As filed with the Securities and Exchange Commission on
September 18, 2020.
Registration No. 333- 235693
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment
No. 2 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)
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(I.R.S. Employer
Identification Number)
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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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Darrin
M. Ocasio, Esq.
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Thomas Poletti, Esq.
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Sichenzia
Ross Ference LLP
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Katherine J. Blair, Esq.
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1185
Avenue of Americas, 37th Floor
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Manatt, Phelps & Phillips, LLP
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New
York, New York 10036
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695 Town Center Drive, 14th Floor
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Tel.:
(212) 398-1493
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Costa Mesa, California 92626
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Fax:
(212) 930-9725
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Tel.: (714) 371-2501
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Email:
DMOcasio@SRF.LAW
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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 ☒
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If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 7(a)(2)(B) of the Securities
Act. ☐
CALCULATION OF REGISTRATION FEE
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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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$2,716.71
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Underwriter
Warrant
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-
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(3)
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Common Stock
underlying Underwriter Warrant (4)
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$ 2,930,200
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$ 380.34
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Total
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23,860,200
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$ 3,097.05(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 140% 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.
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.
Subject to Completion, dated September 18,
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 $7.00 per share. We intend to list our shares of
common stock for trading on the Nasdaq Capital Market under the
symbol HFEN.
Investing
in our common stock involves a high degree of risk. See “Risk
Factors” beginning on page 11.
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Per
Share
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Total
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Initial public
offering price
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$
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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) Does not
include a non-accountable expense allowance equal to 2% of the
gross proceeds of this offering payable to underwriters. 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
TABLE OF CONTENTS
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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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11
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Cautionary
Note Regarding Forward-Looking Statements
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28
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Use of
Proceeds
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30
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Dividend
Policy
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30
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Capitalization
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31
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Dilution
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32
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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34
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Business
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58
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Management
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73
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Executive
Compensation
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79
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Certain
Relationships and Related Party Transactions
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81
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Principal
Stockholders
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87
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Description
of Capital Stock
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88
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Shares
Eligible for Future Sale
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91
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Underwriting
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93
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Indemnification
for Securities Act Liabilities
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97
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Legal
Matters
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97
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Experts
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97
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Where
You Can Find More Information
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97
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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, Alset International Limited (formerly known
as Singapore eDevelopment Limited and referred to herein as
“Alset International”), 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 Alset
International, 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.
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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 that 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 Current
Operations
Chan
Heng Fai has led our Alset
International subsidiary since 2014. In March 2018, Chan
Heng Fai formed our company and subsequently assigned his equity
interests in several companies, including Alset
International 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
51.04%-owned subsidiary Alset International started
developing property projects and participating in third-party
property development projects. LiquidValue Development
Inc.(“LiquidValue Development”), a
99.9%-owned subsidiary of Alset International, 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.,
(“HotApp”) a 99.9%-owned subsidiary of
Alset International, 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.
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Biohealth
Business. Our biohealth
business is committed to both funding research and developing and
selling products that promote a healthy lifestyle. Since
Alset International 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. On August 21, 2020, Impact BioMedical Inc, one of
our subsidiaries, was acquired by a subsidiary of Document Security
Systems, Inc. in exchange for securities of Document Securities
Systems, Inc. A subsidiary of Impact BioMedical is 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. Global BioLife has
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 Limited
(“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 Alset
International, 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.
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.
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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.
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 Alset International 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.
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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
a net loss of $93,085 for the six months ended June 30, 2020 and
net losses of $8,053,428 and $7,490,568 for the years ended
December 31, 2019 and 2018, respectively. There can be no assurance
we will have net income in future periods.
● 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.
● 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.
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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 22 (“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.
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:
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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, Vivacitas Oncology Inc. and Document
Security Systems, Inc., for which we own only a minority
interest. As Impact BioMedical Inc and its majority
subsidiaries were acquired by Document Security Systems, Inc. on
August 21, 2020, future financial statements will not reflect the
financial results of those entities unless we acquire additional
interests in Document Security Systems.
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:
● 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 Alset
International Limited and warrants to purchase 359,834,471
ordinary shares of Alset International
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.
On August 20, 2020,
our wholly-owned subsidiary Hengfai Business Development Pte. Ltd.
purchased 30,000,000 shares of Alset International from our
founder, Chairman, and Chief Executive Officer, Chan Heng Fai, for
S$1,860,000 Singapore Dollars ($1,333,429 U.S. Dollars). We have
issued our founder a two-year, interest-free promissory note in the
amount of such purchase price.
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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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 six months ended June 30, 2020 and 2019 and the
summary consolidated balance sheet data as of June 30,
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 June 30, 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 June 30, 2020.
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As
of June 30, 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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$10,186,428
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$24,686,099
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Working
capital
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3,412,496
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17,912,167
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Total
assets
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42,698,197
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57,197,868
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Total
indebtedness**
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6,929,011
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6,929,011
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Total
liabilities
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19,599,685
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19,599,685
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Total
stockholders’ equity
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23,098,512
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37,598,183
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*includes
cash from discontinued operations
**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) attributable to common shareholders
–basic and diluted would have been $0.08, $(0.60),
$(0.82), and $(0.78) for the six months ended June
30, 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 six months ended June 30, 2020 and years ended
December 31, 2019 and 2018, we had revenue of $5,030,996,
$24,257,953 and $20,380,940, net loss of $93,085 in the six months
ended June 30, 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 revenue grows 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 may 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, Alset International 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 Alset International 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 six months ended June 30, 2020
and 2019, we received approximately $4.9 million and $10.2 million
in revenue from lot sales to NVR, respectively. During 2019 and
2018, we received $15.9 million and $12.0 million in revenue 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 properties 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.
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 were approximately $35.9
million, $35.8 million and $41.1 million on June 30,
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 and it could result in material errors in our
financial statements.
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 $3.11 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 September
18, 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.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING
STATEMENTS
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 $14,499,671 (or
approximately $16,793,846 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
|
$ 13,049,704
|
90%
|
|
Working capital and
general corporate purposes
|
$ 1,449,967
|
10%
|
|
Total
|
$ 14,499,671
|
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 June 30, 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 June 30, 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 June 30, 2020
|
|
|
|
Actual
|
As
Adjusted
|
|
|
(Unaudited)
|
|
|
Cash and restricted
cash*
|
$ 10,186,428
|
$ 24,686,099
|
|
Debt, net of debt
discount**
|
6,929,011
|
6,929,011
|
|
Long-term debt, net
of current portion
|
5,611,591
|
5,611,591
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Common stock,
$0.001 par value
|
6,400
|
9,000
|
|
Additional paid-in
capital
|
55,200,643
|
69,700,314
|
|
Accumulated
deficit
|
(39,966,767)
|
(39,966,767)
|
|
Accumulated Other
Comprehensive Income
|
744,462
|
744,462
|
|
Stockholders’
equity
|
15,984,738
|
30,484,409
|
|
Non-controlling
interests
|
7,113,774
|
7,113,774
|
|
Total
stockholders’ equity
|
$ 23,098,512
|
$ 37,598,183
|
|
Total
capitalization***
|
$ 28,710,103
|
$ 43,209,774
|
*
includes cash from discontinued
operations
**
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
June 30, 2020, we had a net tangible book value of
$15,984,738 or $2.50 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
June 30, 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 June 30, 2020, would have
been approximately $30,484,409 or $3.39
per share of common stock. This represents an immediate increase in
the pro forma net tangible book value of $0.89 per
share to existing stockholders and an immediate dilution of
$3.11 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
|
2.50
|
|
Increase in pro
forma net tangible book value attributable to new
investors
|
0.89
|
|
Pro forma as
adjusted net tangible book value after offering
|
$ 3.39
|
|
Dilution in pro
forma net tangible book value to new investors
|
$ 3.11
|
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 $0.74 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 $0.03 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 $0.03 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 $3.49 per share, the increase in the pro forma net tangible book
value per share to existing stockholders would be $0.99 per share
and the dilution per share to new investors purchasing common stock
in this offering would be $3.01 per share.
The
following table illustrates, on an as adjusted basis as of
June 30, 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%
|
$ 15,984,738
|
48.6%
|
$ 2.50
|
|
New
investors
|
2,600,000
|
28.9%
|
$ 16,900,000
|
51.4%
|
$6.50
|
|
Total
|
9,000,000
|
100.0%
|
$ 32,884,738
|
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 June 30, 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
June 30, 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
51.04%-owned subsidiary, Alset International 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 Alset International, 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 six months ended June 30, 2020 and the years ended December
31, 2019 and 2018 were $5,030,996, $24,257,953 and $20,380,940,
respectively. Our net loss for the six months ended June 30, 2020
was $93,085 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 99% and sales of biohealth products accounted
for approximately 1% of our total revenue in the first six 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 six 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
to 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 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, the
COVID-19 pandemic 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 a 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 compensation levels 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 Pte. Ltd. and Global eHealth
Limited 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 Pte. Ltd. and
LiquidValue Asset Management Pte. Ltd. led to change in the
reporting entities and the acquisitions of Heng Fai Enterprises
Pte. Ltd. and Global eHealth Limited 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 into 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 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 FFB
assessment, both our and NVR’s performance obligation have to
be satisfied. Our performance obligation is completed once we
complete the construction of water and sewer facility and close the
lot sales with NVR, which inspects these water and sewer facility
prior to close lot sales to ensure all specifications are met.
NVR’s performance obligation is to sell homes they build to
homeowners. Our FFB revenue is recognized on quarterly basis after
NVR closes sales of homes to homeowners. The agreement with these
FFB investors is not subject to amendment by regulatory agencies
and thus our revenue from FFB assessment is not either. During the
six months ended on June 30, 2020 and 2019, we recognized revenue
in the amounts of $115,202 and $236,614 from FFB assessments,
respectively. During the three months ended on June 30, 2020 and
2019, we recognized revenue in the amounts of $74,880 and $225,717
from FFB assessments, respectively.
●
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 product. 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 of 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 six months
ended June 30, 2020 and 2019, we capitalized interest from the
third-party borrowings of $0 and $471,965 and capitalized
construction costs of $6,135,261 and $3,558,398,
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
June 30, 2020, total real estate property under development was
$26.0 million, including:
●
land held for
development in the amount of $13.6 million (consisting of $6.9
million for Black Oak, $6.2 million for Ballenger Run and $0.5
million for our Perth project);
●
capitalized
development costs in the amount of $8.5 million (consisting of $0.8
million for Black Oak and $7.7 million for Ballenger Run);
and
●
capitalized finance
costs were $3.9 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
June 30, 2020, the capitalized construction costs were
as follows:
On
December 31, 2019, the capitalized construction costs were as
follows:
Through
June 30, 2020, there were no sales from the Perth
project. In addition, no sales agreement had been signed for this
project.
Results of Operations
Summary
of Statements of Operations for the Three and Six Months
Ended June 30, 2020 and 2019
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||
|
|
2020
|
2019
|
2020
|
2019
|
|
Revenue
|
$2,065,825
|
$5,866,315
|
$5,030,996
|
$17,637,635
|
|
Operating
Expenses
|
4,064,460
|
9,880,563
|
7,391,679
|
21,871,158
|
|
Other
Income (Expense)
|
240,360
|
(1,574,268)
|
2,743,636
|
(840,339)
|
|
Loss
from Discontinued Operations
|
(235,808)
|
(140,640)
|
(361,385)
|
(260,377)
|
|
Net
Loss
|
$(2,108,736)
|
$(5,729,156)
|
$(93,085)
|
$(5,334,239)
|
Revenue
The
following tables sets forth period-over-period changes in revenues
for each of our reporting segments:
|
|
Three Months Ended June 30,
|
Change
|
||
|
|
2020
|
2019
|
Dollars
|
Percentage
|
|
Property
development
|
$2,047,405
|
$5,252,585
|
$(3,205,180)
|
-61%
|
|
Biohealth
|
18,420
|
601,507
|
(583,087)
|
-97%
|
|
Digital
transformation technology
|
-
|
-
|
-
|
-
|
|
Other
|
-
|
12,223
|
(12,223)
|
-100%
|
|
Total
revenue
|
$2,065,825
|
$5,866,315
|
$(3,800,490)
|
-65%
|
Revenue was
$2,065,825 and $5,866,315 for the three months ended June 30, 2020
and 2019, respectively. Revenue was $5,030,996 for the six months
ended June 30, 2020, compared to $17,637,635 for the six months
ended June 30, 2019. An increase in property sales from the
Ballenger Project and first sale of a section of Black Oak Project
in the first quarter 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 in January 2019. 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., Alset International’s 53%-owned
subsidiary. During the three months ended on June 30, 2020 and
2019, the revenues from iGalen were $18,420 and $601,507,
respectively. During the six months ended June 30, 2020 and 2019,
the revenues from iGalen Inc. were $28,195 and $1,046,600,
respectively. The decrease was mainly due to slow sales of current
products and delay of the new product’s
promotion.
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 recognized only approximately $1,000
in revenue in six months ended June 30,
2020.
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 six months ended June 30, 2020 and 2019, the
revenue from other businesses was $0 and $19,855, respectively,
generated by fund management services. In the three months
ended June 30, 2020 and 2019, the revenue from other businesses was
$0 and $12,223, respectively
Operating
Expenses
The
following tables sets forth period-over-period changes
in cost of sales for each of our reporting segments:
|
|
Three Months Ended June 30,
|
Change
|
||
|
|
2020
|
2019
|
Dollars
|
Percentage
|
|
Property
development
|
$1,609,223
|
$4,290,853
|
$(2,681,630)
|
-62%
|
|
Biohealth
|
-
|
197,662
|
(197,662)
|
-100%
|
|
Digital
transformation technology
|
-
|
-
|
-
|
-
|
|
Other
|
-
|
-
|
-
|
-
|
|
Total Cost of
Sales
|
$1,609,223
|
$4,488,515
|
$(2,879,292)
|
-64%
|
|
|
Six
Months Ended June 30,
|
Change
|
||
|
|
2020
|
2019
|
Dollars
|
Percentage
|
|
Property
development
|
$3,992,926
|
$14,729,106
|
$(10,736,180)
|
-73%
|
|
Biohealth
|
-
|
318,210
|
(318,210)
|
-100%
|
|
Digital
transformation technology
|
-
|
-
|
-
|
-
|
|
Other
|
-
|
-
|
-
|
-
|
|
Total cost of
sales
|
$3,992,926
|
$15,047,316
|
$(11,054,390)
|
-73%
|
Cost
of sales decreased from $4,488,515 in the three months ended June
30, 2019 to $1,609,223 in the three months ended June 30, 2020, as
a result of the decrease in sales in the Ballenger Run project.
