenses approximate fair value
because of the short-term maturity of these financial instruments.
The liabilities in connection with the conversion and make-whole
features included within certain of the Company’s convertible
notes payable and warrants are each classified as a level 3
liability.
Non-controlling interests
Non-controlling
interests represent the equity in subsidiary not attributable,
directly or indirectly, to owners of the Company, and are presented
separately in the consolidated statements of operation and
comprehensive income, and within equity in the Consolidated Balance
Sheets, presented separately from equity attributable to owners of
the Company.
On
December 31, 2019 and 2018, the aggregate non-controlling interests
in the Company were $6,975,459 and $9,155,051 respectively, which
is separately presented on the Consolidated Balance
Sheets.
Recent Accounting Pronouncements
Accounting pronouncement adopted
In
January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic
825-10): Recognition and Measurement of Financial Assets and
Financial Liabilities (“ASU 2016-01”). The new
guidance requires equity investments (except those accounted for
under the equity method of accounting, or those that result in
consolidation of the investee) with readily determinable fair
values to be measured at fair value with changes in fair value
recognized in net income. Equity investments that do not have
readily determinable fair values are allowed to be remeasured upon
the occurrence of an observable price change or upon identification
of an impairment. Along with ASU 2016-01, the Company evaluated the
Accounting Standards Update 2018-03, Technical Corrections and Improvements to
Financial Instruments Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities
(“ASU 2018-03”), which was issued in February 2018, and
Accounting Standards Update 2018-04, Investments—Debt Securities (Topic 320)
and Regulated Operations (Topic 980): Amendments to SEC Paragraphs
Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC No.
33-9273 (“ASU 2018-04”), which was issued in
March 2018. The Company adopted ASU 2016-01, ASU 2018-03 and ASU
2018-04 as of January 1, 2018. Upon adoption the Company
reclassified $1,961,835 of previously recognized unrealized gains
from Accumulated Other Comprehensive Income to Accumulated
Deficit.
In May
2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic
606) (“ASU 2014-09”). The standard’s core
principle is that a company will recognize revenue when it
transfers promised goods or services to customers in an amount that
reflects the consideration to which the company expects to be
entitled in exchange for those goods or services. In doing so,
companies will need to use more judgment and make more estimates
than under previous guidance. This may include identifying
performance obligations in the contract, estimating the amount of
variable consideration to include in the transaction price and
allocating the transaction price to each separate performance
obligation. In July 2015, the FASB approved the proposal to defer
the effective date of ASU 2014-09 standard by one year. Early
adoption was permitted after December 15, 2016, and the standard
became effective for public entities for annual reporting periods
beginning after December 15, 2017 and interim periods therein. In
2016, the FASB issued final amendments to clarify the
implementation guidance for principal versus agent considerations
(“ASU No. 2016-08”), accounting for licenses of
intellectual property and identifying performance obligations
(“ASU No. 2016-10”), narrow-scope improvements and
practical expedients (“ASU No. 2016-12”) and technical
corrections and improvements to ASU 2014-09 (“ASU No.
2016-20”) in its new revenue standard. The Company has
performed a review of the requirements of the new revenue standard
and is monitoring the activity of the FASB and the transition
resource group as it relates to specific interpretive guidance. The
Company reviewed customer contracts, applied the five-step model of
the new standard to its contracts, and compared the results to its
current accounting practices. The Company adopted this new standard
on January 1, 2018 under the modified retrospective method to all
contracts not completed as of January 1, 2018 and the adoption did
not have a material effect on the Company’s financial
statements. The adoption of this standard required increased
disclosures related to the disaggregation of
revenue.
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842)
(“ASU 2016-02”) which supersedes ASC Topic 840, Leases.
ASU 2016-02 requires lessees to recognize a right-of-use asset and
a lease liability on their balance sheets for all the leases with
terms greater than twelve months. Based on certain criteria, leases
will be classified as either financing or operating, with
classification affecting the pattern of expense recognition in the
income statement. For leases with a term of twelve months or less,
a lessee is permitted to make an accounting policy election by
class of underlying asset not to recognize lease assets and lease
liabilities. If a lessee makes this election, it should recognize
lease expense for such leases generally on a straight-line basis
over the lease term. ASU 2016-02 is effective for fiscal years
beginning after December 15, 2019 for emerging growth companies,
and interim periods within those years, with early adoption
permitted. In transition, lessees and lessors are required to
recognize and measure leases at the beginning of the earliest
period presented using a modified retrospective approach. In July
2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842):
Targeted Improvements” that allows entities to apply the
provisions of the new standard at the effective date (e.g. January
1, 2019), as opposed to the earliest period presented under the
modified retrospective transition approach (January 1, 2017) and
recognize a cumulative-effect adjustment to the opening balance of
retained earnings in the period of adoption. The modified
retrospective approach includes a number of optional practical
expedients primarily focused on leases that commenced before the
effective date of Topic 842, including continuing to account for
leases that commence before the effective date in accordance with
previous guidance, unless the lease is modified. 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 consolidated
balance sheets, but did not have an impact on its consolidated
statements of operations. The most significant impact was the
recognition of right-of-use assets and lease liabilities for
operating leases. As a lessor of one house, this standard does not
have a material impact on the Company. The balances of operating
lease right-of-use assets and operating lease liabilities as of
December 31, 2019 were $146,058 and $150,195, respectively.
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 July
2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260), Distinguishing
Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic
815): (Part I) Accounting for Certain Financial Instruments with
Down Round Features, (Part II) Replacement of the Indefinite
Deferral for Mandatorily Redeemable Financial Instruments of
Certain Nonpublic Entities and Certain Mandatorily Redeemable
Noncontrolling Interests with a Scope Exception (“ASU
2017-11”). ASU 2017-11 is intended to simplify the accounting
for financial instruments with characteristics of liabilities and
equity. Among the issues addressed are: (i) determining whether an
instrument (or embedded feature) is indexed to an entity’s
own stock; (ii) distinguishing liabilities from equity for
mandatorily redeemable financial instruments of certain nonpublic
entities; and (iii) identifying mandatorily redeemable
noncontrolling interests. The Company adopted ASU 2017-11 on
January 1, 2019 and determined that this ASU did not have a
material impact on the consolidated financial
statements.
Accounting pronouncement being evaluated
In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure
Framework: Changes to the Disclosure Requirements for Fair Value
Measurement (“ASU 2018-13”). ASU 2018-13 is
intended to improve the effectiveness of fair value measurement
disclosures. ASU 2018-13 is effective for fiscal years beginning
after December 15, 2019, and interim periods within those fiscal
years. Early adoption is permitted. The Company determined that ASU
2018-13 has no material impact on its consolidated financial
statements.
In
December 2019, The FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the
Accounting for Income Taxes. The amendments in this Update
simplify the accounting for income taxes by removing certain
exceptions to the general principles in Topic 740. The amendments
also improve consistent application of and simplify GAAP for other
areas of Topic 740 by clarifying and amending existing guidance.
For public business entities, the amendments in this Update are
effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2020. The Company is currently
evaluating the impact of ASU 2020-04 on its future consolidated
financial statements.
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.
|
4.
|
CONCENTRATIONS
|
The
Company maintains cash balances at various financial institutions
in different countries. These balances are usually secured by the
central banks’ insurance companies. At times, these balances
may exceed the insurance limits. As of December 31, 2019 and 2018,
uninsured cash and restricted cash balances were $5,905,134 and
$4,125,113, respectively.
For the
year ended December 31, 2019, two customers accounted for
approximately 72% and 27% of the Company’s property and
development revenue. For the year ended December 31, 2018, two
customers accounted for approximately 70% and 30% of the
Company’s property and development
revenue.
For the
year ended December 31, 2018, one related party customer accounted
for 82% of the Company’s digital transformation technology
revenue and the second customer accounted for approximately 18%. No
revenue was recognized by the Company’s digital
transformation technology during the year ended December 31,
2019.
As of
December 31, 2018, one related party customer accounted for
approximately 100% of Company’s digital transformation
technology accounts receivable. As of December 31, 2019, accounts
receivable on Company’s digital transformation
technology’s Consolidated Balance Sheet was
$0.
For the
years ended December 31, 2019 and 2018, one customer accounted for
approximately 80% of the Company’s Other Business Segment
revenue and the second customer accounted for approximately
20%.
As of
December 31, 2019, one customer accounted for approximately 94% of
the Company’s Other Business Segment accounts and other
receivable and the second customer accounted for approximately 6%.
As of December 31, 2018, one customer accounted for approximately
76% of the Company’s Other Business segment accounts
receivable and the second customer accounted for approximately
24%.
As of
December 31, 2019 and 2018, there was only one related party
supplier who accounted for 100% of the biohealth segment raw
material and product inventory.
|
5.
|
SEGMENTS
|
Operating
segments are defined as components of an enterprise about which
separate financial information is available that is evaluated
regularly by the chief operating decision maker, or
decision–making group, in deciding how to allocate resources
and in assessing performance. The Company’s chief operating
decision-maker is the CEO. The Company operates in and reports four
business segments: property development, digital transformation
technology, biohealth, and other business activities. The
Company’s reportable segments are determined based on the
services they perform and the products they sell, not on the
geographic area in which they operate. The Company’s chief
operating decision maker evaluates segment performance based on
segment revenue. Costs excluded from segment income (loss) before
taxes and reported as “Other” consist of corporate
general and administrative activities which are not allocable to
the four reportable segments.
The
following table summarizes the Company’s segment information
for the following balance sheet dates presented, and for the years
ended December 31, 2019 and 2018:
|
|
Property Development
|
Digital Transformation Technology
|
Biohealth Business
|
Other
|
Total
|
|
Year ended December 31, 2019
|
|
|
|
|
|
|
Revenue
|
$22,855,446
|
$-
|
$1,371,298
|
$31,209
|
$24,257,953
|
|
Cost
of Sales
|
(19,510,275)
|
-
|
(458,482)
|
-
|
(19,968,757)
|
|
Gross
Margin
|
3,345,171
|
-
|
912,816
|
31,209
|
4,289,196
|
|
Operating
Expenses
|
(6,064,563)
|
(284,158)
|
(2,791,963)
|
(2,614,714)
|
(11,755,398)
|
|
Operating
Income (Loss)
|
(2,719,392)
|
(284,158)
|
(1,879,147)
|
(2,583,505)
|
(7,466,202)
|
|
Other
Income (Expense)
|
49,201
|
333,419
|
(116,668)
|
(418,078)
|
(152,126)
|
|
Net
Income (Loss) Before Income Tax
|
(2,670,191)
|
49,261
|
(1,995,815)
|
(3,001,583)
|
(7,618,328)
|
|
Year ended December 31, 2018
|
|
|
|
|
|
|
Revenue
|
$17,675,034
|
$140,652
|
$2,532,852
|
$32,402
|
$20,380,940
|
|
Cost
of Sales
|
(14,777,546)
|
(74,129)
|
(682,026)
|
-
|
(15,533,701)
|
|
Gross
Margin
|
2,897,488
|
66,523
|
1,850,826
|
32,402
|
4,847,239
|
|
Operating
Expenses
|
(2,206,093)
|
(518,175)
|
(2,846,048)
|
(3,507,235)
|
(9,077,551)
|
|
Operating
Income (Loss)
|
691,395
|
(451,652)
|
(995,222)
|
(3,474,833)
|
(4,230,312)
|
|
Other
Income (Expense)
|
38,019
|
(51,508)
|
(6,283)
|
(3,143,735)
|
(3,163,507)
|
|
Net
Loss Before Income Tax
|
729,414
|
(503,160)
|
(1,001,505)
|
(6,618,568)
|
(7,393,819)
|
|
|
|
|
|
|
|
|
December
31, 2019
|
|
|
|
|
|
|
Cash
and Restricted Cash
|
$5,439,318
|
$55,752
|
$497,401
|
$1,338,525
|
$7,330,996
|
|
Total
Assets
|
29,857,615
|
155,854
|
1,088,362
|
4,770,949
|
35,872,780
|
|
|
|
|
|
|
|
|
December
31, 2018
|
|
|
|
|
|
|
Cash
and Restricted Cash
|
$4,683,040
|
$118,044
|
$174,183
|
$532,931
|
$5,508,198
|
|
Total
Assets
|
43,786,046
|
136,211
|
753,492
|
4,026,706
|
48,702,456
|
|
6.