Cost of sales decreased from $15,047,316 in the six months ended
June 30, 2019 to $3,992,926 in the six months ended June 30, 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 $1,377,800 to $456,602 in the three months ended
June 30, 2019 and 2020, respectively. The gross margin decreased
from $2,590,319 to $1,038,070 in the six months ended June 30, 2019
and 2020, respectively. The decrease of gross margin was caused by
the decrease of gross margin of Ballenger Run project, mostly 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 tables sets forth period-over-period changes
in operating expenses for each of our reporting
segments.
|
|
Three Month Ended June 30,
|
Change
|
||
|
|
2020
|
2019
|
Dollars
|
Percentage
|
|
Property
development
|
$225,872
|
$4,189,275
|
$(3,963,403)
|
-95%
|
|
Biohealth
|
206,749
|
795,177
|
(588,428)
|
-74%
|
|
Digital
transformation technology
|
77,033
|
66,050
|
10,983
|
17%
|
|
Other
|
1,945,583
|
341,546
|
1,604,037
|
470%
|
|
Discontinued
Operations
|
235,808
|
134,746
|
101,062
|
68%
|
|
Total
operating expenses
|
$2,691,045
|
$5,526,794
|
$(2,835,749)
|
-51%
|
|
|
Six Month Ended June 30,
|
Change
|
||
|
|
2020
|
2019
|
Dollars
|
Percentage
|
|
Property
development
|
$502,928
|
$4,427,281
|
$(3,924,353)
|
-89%
|
|
Biohealth
|
213,800
|
1,208,435
|
(994,635)
|
-82%
|
|
Digital
transformation technology
|
95,261
|
158,990
|
(63,729)
|
-40%
|
|
Other
|
2,586,764
|
1,025,290
|
1,561,474
|
152%
|
|
Discontinued
Operations
|
361,385
|
247,565
|
113,820
|
46%
|
|
Total
operating expenses
|
$3,760,138
|
$7,067,561
|
$(3,307,423)
|
-47%
|
The
decrease of operating expenses of property development in 2020
compared with 2019 was mostly caused by the recognition of $3.9
million impairment in the first quarter of 2019. The decrease of
research and development expense in biohealth segment was the main
reason of decrease of operating expenses in biohealth segment in
2020 compared with 2019. The increase expense in other segment was
mostly due to the issuance of Alset International’s stock for
performance award program at the expense of $1,417,523 in second
quarter of 2020.
Other
Income (Expense)
In the three months
ended June 30, 2020, the Company had other income of $240,360
compared to other expense of $1,574,268 in the three months ended
June 30, 2019. In the six months ended June 30, 2020, the Company
had other income of $2,743,636 compared to other expense of
$840,339 in the six months ended June 30, 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 June 30, 2020, the unrealized
gain on securities investment was $1,108,285 comparing to
unrealized loss on security investment of $1,388,796 in the three
months ended June 30, 2019. In the six months ended June 30, 2020,
the unrealized gain on securities investment was $1,592,647
comparing to unrealized loss on security investment of $654,197 in
the six months ended June 30, 2019. Foreign exchange transaction
loss was $743,481 in the three months ended June 30, 2020, compared
to $106,462 loss in the three months ended June 30, 2019. Foreign
exchange transaction gain was $1,375,471 in the six months ended
June 30, 2020, compared to $318,460 loss in the six months ended
June 30, 2019.
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 June 30, 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.
During the three
months ended June 30, 2020 and 2019, no income or loss from this
discontinued operation was recognized. During the six months ended
June 30, 2020, no income or loss from this discontinued operation
was recognized. During the six months ended on June 30, 2019, the
discontinued loss was $3,712.
On April 27, 2020,
Global BioMedical Pte Ltd (“GBM”), one of our
subsidiaries, entered into a share exchange agreement with DSS
BioHealth Security, Inc. (“DBHS”), a wholly owned
subsidiary of Document Securities Systems Inc. (“DSS”),
pursuant to which, DBHS agreed to acquire all of the outstanding
capital stock of Impact BioMedical Inc, a wholly owned subsidiary
of GBM, through a share exchange. It was agreed that the aggregate
consideration to be issued to GBM for the Impact BioMedical shares
would be the following: (i) 483,334 newly issued shares of DSS
common stock; and (ii) 46,868 newly issued shares of a new series
of DSS perpetual convertible preferred stock with a stated value of
$46,868,000 ($1,000 per share). The convertible preferred stock
will be convertible into shares of DSS common stock at a conversion
price of $6.48 of preferred stock stated value per share of common
stock, subject to a 19.9% beneficial ownership conversion
limitation (a so-called “blocker”) based on the total
issued outstanding shares of common stock of DSS beneficially owned
by GBM. Holders of the 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 convertible
preferred stock. The holders of convertible preferred stock will be
entitled to a liquidation preference of $1,000 per share, and DSS
will have the right to redeem all or any portion of the then
outstanding shares of convertible preferred stock, pro rata among
all holders, at a redemption price per share equal to such
liquidation value per share.
Under ASU 2014-08,
a disposal transaction meets the definition of a discontinued
operation if all of the following criteria are
met:
1.
The disposal group
constitutes a component of an entity or a group of components of an
entity
2.
The component of an
entity (or group of components of an entity) meets the
held-for-sale classification criteria, is disposed of by sale, or
is disposed of other than by sale (e.g., “by abandonment, in
an exchange measured based on the recorded amount of the
nonmonetary asset relinquished, or in a distribution to owners in a
spinoff”).
3.
The disposal of a
component of an entity (or group of components of an entity)
“represents a strategic shift that has (or will have) a major
effect on an entity’s operations and financial
results”.
Impact BioMedical
Inc and its subsidiaries have financial reporting. The transaction
is a disposal by sale and has a major effect on our financial
results. Since it meets all of the test criteria set forth above,
we have treated this disposal transaction as a discontinued
operations in our financial statements.
On August 21,
2020, the transaction closed and Impact BioMedical Inc became a
direct wholly owned subsidiary of DBHS. GBM received 483,334 shares
of DSS common stock and 46,868 shares of DSS preferred stock, which
preferred shares could be converted to 7,232,716 common shares
(however, any conversion will be subject to the blocker GBM has
agreed to, as described above). After this transaction, we hold
500,001 shares of the common stock of DSS, representing 9.7% of the
outstanding common stock of DSS. Our CEO, Chan Heng Fai owns an
additional 14.5% of the common stock of DSS (not including any
common or preferred shares we hold) and is the executive chairman
of the board of directors of DSS.
The Company has
elected the fair value option for the DSS common stock that would
otherwise be accounted for under the equity method of accounting.
ASC 820, Fair Value Measurement and Disclosures, defines the fair
value of the financial assets. We value DSS common stock under
level 1 category through quoted prices and preferred stock under
level 2 category through the value of the common shares into which
the preferred shares are convertible. The quoted price of DSS
common stock was $6.95 as of August 21, 2020. The total fair value
of DSS common and preferred stocks GBM received as consideration
for the disposal of Impact BioMedical was $53,626,548. As of August
21, 2020, the net asset value of Impact BioMedical was $57,143. The
difference of $53,569,405 was recorded as additional paid in
capital. We did not recognize gain or loss from this transaction as
it was a related party transaction.
During the three
months ended June 30, 2020 and 2019, the discontinued operation
loss from Impact BioMedical Inc was $235,808 and $134,746,
respectively. During the six months ended June 30, 2020, the
discontinued operation loss from Impact BioMedical Inc was $361,385
and $235,808, respectively.
Net
Income (Loss)
In the six months
ended June 30, 2020, the Company had net loss of $93,085 compared
to net loss of $5,334,239 in the six months ended June 30, 2019. In
the three months ended June 30, 2020 and 2019, the Company had net
loss of $2,108,736 and $5,729,156.
Liquidity
and Capital Resources
Our real estate
assets have increased to $26,015,499 as of June 30, 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 increased from
$2,774,587 as of December 31, 2019 to $6,015,534 as of June 30,
2020. Our liabilities increased from $13,649,449 at December 31,
2019 to $19,599,685 at June 30, 2020. Our total assets have
increased to $42,698,197 as of June 30, 2020 from $35,872,780 as of
December 31, 2019 due to the increase in cash and investments in
securities.
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.
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.
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 Alset International and
Chan Heng Fai was executed.
Under the agreement, Chan Heng
Fai provides a lending credit limit of approximately $10
million for Alset International 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 June 30, 2020
and December 31, 2019, the outstanding principal balance of the
Related Party Loan was $4,295,252 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 six months ended June 30, 2020 and 2019, the interest
expenses were $123,232 and $200,365, respectively. As of June 30,
2020 and December 31, 2019, the accrued interest total was $905,065
and $822,405, respectively.
Chan
Heng Fai provided an interest-free, due on demand, advance to HF
Enterprises for the general operations of the Company. On June 30,
2020 and December 31, 2019, the outstanding 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 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 June 30, 2020 and December 31, 2019, the total
outstanding principal balance of the loans was $531,030 and
$546,397, respectively, and was included in the Notes Payable
– Related Parties balance on the Company’s Condensed
Consolidated Balance Sheets. During the six months ended June 30,
2020 and 2019, the Company incurred $8,774 and $8,084 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 six months
ended June 30, 2020, the Company incurred $9,619 of interest
expense and $0 from the right to receive 3% of revenue. The amount
outstanding on the loan as of June 30, 2020 and December 31, 2019
was $0 and $250,000, respectively. The accrued interest was $19,128
and $9,589 as of June 30, 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 six months ended June
30, 2020, the Company incurred $8,044 of interest expense. The
amount outstanding on the loan as of both, June 30, 2020 and
December 31, 2019 was $160,000. The accrued interest was $10,667 as
of June 30, 2020 and $2,542 as of December 31, 2019. The expiration
date was extended to November 3, 2020 after 6
months.
From January to
June 30, 2020 the Company sold 37,300 shares of HotApp Blockchain
to international investors for a total of $32,300, 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
Revenue
The
following table sets forth period-over-period changes in revenues
for each of our reporting segments:
Revenue
was $24,257,953 for the year ended December 31, 2019, compared to
$20,388,256 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:
Cost of
sales increased to $19,968,757 for the year ended December 31, 2019
from $15,538,228 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
|
2,268,802
|
1,791,461
|
477,341
|
27%
|
|
Digital
transformation technology
|
284,158
|
518,175
|
(234,017)
|
-45%
|
|
Other
|
2,614,714
|
3,507,235
|
(892,521)
|
-25%
|
|
Discontinued
Operations
|
526,871
|
1,154,313
|
(627,442)
|
-54%
|
|
Total
operating expenses
|
$11,759,108
|
$9,177,277
|
$2,581,831
|
28%
|
Operating
expenses increased to $11,759,108 for the year ended December 31,
2019 from $9,177,277 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
$152,128, including discontinued operations, and $3,163,328,
respectively. In 2018, the unrealized loss of $3,366,958 on
investment in securities at fair value was the major contributor to
this expense compared to a gain of $320,032 in 2019. 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.
Loss
from Discontinued Operations
The Company
recorded a loss of $3,712 and $96,749 from discontinued operations
from HotApps Information Technology Co. Ltd., during the years
ended December 31, 2019 and 2018, respectively. The Company
recorded a loss from discontinued operations from Impact BioMedical
Inc of $657,760 and $1,101,218 for the years ended December 31,
2019 and 2018, respectively.
Net
Loss
Net
loss increased from $7,490,568 in the year ended December 31, 2018
to $8,053,428 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 $1,351,834 as of December 31, 2018 to
$2,774,587 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 Six Months Ended June
30, 2020 and 2019
|
|
Six
Months Ended June 30,
|
|
|
|
2020
|
2019
|
|
Net
cash provided by operating activities
|
$1,677,728
|
$7,617,587
|
|
Net
cash provided by (used in) investing activities
|
$97,794
|
$(36,000)
|
|
Net cash provided by (used in) financing
activities
|
$1,058,925
|
$(2,902,415)
|
Cash
Flows from Operating Activities
Net
cash provided by operating activities was $1,677,728 in the first
six months of 2020, as compared to net cash provided by operating
activities of $7,617,587 in the same period of 2019. The lower
sales and more property development expenses explain the increased
cash flow used in operating activities. We received approximately
$4.9 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 six months ended June 30,
2020.
Cash
Flows from Investing Activities
In 2020, we
received $301,976 from the liquidation of Global Opportunity Fund.
We also invested $200,000 in a promissory note of a related
party.
Cash
Flows from Financing Activities
Net cash provided
by financing activities was $1,058,925 in the six months ended June
30, 2020, comparing to net cash used of $2,902,415 in the six
months ended June 30, 2019. During the six months ended June 30,
2020, we received cash proceeds of $615,623 from the exercise of
subsidiary warrants, $32,300 from the sale of our HotApp shares to
individual investors and $671,634 from a promissory note. The
Company also distributed $197,400 to one minority interest
investor, repaid $265,367 of promissory note and borrowed $202,135
from related party. During the six months ended June 30, 2019, we
received cash proceeds of $199,500 from the sale of our HotApp
shares to individual investors, repaid remaining $13,899 back to
the Union Bank loan and repaid approximately $2.3 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 was $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
Alset International, 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
|
|
|
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
|
March
2022
|
|
Phase
5
|
3,293,000
|
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.
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 Alset
International.
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 six
months of 2020, the remaining balance was released leaving $0 on
June 30, 2020.
Ballenger
Run
In
November 2015, through LiquidValue Development, we completed the
$15.7 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 June
30, 2020 and December 31, 2019, the principal balance was $0. 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 June 30, 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 June
30, 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 June 30, 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 was $4,563,830 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 June 30, 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, which we recorded under equity method
investment on our consolidated balance sheet. 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 June 30, 2020
and December 31, 2019, both AMRE and Vivacitas were private
companies. Based on management’s analysis, the fair value of
the warrants and the stock option was $0 as of June
30, 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
American
Medical REIT Inc.
LiquivdValue Asset
Management Pte. Ltd. (“LiquidValue”), a subsidiary of
the Company owns 36.1% of American Medical REIT Inc.
(“AMRE”), a startup REIT company concentrating on
medical real estate. AMRE acquires state-of-the-art, purpose-built
healthcare facilities and leases them to leading clinical operators
with dominant market share under secure triple net leases. AMRE
targets hospitals (both Critical Access and Specialty Surgical),
Physician Group Practices, Ambulatory Surgical Centers, and other
licensed medical treatment facilities. Chan Heng Fai, our CEO, is
the executive chairman and director of AMRE. LiquidValue did not
invest equity but lend a loan to AMRE. See detail in Note 10,
Related Party Transactions. On balance sheet, the prorate loss from
AMRE was recorded as a liability, accumulated losses on equity
method investment. During three months ended June 30, 2020 and
2019, the investment losses from AMRE were $88,245 and $0,
respectively. During the six months ended June 30, 2020 and 2019,
the investment losses from AMRE were $140,740 and $0, respectively.
As of June 30, 2020 and December 31, 2019, the accumulated losses
on equity method investment were $140,740 and $0,
respectively.
Sweet Sense Inc.
On April 25, 2018,
BioLife Sugar, Inc. ("BioLife"), a subsidiary consolidated under
Alset International, 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
$44,053 recorded as loss on investment in security by equity method
in the Condensed 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 in the amount of $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 Alset
International, and therefore, was consolidated into the
Company’s condensed consolidated financial statements as of
June 30, 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. VeganBurg
International has no operations as of June 30, 2020 and $2,176 was
recorded as investment in securities at equity method on balance
sheet on June 30, 2020.
Discontinued
Operations
HotApps Information Technology Co. Ltd.
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 June 30, 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.
Impact BioMedical Inc.
On April 27, 2020,
Global BioMedical Pte Ltd (“GBM”), one of our
subsidiaries, entered into a share exchange agreement with DSS
BioHealth Security, Inc. (“DBHS”), a wholly owned
subsidiary of Document Securities Systems Inc. (“DSS”),
pursuant to which, DBHS agreed to acquire all of the outstanding
capital stock of Impact BioMedical Inc., a wholly owned subsidiary
of GBM, through a share exchange. It was agreed that the aggregate
consideration to be issued to GBM for the Impact BioMedical shares
would be the following: (i) 483,334 newly issued shares of DSS
common stock; and (ii) 46,868 newly issued shares of a new series
of DSS perpetual convertible preferred stock with a stated value of
$46,868,000, or $1,000 per share. The convertible preferred stock
can be convertible into shares of DSS common stock at a conversion
price of $6.48 of preferred stock stated value per share of common
stock, subject to a 19.9% beneficial ownership conversion
limitation (a so-called “blocker”) based on the total
issued outstanding shares of common stock of DSS beneficially owned
by GBM. Holders of the 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 convertible
preferred stock. The holders of convertible preferred stock will be
entitled to a liquidation preference of $1,000 per share, and DSS
will have the right to redeem all or any portion of the then
outstanding shares of convertible preferred stock, pro rata among
all holders, at a redemption price per share equal to such
liquidation value per share.
Under ASU 2014-08,
a disposal transaction meets the definition of a discontinued
operation if all of the following criteria are
met:
1.
The disposal group
constitutes a component of an entity or a group of components of an
entity
2.
The component of an
entity (or group of components of an entity) meets the
held-for-sale classification criteria, is disposed of by sale, or
is disposed of other than by sale (e.g., “by abandonment, in
an exchange measured based on the recorded amount of the
nonmonetary asset relinquished, or in a distribution to owners in a
spinoff”).
3.
The disposal of a
component of an entity (or group of components of an entity)
“represents a strategic shift that has (or will have) a major
effect on an entity’s operations and financial
results”.
Impact BioMedical
Inc and its subsidiaries have financial reporting. The transaction
is a disposal by sale and has a major effect on our financial
results. Since it meets all of the test criteria set forth above,
we have treated this disposal transaction as a discontinued
operations in our financial statements.
On August 21,
2020, the transaction closed and Impact BioMedical Inc became a
direct wholly owned subsidiary of DBHS. GBM received 483,334 shares
of DSS common stock and 46,868 shares of DSS preferred stock, which
preferred shares could be converted to 7,232,716 common shares
(however, any conversion will be subject to the blocker GBM has
agreed to, as described above). After this transaction, we hold
500,001 shares of the common stock of DSS, representing 9.7% of the
outstanding common stock of DSS. Our CEO, Chan Heng Fai owns an
additional 14.5% of the common stock of DSS (not including any
common or preferred shares we hold) and is the executive chairman
of the board of directors of DSS.
The Company has
elected the fair value option for the DSS common stock that would
otherwise be accounted for under the equity method of accounting.
ASC 820, Fair Value Measurement and Disclosures, defines the fair
value of the financial assets. We value DSS common stock under
level 1 category through quoted prices and preferred stock under
level 2 category through the value of the common shares into which
the preferred shares are convertible. The quoted price of DSS
common stock was $6.95 as of August 21, 2020. The total fair value
of DSS common and preferred stocks GBM received as consideration
for the disposal of Impact BioMedical was $53,626,548. As of August
21, 2020, the net asset value of Impact BioMedical was $57,143. The
difference of $53,569,405 was recorded as additional paid in
capital. We did not recognize gain or loss from this transaction as
it was a related party transaction.
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 six months ended June 30, 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 $35.9
million, $35.8 million and $41.1 million on June 30,
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 51.04%-owned
subsidiary, Alset International 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
Alset International, 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 Alset International and that Alset
International, 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 Alset International, 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
LiquidValue Development has increased its 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
|
March
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 six
months of 2020, the remaining balance was released, leaving $0 as
of June 30, 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 Maryland is
83.55% owned by SeD Ballenger and 16.45% by CNQC.
MacKenzie Equity
Partners, owned by Charles MacKenzie, a Director of the Company's
subsidiary LiquidValue Development 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 $120,000 and $120,000
for the six months ended June 30, 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. The Company incurred expenses
of $60,000 and $60,000 for the three months ended June 30, 2020 and
2019, respectively. As of June 30, 2020, and December 31, 2019 the
Company owed $20,000 and $0, respectively, to this
entity.
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:
|
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
|
|
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 June
30, 2020 and 2019, the
principal balances were $0 and $0,
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 June 30, 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 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 June 30, 2020 and
December 31, 2019, the principal balance of the loan was $0. 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. 46 lots
were sold in the six months ended June 30, 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 six months ended June 30, 2020 and years ended
December 31, 2019 and 2018, our property development business
accounted for 99%, 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
Alset International 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 June
30, 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 Alset International.
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
Alset International. 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.
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.
Global
BioLife has 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.
Reorganization of Certain Biohealth Activities
On
March 12, 2020, two of Alset International’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 agreed to 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 interests in the Linebacker, 3F and Laetose
projects.
On
April 27, 2020, Alset International, GBM, DSS and DBHS entered into
a share exchange agreement (the “DSS Share Exchange
Agreement”) that provided further details regarding this
transaction in which DBHS agreed to 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.
It
was agreed that the aggregate consideration for the Impact Shares
to be issued to GBM by DSS would be the following: (i) 483,334
newly issued shares of DSS common stock; and (ii) 46,868 newly
issued shares of a new series of DSS perpetual convertible
preferred stock with a stated value of $46,868,000, or $1,000 per
share. The convertible preferred stock can be convertible into
shares of DSS common stock at a conversion price of $6.48 of
preferred stock stated value per share of common stock, subject to
a 19.9% beneficial ownership conversion limitation (a so-called
“blocker”) based on the total issued outstanding shares
of common stock of DSS beneficially owned by GBM. Holders of the
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 convertible preferred stock. The
holders of convertible preferred stock will be entitled to a
liquidation preference of $1,000 per share, and DSS will have the
right to redeem all or any portion of the then outstanding shares
of 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 Alset International
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 Alset International
approved this transaction.
On August 10, 2020 the stockholders of DSS voted 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.
This transaction
was completed on August 21, 2020. Accordingly, our ownership
interest in these biohealth projects was reduced, and our ownership
interest in DSS was increased.
DSS owns 9.25% of the issued and outstanding stock of Alset
International.
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 June 30, 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. Alset International'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 June 30, 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 $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
September 18, 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.,
Alset International 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 September 18,
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 Alset International
Limited since April 2014. Mr. Chan joined the Board of Directors of
Alset International 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 director of Alset
International’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 Alset International since
November 2016 and served as its Acting Chief Financial Officer
since June 2016. Mr. Lui has served as an Executive Director of
Alset International since July 2020. 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 Alset
International. 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 Alset International, 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 Alset International 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 Alset
International, 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 Alset
International. Mr. Trapp has served on the Board of
Directors of Theralink Technologies 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
March 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 $100,000 in the form of salary and
bonus during such year. While our company was not incorporated
until March 7, 2018, we have included the information for certain
individuals who were employed and compensated by Alset
International or its subsidiaries. Such compensation was
paid solely for services rendered to such subsidiary. For purposes
of this prospectus, these individuals are collectively the
“named executive officers” of our
company.
|
Name and
Position
|
Years
|
Salary
($)
|
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, Alset International, for his services as
an officer and director of that company and Aileen Ang has been
compensated by Alset International for her services as
an officer. Our director nominee Wong Tat Keung is currently
compensated by Alset International 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 Alset
International and warrants to purchase 359,834,471 ordinary
shares of Alset International.
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
June 30, 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
August 20, 2020, our wholly-owned subsidiary Hengfai Business
Development Pte. Ltd. purchased 30,000,000 shares of Alset
International from our founder, Chairman, and Chief Executive
Officer, Chan Heng Fai, for S$1,860,000 Singapore Dollars
($1,333,429 U.S. Dollars). We have issued our founder a two-year,
interest-free promissory note in the amount of such purchase
price.
Personal Guarantees by Directors
As of both June 30,
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.
Compensation of Key Management Personnel - Directors’
Interests in Employee Share Option Plan
During 2018,
options to purchase 530,667 shares of Alset International were
forfeited due to the resignation of two directors of Alset
International. As of December 31, 2019 and 2018, options to
purchase 1,061,333 shares of Alset International were
outstanding.
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 payment 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.
For the years ended December 31, 2019 and 2018, the revenue
from DSS was $0 and $92,000,
respectively.
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 the Company. iGalen
Inc. provides use of its platform to collect sale revenue and
payment of expenses for these entities without service fees. On
June 30, 2020 and December 31, 2019, iGalen owed $173,695 and
$342,695 to iGalen Philippines, respectively.
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 $24,000 for the six months ended June
30, 2020 and 2019. The Company incurred expenses of $12,000 for the
three months ended June 30, 2020 and 2019. As of June 30, 2020,
iGalen owed $80,256 to iGalen SDN. As of December 31, 2019, iGalen
SDN owed iGalen $74,331.
During the six
months ended June 30, 2020, iGalen SDN provided a $721,375 advance
to iGalen for its operations. The advance is interest free, no
security requirement and no payment term. The repayment depends on
the demand and the future financial situation of
iGalen.
Medi Botanics Sdn
Bhd, a subsidiary of Holista CollTech, is only raw material and
product supplier 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 $286,807
raw materials and products to iGalen in the six months ended June
30, 2020 and 2019, respectively. During the three months ended on
June 30, 2020 and 2019, Medi Botanics Sdn Bhd supplied $0 and
$254,921 raw materials and products to iGalen. On June 30, 2020 and
December 31, 2019, iGalen owed $698,198 and $956,300 to this
entity, respectively.
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 six months ended on June 30,
2020 and 2019, the management fee and performance fee charged to
the Fund were $0 and $3,150, respectively. On June 30,
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
Alset International 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. Alset International incurred expenses of $120,000,
$120,000, $240,000 and $240,000 for the six months ended June 30,
2020 and 2019 and the years ended December 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 June 30, 2020 and December 31, 2019 the Company owed $20,000 and $0, respectively, to
this entity.
Purchase of Minority Interest in 150 CCM Black Oak
Ltd
On July 23, 2018, SeD Development USA, LLC, a
wholly-owned subsidiary of Alset International, 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 LiquidValue
Development, a 99.99%-owned subsidiary of Alset International,
performs consulting services for that company. Alset International
incurred expenses of $0 and $42,058 for the six months ended June
30, 2020 and 2019, respectively. Alset International incurred
expenses of $52,723 and $101,979 for the years ended December 31,
2019 and 2018, respectively. As of June 30, 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 $120,000 for the six
months ended June 30, 2020 and 2019, respectively and $240,000 in
both years ended December 31, 2019 and 2018. On June 30, 2020 and
December 31, 2019, iGalen owed this related party fees for
consulting services in the amounts of $591,403 and $671,403,
respectively. The consulting service with Rajen Manicka was
terminated on December 31, 2019.