|
REAL ESTATE ASSETS
|
As of
December 31, 2019 and 2018, real estate assets consisted of the
following:
|
|
December 31,
2019
|
December 31,
2018
|
|
|
|
|
|
Construction
in Progress
|
$9,601,364
|
$19,097,644
|
|
Land
Held for Development
|
14,283,340
|
19,677,292
|
|
Total
Properties Under Development
|
23,884,704
|
38,774,936
|
|
|
|
|
|
Real
Estate Held for Sale
|
-
|
136,248
|
|
Total
Real Estate Assets
|
$23,884,704
|
$38,911,184
|
|
7.
|
PROPERTY
AND EQUIPMENT
|
|||||||||
As of
December 31, 2019 and 2018, property and equipment consisted of the
following:
|
|
December 31,
2019
|
December 31,
2018
|
|
|
|
|
|
Computer
Equipment
|
$175,992
|
$175,992
|
|
Furniture
and Fixtures
|
52,798
|
52,798
|
|
Vehicles
|
90,929
|
90,929
|
|
Subtotal
|
319,719
|
319,719
|
|
Accumulated
Depreciation
|
(239,434)
|
(216,294)
|
|
Total
|
$80,285
|
$103,425
|
The
Company recorded depreciation expense of $23,140 and $41,197 during
the years ended December 31, 2019 and 2018,
respectively.
|
8.
|
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 $64,000,000, 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. As of December 31, 2019 and 2018, amounts
held on deposit from NVR were $2,445,269 and $3,878,842,
respectively.
|
9.
|
BONDS PAYABLE
|
As of
December 31, 2019 and 2018, bonds payable consisted of the
following:
|
|
December
31,
2019
|
December 31,
2018
|
|
SeD Home Ltd
Bonds
|
$-
|
$1,500,000
|
|
Less: Debt
Discount
|
-
|
(43,651)
|
|
Total bonds
payable
|
$-
|
$1,456,349
|
On
November 29, 2016 SeD Home Ltd entered into three $500,000 bonds
for a total transaction price of $1,500,000. These bonds are
guaranteed by both SeD Home and Chan Heng Fai who provided
approximately $5 million personal guarantee, accrue interest
annually at 8%, and mature on November 29, 2019. Upon maturity, the
bondholders have the right to propose on the acquisition of a
property built by SeD Home. The proposed acquisition purchase price
would be at SeD Home's cost. In the event the cost exceeds
$1,500,000, the difference is paid by the bondholders,
alternatively if the cost price is less than $1,500,000, SeD Home
pays the deficit.
As of
December 31, 2018, the principal balance was $1,500,000. As part of
the transaction, the Company incurred loan origination fees and
closing fees, totaling $150,000, which were recorded as debt
discount and are amortized over the life of the loan. The
unamortized debt discount was $43,651 on December 31, 2018. On
November 29, 2019, all three bonds were fully paid by cash and the
loan balance was $0 at December 31, 2019.
|
10.
|
NOTES
PAYABLE
|
As of
December 31, 2019 and 2018, notes payable consisted of the
following:
|
|
December
31,
2019
|
December
31,
2018
|
|
Union Bank
Loan
|
$-
|
$13,899
|
|
M&T Bank
Loan
|
-
|
-
|
|
Australia
Loan
|
157,105
|
158,036
|
|
Total notes
payable
|
$157,105
|
$171,935
|
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%. The interest rate at
December 31, 2018 was 6.125%. Beginning December 1, 2015, interest
only payments were due on the outstanding principal balance. The
entire unpaid principal and interest sum was due and payable on
November 22, 2018, with the option of one twelve-month extension
period. The loan is secured by a deed of trust on the property,
$2,600,000 of collateral cash, and a Limited Guaranty Agreement
with SeD Ballenger. The Company also had an $800,000 letter of
credit from the Union Bank. The letter of credit was due on
November 22, 2018 and bore interest at 15%. In September 2017, SeD
Maryland Development LLC and the Union Bank modified the Revolving
Credit Note, which increased the original principal amount from
$8,000,000 to $11,000,000 and extended the maturity date of the
loan and letter of credit to December 31, 2019. The Company did not
pay fees to Union Bank for this modification. Accordingly, this
change in terms of the Union Bank Loan was accounted for as a
modification in accordance with ASC 470 –
Debt.
On
April 17, 2019, the Union Bank Loan was paid off and SeD Maryland
Development LLC and Union Bank terminated the Revolving Credit
Note. After termination, the collateral cash was released and all
L/Cs were transferred to the M&T Bank L/C
Facility.
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 rate on 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 up to
$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 loan 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 Loan Agreement is
secured by $2,600,000 collateral fund and a Deed of Trust issued to
the Lender on the property owned by SeD Maryland. As of December
31, 2019, the outstanding balance of the revolving loan was
$0. As part of the transaction,
the Company incurred loan origination fees and closing fees in the
amount of $381,823, which were capitalized into construction in
process.
Australia Loan
On January 7, 2017, SeD Perth Pty Ltd (“SeD Perth”)
entered into a loan agreement with National Australian Bank Limited
(the “Australia Loan”) for the purpose of funding land
development. The loan facility provides SeD Perth with access to
funding of up to approximately $460,000 and matures on December 31,
2018. The Australia Loan is secured by both the land under
development and a pledged deposit of $35,276. This loan is
denominated in AUD. Personal guarantees amounting to approximately
$500,000 have been provided by our CEO, Chan Heng Fai and by Rajen
Manicka, the CEO of Holista CollTech and Co-founder of iGalen Inc.
The interest rate on the Australia Loan is based on the weighted
average interest rates applicable to each of the business markets
facility components as defined within the loan agreement, ranging
from 5.14% to 6.64% per annum for the year ended December 31, 2019
and from 6.03% to 6.35% per annum for the year ended December 31,
2018. On September 7, 2017 the Australia Loan was amended to reduce
the maximum borrowing capacity to approximately $179,000. On
February 6, 2019 and March 24, 2020, the terms of the Australia
Loan were further amended to reflect an extended maturity date of
March 31, 2020 and September 30, 2020, respectively. This was
accounted for as a debt modification. The Company did not pay fees
to the National Australian Bank Limited for the modification of the
loan agreement.
|
11.
|
RELATED
PARTY TRANSACTIONS
|
Personal Guarantees by Director
As of
both December 31, 2019 and 2018, a director of the Company provided
personal guarantees amounting to approximately $5,500,000 to secure
external loans from financial institutions for HFE and the
consolidated entities.
Revenue from a Related Party
On
March 1, 2018, the Company’s subsidiary HotApp International
Ltd. entered into an Outsource Technology Development Agreement
(the “Agreement”) with Document Security Systems, Inc.
(“DSS”), which may be terminated by either party on
30-days' notice. The purpose of the Agreement is to facilitate
DSS’s development of a software application to be included as
part of DSS’s AuthentiGuard® Technology suite. Under
this agreement, DSS agreed to pay $23,000 per month for access to
HotApp International Ltd.’s software programmers. The
agreement was terminated on July 31, 2018. Mr. Chan Heng Fai is a
member of HotApp’s Board of Directors and the beneficial
owner of a majority of HotApp’s common stock. Chan Heng Fai
is also a member of the Board of DSS and a stockholder of DSS. For
the years ended December 31, 2019 and 2018, the revenue from DSS
was $0 and $92,000, respectively.
Sale of HotApp Blockchain, Inc. to DSS Asia
On
October 25, 2018, HIP, a wholly-owned subsidiary of HotApp
Blockchain, Inc., entered into an equity purchase agreement (the
“HotApps Purchase Agreement”) with DSS Asia, a Hong
Kong subsidiary of DSS International, pursuant to which HIP agreed
to sell to DSS Asia all of the issued and outstanding shares of
HotApps Information Technology Co. Ltd., also known as Guangzhou
HotApps, a wholly-owned subsidiary of HIP. Guangzhou HotApps is
primarily engaged in engineering work for software development, as
well as, a number of outsourcing projects related to real estate
and lighting. Chan Heng Fai is the CEO of DSS Asia and DSS
International. For further details on this transaction, refer to
Note 14 – Discontinued
Operations.
Sale of 18% of LiquidValue Asset Management Pte. Ltd.
On May
8, 2019, SeD Capital Pte. Ltd. entered into a sale and purchase
agreement to sell 522,000 ordinary shares (representing
approximately 18% of the ownership) in LiquidValue Asset Management
Pte. Ltd. to LiquidValue Development Pte. Ltd. (“LVD”)
for a cash of $46,190. Chan Heng Fai is the owner of
LVD.
Notes Payable
During the year ended December 31, 2017, a director of the Company
lent non-interest loans of $7,156,680, for the general operations
of the Company. The loans are interest free, not tradable,
unsecured, and repayable on demand. On October 15, 2018, a formal
lending agreement between the Singapore eDevelopment Limited and
Chan Heng Fai was executed. Under the agreement, Chan Heng Fai
provides a lending credit limit of approximately $10 million for
Singapore eDevelopment Limited with interest rate 6% per annum for
the outstanding borrowed amount, which commenced retroactively from
January 1, 2018. The loans are still not tradable, unsecured and
repayable on demand. As of December 31, 2019 and 2018 the
outstanding principal balance of the loan is $4,246,604 and
$8,517,490, respectively. Chan Heng Fai confirmed through a letter
that he would not demand the repayment within a year. Interest
started to accrue on January 1, 2018 at 6% per annum. During the
years ended December 31, 2019 and 2018, the interest expenses were
$358,203 and $357,048, respectively. As of December 31, 2019 and
2018, the accrued interest total was $822,405 and $476,063,
respectively.
Chan
Heng Fai also provided an interest free, due on demand advance to
the Company for general operations. On December 31, 2019 and 2018,
the advance outstanding was $178,400 and $125,000,
respectively.
On May
1, 2018, Rajen Manicka, CEO and one of the directors of iGalen
International Inc., which holds 100% of iGalen Inc., provided a
loan of approximately $367,246 to iGalen Inc. (the “2018
Rajen Loan”). The term of this loan is ten years. The Loan
has an interest rate of 4.7% per annum. On March 8, March 27 and
April 23, 2019, iGalen borrowed additional monies of $150,000,
$30,000 and $50,000, respectively, from Rajen Manicka, a total
$230,000 (the “2019 Rajen Loan”). The 2019 Rajen Loan
is interest free, not tradable, unsecured, and repayable on demand.