Chan
Tung Moe, the consultant engaged with the Company through Pop
Motion Consulting Pte. Ltd., is the son of Chan Heng Fai, a
director and the CEO of the Company. The Company incurred expense
of $118,288 for the six months ended June 20, 2020 and 2019,
respectively. The Company incurred expense of $59,144 for the three
months ended June 30, 2020 and 2019, respectively. As of June 30,
2020 and December 2019, the Company owed Pop Motion consulting fee
of $39,429 and $118,288, respectively.
2019 Exercised Warrants
On December 19,
2019, Document Security Systems, Inc. exercised warrants to acquire
61,977,577 shares of Alset International at a price approximately
$0.03 per share. Alset International 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.
Deposit Received from Warrants Exercise
On June 30, 2020,
we received deposit $1,419,605 from Document Security Systems, Inc.
for warrants exercise to acquire 44,005,182 shares of Alset
International at a price of approximately $0.03 per share. The
transaction was closed in July 2020. After this exercise, DSS holds
127,179,311 shares of Alset International’s common stock,
approximately 9.3%. 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.
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
Alset International. The loans are interest free, not tradable,
unsecured, and repayable on demand. On October 15, 2018, a formal
lending agreement between Alset International and Chan Heng Fai was
executed. Under the agreement, Chan Heng Fai provides a lending
credit limit of approximately $10 million for Alset International
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 June 30, 2020
and December 31, 2019 the outstanding
principal balance of the loan is $4,295,252 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 six months
ended on June 30, 2020 and
2019, the interest expenses were $123,232 and $200,365,
respectively. During the years ended December 31, 2019 and 2018,
the interest expenses were $358,203 and $357,048, respectively. As
of June 30, 2020 and December
31, 2019, the accrued interest total was $905,065 and $822,405,
respectively.
Prior to this
offering, Chan Heng Fai also provided an interest free short-term
loan to our company for our general operations. As of June 30, 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 June
30, 2020 and December 31, 2019, the total outstanding principal
balance of the 2018 and 2019 March Rajen Loan were $531,030 and
$546,397 respectively, and included in the Notes Payable –
Related Parties balance on our Consolidated Balance Sheets. During
the six months ended June 30, 2020 and 2019, we incurred $8,774 and
$8,084 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 six months
ended June 30, 2020, we incurred $9,619 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 June 30, 2020 and December 31, 2019
was $0 and $250,000, respectively. The accrued interest was $19,128
and $9,589 as of June 30, 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 six months ended June
30, 2020 the Company incurred $8,044 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 both,
June 30, 2020 and December 31, 2019 was $160,000. The accrued
interest was $10,667 and $2,542 as of June 30, 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,
LiquidValue 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 Alset International
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 June 30, 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 Alset
International 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 mature 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 63.
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 Alset International. 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.
Reorganization of Certain Biohealth Activities
On April 27, 2020,
Global BioMedical Pte Ltd (“GBM”), one of our
subsidiaries, entered into a share exchange agreement with DSS
BioHealth Security, Inc. (“DBHS”), a wholly owned
subsidiary of Document Securities Systems Inc. (“DSS”),
pursuant to which, DBHS will acquire all of the outstanding capital
stock of Impact BioMedical Inc., wholly owned subsidiary of GBM,
through a share exchange. The aggregate consideration to be issued
to GBM for the Impact BioMedical shares will be the following: (i)
483,334 newly issued shares of DSS common stock; and (ii) 46,868
newly issued shares of a new series of DSS perpetual convertible
preferred stock with a stated value of $46,868,000, or $1,000 per
share. The convertible preferred stock can be convertible into
shares of DSS common stock at a conversion price of $6.48 of
preferred stock stated value per share of common stock, subject to
a 19.9% beneficial ownership conversion limitation (a so-called
“blocker”) based on the total issued outstanding shares
of common stock of DSS beneficially owned by GBM. Holders of the
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 convertible preferred stock. The
holders of convertible preferred stock will be entitled to a
liquidation preference of $1,000 per share, and DSS will have the
right to redeem all or any portion of the then outstanding shares
of convertible preferred stock, pro rata among all holders, at a
redemption price per share equal to such liquidation value per
share.
On August 21,
2020, the transaction closed and Impact BioMedical Inc became a
direct wholly owned subsidiary of DBHS. GBM received 483,334 shares
of DSS common stock and 46,868 shares of DSS preferred stock, which
preferred shares could be converted to 7,232,716 common shares
(however, any conversion will be subject to the blocker GBM has
agreed to, as described above). After this transaction, we hold
500,001 shares of the common stock of DSS, representing 9.7% of the
outstanding common stock of DSS. Our CEO, Chan Heng Fai owns an
additional 14.5% of the common stock of DSS (not including any
common or preferred shares we hold) and is the executive chairman
of the board of directors of DSS.
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 September 18, 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 September 18, 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 September 18, 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 $1,132,829, including a 2% 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
retainer in the amount of $75,000 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 140% 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 fourth
anniversary of the effective date of the registration statement for
this offering. In addition, the Underwriter Warrant provides for
“piggyback” registration rights at our expense with
respect to the underlying shares of common stock which shall
terminate on the earlier of (i) the third anniversary of the
effective date of the registration statement of which this
prospectus forms a part and (ii) the date that Rule 144 would allow
the holder to sell its shares during any ninety (90) day period,
and shall not be applicable so long as a registration statement
registering the warrant shares remains
effective.
Right
of First Refusal
We have agreed to
grant to the Representative a right of first refusal for a period
of one year 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.
Board
of Directors
The Company granted
the Representative the right through the earlier of September 18,
2022 or until it declines to participate in a future offering to
designate one nominee for election to the Board of Directors of the
Company, or to designate one consultant to the Board of Directors
of the Company, which such nominee or consultant will be mutually
agreeable to both the Representative and the Company, and should
the Representative elect the latter, the consultant shall have the
right to attend all meetings of the Board of Directors and
committees thereof (subject to exclusion if necessary to preserve
attorney-client privilege) and shall be compensated as if he/she
were a Board member.
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.
LEGAL MATTERS
Sichenzia
Ross Ference 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.
EXPERTS
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.
WHERE YOU CAN FIND MORE INFORMATION
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 Six Months Ended June 30, 2020 and 2019
|
F-1
|
|
|
|
|
|
F-2
|
|
|
|
|
|
F-3
|
|
|
|
|
|
F-4
|
|
|
|
|
|
F-5 -
F-38
|
HF Enterprises Inc. and Subsidiaries
Condensed Consolidated Balance
Sheets
See
accompanying notes to condensed consolidated financial
statements.
HF Enterprises Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Other
Comprehensive Loss
For the Three and Six Months Ended June 30, 2020 and
2019
(Unaudited)
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||
|
|
2020
|
2019
|
2020
|
2019
|
|
Revenue
|
|
|
|
|
|
Property
Sales
|
$2,047,405
|
$5,252,585
|
$5,001,794
|
$16,571,180
|
|
Biohealth
Product Sales
|
18,420
|
601,507
|
29,202
|
1,046,600
|
|
Others
|
-
|
12,223
|
-
|
19,855
|
|
Total
Revenue
|
2,065,825
|
5,866,315
|
5,030,996
|
17,637,635
|
|
Operating
Expenses
|
|
|
|
|
|
Cost of
Sales
|
1,609,223
|
4,488,515
|
3,992,926
|
15,047,316
|
|
General and
Administrative
|
2,455,237
|
1,453,279
|
3,398,753
|
2,885,073
|
|
Research and
Development
|
-
|
-
|
-
|
-
|
|
Impairment of
Real Estate
|
-
|
3,938,769
|
-
|
3,938,769
|
|
Total
Operating Expenses
|
4,064,460
|
9,880,563
|
7,391,679
|
21,871,158
|
|
|
|
|
|
|
|
Loss From
Continuing Operations
|
(1,998,635)
|
(4,014,248)
|
(2,360,683)
|
(4,233,523)
|
|
|
|
|
|
|
|
Other Income
(Expense)
|
|
|
|
|
|
Interest
Income
|
4,681
|
12,315
|
12,491
|
27,581
|
|
Interest
Expense
|
(79,692)
|
(95,536)
|
(140,516)
|
(200,229)
|
|
Gain on
Disposal of Subsidiary
|
-
|
-
|
-
|
299,255
|
|
Foreign
Exchange Transaction Gain (Loss)
|
(743,481)
|
(106,462)
|
1,375,471
|
(318,460)
|
|
Unrealized
(Loss) Gain on Securities Investment
|
1,108,285
|
(1,388,796)
|
1,592,647
|
(654,197)
|
|
Realized Gain
on Securities Investment
|
2,281
|
-
|
2,281
|
-
|
|
Loss on
Investment on Security by Equity Method
|
(88,245)
|
-
|
(140,740)
|
-
|
|
Other
Income
|
36,531
|
4,211
|
42,002
|
5,711
|
|
Total
Other Income (Expense)
|
240,360
|
(1,574,268)
|
2,743,636
|
(840,339)
|
|
|
|
|
|
|
|
Net (Loss)
Income from Continuing Operations Before Income
Taxes
|
(1,758,275)
|
(5,588,516)
|
382,953
|
(5,073,862)
|
|
|
|
|
|
|
|
Income Tax
Expense from Continuing Operations
|
(114,653)
|
-
|
(114,653)
|
-
|
|
|
|
|
|
|
|
Net (Loss)
Income from Continuing Operations
|
(1,872,928)
|
(5,588,516)
|
268,300
|
(5,073,862)
|
|
|
|
|
|
|
|
Loss from
Discontinued Operations, Net of Tax
|
(235,808)
|
(140,640)
|
(361,385)
|
(260,377)
|
|
Net
Loss
|
(2,108,736)
|
(5,729,156)
|
(93,085)
|
(5,334,239)
|
|
|
|
|
|
|
|
Net Loss
Attributable to Non-Controlling Interest
|
(1,188,418)
|
(1,524,149)
|
(620,433)
|
(1,473,383)
|
|
|
|
|
|
|
|
Net (Loss)
Income Attributable to Common Stockholders
|
$(920,318)
|
$(4,205,007)
|
$527,348
|
$(3,860,856)
|
|
|
|
|
|
|
|
Other
Comprehensive Income (Loss), Net
|
|
|
|
|
|
Unrealized
Gain on Securities Investment
|
13,115
|
32
|
516
|
16,934
|
|
Foreign
Currency Translation Adjustment
|
626,872
|
151,587
|
(1,047,149)
|
259,043
|
|
Comprehensive
Loss
|
(1,468,749)
|
(5,577,537)
|
(1,139,718)
|
(5,058,262)
|
|
|
|
|
|
|
|
Comprehensive
Loss Attributable to Non-controlling Interests
|
(973,378)
|
(1,477,314)
|
(988,963)
|
(1,388,134)
|
|
|
|
|
|
|
|
Comprehensive
Income (Loss) Attributable to Common
Stockholders
|
$(495,371)
|
$(4,100,223)
|
$(150,755)
|
$(3,670,128)
|
|
|
|
|
|
|
|
Net Income
(Loss) Per Share - Basic and Diluted
|
|
|
|
|
|
Continuing
Operations
|
$(0.08)
|
$(0.41)
|
$0.08
|
$(0.37)
|
|
Discontinued
Operations
|
$(0.01)
|
$(0.01)
|
$(0.03)
|
$(0.02)
|
|
Net (Loss)
Income Per Share
|
$(0.09)
|
$(0.42)
|
$0.05
|
$(0.39)
|
|
|
|
|
|
|
|
Weighted
Average Common Shares Outstanding - Basic and
Diluted
|
9,758,236
|
10,001,000
|
9,880,967
|
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 and Six Months Ended June 30, 2020 and
2019
(Unaudited)
|
|
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, 2019
|
|
|
10,001,000
|
$10,001
|
$53,717,424
|
$1,582,788
|
$(35,263,650)
|
$9,155,051
|
$29,201,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127,508
|
|
|
56,992
|
184,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in Unrealized Gain on Investment
|
|
|
|
|
11,681
|
|
5,221
|
16,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency Translations
|
|
|
|
|
|
74,262
|
|
33,194
|
107,456
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
|
|
344,151
|
50,766
|
394,917
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
March 31, 2019
|
|
|
10,001,000
|
$10,001
|
$53,844,932
|
$1,668,731
|
$(34,919,499)
|
$9,301,224
|
$29,905,389
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from Selling Subsidiary Equity
|
|
|
|
10,367
|
|
|
4,633
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
10
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency Translations
|
|
|
|
|
|
104,762
|
|
46,825
|
151,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(740,250)
|
(740,250)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
|
|
|
|
(4,205,007)
|
(1,524,149)
|
(5,729,156)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
June 30, 2019
|
|
|
10,001,000
|
$10,001
|
$53,855,299
|
$1,773,515
|
$(39,124,506)
|
$7,088,293
|
$23,602,602
|
See
accompanying notes to condensed consolidated financial
statements.
HF Enterprises Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2020 and 2019
(Unaudited)
|
|
2020
|
2019
|
|
Cash Flows
from Operating Activities
|
|
|
|
Net Income
(Loss) from Continuing Operations
|
$268,300
|
$(5,073,862)
|
|
Adjustments to
Reconcile Net Income (Loss) from Continuing Operations to Net Cash
Provided by Operating Activities:
|
|
|
|
Depreciation
|
13,062
|
13,617
|
|
Amortization
of Right -Of - Use Asset
|
141,097
|
37,579
|
|
Amortization
of Debt Discount
|
3,777
|
-
|
|
Gain on
Disposal of Subsidiary
|
-
|
(299,255)
|
|
Shared-based
Compensation
|
1,564,376
|
-
|
|
Foreign
Exchange Transaction (Gain) Loss
|
(1,375,471)
|
318,460
|
|
Unrealized
(Gain) Loss on Security Investment
|
(1,592,647)
|
654,197
|
|
Loss from
Investment in Security by Equity Method
|
140,740
|
-
|
|
Impairment of
Real Estate
|
-
|
3,938,769
|
|
Changes in
Operating Assets and Liabilities
|
|
|
|
Real
Estate
|
(2,387,115)
|
9,812,212
|
|
Trade
Receivables
|
512,117
|
(154,673)
|
|
Prepaid
Expense
|
(411,057)
|
(25,656)
|
|
Deferred
Revenue
|
940,699
|
(27,866)
|
|
Inventory
|
(17,231)
|
(14,856)
|
|
Accounts
Payable and Accrued Expenses
|
4,411,602
|
(531,696)
|
|
Accrued
Interest - Related Parties
|
100,324
|
192,914
|
|
Operating
Lease Liability
|
(147,231)
|
(41,805)
|
|
Builder
Deposits
|
(249,145)
|
(880,318)
|
|
Income Tax
Payable
|
114,653
|
-
|
|
Net Cash
Provided by Continuing Operating Activities
|
2,030,851
|
7,917,761
|
|
Net Cash Used
in Discontinued Operating Activities
|
(353,123)
|
(300,174)
|
|
Net Cash
Provided by Operating Activities
|
1,677,728
|
7,617,587
|
|
|
|
|
|
Cash Flows
From Investing Activities
|
|
|
|
Purchase of
Fixed Assets
|
(4,182)
|
-
|
|
Proceeds from
Global Opportunity Fund Liquidation
|
301,976
|
-
|
|
Promissory
Note to Related Party
|
(200,000)
|
-
|
|
Net Cash
Provided by (Used in) Continuing Investing
Activities
|
97,794
|
-
|
|
Net Cash from
Discontinued Investing Activities
|
-
|
(36,000)
|
|
Net Cash
Provided by (Used in) Investing Activities
|
97,794
|
(36,000)
|
|
|
|
|
|
Cash Flows
From Financing Activities
|
|
|
|
Proceeds
from Exercise of Subsidiary Warrants
|
615,623
|
-
|
|
Proceeds from
Sale of Subsidiary Shares
|
32,300
|
199,500
|
|
Proceeds from
Note Payable
|
671,634
|
-
|
|
Repayments of
Note Payable
|
(265,367)
|
(13,899)
|
|
Distribution
to Minority Shareholder
|
(197,400)
|
(740,250)
|
|
Net Proceeds
from (Repayment to) Notes Payable - Related
Parties
|
202,135
|
(2,347,766)
|
|
Net Cash
Provided by (Used in) Continuing Financing
Activities
|
1,058,925
|
(2,902,415)
|
|
Net Cash
Provided by Discontinued Financing Activities
|
-
|
-
|
|
Net Cash
Provided by (Used in) Financing Activities
|
1,058,925
|
(2,902,415)
|
|
|
|
|
|
Net Increase
in Cash and Restricted Cash
|
2,834,447
|
4,679,172
|
|
Effects of
Foreign Exchange Rates on Cash
|
20,985
|
5,408
|
|
|
|
|
|
Cash and
Restricted Cash - Beginning of Year
|
7,330,996
|
5,508,198
|
|
Cash and
Restricted Cash- End of Period
|
$10,186,428
|
$10,192,778
|
|
|
|
|
|
Supplementary
Cash Flow Information
|
|
|
|
Cash Paid for
Interest
|
$8,031
|
$4,440
|
|
|
|
|
|
Supplemental
Disclosure of Non-Cash Investing and Financing
Activities
|
|
|
|
Amortization
of Debt Discount Capitalized
|
$-
|
$25,000
|
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, Australia and South Korea. The Company
manages its principal businesses primarily through its subsidiary,
Alset International Limited (“Alset International”,
f.k.a. Singapore eDevelopment Limited ), 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
held 761,150,294 shares and 359,834,471 warrants of Alset International on June 30, 2020 and
December 31, 2019, of the outstanding shares of Alset International, 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.
On June
24, 2020, 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.
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
LiquidValue
Development Inc. ("LiquidValue
Development") and SeD Perth Pty Ltd.
In
2014, Alset International
commenced operations developing property projects and participating
in third-party property development projects. LiquidValue
Development Inc. (f.k.a. SeD Intelligent Home Inc.) a 99.9%-owned
subsidiary of Alset
International, 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 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 Alset
International, 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 Global BioMedical
Pte. Ltd. and Health Wealth Happiness Pte. Ltd. and is committed to
both funding research and developing and selling products that
promote a healthy lifestyle.
Impact
BioMedical Inc., a subsidiary of Global BioMedical Pte. Ltd, is
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. purchased
50% of Sweet Sense Inc. from Quality Ingredients, LLC for $91,000.
Sweet Sense Inc. is an 81.8% owned subsidiary of Impact BioMedical
Inc.
On
April 27, 2020, Global BioMedical Pte Ltd (“GBM”), a
wholly owned subsidiary of Alset International, entered into a
share exchange agreement with DSS BioHealth Security, Inc.
(“DBHS”), a wholly owned subsidiary of Document
Securities Systems Inc. (“DSS”), pursuant to which,
DBHS will acquire all of the outstanding capital stock of Impact
BioMedical Inc., through a share exchange. The transaction was
closed on August 21, 2020 and Impact BioMedical became a direct
wholly owned subsidiary of DBHS. See details in Note 13,
Discontinued Operations.
Currently,
revenue from our biohealth segment come from iGalen Inc. (f.k.a.
iGalen USA, LLC), which is 100% owned by iGalen International Inc.,
Alset International’s
53%-owned subsidiary. During the six months ended June 30, 2020 and
2019, the revenue from iGalen Inc. were $28,195 and $1,046,600,
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 recognized only approximately $1,000 in revenue in six
months ended June 30, 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 Alset
International, 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 losses from
operations over the past six months. As of and for the six months
ended June 30, 2020, the Company had an accumulated deficit of
$39,966,767 and a loss of $2,360,683 from continuing
operations.
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 June 30,
2020, the Company had cash and restricted cash of $10,186,428
(including cash from discontinued operations $75,608) compared to
$7,330,996 (including cash from discontinued operations $108,731)
as of December 31, 2019. 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 June 30, 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 six months ended June 30, 2020, the revenue from lot sales was
approximately $5 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, favorable cash revenue from real estate operations in six
months ended on June 30, 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 June 30, 2020 and December 31, 2019, and for the three
and six month periods ended June 30, 2020 and 2019 as
follows:
|
|
|
|
|
Attributable interest
|
|
|||||
|
|
|
|
|
as of,
|
|
|||||
|
Name of subsidiary consolidated under HFE
|
|
State or other jurisdiction
of
incorporation or organization
|
|
June 30,
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
|
|
|
Alset
International Inc. (f.k.a.Singapore eDevelopment
Limited)
|
|
Singapore
|
|
|
62.12
|
|
|
|
65.4
|
|
|
Singapore
Construction & Development Pte. Ltd.
|
|
Singapore
|
|
|
62.12
|
|
|
|
65.4
|
|
|
Art
eStudio Pte. Ltd.
|
|
Singapore
|
|
|
31.68
|
*
|
|
|
33.36
|
*
|
|
Singapore
Construction Pte. Ltd.
|
|
Singapore
|
|
|
62.12
|
|
|
|
65.4
|
|
|
Global
BioMedical Pte. Ltd.
|
|
Singapore
|
|
|
62.12
|
|
|
|
65.4
|
|
|
SeD
BioLife International, Inc.
|
|
United
States of America
|
|
|
62.12
|
|
|
|
65.4
|
|
|
SeD
BioMedical International, Inc.
|
|
United
States of America
|
|
|
62.12
|
|
|
|
65.4
|
|
|
Global
BioMedical, Inc.
|
|
United
States of America
|
|
|
56.47
|
|
|
|
59.45
|
|
|
Global
BioLife, Inc.
|
|
United
States of America
|
|
|
39.53
|
*
|
|
|
41.62
|
*
|
|
SeD
Investment Pte. Ltd.
|
|
Singapore
|
|
|
62.12
|
|
|
|
65.4
|
|
|
Health
Wealth Happiness Pte. Ltd.
|
|
Singapore
|
|
|
62.12
|
|
|
|
65.4
|
|
|
iGalen
International Inc.
|
|
United
States of America
|
|
|
32.66
|
*
|
|
|
34.38
|
*
|
|
iGalen
Inc (f.k.a iGalen USA LLC)
|
|
United
States of America
|
|
|
32.66
|
*
|
|
|
34.38
|
*
|
|
SeD
Capital Pte. Ltd.
|
|
Singapore
|
|
|
62.12
|
|
|
|
65.4
|
|
|
LiquidValue
Asset Management Pte. Ltd. (f.k.a. HengFai Asset Management Pte.
Ltd.)
|
|
Singapore
|
|
|
50.91
|
|
|
|
53.6
|
|
|
SeD
Home Limited
|
|
Hong
Kong
|
|
|
62.12
|
|
|
|
65.4
|
|
|
SeD
Reits Management Pte. Ltd.
|
|
Singapore
|
|
|
62.12
|
|
|
|
65.4
|
|
|
Global
TechFund of Fund Pte. Ltd.
|
|
Singapore
|
|
|
62.12
|
|
|
|
65.4
|
|
|
Singapore
eChainLogistic Pte. Ltd.
|
|
Singapore
|
|
|
62.12
|
|
|
|
65.4
|
|
|
BMI
Capital Partners International Limited.
|
|
Hong
Kong
|
|
|
62.12
|
|
|
|
65.4
|
|
|
SeD
Perth Pty. Ltd.
|
|
Australia
|
|
|
62.12
|
|
|
|
65.4
|
|
|
SeD
Intelligent Home Inc. (f.k.a SED Home International,
Inc.)
|
|
United
States of America
|
|
|
62.12
|
|
|
|
65.4
|
|
|
LiquidValue
Development Inc. (f.k.a. SeD Intelligent Home Inc.)
|
|
United
States of America
|
|
|
62.11
|
|
|
|
65.39
|
|
|
Alset
iHome Inc. (f.k.a. SeD Home & REITs Inc. and SeD Home,
Inc.)
|
|
United
States of America
|
|
|
62.11
|
|
|
|
65.39
|
|
|
SeD
USA, LLC
|
|
United
States of America
|
|
|
62.11
|
|
|
|
65.39
|
|
|
150
Black Oak GP, Inc.
|
|
United
States of America
|
|
|
62.11
|
|
|
|
65.39
|
|
|
SeD
Development USA Inc.
|
|
United
States of America
|
|
|
62.11
|
|
|
|
65.39
|
|
|
150 CCM
Black Oak, Ltd.
|
|
United
States of America
|
|
|
62.11
|
|
|
|
65.39
|
|
|
SeD
Texas Home, LLC
|
|
United
States of America
|
|
|
62.11
|
|
|
|
65.39
|
|
|
SeD
Ballenger, LLC
|
|
United
States of America
|
|
|
62.11
|
|
|
|
65.39
|
|
|
SeD
Maryland Development, LLC
|
|
United
States of America
|
|
|
51.9
|
|
|
|
54.63
|
|
|
SeD
Development Management, LLC
|
|
United
States of America
|
|
|
52.8
|
|
|
|
55.58
|
|
|
SeD
Builder, LLC
|
|
United
States of America
|
|
|
62.11
|
|
|
|
65.39
|
|
|
HotApp
Blockchain Inc.
|
|
United
States of America
|
|
|
62.11
|
|
|
|
65.39
|
|
|
HotApps
International Pte. Ltd.
|
|
Singapore
|
|
|
62.11
|
|
|
|
65.39
|
|
|
HotApp
International Limited
|
|
Hong
Kong
|
|
|
62.11
|
|
|
|
65.39
|
|
|
HWH
International, Inc.
|
|
United
States of America
|
|
|
62.12
|
|
|
|
65.4
|
|
|
Health
Wealth & Happiness Inc.
|
|
United
States of America
|
|
|
62.12
|
|
|
|
65.4
|
|
|
HWH
Multi-Strategy Investment, Inc.
|
|
United
States of America
|
|
|
62.12
|
|
|
|
65.4
|
|
|
Impact
BioMedical Inc
|
|
United
States of America
|
|
|
62.12
|
|
|
|
65.4
|
|
|
Biolife
Sugar, Inc.
|
|
United
States of America
|
|
|
39.1
|
*
|
|
|
41.16
|
*
|
|
Happy
Sugar, Inc.
|
|
United
States of America
|
|
|
39.1
|
*
|
|
|
41.16
|
*
|
|
Sweet
Sense Inc.
|
|
United
States of America
|
|
|
50.82
|
|
|
|
53.5
|
|
|
SeDHome
Rental Inc
|
|
United
States of America
|
|
|
62.11
|
|
|
|
65.39
|
|
|
SeD
REIT Inc.
|
|
United
States of America
|
|
|
62.11
|
|
|
|
65.39
|
|
|
Crypto
Exchange Inc
|
|
United
States of America
|
|
|
62.11
|
|
|
|
65.39
|
|
|
HWH
World Inc.
|
|
United
States of America
|
|
|
62.11
|
|
|
|
65.39
|
|
|
HWH
World Pte. Ltd.
|
|
Singapore
|
|
|
62.11
|
|
|
|
65.39
|
|
|
UBeauty
Limited
|
|
Hong
Kong
|
|
|
62.12
|
|
|
|
65.4
|
|
|
WeBeauty
Korea Inc
|
|
Korea
|
|
|
62.12
|
|
|
|
65.4
|
|
|
HWH
World Limited
|
|
Hong
Kong
|
|
|
62.12
|
|
|
|
65.4
|
|
|
HWH
World Inc.
|
|
Korea
|
|
|
62.12
|
|
|
|
65.4
|
|
|
Global
Sugar Solutions Inc.
|
|
United
States of America
|
|
|
49.68
|
|
|
|
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, and therefore, 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 and Cash Equivalents
The
Company considers all highly liquid investments with a maturity of
three months or less at the date of acquisition to be cash
equivalents. 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 June 30, 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 June 30, 2020
and December 31, 2019, the total balance of these two accounts was
$3,967,829 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
June 30, 2020 and December 31, 2019, the account balance was
$34,390 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 June 30, 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, June 30, 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 June 30, 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 June 30, 2020 and December 31, 2019,
inventory consisted of finished goods from both HWH World Inc. and
iGalen Inc. 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 owner of
approximately 14.5% of the outstanding shares of DSS
in addition to the common and preferred shares of DSS that we
own, 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 June 30, 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 June 30, 2020 and December 31, 2019, both AMRE and Vivacitas
were private companies. Based on management’s analysis, the
fair value of the warrants and the stock option was $0 as of June
30, 2020; the fair value of the stock option was $0 as of 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 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, Investments –
Equity Securities, 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.