As of December 31, 2019 and 2018, the total outstanding principal
balance of the loans was $546,397 and $345,706 and was included in
the Notes Payable – Related Parties balance on the
Company’s Consolidated Balance Sheets. During the years ended
December 31, 2019 and 2018, the Company incurred $14,550 and
$15,560 of interest expense, respectively.
On
August 13, 2019, iGalen International Inc., which holds 100% of
iGalen Inc., borrowed $250,000 from Decentralized Sharing Services,
Inc., a company whose sole shareholder and director is Chan Heng
Fai, our CEO. The term of the loan is 12 months, with an interest
rate of 10% per annum. In addition, Decentralized Sharing Services,
Inc. received the right to receive 3% of any revenue received by
iGalen International Inc. for 99 years. During the year ended
December 31, 2019 the Company incurred $9,589 of interest expense
and $0 from the right to receive 3% of revenue. Total principal
outstanding at December 31, 2019 was $250,000.
On
November 3, 2019, iGalen Inc. borrowed $160,000 from iGalen Funding
Inc., a company whose directors and shareholders include two
members of the Board of iGalen Inc. The term of such loan is 6
months, with an interest rate of 10% per annum. During the year
ended December 31, 2019 the Company incurred $2,542 of interest
expense and the total principal outstanding at December 31, 2019
was $160,000. The expiration date was extended November 3, 2020
after 6 months.
Shares issued in exchange agreement with Chairman and
CEO
Hengfai International Pte. Ltd
On October 1, 2018, 100% of the ownership interest in Hengfai
International Pte. Ltd. (“Hengfai International”) was
transferred from Chan Heng Fai, our founder, Chairman and CEO to HF
Enterprises Inc. in exchange for 8.5 million shares of the Company.
Hengfai International holds 100% of Hengfai Business Development
Pte. Ltd. (“Hengfai Business Development”), which holds
761,185,294 shares of SeD Ltd and 359,834,471 warrants. Both
Hengfai International and Hengfai Business Development are holding
companies without any business
operations.
Heng Fai Enterprises Pte. Ltd.
On October 1, 2018, 100% of the ownership interest in Heng Fai
Enterprises Pte. Ltd. (“Heng Fai Enterprises”) was
transferred from Chan Heng Fai, our founder, Chairman and CEO to HF
Enterprises Inc. in exchange for 500,000 shares of the Company.
Heng Fai Enterprises holds 2,730,000 shares (13.72% as of September
30, 2019 and 14.2% as of December 31, 2018). Of Vivacitas Oncology
Inc., a U.S.-based biopharmaceutical company. Heng Fai Enterprises
cost to purchase these Vivacitas shares was $200,128, which is
recorded at cost by the Company because it does not have a readily
determinable fair value as it is a private US company. Heng Fai
Enterprises is a holding company without any business
operations.
Global eHealth Limited
On October 1, 2018, 100% of Global eHealth Limited (“Global
eHealth”) was transferred from Chan Heng Fai, a director of
the Company, to the Company in exchange for 1,000,000 shares of the
Company. There was no other consideration exchange in conjunction
with this transaction. Global eHealth holds 46,226,673 shares
(19.8%) of Holista CollTech Limited, a public Australian company
that produces natural food ingredients. Global eHealth is a holding
company without any business operations.
Management Fees
150 CCM Black Oak Ltd
150 CCM Black Oak Ltd 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 is 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.
As of January 1, 2018, outstanding management fees payable to Arete
and AREI are $314,630 and $48,000, respectively and included in
Accounts Payable and Accrued Expenses. 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, 150 CCM Black Oak Ltd paid Arete $300,000
and AREI $30,000 to fulfil the commitments.
MacKenzie Equity Partners
MacKenzie
Equity Partners, owned by Charles MacKenzie, a Director of the
Company's subsidiary SeD Intelligent Home Inc., has had 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. Since January of 2019,
the Company has paid a monthly fee of $20,000 for these consulting
services. The Company incurred expenses of $240,000 and $240,000
for the years ended December 31, 2019 and 2018, respectively, which
were capitalized as part of Real Estate on the Company’s
Consolidated Balance Sheet as the services relate to property and
project management. As of December 31, 2019 and 2018 the
outstanding balance of $0 and $60,000, respectively, is included in
the Accounts Payable – Related Parties balance on the
Company’s Consolidated Balance Sheets.
Purchase of Minority Interest in 150 CCM Black Oak Ltd
On July 23, 2018, SeD Development USA, LLC, a wholly-owned
subsidiary of SeD Ltd, entered into two partnership interest
purchase agreements (the “Black Oak Purchase
Agreements”) through which it purchased an aggregate of 31%
of 150 CCM Black Oak Ltd for $60,000. In addition, if and when 150
CCM Black Oak Ltd receives at least $15,000,000 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), 150 CCM Black Oak Ltd shall pay
Fogarty Family Trust II, one of two previous partners of 150 CCM
Black Oak Ltd, an amount equal to 10% of the net reimbursement
receivable proceeds received from HC17 and/or Aqua Texas, Inc. that
exceeds $15,000,000; provided however, this obligation shall only
apply to reimbursement revenue received on or before December 31,
2025. Prior to the Black Oak Purchase Agreements, the Company owned
and controlled 150 CCM Black Oak Ltd through its 68.5% limited
partnership interest and its ownership of the General Partner, 150
Black Oak GP, Inc, a 0.5% owner in 150 CCM Black Oak Ltd. As a
result of the purchase, the Company, through its subsidiaries, now
owns 100% of 150 CCM Black Oak Ltd.
Consulting Services
A law
firm owned by Conn Flanigan, a Director of SeD Intelligent Home,
performs consulting services for SeD Intelligent Home and some
subsidiaries of the Company. The Company incurred expenses of
$52,723 and $101,979 for the years ended December 31, 2019 and
2018, respectively. On December 31, 2019 and 2018, we owed this
related party $0 and $8,000, respectively.
Rajen
Manicka, the CEO of Holista CollTech and Co-founder of iGalen
International Inc., performs consulting services for iGalen Inc.
iGalen Inc. incurred expenses of $240,000 and $240,000 for the
years ended December 31, 2019 and 2018, respectively. On December
31, 2019 and 2018, iGalen owed this related party fees for
consulting services in the amount of $671,403 and $465,331,
respectively. The consulting agreement was terminated on
January 1, 2020.
iGalen Inc. Affiliates
iGalen
Philippines and iGalen SDN are related party entities which are
owned by Dr. Rajen Manicka and are not owned by HFE. iGalen Inc.
provides use of its platform to collect sale revenue and payment of
expenses for these entities without service fees. iGalen SDN has a
consulting agreement to provide accounting, administration and
other logistic services to iGalen with a monthly fee of $4,000. The
Company incurred expenses of $48,000 for the each year ended
December 31, 2019 and 2018. On December 31, 2019 and 2018, iGalen
owed total $416,812 and $246,722, respectively to iGalen
Philippines and iGalen SDN.
Medi
Botanics Sdn Bhd, a subsidiary of Holista CollTech, is the only raw
material and product suppliers of iGalen. Dr. Rajen Manicka is the
controlling shareholder and a director of both Medi Botanics Sdn
Bhd and Holista CollTech. Medi Botanics Sdn Bhd supplied $480,821
and $758,888 raw materials and products to iGalen in the years
ended December 31, 2019 and 2018, respectively. On December 31,
2019 and 2018, iGalen owed $956,300 and $719,395,
respectively.
Investment in the Global Opportunity Fund
On
February 1, 2017, the Company invested $300,000 in Global
Opportunity Fund (“Fund”), a mutual fund registered in
the Cayman Islands and Chan Heng Fai is one of the directors of
this fund. This Fund was closed during November 2019 and is being
liquidated. LiquidValue Asset Management Pte. Ltd., one of the
subsidiaries of the Company, is the investment manager of the Fund
and receives a management fee from the Fund at 2% per annum of the
aggregated net asset value of the investments and a performance fee
of 20%. The fund was closed during November 2019 and is being
liquidated. As of December 31, 2019, the Company recorded a
receivable $307,944 from the Global Opportunity Fund. For the years
ended December 31, 2019 and 2018, the management fee and
performance fee charged to the Fund were $4,894 and $5,709,
respectively. On December 31, 2019 and 2018, the Fund owed accrued
management and performance fee receivable $15,484 and $69,478
respectively.
Exercised Warrants
On
December 19, 2019, Document Security Systems, Inc. exercised
warrants to acquire 61,977,577 shares of Singapore eDevelopment
Limited at a price approximately $0.03 per share. Singapore
eDevelopment Limited received $1,841,693. Fai Heng Chan, our CEO,
Chairman of our Board and controlling shareholder, is also Chairman
of the Board of Document Security Systems, Inc. and a significant
shareholder of Document Security Systems, Inc.
|
12.
|
EQUITY
|
The
Company is authorized to issue 20,000,000 common shares and
5,000,000 preferred shares, both at a par value $0.001 per share.
At December 31, 2019 and 2018, there were 10,001,000 common shares
issued and outstanding.
HotApp Blockchain, Inc. Sale of Shares
From
January to December, 2019, the Company sold 439,900 shares of
HotApp Blockchain, Inc. to international investors for $303,700,
which was recorded as addition paid-in capital. The Company held
500,821,889 shares of the total outstanding shares 506,898,576
before the sale. After the sale, the Company still owns
approximately 99% of HotApp Blockchain, Inc.’s total
outstanding shares.
LiquidValue Asset Management Pte. Ltd. Sale of Shares
On May
8, 2019, SeD Capital Pte. Ltd. entered into a sale and purchase
agreement to sell 522,000 ordinary shares (representing
approximately 18% of the ownership) in LiquidValue Asset Management
Pte. Ltd. to LiquidValue Development Pte. Ltd. (“LVD”)
for a cash of $46,190. Chan Heng Fai is the owner of LVD. $29,329
was recorded as additional paid-in-capital.
Distribution to Minority Shareholders
From
January to December, 2019, SeD Maryland Development LLC (the 83.55%
owned subsidiary of the Company which owns the Company’s
Ballenger Project) Board approved four payment distribution plans
to members and paid a total of $1,069,250 in distributions to the
minority shareholder.
Exercised Warrants of Singapore eDevelopment Limited
On July
31, 2019 500,000 warrants of Singapore eDevelopment Limited were
exercised by an unrelated shareholder at a price approximately
$0.03 per share. Singapore eDevelopment Limited received $14,858.
After these 500,000 warrants were exercised, the total number of
outstanding ordinary shares of Singapore eDevelopment Limited was
1,101,956,707. The Company’s ownership percentage of
Singapore eDevelopment Limited has changed from 69.11% to
69.08%.
On
December 19, 2019, Document Security Systems, Inc. exercised
warrants to acquire 61,977,577 shares of Singapore eDevelopment
Limited at a price approximately $0.03 per share. Singapore
eDevelopment Limited received $1,841,693. Fai Heng Chan, our CEO,
Chairman of our Board and controlling shareholder, is also Chairman
of the Board of Document Security Systems, Inc. and a significant
shareholder of Document Security Systems, Inc. As a result of the
exercise of these warrants, the percent of Singapore eDevelopment
Limited that our company owns has been reduced from 69.08% to
65.4%.