Investment Securities under Equity Method Accounting
American Medical REIT Inc.
LiquivdValue
Asset Management Pte. Ltd. (“LiquidValue”), a
subsidiary of the Company owns 36.1% of American Medical REIT Inc.
(“AMRE”), a startup REIT company concentrating on
medical real estate. AMRE acquires state-of-the-art, purpose-built
healthcare facilities and leases them to leading clinical operators
with dominant market share under secure triple net leases. AMRE
targets hospitals (both Critical Access and Specialty Surgical),
Physician Group Practices, Ambulatory Surgical Centers, and other
licensed medical treatment facilities. Chan Heng Fai, our CEO, is
the executive chairman and director of AMRE. LiquidValue did not
invest equity but provided a loan to AMRE (See detail in Note 10,
Related Party Transactions). On balance sheet, the prorate loss
from AMRE was recorded as a liability, accumulated losses on equity
method investment. During three months ended June 30, 2020 and
2019, the investment losses from AMRE were $88,245 and $0,
respectively. During six months ended June 30, 2020 and 2019, the
investment losses from AMRE were $140,740 and $0, respectively. As
of June 30, 2020, and December 31, 2019, the accumulated losses on
equity method investment were $140,740 and $0,
respectively.
Sweet Sense, Inc.
BioLife
Sugar, Inc. (“BioLife’), a subsidiary consolidated
under Alset International,
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.
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 Impact
BioMedical Inc. and therefore, was consolidated into
the Company’s condensed consolidated financial statements as
of June 30, 2020 and December 31, 2019. During the three and six
month ended June 30, 2019, the investment losses from Sweet Sense
were $9,604 and $12,810, respectively. As a subsidiary of Impact
BioMedical Inc., Sweet Sense was in the discontinued operations of
Impact BioMedical Inc. (See Note 13 Discontinued
Operations).
Veganburg International Pte. Ltd.
On
February 5, 2020, SeD Capital Pte Ltd, a subsidiary of the Company,
invested $2,176 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. VeganBurg International has no operations till
June 30, 2020 and $2,176 was recorded as investment in Securities
at equity method on balance sheet on June 30, 2020.
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 $428,290 for the three months ended June 30,
2020 and 2019, respectively. The Company capitalized construction
costs of $3,768,353 and $2,352,390 for the three months ended June
30, 2020 and 2019, respectively. The Company capitalized interest
and finance expenses from third-party borrowings of $0 and $471,965
for the six months ended June 30, 2020 and 2019, respectively. The
Company capitalized construction costs of $6,135,261 and $3,558,398
for the six months ended June 30, 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 for building 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
99% and 94%, respectively, of the Company’s revenue in the
six months ended on June 30, 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 NVR lots. This is a 30-year annual assessment allowed in
Frederick County which requires homeowners to reimburse the
developer for the costs of installing public water and sewer to the
lots. These assessments become effective as homes are settled, at
which time we can sell the collection rights to investors who will
pay an upfront lump sum, enabling us to more quickly realize the
revenue. The selling prices range from $3,000 to $4,500 per home
depending the type of the home. Our total revenue from the front
foot benefit assessment is approximately $1 million. To recognize
revenue of FFB assessment, both our and NVR’s performance
obligation have to be satisfied. Our performance obligation is
completed once we complete the construction of water and sewer
facility and close the lot sales with NVR, which inspects these
water and sewer facility prior to close lot sales to ensure all
specifications are met. NVR’s performance obligation is to
sell homes they build to homeowners. Our FFB revenue is recognized
on quarterly basis after NVR closes sales of homes to homeowners.
The agreement with these FFB investors is not subject to amendment
by regulatory agencies and thus our revenue from FFB assessment is
not either. During the six months ended on June 30,
2020 and 2019, we recognized revenue $115,202 and $236,614 from FFB
assessment, respectively. During the three months
ended on June 30, 2020 and 2019, we recognized revenue $74,880 and
$225,717 from FFB assessment, respectively.
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 refund. The Company’s performance obligation is to
provide members to purchase products, access to certain back office
services, receive commissions and attend corporate events. It 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
$126,700 for the six months ended June 30, 2020 and 2019,
respectively. Shipping
and handling expenses were $0 and $66,306 for the three months
ended June 30, 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.
During
the three months ended June 30, 2020 and 2019, the Company
recognized revenue of $0 and $12,223, respectively. During the six
months ended June 30, 2020 and 2019, the Company recognized revenue
of $0 and $19,885, respectively.
Remaining performance obligations
As of
June 30, 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 six months ended June 30,
2020 and 2019 were $62,191 and $128,553,
respectively. Advertising expenses for the three months ended
June 30, 2020 and 2019 were $62,191 and $84,277,
respectively.
Foreign currency
Functional and reporting currency
Items
included in the financial statements of each entity in the Company
are measured using the currency of the primary economic environment
in which the entity operates (“functional currency”).
The financial statements of the Company are presented in U.S.
dollars (the “reporting currency”).
The
functional and reporting currency of the Company is the United
States dollar (“U.S. dollar”). The financial records of
the Company’s subsidiaries located in Singapore, Hong Kong,
Australia and South Korea are maintained in their local currencies,
the Singapore Dollar (S$), 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 $1,375,471 gain on foreign exchange
during the six months ended on June 30, 2020 and a $318,460 loss
during the six months ended on June 30, 2019. The Company recorded
foreign exchange loss $743,481 and $106,462 during the three months
ended on June 30, 2020 and 2019, respectively. 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
six months ended on June 30, 2020, the Company recorded other
comprehensive loss from foreign currency translation of $1,047,149,
and a $259,043 gain in the six months ended June 30, 2019, in
accumulated other comprehensive loss. The Company recorded
other comprehensive gain from translation of $626,872 and $151,587
in the three months ended June 30, 2020 and 2019,
respectively.
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 June 30, 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 June
30, 2020 and December 31, 2019, the aggregate non-controlling
interests in the Company were $7,113,774 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 June 30, 2020 were $185,912 and $185,031,
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 did not have a material impact on its consolidated
financial statements.
In
response to the COVID-19 pandemic, the Coronavirus Aid, Relief and
Economic Security Act (“CARES Act”) was signed into law
in March 2020. The CARES Act lifts certain deduction limitations
originally imposed by the Tax Cuts and Jobs Act of 2017
(“2017 Tax Act”). Corporate taxpayers may carryback net
operating losses (NOLs) originating between 2018 and 2020 for up to
five years, which was not previously allowed under the 2017 Tax
Act. The CARES Act also eliminates the 80% of taxable income
limitations by allowing corporate entities to fully utilize NOL
carryforwards to offset taxable income in 2018, 2019 or 2020.
Taxpayers may generally deduct interest up to the sum of 50% of
adjusted taxable income plus business interest income (30% limit
under the 2017 Tax Act) for 2019 and 2020. The CARES Act allows
taxpayers with alternative minimum tax credits to claim a refund in
2020 for the entire amount of the credits instead of recovering the
credits through refunds over a period of years, as originally
enacted by the 2017 Tax Act.
In
addition, the CARES Act raises the corporate charitable deduction
limit to 25% of taxable income and makes qualified improvement
property generally eligible for 15-year cost-recovery and 100%
bonus depreciation. The enactment of the CARES Act did not result
in any material adjustments to our income tax provision for the six
months ended June 30, 2020.
Accounting pronouncement not yet adopted
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 June 30, 2020 and December
31, 2019, uninsured cash and restricted cash balances were
$8,604,023 and $5,905,134, respectively.
For the
six months ended June 30, 2020, one customer accounted for 100% of
the Company’s property and development revenue. For the six
months ended June 30, 2019, two customers accounted for
approximately 62% and 38% of the Company’s property and
development revenue. For the three months ended June 30, 2020,
one customer accounted for 100% of the Company’s property and
development revenue. For the three months ended June 30, 2019, one
customer accounted for 100% of the Company’s property and
development revenue.
During
the three and six months ended June 30, 2020, no revenue was
recognized by the Company’s Other Business Segment. Two
customers accounted for 80% and 20% of the Company’s Other
Business Segment revenue during three and six months ended June 30,
2019, respectively.
As of
June 30, 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 and six months ended on June 30, 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 and six months ended on June 30, 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 six
months ended June 30, 2020 and 2019:
|
|
Property Development
|
Digital Transformation Technology
|
Biohealth Business
|
Other
|
Discontinued Operations
|
Total
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2020
|
|
|
|
|
|
|
|
Revenue
|
$5,001,794
|
$-
|
$29,202
|
$-
|
$-
|
$5,030,996
|
|
Cost of
Sales
|
(3,992,926)
|
-
|
-
|
-
|
-
|
(3,992,926)
|
|
Gross
Margin
|
1,008,868
|
-
|
29,202
|
-
|
-
|
1,038,070
|
|
Operating
Expenses
|
(502,928)
|
(95,261)
|
(213,800)
|
(2,586,764)
|
(361,385)
|
(3,760,138)
|
|
Operating
Income (Loss)
|
505,940
|
(95,261)
|
(184,598)
|
(2,586,764)
|
(361,385)
|
(2,722,068)
|
|
Other Income
(Expense)
|
6,894
|
3
|
(17,208)
|
2,753,947
|
-
|
2,743,636
|
|
Net Income
(Loss) Before Income Tax
|
512,834
|
(95,258)
|
(201,806)
|
167,183
|
(361,385)
|
21,568
|
|
|
Property Development
|
Digital Transformation Technology
|
Biohealth Business
|
Other
|
Discontinued Operations
|
Total
|
|
|
|
|
|
|
|
|
|
Six Months ended June 30, 2019
|
|
|
|
|
|
|
|
Revenue
|
$16,571,180
|
$-
|
$1,046,600
|
$19,855
|
$-
|
$17,637,635
|
|
Cost of
Sales
|
(14,729,106)
|
-
|
(318,210)
|
-
|
-
|
(15,047,316)
|
|
Gross
Margin
|
1,842,074
|
-
|
728,390
|
19,855
|
-
|
2,590,319
|
|
Operating
Expenses
|
(4,427,281)
|
(158,990)
|
(1,208,435)
|
(1,025,290)
|
(247,565)
|
(7,067,561)
|
|
Operating
Income (Loss)
|
(2,585,207)
|
(158,990)
|
(480,045)
|
(1,005,435)
|
(247,565)
|
(4,477,242)
|
|
Other Income
(Expense)
|
29,626
|
318,228
|
(19,673)
|
(1,168,654)
|
(12,812)
|
(853,285)
|
|
Net Income
(Loss) Before Income Tax
|
(2,555,581)
|
159,238
|
(499,718)
|
(2,174,089)
|
(260,377)
|
(5,330,527)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
Cash and
Restricted Cash
|
$5,989,724
|
$47,975
|
$1,086,308
|
$2,986,813
|
$75,608
|
$10,186,428
|
|
Total
Assets
|
32,449,534
|
148,077
|
1,978,944
|
8,022,715
|
98,927
|
42,698,197
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
Cash and
Restricted Cash
|
$5,439,318
|
$55,752
|
$388,670
|
$1,338,525
|
$108,731
|
$7,330,996
|
|
Total
Assets
|
29,857,615
|
155,854
|
948,931
|
4,770,949
|
139,431
|
35,872,780
|
|
6.
|
REAL ESTATE ASSETS
|
As of
June 30, 2020 and December 31, 2019, real estate assets consisted
of the following:
|
|
June 30,
2020
|
December 31,
2019
|
|
|
|
|
|
Construction
in Progress
|
$12,414,035
|
9,601,364
|
|
Land
Held for Development
|
13,601,464
|
14,283,340
|
|
Total
Real Estate Assets
|
26,015,499
|
23,884,704
|
|
|
|
|
|
7.
|
PROPERTY AND EQUIPMENT
|
As of
June 30, 2020 and December 31, 2019, property and equipment
consisted of the following:
The
Company recorded depreciation expense of $13,062 and $13,617 during
the six months ended June 30, 2020 and 2019, respectively. The
Company recorded depreciation expense of $7,120 and $6,468 during
the three months ended June 30, 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 and April 28, 2020,
NVR gave SeD Maryland two more deposits in the amounts of $100,000
and $220,000, respectively, based on the 3rd Amendment to the Lot
Purchase Agreement. On June 30,
2020 and December 31, 2019, there were $2,196,124 and $2,445,269
held on deposit, respectively.
|
9.
|
NOTES PAYABLE
|
As of
June 30, 2020 and December 31, 2019, notes payable consisted of the
following:
|
|
June
30,
2020
|
December
31,
2019
|
|
Union Bank
Loan
|
-
|
-
|
|
M&T Bank Loan,
Net of Debt Discount
|
606,909
|
-
|
|
PPP
Loan
|
68,502
|
-
|
|
Australia
Loan
|
154,058
|
157,105
|
|
Total notes
payable
|
$829,469
|
$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 June 30,
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.
On June 18, 2020, Alset iHome Inc. (“Alset iHome”), a
wholly-owned subsidiary of LiquidValue
Development Inc., entered into a Loan Agreement with
Manufacturers and Traders Trust Company, (the
“Lender”).
Pursuant to the Loan Agreement, the Lender provided a non-revolving
loan to Alset iHome 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 Alset iHome. The maturity date of this Loan is July
1, 2022. LiquidValue
Development Inc. and one of its subsidiaries are guarantors
of this Loan.
As of June 30, 2020, the loan balance was $664,810. As part of the
transaction, the Company incurred loan origination fees and closing
fees in the amount of $61,679 which was recorded as loan discount
and is amortized over the term of the loan. As of June 30, 2020 and
December 31, 2019, the balance
of unamortized loan discount was $57,901 and $0,
respectively.
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.
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 4.36% to 5.57% per annum for the six months ended June 30,
2020 and from 5.97% to 6.64% per annum for the six months ended
June 30, 2019. On September 7, 2017 the Australia Loan was amended
to reduce the maximum borrowing capacity to approximately $179,000.
On March 24, 2020, the terms of the Australia Loan were amended to
reflect an extended maturity date of September 30, 2020. 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 June 30, 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 Alset International and Chan
Heng Fai was executed. Under the agreement, Chan Heng Fai provides
a lending credit limit of approximately $10 million for Alset
International 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 June 30, 2020 and
December 31, 2019 the outstanding principal balance of the loan is
$4,295,252 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 six months ended on June 30, 2020
and 2019, the interest expenses were
$123,232 and $200,365, respectively. During the three months ended
on June 30, 2020 and 2019, the
interest expenses were $61,391 and $95,956, respectively. As
of June 30, 2020 and December
31, 2019, the accrued interest total was $905,065 and $822,405,
respectively.
Chan Heng Fai provided interest-free due on demand advance to HFE
for the general operations. On June 30, 2020 and December
31, 2019, the outstanding 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 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 June 30, 2020 and December 31, 2019, the total outstanding
principal balance of the loans was $531,030 and $546,397,
respectively, and was included in the Notes Payable – Related
Parties balance on the Company’s Condensed Consolidated
Balance Sheets. During the six months ended June 30, 2020 and 2019,
the Company incurred $8,774 and $8,084 of interest expense,
respectively. During the
three months ended June 30, 2020 and 2019, the Company incurred
$4,924 and $3,998 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 six
months ended June 30, 2020 the Company incurred $9,619 of interest
expense and $0 from the right to receive 3% of revenue. During the
three months ended June 30, 2020 the Company incurred $3,455 of
interest expense and $0 from the right to receive 3% of revenue.
The amount outstanding on the loan as of June 30, 2020 and December
31, 2019 was $0 and $250,000, respectively. The accrued interest
was $19,128 and $9,589 as of June 30, 2020 and December 31, 2019.
The 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 is 6
months, with an interest rate of 10% per annum. During the six
months ended June 30, 2020 the Company incurred $8,044 of interest
expense. During the three months ended June 30, 2020 the Company
incurred $4,099 of interest expense. The amount outstanding on the
loan as of June 30, 2020 and December 31, 2019 was $160,000 and
$160,000, respectively. The accrued interest was $10,667 and $2,542
as of June 30, 2020 and December 31, 2019. The expiration date was
extended to 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 Alset International 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 (13.1% as of June 30,
2020 and December 31, 2019) 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 LiquidValue
Development, 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 $120,000 and $120,000 for the six months ended
June 30, 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.
The Company incurred expenses of $60,000 and $60,000 for the three
months ended June 30, 2020 and 2019, respectively. As of June 30,
2020, and December 31, 2019 the
Company owed $20,000 and $0, respectively, to this
entity.
Consulting Services
A law
firm owned by Conn Flanigan, a Director of LiquidValue
Development, performs consulting services for
LiquidValue
Development and some subsidiaries of the Company. The
Company incurred expenses of $0 and $42,058 for the six months
ended June 30, 2020 and 2019, respectively. The Company incurred
expenses of $0 and $37,578 for the three months ended June 30, 2020
and 2019, respectively. As of June 30, 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 $120,000 for the six months
ended June 30, 2020 and 2019, respectively. The Company incurred
expenses of $0 and $60,000 for the three months ended June 30, 2020
and 2019, respectively. On both, June 30, 2020 and December 31,
2019, iGalen owed this related party fees for consulting services
in the amount of $591,403. The Consulting service with Rajen
Manicka was terminated on December 31, 2019.
Chan
Tung Moe, the consultant engaged with the Company through Pop
Motion Consulting Pte. Ltd., is the son of Chan Heng Fai, a
director and the CEO of the Company. The Company incurred expense
of $118,288 for the six months ended June 20, 2020 and 2019,
respectively. The Company incurred expense of $59,144 for the three
months ended June 30, 2020 and 2019, respectively. As of June 30,
2020 and December 2019, the Company owed Pop Motion consulting fee
of $39,429 and $118,288, respectively.
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. On
June 30, 2020 and December 31, 2019, iGalen owed $173,695 and
$342,695 to iGalen Philippines, respectively.
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 $24,000 for the six
months ended June 30, 2020 and 2019. The Company incurred expenses
of $12,000 for the three months ended June 30, 2020 and 2019. As of
June 30, 2020, iGalen owed $80,256 to iGalen SDN. As of December
31, 2019, iGalen SDN owed iGalen $74,331.
During
six month ended June 30, 2020, iGalen SDN provide $721,375 advance
to iGalen for its operations. The advance is interest free, no
security requirement and no payment term. The repayment depends on
the demand and the future financial situation of
iGalen.
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
$286,807 raw materials and products to iGalen in the six months
ended June 30, 2020 and 2019, respectively. During three months
ended on June 30, 2020 and 2019, Medi Botanics Sdn Bhd supplied $0
and $254,921 raw materials and products to iGalen. On June 30, 2020
and December 31, 2019, iGalen owed $698,198 and $956,300 to this
entity, 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%. As of December 31, 2019, the Company recorded a receivable
$307,944 from the Global Opportunity Fund. In the six months ended
on June 30, 2020 and 2019, the management fee and performance fee
charged to the Fund were $0 and $3,039, respectively. In the three
months ended on June 30, 2020 and 2019, the management fee and
performance fee charged to the Fund were $0 and $1,407,
respectively. On June 30, 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.
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 Alset International 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 June 30, 2020, the fair market value of the warrants was
$0.
Deposit Received from Warrants Exercise
On June
30, 2020, we received deposit $1,419,605 from Document Security
Systems, Inc. for a warrant exercise to acquire 44,005,182 shares
of Alset International at a
price approximately $0.03 per share. The transaction was closed in
July 2020. After this exercise, DSS holds 127,179,311 shares of
Alset International’s
common stock, approximately 9.3%. 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. At June 30, 2020,
the deposit amount of $1,419,605 was recorded in accounts payable
and accrued expense on the balance sheet.
|
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 December 31, 2019, there were 10,001,000 common shares issued
and outstanding.
Pursuant
to an agreement 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 at June 30, 2020 was reduced
to 6,400,000 shares from 10,001,000 shares.
HotApp Blockchain, Inc. Sale of Shares
From
January to June, 2020, the Company sold 37,300 shares of HotApp
Blockchain to international investors with the amount of $32,300,
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 June, 2019, the Company sold 331,500 shares of HotApp
Blockchain to international investors with the amount of $199,500,
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 Shareholder
From
January to June, 2020, SeD Maryland Development LLC Board approved
the payment distribution plan to members and paid $197,400 in
distribution to the minority shareholder. From January to
June, 2019, SeD Maryland Development LLC Board approved the payment
distribution plan to members and paid $740,250 in distribution to
the minority shareholder.
Change in Minority Interest
From May 11 to June 30, 2020, Alset International issued 18,500,000
common shares to unrelated parties through warrants exercise with
exercise price approximately $0.03 per share and received $615,623
cash. On May 27, 2020, the Alset International granted 7,500,000
common shares to its employees in the performance share award plan.
The fair value $146,853 of these shares was based on the market
price on the granted day and was recorded as both compensation
expense and equity in the financial statements. On June 5, 2020,
the shareholder meeting approved 35,278,600 shares granted to the
directors. The fair value $1,417,523 was based the June 5, 2020,
the grant day, market price and was recorded as both compensation
expense and equity in the financial statements. During the three
and six months ended June 30, 2020, the stock-based compensation
expense was $1,417,523 and $1,564,376, respectively. The
Company’s ownership of Alset International changed from 65.4%
as of December 31, 2019 to 62.12% as of June 30, 2020.
During the three and six months ended June 30, 2020 and 2019, the
sales of HotApp Blockchain’s shares were de minimis
compared to its outstanding shares and did not change the minority
interest.
|
12.
|
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 Three and Six Months Ended on June 30, 2020 and
2019
|
|
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)
|
-
|
(1,103,050)
|
|
|
|
|
|
|
|
Balance
at March 31, 2020
|
$(68,128)
|
$518,315
|
$(84,968)
|
$365,219
|
|
|
|
|
|
|
|
Other
Comprehensive Income
|
8,147
|
389,413
|
(18,317)
|
379,243
|
|
|
|
|
|
|
|
Balance
at June 30, 2020
|
$(59,981)
|
$907,728
|
$(103,285)
|
$744,462
|
|
|
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
|
|
|
|
|
|
|
Other
Comprehensive Income
|
22
|
104,761
|
104,783
|
|
|
|
|
|
|
Balance
at June 30, 2019
|
$(12,076)
|
$1,785,591
|
$1,773,515
|
|
13.
|
DISCONTINUED OPERATIONS
|
HotApps Information Technology Co. Ltd.
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 June 30,
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:
The
aggregate financial results of discontinued operations were as
follows:
The
cash flows attributable to the discontinued operations are as
follows:
|
|
Six Months Ended
June 30, 2020
|
Six Months Ended
June 30, 2019
|
|
Operating
|
$-
|
$24,493
|
|
Investing
|
-
|
-
|
|
Financing
|
-
|
-
|
|
Net
Change in Cash
|
$-
|
$24,493
|
Impact BioMedical Inc.
On
April 27, 2020, Global BioMedical Pte Ltd (“GBM”), one
of our subsidiaries, entered into a share exchange agreement with
DSS BioHealth Security, Inc. (“DBHS”), a wholly owned
subsidiary of Document Securities Systems Inc. (“DSS”),
pursuant to which, DBHS will acquire all of the outstanding capital
stock of Impact BioMedical Inc., wholly owned subsidiary of GBM,
through a share exchange. The aggregate consideration to be issued
to GBM for the Impact BioMedical shares will be the following: (i)
483,334 newly issued shares of DSS common stock; and (ii) 46,868
newly issued shares of a new series of DSS perpetual convertible
preferred stock with a stated value of $46,868,000, or $1,000 per
share. The convertible preferred stock can be convertible into
shares of DSS common stock at a conversion price of $6.48 of
preferred stock stated value per share of common stock, subject to
a 19.9% beneficial ownership conversion limitation (a so-called
“blocker”) based on the total issued outstanding shares
of common stock of DSS beneficially owned by GBM. Holders of the
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 convertible preferred stock. The
holders of convertible preferred stock will be entitled to a
liquidation preference of $1,000 per share, and DSS will have the
right to redeem all or any portion of the then outstanding shares
of convertible preferred stock, pro rata among all holders, at a
redemption price per share equal to such liquidation value per
share.
Under
ASU 2014-08, a disposal transaction meets the definition of a
discontinued operation if all of the following criteria are
met:
1.
The disposal group
constitutes a component of an entity or a group of components of an
entity
2.
The component of an
entity (or group of components of an entity) meets the
held-for-sale classification criteria, is disposed of by sale, or
is disposed of other than by sale (e.g., “by abandonment, in
an exchange measured based on the recorded amount of the
nonmonetary asset relinquished, or in a distribution to owners in a
spinoff”).
3.
The disposal of a
component of an entity (or group of components of an entity)
“represents a strategic shift that has (or will have) a major
effect on an entity’s operations and financial
results”.
Impact
Biomedical Inc. is a group of subsidiaries of HFE and
operates independently with its own financial reporting. The
transaction is a disposal by sale and has a major effect on
HFE’s financial results. Since it meets all above test
criteria, we treated this disposal transaction as a discontinued
operation in our financial statements.
On
August 21, 2020, the transaction closed and Impact BioMedical Inc
became a direct wholly owned subsidiary of DBHS. GBM received
483,334 shares of DSS common stock and 46,868 shares of DSS
preferred stock, which preferred shares could be converted to
7,232,716 common shares (however, any conversion will be subject to
the blocker GBM has agreed to, as described above). After this
transaction, we hold 500,001 shares of the common stock of DSS,
representing 9.7% of the outstanding common stock of DSS. Our CEO,
Chan Heng Fai owns an additional 14.5% of the common stock of DSS
(not including any common or preferred shares we hold) and is the
executive chairman of the board of directors of DSS. The
Company has elected the fair value option for the DSS common stock
that would otherwise be accounted for under the equity method of
accounting. ASC 820, Fair Value Measurement and Disclosures,
defines fair value of the financial assets. We value DSS common
stock under level 1 category through quoted prices and preferred
stock under level 2 category through the value of the common shares
into which the preferred shares are convertible. The quoted price
of DSS common stock was $6.95 as of August 21, 2020. The total fair
value of DSS common and preferred stocks GBM receive as
consideration for the disposal of Impact BioMedical was
$53,626,548. As of August 21, 2020, net asset value of Impact
BioMedical was $57,143. The difference of $53,569,405 was recorded
as additional paid in capital. We did not recognize gain or loss
from this transaction as it was a related party
transaction.