The
Company has applied ASC 810 as the accounting guidance for the
increase in the noncontrolling interest resulting from the warrant
exercises. With the Company’s ownership of Singapore
eDevelopmnet Limited going down, the Company’s additional
paid in capital and accumulated other comprehensive income
decreased by $885,693 and $84,968, and the minority interest
increased by $970,660.
|
13.
|
ACCUMULATED
OTHER COMPREHENSIVE INCOME
|
Following
is a summary of the changes in the balances of accumulated other
comprehensive income, net of tax:
|
Changes in Accumulated Other Comprehensive Income by
Component
|
|
For Year Ended on December 31, 2019
|
|
|
Unrealized Gains and Losses on Security Investment
|
Foreign Currency Translations
|
Change in Minority Interest
|
Total
|
|
Balance
at January 1, 2019
|
$(23,779)
|
$1,606,567
|
$-
|
$1,582,788
|
|
|
|
|
|
|
|
Other
Comprehensive Income
|
(36,109)
|
6,558
|
(84,968)
|
(114,519)
|
|
|
|
|
|
|
|
Balance
at December 31, 2019
|
$(59,888)
|
$1,613,125
|
$(84,968)
|
$1,468,269
|
|
Changes in Accumulated Other Comprehensive Income by
Component
|
|
For Year Ended on December 31, 2018
|
|
|
Unrealized Gains and Losses on Security Investment
|
Foreign Currency Translations
|
Total
|
|
Balance
at January 1, 2018
|
$1,961,835
|
$1,961,401
|
$3,923,236
|
|
|
|
|
|
|
Other
Comprehensive Income
|
(23,779)
|
(354,834)
|
(378,613)
|
|
|
|
|
|
|
Amount
Reclassified From Accumulated Other Comprehensive
Income
|
(1,961,835)
|
|
(1,961,835)
|
|
|
|
|
|
|
Balance
at December 31, 2018
|
$(23,779)
|
$1,606,567
|
$1,582,788
|
|
14.
|
DISCONTINUED
OPERATIONS
|
On
October 25, 2018, HotApps International Pte. Ltd.
(“HIP”) entered into an Equity Purchase Agreement with
DSS Asia Limited (“DSS Asia”), a Hong Kong subsidiary
of DSS International Inc. (“DSS International”),
pursuant to which HIP agreed to sell to DSS Asia all of the issued
and outstanding shares of HotApps Information Technology Co. Ltd.,
also known as Guangzhou HotApps Technology Ltd. (“Guangzhou
HotApps”). Guangzhou HotApps was a wholly-owned subsidiary of
HIP, which was primarily engaged in engineering work for software
development, mainly voice over internet protocol. Guangzhou HotApps
was also involved in a number of outsourcing projects, including
projects related to real estate and lighting.
The
parties to the Equity Purchase Agreement agreed that the purchase
price for this transaction would be $100,000, which would be paid
in the form of a two-year, interest free, unsecured, demand
promissory note in the principal amount of $100,000, and that such
note would be due and payable in full in two years. The closing of
the Equity Purchase Agreement was subject to certain conditions;
these conditions were met and the transaction closed on January 14,
2019. As of December 31, 2019, the promissory note had not been
paid and outstanding balance was $100,000.
The
composition of assets and liabilities included in discontinued
operations was as follows:
|
|
January
14,
2019
|
December
31,
2018
|
|
Assets
|
|
|
|
Current
Assets
|
|
|
|
Cash
|
$31,060
|
$9,268
|
|
Deposit
and other receivable
|
5,136
|
5,049
|
|
Total
Current Assets
|
36,196
|
14,317
|
|
|
|
|
|
Fixed
assets, net
|
1,717
|
1,765
|
|
Total
Assets
|
$37,913
|
$16,082
|
|
|
|
|
|
Liabilities and
Stockholders' Deficit
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
Accounts
payable and accrued expenses
|
$202,848
|
$174,606
|
|
Total
Current Liabilities
|
202,848
|
174,606
|
|
|
|
|
|
Total
Liabilities
|
$202,848
|
$174,606
|
The
aggregate financial results of discontinued operations were as
follows:
|
|
Period Ended
January 14, 2019
|
Year Ended
December 31, 2018
|
|
Revenues:
|
|
|
|
Project
fee-others
|
$-
|
$7,325
|
|
|
-
|
7,325
|
|
|
|
|
|
Cost of revenues
|
-
|
4,527
|
|
|
|
|
|
Gross profit
|
$-
|
$2,798
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
Depreciation
|
48
|
6,544
|
|
General
and administrative
|
3,662
|
93,182
|
|
Total operating expenses
|
3,710
|
99,726
|
|
|
|
|
|
Loss from operations
|
(3,710)
|
(96,928)
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
Other
sundry income
|
-
|
415
|
|
Foreign
exchange (loss)
|
(2)
|
(236)
|
|
Total other (expenses) income
|
(2)
|
179
|
|
|
|
|
|
Loss from discontinued operations
|
$(3,712)
|
$(96,749)
|
The
cash flows attributable to the discontinued operations are as
follows:
|
|
Year
Ended
December 31,
2019
|
Year
Ended
December 31,
2018
|
|
Operating
|
$24,493
|
$(74,866)
|
|
Investing
|
-
|
-
|
|
Financing
|
-
|
28,502
|
|
Net
cash (outflows)/inflows
|
$24,493
|
$(46,364)
|
|
15.
|
INVESTMENTS
MEASURED AT FAIR VALUE
|
Financial
assets measured at fair value on a recurring basis are summarized
below and disclosed on the consolidated balance sheet as of
December 31, 2019 and 2018:
|
|
|
Fair Value Measurement
Using
|
|
||
|
|
Amount at Cost
|
Level 1
|
Level 2
|
Level 3
|
Amount at Fair Value
|
|
December 31, 2019
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Investment
securities- Fair Value Option
|
$3,457,056
|
$2,973,582
|
$-
|
$-
|
$2,973,582
|
|
Investment
securities- Trading
|
16,016
|
15,907
|
-
|
-
|
15,907
|
|
Convertible
note receivable
|
50,000
|
-
|
-
|
26,209
|
26,209
|
|
Stock
Option - Vivacitas
|
-
|
-
|
-
|
-
|
-
|
|
Total
Investment in securities at Fair Value
|
$3,523,072
|
$2,989,489
|
$-
|
$26,209
|
$3,015,698
|
Unrealized gain on investment securities for the year ended
December 31, 2019 was $320,032 compared to a loss of $3,366,958 for
the year ended December 31, 2018.
For U.S. trading stocks, we use Bloomberg Market stock prices as
the share prices to calculate fair value. For overseas stock, we
use the stock price from local stock exchange to calculate fair
value. The following chart shows details of the fair value of
equity security investment at December 31, 2019 and 2018,
respectively.
|
|
Share price
|
Shares
|
Market Value
|
|
|
|
12/31/2019
|
12/31/2019
|
Valuation
|
|
|
|
|
|
|
|
|
DSS (Related Party)
|
0.301
|
500,000
|
150,500
|
Investment
in Securities at Fair Value
|
|
|
|
|
|
|
|
AMBS (Related Party)
|
0.013
|
20,000,000
|
262,000
|
Investment
in Securities at Fair Value
|
|
|
|
|
|
|
|
Holista (Related Party)
|
0.055
|
46,226,673
|
2,561,082
|
Investment
in Securities at Fair Value
|
|
|
|
|
|
|
|
Others
|
|
|
15,907
|
Investment
in Securities at Fair Value
|
|
|
|
|
|
|
|
|
|
Total Level 1 Equity Securities
|
2,989,489
|
|
|
|
|
|
|
|
|
Vivacitus (Related Party)
|
N/A
|
2,480,000
|
200,128
|
Investment
in Securities at Cost
|
|
|
|
|
|
|
|
|
|
Total Equity Securities
|
3,189,617
|
|
|
|
Share price
|
Shares
|
Market Value
|
|
|
|
12/31/2018
|
12/31/2018
|
Valuaion
|
|
|
|
|
|
|
|
|
DSS (Related Party)
|
0.733
|
500,000
|
366,300
|
Investment
in Securities at Fair Value
|
|
|
|
|
|
|
|
AMBS (Related Party)
|
0.020
|
20,000,000
|
400,000
|
Investment
in Securities at Fair Value
|
|
|
|
|
|
|
|
Holista (Related Party)
|
0.041
|
46,226,673
|
1,889,940
|
Investment
in Securities at Fair Value
|
|
|
|
|
|
|
|
Others
|
|
|
15,701
|
Investment
in Securities at Fair Value
|
|
|
|
|
|
|
|
|
|
Total Level 1 Equity Securities
|
2,671,941
|
|
|
|
|
|
|
|
|
Vivacitus (Related Party)
|
N/A
|
2,480,000
|
200,128
|
Investment
in Securities at Cost
|
|
|
|
|
|
|
|
|
|
Total Equity Securities
|
2,872,069
|
|
Other investments consist of a $50,000 investment in a convertible
promissory note of Sharing Services, Inc. (“Sharing Services
Convertible Note”), a company quoted on the US OTC market.
The value of the convertible note was estimated by management using
a Black-Scholes valuation model.
The
table below provides a summary of the changes in fair value,
including net transfers in and/or out of all financial assets
measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) during the years ended December 31,
2019 and 2018:
|
|
Total
|
|
Balance at January
1, 2018
|
$50,000
|
|
Total
gains
|
28,723
|
|
Purchases, sales,
and settlements
|
-
|
|
Balance at December
31, 2018
|
$78,723
|
|
Total losses
|
(52,514)
|
|
Purchases, sales,
and settlements
|
-
|
|
Balance
at December 31, 2019
|
$26,209
|
The
fair value of the Sharing Services
Convertible Note as of December 31, 2019 and 2018 was
calculated using a Black-Scholes valuation model valued with the
following assumptions:
|
|
December
31,
2019
|
December
31,
2018
|
|
|
|
|
|
Dividend
yield
|
0.00%
|
0.00%
|
|
Expected
volatility
|
159.88%
|
162.68%
|
|
Risk free interest
rate
|
1.61%
|
1.98%
|
|
Contractual term
(in years)
|
2.76
|
3.76
|
|
Exercise
price
|
$0.15
|
$0.15
|
Changes
in the observable input values would likely cause material changes
in the fair value of the Company’s Level 3 financial
instruments. A significant increase (decrease) in this likelihood
would result in a higher (lower) fair value
measurement.
The
Company holds a stock option to purchase 250,000 shares of
Vivacitas’ common stock at $1 per share at any time prior to
the date of public offering. As of December 31, 2019 and 2018,
Vivacitas was a private companies. Based the management’s
analysis, the fair value of the stock option was $0 as of December
31, 2019 and 2018, respectively.
Additionally,
the Company maintained an investment in mutual funds which was
measured at fair value on a recurring basis using net asset value
per share as a practical expedient. As of December 31, 2019 and
2018, the balance of this investment was $0 and $276,102,
respectively, and was included as part of Investment Securities at
Fair Value on the Company’s consolidated balance
sheet.
The
following table presents summarized financial information for our
investments that we elected the fair value option that would
otherwise be accounted for under the equity method of
accounting.
|
|
Summarized
Financial Information
|
||
|
|
Assets
|
Liabilities
|
Net Income
(Loss)
|
|
December 31,
2019
|
|
|
|
|
AMBS
(Unaudited)
|
$4,758,504
|
$33,647,816
|
$(1,623,051)
|
|
Holista
|
$5,559,362
|
$3,055,783
|
$(629,112)
|
|
DSS
|
$20,144,759
|
$7,841,942
|
$(2,889,147)
|
|
|
|
|
|
|
December 31,
2018
|
$3,480,000
|
$31,216,000
|
$(3,767,000)
|
|
AMBS
(Unaudited)
|
$5,240,181
|
$2,020,432
|
$(1,638,673)
|
|
Holista
|
$15,279,786
|
$7,705,453
|
$1,464,969
|
|
DSS
|
|
|
|
|
16.
|
INCOME
TAXES
|
US Income Taxes
On
December 22, 2017, the “Tax Cuts and Jobs Act”
(“TCJA”) was signed into legislation, lowering the
corporate tax rate to 21 percent beginning with years starting
January 1, 2018. Because a change in tax law is accounted for in
the period of enactment, the deferred tax assets and liabilities
have been adjusted to the newly enacted U.S. corporate rate, and
the related impact to the tax expense has been recognized in the
current year.
The
components of income tax expense and the effective tax rates for
the years ended December 31, 2019 and 2018 are as
follows:
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:
Deferred
tax assets consist of the following at December 31, 2019 and
2018:
|
|
2019
|
2018
|
|
Interest
Income
|
$(4,574,401)
|
$(4,023,599)
|
|
Interest
Expense
|
4,327,741
|
3,928,264
|
|
Depreciation
and Amortization
|
(5,802)
|
6,302
|
|
Management
Fees
|
531,968
|
404,342
|
|
Impairment
|
1,924,305
|
114,433
|
|
Accrued
Expense
|
105,175
|
105,175
|
|
Partnership
Loss
|
(263,152)
|
(144,723)
|
|
Others
|
15,839
|
38,748
|
|
Net
Operating Loss
|
1,525,109
|
916,366
|
|
Total
Deferred Tax Asset
|
$3,586,782
|
$1,345,308
|
|
Valuation
Allowance
|
(3,586,782)
|
(1,345,308)
|
|
Net
Deferred Tax Asset
|
-
|
-
|
As of
December 31, 2019, the Company has federal net operating loss
carry-forwards of approximately $6.5 million which will begin to
expire in 2039. The full utilization of the deferred tax assets in
the future is dependent upon the Company’s ability to
generate taxable income. Accordingly, a valuation allowance of an
equal amount has been established. During the years ended December
31, 2019, the valuation allowance increased by
$2,241,474.
As of
December 31, 2019, the Company’s total current tax liability
is $420,327, including federal income tax liability $251,266 and
Maryland state income tax liability $169,061. The deferred tax
asset cannot be used to offset the current tax liability. As of
December 31, 2018, no tax liability was recorded.
On
December 31, 2018, the Company’s US subsidiaries have federal
net operating loss carry-forwards of approximately $3.8 million,
which will begin to expire in 2038. The full utilization of the
deferred tax assets in the future is dependent upon the
Company’s ability to generate taxable income; accordingly, a
valuation allowance of an equal amount has been established. During
the year ended December 31, 2018, the valuation allowance decreased
by $461,251.
The
federal income tax returns of the Company are subject to
examination by the IRS, generally for three years after they are
filed.
Income taxes – Other Countries
On
December 31, 2019 and 2018, foreign subsidiaries have tax losses of
approximately $2.7 million and $2.4 million, respectively, which
are available for offset against future taxable profits, subject to
the agreement of the tax authorities and compliance with the
relevant provisions. The deferred tax assets arising from these tax
losses have not been recognized because it is not probable that
future taxable profits will be available to use these tax assets.
The following charts show the details in different regions as of
December 31, 2019 and 2018.
As of
December 31, 2019:
|
|
||||
|
|
SG Companies
|
AU Companies
|
HK Companies
|
Total
|
|
Cumulative
loss & other deferred tax assets before tax
|
$(12,618,524)
|
$(274,945)
|
$(2,729,852)
|
$(15,623,321)
|
|
Effective
tax rates
|
17.00%
|
30.00%
|
16.50%
|
|
|
Tax at the
domestic tax rates applicable to profits in the countries where the
Company operates
|
$(2,145,149)
|
$(82,484)
|
$(450,426)
|
$(2,678,058)
|
|
|
|
|
|
|
|
Adjustments:
|
|
|
|
|
|
Deferred tax assets not recognized
|
$2,145,149
|
$82,484
|
$450,426
|
$2,678,058
|
|
|
|
|
|
|
|
Income
tax expenses recognized in
profit or loss
|
$-
|
$-
|
$-
|
$-
|
As of
December 31, 2018:
|
|
|
|
|
|
|
|
SG Companies
|
AU Companies
|
HK Companies
|
Total
|
|
Cumulative
loss & other deferred tax assets before tax
|
$(10,894,198)
|
$(274,945)
|
$(2,729,852)
|
$(13,898,996)
|
|
Effective
tax rates
|
17.00%
|
30.00%
|
16.50%
|
|
|
Tax at the
domestic tax rates applicable to profits in the countries where the
Company operates
|
$(1,852,014)
|
$(82,484)
|
$(450,426)
|
$(2,384,923)
|
|
|
|
|
|
|
|
Adjustments:
|
|
|
|
|
|
Deferred tax assets not recognized
|
$1,852,014
|
$82,484
|
$450,426
|
$2,384,923
|
|
|
|
|
|
|
|
Income
tax expenses recognized in
profit or loss
|
$-
|
$-
|
$-
|
$-
|
|
17.
|
COMMITMENTS
AND CONTINGENCIES
|
Commercial leases
The
Company has entered into 5 commercial leases in Bethesda, Maryland,
Magnolia, Texas, Singapore, Hong Kong and South Korea, relating to
the rental of office premises. These leases have expiration dates
through 2021. The Company is restricted from subleasing the office
premises to third parties without prior written consent of the
landlord. The rents are paid on monthly basis and the rates usually
are escalating about 3% annually.
Annual
future minimum lease payments under these long-term building leases
as follows:
|
2020
|
$290,152
|
|
2021
|
52,839
|
|
|
$342,991
|
|
Less
Present Value Discount
|
(192,796)
|
|
|
$150,195
|
The
components of rent expense for the year ended December 31, 2019 was
as follows:
|
|
Year Ended
|
|
|
December 31, 2019
|
|
|
|
|
Operating
Leases
|
$163,064
|
|
Short
-term Leases
|
130,422
|
|
Total
|
$293,486
|
The
Company’s leases are accounted for as operating leases except
for short-term leases less than 12 months. Operating lease
right-of-use assets and operating lease liability is included on
the face of the 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 or de minimis.
The
balance of the operating lease right-of-use asset and operating
lease liability as of December 31, 2019 were $146,058 and $150,195,
respectively.
Supplemental
Cash Flow and Other Information Related to Operating Leases as
follows:
|
|
Year
Ended
December 31,
2019
|
|
Operating Cash
Flows
|
$292,950
|
|
Weighted Average
Remaining Operating Lease Term (in years)
|
1.1
|
|
Weighted Average
Operating Lease Discount Rate
|
6.1%
|
The
incremental borrowing rate (proximately average 6.1% during the
year in 2019) is based on our incremental borrowing rate current
M&T Bank loan as the discount rate.
Lots Sales Agreement
On
November 23, 2015, SeD Maryland Development LLC completed the
$15,700,000 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 a
$15,000,000 assignable real estate sales contract with NVR, by
which RBG Family, LLC would facilitate the sale of the 197 acres of
Ballenger Run to NVR. On December 10, 2014, NVR assigned this
contract to SeD Maryland Development, LLC through execution of an
assignment and assumption agreement and entered into a series of
lot purchase agreements by which NVR would purchase 443 subdivided
residential lots from SeD Maryland Development, LLC. Through
December 31, 2018, NVR has purchased 144 lots. In the year ended on
December 31, 2019, NVR purchased 123 additional
lots.
On July 20, 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.
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
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 will convert the 5.9 acre CCRC parcel
to 36 lots (the 28 feet wide villa lot) and sell to NVR. SeD
Maryland pursued the required zoning approval to change the number
of such lots from 85 to 121, which was approved in July
2019.
On July 3, 2018, 150 CCM Black Oak entered into a Purchase and Sale
Agreement with Houston LD, LLC for the sale of 124 lots located at
its Black Oak project. Pursuant to the Purchase and Sale 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 is currently held in escrow.
150 CCM Black Oak will apply these funds exclusively towards an
amenity package on the property. The closing of the transactions
contemplated by the Purchase and Sale 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 Purchase and Sale Agreement”) for these 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 in Magnolia, Texas was
completed.
Royalty Fees
The Company has royalty commitments for the license and sale rights
of certain nutraceutical products that include both fixed and
variable royalty payments through 2022. The fixed royalty
commitments are $15,000 per month. Variable royalty payments vary
from $1.00 per unit sold to $0.20 per unit sold depending on sales
volume. The Exclusive Sublicensing Agreement was terminated on
January 8, 2019. During the years ended December 31, 2019 and 2018,
the Company incurred royalty expenses of $0 and $223,632,
respectively.
Litigation with Gara Group
On September 27, 2019, iGalen International Inc., one of our
majority-owned subsidiaries, and iGalen Inc., its wholly-owned
subsidiary, filed a complaint in the Superior Court of the State of
California, County of San Diego, Central Division, against Gara
Group, Inc., a Delaware corporation, and certain affiliated or
related entities, including the Chief Executive Officer of the Gara
Group (collectively these entities are referred to herein as the
“Gara Group”). A similar complaint had been filed in
Utah on September 26, 2019, but subsequently re-filed in
California. The complaint, as amended on October 24, 2019,
enumerates causes of action for breach of contract, breach of
covenant of good faith and fair dealing and intentional
interference with economic relations.
iGalen Inc. and Gara Group are parties to a Specialized Services
Agreement, dated March 29, 2017 (the “Specialized Services
Agreement”). iGalen Inc. contracted with Gara Group to
provide for services that include, among other things, (i) product
fulfillment; (ii) software development and maintenance of an onsite
“Platform,” which includes a company website and
interactive portal referred to as the “Back Office”;
and (iii) managing iGalen’s social media sites. The Gara
Group had previously claimed that iGalen Inc. owed Gara Group
certain amounts, including (i) $125,000 for “Back Office
Fees”; (ii) $150,000 for “Speaking Fees”; and
(iii) $67,299 for services related to iGalen’s merchant
account, back office, and shipping fulfillment, invoiced on August
28 and 31, and September 15, 2019. iGalen Inc.’s amended
complaint notes that no provision in the Specialized Services
Agreement allows for the particular “Back Office Fees”
of $125,000 and that no provision in the Specialized Services
Agreement allows for the so-called “Speaking Fees” of
$150,000. Gara Group cut off services to iGalen following
iGalen’s indication that it was disputing the amounts owed.
iGalen’s amended complaint notes that the actions of Gara
Group and Mr. Gara have caused, and continue to cause, iGalen to
suffer substantial harm by, among other things, making it so iGalen
was unable to communicate with distributors via its website and
Back Office, fulfill orders made by distributors, or pay commission
to distributors. iGalen is seeking damages.
On October 10, 2019, Gara Group filed a complaint in the Superior
Court of the State of California, County of San Diego, Central
Division against iGalen International Inc., iGalen Inc., Singapore
eDevelopment Limited, Chan Heng Fai, Dr. Rajen Manicka and David
Price, an executive of iGalen Inc. Gara Group’s complaint for
damages asserts that the Gara Group is entitled to general damages
of $9,000,000 and liquidated damages of $50,000,000. iGalen Inc.
intends to vigorously contest this matter. No trial date has been
set. The Company is unable to assess the risk of loss at this time,
but does not believe the outcome will have a material effect on our
financial statements.
In addition, from time to time, during the normal course of our
businesses, we may be subject to various litigation claims and
legal disputes, including in the area of intellectual property
(e.g., trademarks, copyrights and patents). Our intellectual
property rights extend to our technology, business processes and
the content on our website. We use the intellectual property of
third parties in marketing and providing our services through
contractual and other rights. Despite our efforts, from time to
time, third parties may allege that we have violated their
intellectual property rights.
Although the results of claims, lawsuits and proceedings in which
we may be involved cannot be predicted with certainty, we do not
currently believe that the final outcome of the matters discussed
above will have a material adverse effect on our business,
financial condition or results of operations. However, defending
and prosecuting any such claims is costly and may impose a
significant burden on our management and employees. In addition, we
may receive unfavorable preliminary or interim rulings in the
course of litigation, and there can be no assurances that favorable
final outcomes will be obtained. With regard to intellectual
property matters which may arise, if we are unable to obtain an
outcome which sufficiently protects our rights, successfully
defends our use or allows us time to develop non-infringing
technology and content or to otherwise alter our business practices
on a timely basis in response to the claims against us, our
business, prospects and competitive position may be adversely
affected.
Promissory Note from Azure
Pursuant
to a Secured Promissory Note dated as of August 13, 2018, on
October 13, 2019 Azure Holdings, LLC, was obligated to pay our
subsidiary, 150 CCM Black Oak Ltd, $140,000 in principal, plus
accrued interest at the rate of 2.5% per annum through October 13,
2019. Azure Holdings, LLC failed to pay the amount
due. Effective as of October 13, 2019, the interest rate
increased to a default rate of 18% per annum. The Company has
subsequently had numerous communications with Azure Holdings, LLC
regarding the payment of this Secured Promissory Note, and attempts
to set a schedule for Azure Holdings, LLC to repay the amount due.
We have not yet commenced litigation against either Azure Holdings,
LLC or the guarantor of this Secured Promissory Note, but may do so
in the immediate future. Based on current situation, the
management has not believed that the collection from Azure is
probable. As of December 31, 2019, $149,697 was due to 150 CCM
Black Oak Ltd.
|
18.
|
DIRECTORS
AND EMPLOYEES’ BENEFITS
|
HFE Stock Option Plans
The
Company reserves 500,000 shares of common stock under the Incentive
Compensation Plan for high-quality executives and other employees,
officers, directors, consultants and other persons who provide
services to the Company or its related entities. This plan is meant
to enable such persons to acquire or increase a proprietary
interest in the Company in order to strengthen the mutuality of
interests between such persons and the Company’s
shareholders, and providing such persons with performance
incentives to expand their maximum efforts in the creation of
shareholder value. As of December 31, 2019 and 2018, there have
been no options granted.
Singapore eDevelopment Limited Stock Option Plans
On
November 20, 2013, SeD Ltd approved a Stock Option Plan (the
“2013 Plan”). Employees, executive directors, and
non-executive directors (including the independent directors) are
eligible to participate in the 2013 Plan.
The
following tables summarize stock option activity under the 2013
Plan for the years ended December 31, 2019 and 2018:
|
|
|
Weighted Average
|
|
|
|
|
Options for
|
|
Remaining
|
Aggregate
|
|
|
Common
Shares
|
Exercise
Price
|
Contractual Term (Years)
|
Intrinsic
Value
|
|
Outstanding
as of January 1, 2018
|
1,592,000
|
$0.09
|
6.00
|
$-
|
|
Granted
|
-
|
-
|
|
|
|
Exercised
|
-
|
-
|
|
|
|
Forfeited,
cancelled, expired
|
(530,667)
|
$0.09
|
|
|
|
Outstanding
as of December 31, 2018
|
1,061,333
|
$0.09
|
5.00
|
$-
|
|
Vested
and exercisable at December 31, 2018
|
1,061,333
|
$0.09
|
|
$-
|
|
Granted
|
-
|
-
|
|
|
|
Exercised
|
-
|
-
|
|
|
|
Forfeited,
cancelled, expired
|
-
|
-
|
|
|
|
Outstanding
as of December 31, 2019
|
1,061,333
|
$0.09
|
4.00
|
$-
|
|
Vested
and exercisable at December 31, 2019
|
1,061,333
|
$0.09
|
|
$-
|
|
19.
|
SUBSEQUENT
EVENTS
|
The
Company evaluated the events and transactions subsequent to
December 31, 2019, the balance sheet date, through July
30, 2020, the date the consolidated financial
statements were available to be issued.
Liquidation of Global Opportunity Fund
On January 23, 2020, the Company received cash of $303,349 as a
result of the liquidation of Global Opportunity Fund.
Distribution to Minority Shareholders
On February 21, 2020, the Board of Managers of SeD Maryland
Development, LLC (“SeD Maryland”) authorized the
payment of distributions to its members in the amount of
$1,200,000. Accordingly, the minority member of SeD Maryland
received a distribution in the amount of $197,400, with the
remainder being distributed to a subsidiary of the Company, which
is eliminated upon consolidation.
Note Receivable from a related party company
On
March 2, 2020 LiquivdValue Asset Management Pte. Ltd.
(“LiquidValue”) received a $200,000 Promissory Note
from American Medical REIT Inc. (“AMRE”), a company
which is 36.1% owned by LiquidValue. Chan Heng Fai and Alan Lui
from Singapore eDevelopment Limited are directors of American
Medical REIT Inc. The note carries interests of 8% and is payable
in two years. LiquidValue also received warrants to purchase AMRE
shares at the Exercise Price $5.00 per share. The amount of the
warrants equals to the note principle divided by the Exercise
Price. If AMRE goes to IPO in the future and IPO price is less than
$10.00 per share, the Exercise price shall be adjusted downward to
fifty percent (50%) of the IPO price.
Paycheck Protection Program Loan
On April 6, 2020 SeD Development Management, LLC (“SeD
Development”) entered into a term note with M&T 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 six
months of principal and interest deferred. Beginning in
November 2020, SeD Development will make 18 equal monthly payments
of principal and interest with the final payment due in April 2022.
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. SeD Development may apply to M&T
Bank for forgiveness of the PPP Term Note, with the amount which
may be forgiven equal to the sum of payroll costs, covered rent and
mortgage obligations, and covered utility payments incurred by SeD
Development during the eight-week period beginning upon receipt of
PPP Term Note funds, 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.
NVR deposit
Based on the Agreement between SeD Maryland Development LLC and
NVR, Inc. dated December 10, 2014 and subsequently amended on
December 31, 2018, SeD Maryland Development LLC was obliged to
provide NVR Inc. with a notice of approval of improvement plans for
CCRC parcel. The notice was sent in April 2020 and SeD Maryland
Development, LLC received a deposit of $220,000.
M&T Bank Loan
On June 18, 2020, SeD Home & REITs Inc. (“SeD
Home”), a wholly-owned subsidiary of SeD Intelligent Home
Inc. (the “Company”), entered into a Loan Agreement
with Manufacturers and Traders Trust Company (“M&T
Bank”), a New York banking corporation (the
“Lender”).
Pursuant to the Loan Agreement, the Lender provided a non-revolving
loan to SeD Home in an aggregate amount of up to $2,990,000 (the
“Loan”). The line of credit bears interest rate
on LIBOR plus 375 basis points. Repayment of the Loan is secured by a Deed of
Trust issued to the Lender on the property owned by certain
subsidiaries of SeD Home. The maturity date of this Loan is July 1,
2022. The Company and one of its subsidiaries are guarantors of
this Loan.
COVID-19
Since the beginning of 2020 there is an outbreak of the novel
strain of coronavirus (“COVID-19”), which has spread to
over 200 countries, including United States. COVID-19 was declared
a global pandemic in March, 2020 and worldwide mitigation and
measures were recommended. The impact of the outbreak is
evolving and is adversely affecting global economic activities and
contributes to significant instability in financial
markets. While the impact related to current situation cannot
be estimated at this time, it is possible that changes in the fair
values of various investments could materially adversely affect our
future financial statements.
Termination of Consulting Agreement with Rajen Manicka
On January 1, 2020, iGalen terminated consulting agreement with
Rajen Manicka. See details in Consulting Services,
Note 11.
Cancellation of Outstanding Stocks
On June
24, 2020, HFE Holdings Limited, a Hong Kong company and the
shareholder of the Company, agreed that 3,600,000 of the common
shares of the Company it owned was cancelled and returned to the
treasury of the Company. Chan Heng Fai agreed that 1,000 of the
common shares of the Company he owned was cancelled and returned to
the treasury of the Company. After these cancellations, the sole
issued and outstanding of the common stock of the Company is
6,400,000 shares, held by HFE Holdings Limited.
Name Changes of Certain Subsidiaries
Boards of Directors and Stockholders of certain subsidiaries of the
Company approved recent changes of those subsidiaries’ names.
On February 6, 2020 SeD Home Inc. changed its name to SeD Home
& REITs Inc. and then again on July 7, 2020 it changed its name
to Alset iHome Inc. On July 8, 2020 SeD Intelligent Home Inc.
changed its name to LiquidValue Development Inc. Boards of
Directors of both companies believe that these new names better
reflect the nature of the anticipated operations of those
entities.
Changes of ownership percentage of SeD Ltd
From May 11 to July13, 2020, SeD Ltd issued 385,575,662 common
shares. 42,778,600 common shares were granted to employees
under SeD Ltd Performance Share Plan and 342,797,062 common shares
were issued by exercising warrants. The Company’s
ownership changed from 65.4% as of March 31, 2020 to 49.1% as of
July 30, 2020.
Planned Reorganization of Certain Biohealth Activities
On March 12, 2020, two of Singapore eDevelopment’s
subsidiaries, Global BioMedical Pte Ltd, a Singapore corporation
(“GBM”), and Impact BioMedical Inc., a Nevada
corporation and wholly owned subsidiary of GBM (“Impact
BioMedical”) entered into a binding term sheet (the
“Impact Term Sheet”) with Document Security Systems,
Inc. (“DSS”) and DSS BioHealth Security, Inc., a wholly
owned subsidiary of DSS (“DBHS”). Pursuant to the
Impact Term Sheet, DBHS will acquire Impact BioMedical.
Impact BioMedical owns 90.9% of Global BioMedical, Inc., which in
turn owns 70% of Global BioLife Inc., our main biohealth entity,
which holds our company’s interests in the Linebacker, 3F and
Laetose projects. Upon the completion of this transaction,
our ownership interest in these biohealth projects will be diluted,
and our ownership interest in DSS will be increased.
On April 27, 2020, Singapore eDevelopment, GBM, DSS and DBHS
entered into a share exchange agreement (the “DSS Share
Exchange Agreement”) that provided further details regarding
this planned transaction in which DBHS will acquire of all of the
outstanding capital stock of Impact BioMedical (the “Impact
Shares”) through a share exchange, with Impact BioMedical
becoming a direct wholly owned subsidiary of DBHS.
The aggregate consideration for the Impact Shares will be the
following to be issued to GBM by DSS: (i) 14,500,000 newly issued
shares of the common stock of DSS (the “DSS Common
Stock”), nominally valued at $3,132,000, or $0.216 per share;
and (ii) 46,868 newly issued shares of the convertible preferred
stock of DSS (“DSS Convertible Preferred Stock”) with a
stated value of $46,868,000, or $1,000 per share, for a total
consideration valued at $50 million. The DSS Convertible Preferred
Stock will be convertible into shares of common stock of DSS,
subject to a 19.9% beneficial ownership conversion limitation
(“blocker”) based on the total issued outstanding
shares of common stock of DSS beneficially owned by GBM. Holders of
the DSS Convertible Preferred Stock will have no voting rights,
except as required by applicable law or regulation, and no
dividends will accrue or be payable on the DSS Convertible
Preferred Stock. The Holders of DSS Convertible Preferred Stock
will be entitled to a liquidation preference at a liquidation value
of $1,000 per share, and DSS will have the right to redeem all or
any portion of the then outstanding shares of DSS Convertible
Preferred Stock, pro rata among all holders, at a redemption price
per share equal to such liquidation value per share.
Prior to the execution of the Share Exchange Agreement, Impact
BioMedical’s ownership of a suite of antiviral and medical
technologies was valued through a required independent valuation
that was completed by Destum Partners. Because the valuation was
higher than the previously agreed value, the Purchase Price was
capped at a value of $50 million.
The closing of the purchase and sale of the Impact Shares
contemplated under the DSS Share Exchange Agreement is subject to a
number of conditions, including both DSS and Singapore eDevelopment
having obtained approvals from their respective shareholders and
receipt by DSS of audited financial statements of Impact
BioMedical, which were included in DSS’s proxy statement
soliciting the vote of its shareholders.
On June 26, 2020, the
shareholders of Singapore eDevelopment approved this
transaction.
A special meeting of the stockholders of DSS will be held on August
10, 2020 to approve the issuance of shares of DSS Common Stock and
DSS Convertible Preferred Stock in connection with the acquisition
of Impact BioMedical, pursuant to the DSS Share Exchange
Agreement.
The Share Exchange Agreement contains customary representations,
warranties and covenants of the parties as well as certain
indemnification provisions.
The Share Exchange Agreement may be terminated prior to the closing
on certain conditions, including by mutual written consent of the
parties; by one party in the event of breach, inaccuracy in or
failure to perform any representation, warranty, covenant or
agreement made by the counterparties that would give rise to the
failure of the conditions precedent to closing that has not been
cured after written notice to the counterparties; or if certain
other conditions as set forth in the Share Exchange Agreement shall
not have been, or it becomes apparent that any of such conditions
will not be, fulfilled by the date that is 180 days after the date
of the Share Exchange Agreement; or in the event that (i) any law
that makes consummation of the transactions contemplated by Share
Exchange Agreement illegal or otherwise prohibited or (ii) a
government authority issues an order restraining or enjoining the
transactions contemplated by the Share Exchange Agreement, and such
order becomes final and non-appealable.
DSS owns 9.25% of the issued and outstanding stock of Singapore
eDevelopment.
Loan from Chan Heng Fai
On July
27, 2020, our founder, Chairman, and Chief Executive Officer, Chan
Heng Fai, agreed to loan the Company $1,200,000 Singapore Dollars
(approximately $900,000 U.S. Dollars), which we will use to
exercise warrants to purchase 30,000,000 shares of Singapore
eDevelopment. We will issue our founder a two-year, interest-free
promissory note for such loan.
2,600,000
Shares
HF ENTERPRISES
INC.
Common
Stock
PROSPECTUS
, 2020
WestPark
Capital Inc.
Until _____, 2020
(25 days after the date of this prospectus), all dealers that buy,
sell or trade shares of our common stock, whether or not
participating in this offering, may be required to deliver a
prospectus. This delivery requirement is in addition to the
obligation of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item 13. Other
Expenses of Issuance and Distribution
The following table
sets forth the costs and expenses, other than underwriting
commissions and the underwriter's unaccountable expense allowance,
to be paid in connection with the sale of the shares of common
stock being registered, all of which we will pay. All amounts,
other than the SEC registration fee, the Nasdaq Capital Market
listing application fee and the FINRA filing fee are
estimates.
|
SEC registration
fee
|
$ 3,000
|
|
Nasdaq Capital
Market listing application fee
|
5,000
|
|
Printing/EDGAR
expenses
|
20,000
|
|
FINRA filing
fee
|
5,200
|
|
Blue sky legal and
filing fees
|
-
|
|
Underwriter
expenses
|
200,000
|
|
Legal fees and
expenses
|
250,000
|
|
Accounting fees and
expenses
|
250,000
|
|
Transfer agent
fees
|
10,000
|
|
Miscellaneous
|
1,200
|
|
Total
|
$ 744,400
|
Item 14. Indemnification
of Directors and Officers
Section 145 of
the Delaware General Corporation Law (the “DGCL”)
provides for, under certain circumstances, the indemnification of
our officers, directors, employees and agents against liabilities
that they may incur in such capacities. A summary of the
circumstances in which such indemnification provided for is
contained herein.
In general, the
statute provides that any director, officer, employee or agent of a
corporation may be indemnified against expenses (including
attorneys’ fees), judgments, fines and amounts paid in
settlement, actually and reasonably incurred in a proceeding
(including any civil, criminal, administrative or investigative
proceeding) to which the individual was a party by reason of such
status. Such indemnity may be provided if the indemnified
person’s actions resulting in the liabilities: (i) were
taken in good faith; (ii) were reasonably believed to have
been in or not opposed to our best interest; and (iii) with
respect to any criminal action, such person had no reasonable cause
to believe the actions were unlawful. Unless ordered by a
court, indemnification generally may be awarded only after a
determination of independent members of the Board of Directors or a
committee thereof, by independent legal counsel or by vote of the
stockholders that the applicable standard of conduct was met by the
individual to be indemnified.
The statutory
provisions further provide that to the extent a director, officer,
employee or agent is wholly successful on the merits or otherwise
in defense of any proceeding to which he was a party, he is
entitled to receive indemnification against expenses, including
attorneys’ fees, actually and reasonably incurred in
connection with the proceeding.
Indemnification in
connection with a proceeding by us or in our right in which the
director, officer, employee or agent is successful is permitted
only with respect to expenses, including attorneys’ fees
actually and reasonably incurred in connection with the
defense. In such actions, the person to be indemnified must
have acted in good faith, in a manner believed to have been in our
best interest and must not have been adjudged liable to us unless
and only to the extent that the Court of Chancery or the court in
which such action or suit was brought shall determine upon
application that, despite the adjudication of liability, in view of
all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expense which the Court
of Chancery or such other court shall deem
proper. Indemnification is otherwise prohibited in connection
with a proceeding brought on our behalf in which a director is
adjudged liable to us, or in connection with any proceeding
charging improper personal benefit to the director in which the
director is adjudged liable for receipt of an improper personal
benefit.
Delaware law
authorizes us to reimburse or pay reasonable expenses incurred by a
director, officer, employee or agent in connection with a
proceeding in advance of a final disposition of the
matter. Such advances of expenses are permitted if the person
furnishes to us a written agreement to repay such advances if it is
determined that he is not entitled to be indemnified by
us.
The statutory
section cited above further specifies that any provisions for
indemnification of or advances for expenses does not exclude other
rights under our certificate of incorporation, bylaws, resolutions
of our stockholders or disinterested directors, or otherwise. These
indemnification provisions continue for a person who has ceased to
be a director, officer, employee or agent of the corporation and
inure to the benefit of the heirs, executors and administrators of
such persons.
The statutory
provision cited above also grants us the power to purchase and
maintain insurance policies that protect any director, officer,
employee or agent against any liability asserted against or
incurred by him in such capacity arising out of his status as such.
Such policies may provide for indemnification whether or not the
corporation would otherwise have the power to provide for
it.
Our Certificate of
Incorporation provides that to the fullest extent permitted by the
DGCL, as the same exists or may hereafter be amended, a director of
our company shall not be personally liable to our company or its
stockholders for monetary damages for breach of fiduciary duty as a
director.
Our bylaws provide
that each person who was or is made a party to, or is threatened to
be made a party to, or is involved in any action, suit, or
proceeding, whether civil, criminal, administrative, or
investigative, by reason of the fact that he or she is or was a
director or officer of our company or is or was serving at the
request of our company as a director, officer, employee, or agent
of another corporation or of a partnership, joint venture, trust,
or other enterprise, including service with respect to employee
benefit plans, whether the basis of such proceeding is alleged
action in an official capacity as such director, officer, employee,
or agent, or in any other capacity while serving as such director,
officer, employee, or agent, shall be indemnified and held harmless
by our company to the fullest extent permitted by the DGCL, as the
same exists or may hereafter be amended, against all expense,
liability, and loss (including attorneys’ fees, judgments,
fines, other expenses and losses, amounts paid or to be paid in
settlement, and excise taxes or penalties arising under the
Employee Retirement Income Security Act of 1974) reasonably
incurred or suffered by such person in connection therewith, and
such indemnification shall continue as to a person who has ceased
to be a director, officer, employee, or agent, and shall inure to
the benefit of his or her heirs, executors, and
administrators.
At present, we do
not maintain directors’ and officers’ liability
insurance in order to limit the exposure to liability for
indemnification of directors and officers, including liabilities
under the Securities Act of 1933; however, we are in the process of
obtaining such insurance.
Item 15. Recent
Sales of Unregistered Securities
On October 1, 2018,
we issued a total of 10,000,000 shares of our common stock as
follows:
●
100% of the
ownership interest in Hengfai International Pte. Ltd. was
transferred from Chan Heng Fai (an officer and director of our
company) to HF Enterprises Inc. in exchange for 8,500,000 shares of
our common stock to be held by HFE Holdings Limited. Hengfai
International Pte. Ltd., a Singapore limited company, is the sole
stockholder of Hengfai Business Development Pte. Ltd., which is the
owner of 761,150,294 ordinary shares of Singapore
eDevelopment Limited and warrants to purchase 359,834,471 ordinary
shares of Singapore eDevelopment Limited.
●
100% of the
ownership interest in Global eHealth Limited was transferred from
Chan Heng Fai to HF Enterprises Inc. in exchange for 1,000,000
shares of our common stock to be held by HFE Holdings Limited.
Global eHealth Limited, a Hong Kong company, is the owner of
46,226,673 ordinary shares of Holista CollTech
Limited.
●
100% of the
ownership interest in Heng Fai Enterprises Pte. Ltd. was
transferred from Chan Heng Fai to HF Enterprises Inc. in exchange
for 500,000 shares of our common stock to be held by HFE Holdings
Limited. Heng Fai Enterprises Pte. Ltd., a Singapore limited
company, owns 2,480,000 shares of the common stock of Vivacitas
Oncology Inc.
The
shares of our common stock issued in the foregoing transactions
were not registered under the Securities Act of 1933 in reliance
upon the exemption from registration provided by Section 4(a)(2)
thereof, which exempts transactions by an issuer not involving any
public offering.
Item 16. Exhibits
and Financial Statement Schedules
(a)
Exhibits
The exhibits listed
in the following Exhibit Index are filed as part of this
Registration Statement.
|
Exhibit
Number
|
|
Description
|
|
1.1**
|
Form
of Underwriting Agreement.
|
|
|
1.2**
|
Form
of Underwriter Warrant.
|
|
|
3.1
|
Certificate
of Incorporation of HF Enterprises Inc.
|
|
|
3.2
|
Bylaws
of HF Enterprises Inc.
|
|
|
3.3
|
Second
Amended and Restated Certificate of Incorporation of HF Enterprises
Inc.
|
|
|
3.4**
|
Third
Amended and Restated Certificate of Incorporation of HF Enterprises
Inc.
|
|
|
4.1
|
Specimen
Common Stock Certificate.
|
|
|
5.1
|
Opinion
of Olshan Frome Wolosky LLP, as to the legality of the common
stock.
|
|
|
10.1
|
HF
Enterprises Inc. 2018 Incentive Compensation Plan.
|
|
|
10.2
|
Office
Lease (Full-Service Gross), dated as of July 21, 2015, by and
between Hampden Square Corporation and SeD Home,
Inc.
|
|
|
10.3
|
Agreement of Limited Partnership of 150 CCM Black
Oak, Ltd., dated as of March 20, 2014, by and among 150 Black Oak
GP, Inc. and CCM Development USA Corporation, American Real Estate
Investments, LLC and the Fogarty Family Trust
II.
|
|
|
10.4
|
Amendment
of Agreement of Limited Partnership of 150 CCM Black Oak, Ltd.,
dated as of November 7, 2014, by and among 150 Black Oak GP, Inc.
and CCM Development USA Corporation, American Real Estate
Investments, LLC and the Fogarty Family Trust II.
|
|
|
10.5
|
Amendment No. 2 to
Agreement of Limited Partnership of 150 CCM Black Oak, Ltd., dated
as of February 24, 2015, by and among 150 Black Oak GP, Inc. and
CCM Development USA Corporation, American Real Estate Investments,
LLC and the Fogarty Family Trust II.
|
|
|
10.6
|
Amendment to Agreement of Limited Partnership of
150 CCM Black Oak, Ltd., dated as of September 25, 2014, by and
among 150 Black Oak GP, Inc. and CCM Development USA Corporation,
American Real Estate Investments, LLC and the Fogarty Family Trust
II.
|
|
|
10.7
|
Form of Lot Purchase Agreement for Ballenger Run,
by and between SeD Maryland Development, LLC and NVR, Inc. d/b/a
Ryan Homes.
|
|
|
10.8
|
Management Agreement, entered into as of July 15,
2015, by and between SeD Maryland Development, LLC and SeD
Development Management, LLC.
|
|
|
10.9
|
Amended and Restated Limited Liability Company
Agreement of SeD Maryland Development, LLC, dated as of September
16, 2015, by and between SeD Ballenger, LLC and CNQC Maryland
Development LLC.
|
|
|
10.10
|
Consulting Services Agreement, dated as of May 1,
2017, by and between SeD Development Management LLC and MacKenzie
Equity Partners LLC.
|
|
|
10.11
|
Project Development and Management Agreement,
dated as of February 25, 2015, by and among MacKenzie Development
Company, LLC, Cavalier Development Group, LLC and SeD Maryland
Development, LLC.
|
|
|
10.12
|
Assignment and Assumption Agreement, dated as of
September 15, 2017, by and between MacKenzie Development Company,
LLC and Adams-Aumiller Properties, LLC.
|
|
|
10.13
|
Acquisition
Agreement and Plan of Merger, dated as of December 29, 2017, by and
among SeD Intelligent Home Inc., SeD Acquisition Corp., SeD Home,
Inc. and SeD Home International, Inc.
|
|
|
10.14
|
Intentionally Omitted.
|
|
|
10.15
|
Lot
Purchase Agreement, dated as of July 20, 2016, by and between SeD
Maryland Development, LLC and Orchard Development
Corporation.
|
|
|
10.16
|
Partnership
Interest Purchase Agreement, dated as of July 23, 2018, by and
between SeD Development USA, Inc and 150 CCM Black Oak,
Ltd.
|
|
|
10.17
|
Partnership
Interest Purchase Agreement, dated as of July 23, 2018, by and
between SeD Development USA, Inc and 150 CCM Black Oak,
Ltd.
|
|
|
10.18
|
Loan Conversion Agreement, dated as of July 13,
2015, by and between HotApp International Inc. and Singapore
eDevelopment Limited.
|
|
|
10.19
|
Agreement
for Services, dated as of January 25, 2017, by and between HotApp
International Inc. and IGalen International Inc.
|
|
|
10.20
|
Loan Conversion Agreement, dated as of March 27,
2017, by and between HotApp International Inc. and Singapore
eDevelopment Limited.
|
|
|
10.21
|
Preferred Stock Cancellation Agreement, dated as
of March 27, 2017, by and between HotApp International Inc.
and Singapore eDevelopment Limited.
|
|
|
10.22
|
Outsource
Technology Development Agreement, dated as of March 1, 2018, by and
between Document Security Systems, Inc. and HotApp International
Ltd.
|
|
|
10.23
|
Term Sheet, dated as of September 14, 2018, by and
between HotApps International Pte Ltd and The Alpha Mind Pte
Ltd.
|
|
|
10.24
|
Construction
Loan Agreement, dated as of November 23, 2015, by and between SeD
Maryland Development, LLC and The Bank of Hampton
Roads.
|
|
|
10.25
|
Loan
Modification Commitment Letter, dated as of July 27, 2017, from
Xenith Bank, f/k/a The Bank of Hampton Roads to SeD Maryland
Development, LLC.
|
|
|
10.26
|
Loan
Modification Commitment Letter, dated as of August 30, 2017, from
Xenith Bank, f/k/a The Bank of Hampton Roads to SeD Maryland
Development, LLC.
|
|
|
10.27
|
Third
Loan Modification Agreement, dated as of September 18, 2017, by and
among SeD Maryland Development, LLC, SeD Ballenger, LLC, and Xenith
Bank, f/k/a The Bank of Hampton Roads.
|
|
|
10.28
|
Stock
Purchase Agreement, dated as of October 1, 2018, by and between HF
Enterprises Inc. and Heng Fai Chan as the sole shareholder of
Hengfai International Pte. Ltd.
|
|
|
10.29
|
Stock
Purchase Agreement, dated as of October 1, 2018, by and between HF
Enterprises Inc. and Heng Fai Chan as the sole shareholder of
Global eHealth Limited.
|
|
|
10.30
|
Stock
Purchase Agreement, dated as of October 1, 2018, by and between HF
Enterprises Inc. and Heng Fai Chan as the sole shareholder of Heng
Fai Enterprises Pte. Ltd.
|
|
|
10.31
|
Purchase
and Sale Agreement, by and among 150 CCM Black Oak, Ltd. and
Houston LD, LLC, dated as of July 3, 2018.
|
|
|
10.32
|
Amended
and Restated Purchase and Sale Agreement, by and among 150 CCM
Black Oak, Ltd. and Houston LD, LLC, dated as of October 12,
2018.
|
|
|
10.33
|
Amendment
to Project Development and Management Agreement for Ballenger Run
PUD, dated as of October 16, 2019 by and between Adams-Aumiller Properties, LLC and
Cavalier Development Group,
LLC.
|
|
|
10.34
|
Development Loan
Agreement, dated as of April 17, 2019, by and between SeD Maryland
Development, LLC and Manufacturers and Traders Trust
Company.
|
|
|
Term
Sheet, dated as of March 3, 2020, by and among DSS Securities,
Inc., LiquidValue Asset Management Pte Ltd., AMRE Asset Management
Inc. and American Medical REIT Inc.
|
||
|
Stockholders’
Agreement, dated as of March 3, 2020, by and among AMRE Asset
Management Inc., AMRE Tennessee, LLC, LiquidValue Asset Management
Pte Ltd., and DSS Securities, Inc.
|
||
|
Term
Sheet, dated as of March 12, 2020, by and between Document Security
Systems, Inc., DSS BioHealth Security Inc., Global BioMedical Pte
Ltd and Impact BioMedical Inc.
|
||
|
Share
Exchange Agreement among Singapore eDevelopment Ltd., Global
BioMedical Pte Ltd., Document Security Systems, Inc. and DSS
BioHealth Security Inc. dated as of April 27,
2020.
|
||
|
Loan
Agreement, dated as of June 18, 2020, by and between SeD Home &
REITs Inc. and Manufacturers and Traders Trust
Company.
|
||
|
14.1
|
Code
of Conduct.
|
|
|
14.2
|
Code
of Ethics for the CEO and Senior Financial Officers.
|
|
|
21.1**
|
Subsidiaries
of HF Enterprises Inc.
|
|
|
23.1
|
Consent
of Olshan Frome Wolosky LLP (included in the opinion filed as
Exhibit 5.1).
|
|
|
23.2**
|
Consent
of Rosenberg Rich Baker Berman, P.A.
|
|
|
23.3
|
Consent
of Wong Tat Keung.
|
|
|
23.4
|
Consent
of Robert Trapp.
|
|
|
23.5
|
Consent
of John Thatch.
|
|
|
23.6
|
Consent
of Charles MacKenzie.
|
|
|
24.1
|
Power
of Attorney (contained on signature page).
|
|
**
Filed
herewith.
Unless
otherwise indicated, each exhibit set forth above has been
previously filed.
(b) Financial
Statement Schedules
None.
Item 17.
Undertakings
The undersigned
Registrant hereby undertakes to provide to the underwriter at the
closing specified in the underwriting agreement certificates in
such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each
purchaser.
Insofar as
indemnification by the Registrant for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions
described in Item 14 or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of
the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Securities Act
and will be governed by the final adjudication of such
issue.
The undersigned
Registrant hereby undertakes that:
(1) For
purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant
to Rule 424(b)(l) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as of
the time it was declared effective.
(2) For
the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
SIGNATURES
Pursuant to the
requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 1 to the registration
statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Bethesda, State of Maryland, on
July 30, 2020.
|
|
HF
ENTERPRISES INC.
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Chan Heng
Fai
|
|
|
|
|
Chan Heng
Fai
|
|
|
|
|
Chairman of the
Board and Chief Executive Officer
|
|
Pursuant to the
requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to the registration statement has been signed by
the following persons in the capacities and on the dates
indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Chan Heng
Fai
|
|
Chairman of the
Board and
|
|
July 30,
2020
|
|
Chan Heng
Fai
|
|
Chief Executive
Officer
(principal
executive officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Lui Wai Leung
Alan
|
|
Co-Chief Financial
Officer
|
|
July 30,
2020
|
|
Lui Wai Leung
Alan
|
|
(co-principal
financial and accounting officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Rongguo
Wei
|
|
Co-Chief Financial
Officer
|
|
July 30,
2020
|
|
Rongguo
Wei
|
|
(co-principal
financial and accounting officer)
|
|
|
|
/s/ Ang Hay Kim
Aileen
|
|
Director
|
|
July 30,
2020
|
|
Ang Hay Kim
Aileen
|
|
|
|
|
|
|
|
|
|
|
II-6