The composition of assets and liabilities included in discontinued
operations is as follows:
|
|
June 30,
|
December 31,
|
|
|
2020
|
2019
|
|
Assets
|
|
|
|
Cash
|
$75,608
|
$108,731
|
|
Prepaid
Expense
|
23,319
|
30,700
|
|
Total
Asset
|
$98,927
|
$139,431
|
|
|
|
|
|
Liabilities
|
|
|
|
Accounts
Payable
|
$7,903
|
$7,021
|
|
Total
Liabilities
|
$7,903
|
$7,021
|
The financial results of discontinued operations are as
follows:
The cash flows attributable to the discontinued operation are as
follows:
|
|
Six Months Ended on June 30, 2020
|
Six Months Ended on June 30, 2019
|
|
|
|
|
|
Operating
|
$(353,123)
|
$(324,667)
|
|
Investing
|
-
|
(36,000)
|
|
Financing
|
-
|
-
|
|
Net
Change in Cash
|
$(353,123)
|
$(360,667)
|
|
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 June
30, 2020 and December 31, 2019:
|
|
Amount at
|
Fair Value Measurement Using
|
Amount at
|
||
|
|
Cost
|
Level 1
|
Level 2
|
Level 3
|
Fair Value
|
|
June 30, 2020
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Investment
securities- Fair Value Option
|
$3,457,056
|
$4,563,831
|
$-
|
$-
|
$4,563,831
|
|
Investment
securities- Trading
|
16,016
|
18,285
|
-
|
-
|
18,285
|
|
Convertible
note receivable
|
50,000
|
-
|
-
|
26,725
|
26,725
|
|
Warrants
- AMRE
|
-
|
-
|
-
|
-
|
-
|
|
Stock
Option - Vivacitas
|
-
|
-
|
-
|
-
|
-
|
|
Total
Investment in securities at Fair Value
|
$3,523,072
|
$4,582,116
|
$-
|
$26,725
|
$4,608,841
|
|
|
Amount at
|
Fair Value Measurement Using
|
Amount at
|
||
|
|
Cost
|
Level 1
|
Level 2
|
Level 3
|
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 six months
ended June 30, 2020 was
$1,592,647 and unrealized loss on investment securities for six
months ended June 30, 2019 was $654,197.
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 June 30, 2020 and December 31, 2019,
respectively.
* Ratio of 1-for-30 (the “Reverse Split”) was effective
at 5:01 p.m. Eastern Time on May 7, 2020 (the “Effective
Time”)
|
|
Share price
|
|
Market Value
|
|
|
|
12/31/2019
|
Shares
|
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
|
|
|
|
|
|
|
|
|
|
Vivacitas (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 and six months ended
June 30, 2020 and 2019:
|
|
Total
|
|
Balance at January
1, 2020
|
$26,209
|
|
Total
losses
|
(12,599)
|
|
Purchases, sales,
and settlements
|
-
|
|
Balance
at March 31, 2020
|
$13,610
|
|
Total
gain
|
13,115
|
|
Purchases, sales,
and settlements
|
-
|
|
Balance
at June 30, 2020
|
$26,725
|
|
|
Total
|
|
Balance at January
1, 2019
|
$78,723
|
|
Total
losses
|
(5,439)
|
|
Purchases, sales,
and settlements
|
-
|
|
Balance
at March 31, 2019
|
$73,284
|
|
Total
losses
|
(18,497)
|
|
Purchases, sales,
and settlements
|
-
|
|
Balance
at June 30, 2019
|
$54,787
|
The
fair value of the Sharing Services
Convertible Note as of June 30, 2020 and December 31, 2019
was calculated using a Black-Scholes valuation model valued with
the following weighted average assumptions:
|
|
June
30,
2020
|
December
31,
2019
|
|
|
|
|
|
Dividend
yield
|
0.00%
|
0.00%
|
|
Expected
volatility
|
224.99%
|
159.88%
|
|
Risk free interest
rate
|
0.69%
|
1.61%
|
|
Contractual term
(in years)
|
2.26
|
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 June 30, 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 June 30, 2020 and 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 six months
ended on June 30, 2020, NVR purchased 46 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., Alset
International, 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 June 30, 2020 and December 31, 2019, $162,629 and
$149,697 were due to 150 CCM Black Oak Ltd,
respectively.
|
16.
|
DIRECTORS AND EMPLOYEES’ BENEFITS
|
Stock Option plans HFE
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 June 30, 2020 and December 31, 2019, there
have been no options granted.
Alset International Stock Option plans
On
November 20, 2013, Alset International 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 six months ended June 30, 2020:
|
|
Options
for
|
|
RemainingContractual
|
Aggregate
|
|
|
Common
Shares
|
Exercise
Price
|
Term
(Years)
|
Intrinsic
Value
|
|
Outstanding as of
December 31, 2019
|
1,061,333
|
$0.09
|
4.00
|
$-
|
|
Granted
|
-
|
-
|
|
|
|
Exercised
|
-
|
-
|
|
|
|
Forfeited,
cancelled, expired
|
-
|
-
|
|
|
|
Outstanding as of
June 30, 2020
|
1,061,333
|
$0.09
|
3.50
|
$37,710
|
|
Vested and
exercisable at June 30, 2020
|
1,061,333
|
$0.09
|
3.50
|
$37,710
|
|
17.
|
SUBSEQUENT EVENTS
|
The
Company evaluated the events and transactions subsequent to June
30, 2020, the balance sheet date, through September
18, 2020, the date the consolidated financial
statements were available to be issued.
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.
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 & REIT 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 Alset International
From July 1 to August 14, 2020, Alset International issued 324,697,062 common
shares. During the period from July 13, 2020 to August 20, 2020,
the Company’s ownership of Alset International was in the
range of 49.62% to 49.11%. On August 20, 2020, the Company acquired
30,000,000 common shares from Chan Heng Fai in exchange with a
two-year no interest note of $1,333,429. After that transaction,
the Company’s ownership was 51.04%. The Company’s
ownership is 51.04% as of September 18,
2020.
Singapore eDevelopment changed name to Alset
International
On September 9, 2020, Singapore eDevelopment Ltd, one of our
subsidiaries, changed its name to “Alset International
Limited”.
HF
Enterprises Inc. and Subsidiaries
Table
of Contents
For
the Years Ended December 31, 2019 and 2018
|
Consolidated
Balance Sheets
|
F-41
|
|
|
|
|
Consolidated
Statements of Operations and Other Comprehensive Loss
|
F-42
|
|
|
|
|
Consolidated
Statements of Stockholders’ Equity
|
F-43
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
F-44
|
|
|
|
|
Notes to
Consolidated Financial Statements
|
F-45 -
F-80
|
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,
except for the changes in presentation and disclosure of the
subsequent discontinued operations of Impact BioMedical Inc., as
noted in Note 14, as to which the date is September 14,
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
|
$2,774,587
|
$1,351,834
|
|
Restricted
Cash
|
4,447,678
|
4,120,989
|
|
Account
Receivables, Net
|
170,442
|
564,759
|
|
Other
Receivables
|
681,677
|
-
|
|
Prepaid
Expenses
|
145,186
|
117,681
|
|
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
|
|
Deposits
|
70,208
|
23,603
|
|
Current
Assets of Discontinued Operations
|
139,431
|
81,505
|
|
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
|
$3,995,001
|
$4,317,835
|
|
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
|
7,021
|
251,624
|
|
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
|
5,860,144
|
6,567,638
|
|
Research
and Development
|
-
|
-
|
|
Inventory
Written Off
|
141,265
|
-
|
|
Impairment
of Real Estate
|
5,230,828
|
1,455,326
|
|
|
31,200,994
|
23,556,665
|
|
|
|
|
|
Loss
From Operations
|
(6,943,041)
|
(3,175,725)
|
|
|
|
|
|
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
|
-
|
-
|
|
Loss
on Acquisition
|
-
|
-
|
|
Other
Income
|
17,414
|
8,845
|
|
|
(17,527)
|
(3,116,876)
|
|
|
|
|
|
Net
Loss from Continuing Operations Before Income Taxes
|
(6,960,568)
|
(6,292,601)
|
|
|
|
|
|
Income
Tax Expense
|
(431,388)
|
-
|
|
|
|
|
|
Net
Loss from Continuing Operations
|
(7,391,956)
|
(6,292,601)
|
|
|
|
|
|
Loss
from Discontinued Operations, Net of Tax
|
(661,472)
|
(1,197,967)
|
|
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
|
$ (0.47)
|
$ (0.42)
|
|
Discontinued
Operations
|
$ (0.05)
|
$ (0.08)
|
|
Net
Loss Per Share
|
$(0.52)
|
$(0.50)
|
|
|
|
|
|
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
|
|
|
|
|
(885,692)
|
(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
|
$ (7,391,956)
|
$ (6,292,601)
|
|
Adjustments
to Reconcile Net Loss from Continuing Operations to Net Cash
Provided by 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
|
-
|
-
|
|
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
|
23,982
|
18,045
|
|
Deferred
Revenue
|
173,596
|
(29,112)
|
|
Inventory
|
(56,809)
|
(134,964)
|
|
Accounts
Payable and Accrued Expenses
|
(352,868)
|
2,470,345
|
|
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
|
6,550,485
|
9,207,391
|
|
Net
Cash Provided by (Used In) Discontinued Operating
Activities
|
(592,051)
|
(1,181,751)
|
|
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
|
-
|
-
|
|
Equity
Method Investment Contributions
|
-
|
-
|
|
Net
Cash Used in Continuing Investing Activities
|
(3,632)
|
(30,645)
|
|
Net
Cash Used in Discontinued Investing Activities
|
(127,000)
|
(55,000)
|
|
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 from 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, Australia and South Korea. The
Company manages its principal businesses primarily through its
subsidiary, Alset International Limited (“Alset
International”, f.k.a. Singapore eDevelopment 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 Alset International, or
65.4% and 69.11% as of December 31, 2019 and 2018, respectively, of
the outstanding shares of Alset International, 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 LiquidValue
Development Inc. (“LiquidValue
Development”) and SeD Perth Pty
Ltd.
In 2014,
Alset International commenced operations developing
property projects and participating in third-party property
development projects. LiquidValue Development Inc. (f.k.a.
SeD Intelligent Home Inc.), a 99.9%-owned subsidiary of
Alset International, 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 550-600 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 Alset
International, 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
Alset International, 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 Alset International, purchased 50%
of Sweet Sense, Inc. from Quality Ingredients, LLC for $91,000.
Sweet Sense, Inc. is now an 81.8% owned subsidiary of Alset
International.
On April 27, 2020,
Global BioMedical Pte Ltd (“GBM”), a wholly owned
subsidiary of Alset International, entered into a share exchange
agreement with DSS BioHealth Security, Inc. (“DBHS”), a
wholly owned subsidiary of Document Securities Systems Inc.
(“DSS”), pursuant to which, DBHS will acquire all of
the outstanding capital stock of Impact BioMedical Inc., through a
share exchange. The transaction was closed on August 21, 2020 and
Impact BioMedical became a direct wholly owned subsidiary of DBHS.
See details in Note 14, Discontinued Operations.
Currently,
revenues from our biohealth segment come from the
direct sales by iGalen Inc. (f.k.a. iGalen USA, LLC),
which is 100% owned by iGalen International Inc., Alset
International’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
Alset International, 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, and 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:
*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 Alset International., 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
Alset International, 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. The agreement with these FFB investors is not subject
to amendment by regulatory agencies and thus our revenue from FFB
assessment is not either. During the years ended on
December 31, 2019 and 2018, we recognized revenue $548,457 and
$413,595 from FFB assessment, respectively.
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
|
Discontinued
Operations
|
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)
|
(2,268,802)
|
(2,614,714)
|
(526,871)
|
(11,759,108)
|
|
Operating
Income (Loss)
|
(2,719,392)
|
(284,158)
|
(1,355,986)
|
(2,583,505)
|
(526,871)
|
(7,469,912)
|
|
Other
Income (Expense)
|
49,201
|
333,419
|
17,931
|
(418,078)
|
(134,601)
|
(152,128)
|
|
Net
Income (Loss) Before Income Tax
|
(2,670,191)
|
49,261
|
(1,338,055)
|
(3,001,583)
|
(661,472)
|
(7,622,040)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2018
|
|
|
|
|
|
|
|
Revenue
|
$17,675,034
|
$140,652
|
$2,532,852
|
$32,402
|
$ 7,325
|
$ 20,388,265
|
|
Cost
of Sales
|
(14,777,546)
|
(74,129)
|
(682,026)
|
-
|
(4,527)
|
(15,538,228)
|
|
Gross
Margin
|
2,897,488
|
66,523
|
1,850,826
|
32,402
|
2,798
|
4,850,037
|
|
Operating
Expenses
|
(2,206,093)
|
(518,175)
|
(1,791,461)
|
(3,507,235)
|
(1,154,313)
|
(9,177,277)
|
|
Operating
Income (Loss)
|
691,395
|
(451,652)
|
59,365
|
(3,474,833)
|
(1,151,515)
|
(4,327,240)
|
|
Other
Income (Expense)
|
38,019
|
(51,508)
|
40,348
|
(3,143,735)
|
(46,452)
|
(3,163,328)
|
|
Net
Loss Before Income Tax
|
729,414
|
(503,160)
|
99,713
|
(6,618,568)
|
(1,197,967)
|
(7,490,568)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
Cash
and Restricted Cash
|
$5,439,318
|
$55,752
|
$ 388,670
|
$1,338,525
|
$ 108,731
|
$7,330,996
|
|
Total
Assets
|
29,857,615
|
155,854
|
948,931
|
4,770,949
|
139,431
|
35,872,780
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
Cash
and Restricted Cash
|
$4,683,040
|
$118,044
|
$ 138,808
|
$532,931
|
$ 49,692
|
$ 5,522,515
|
|
Total
Assets
|
43,786,046
|
120,129
|
686,304
|
4,026,706
|
83,271
|
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 Alset International and Chan Heng Fai
was executed. Under the agreement, Chan Heng Fai provides a lending
credit limit of approximately $10 million for Alset
International 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 Alset
International 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 (13.1% and 14.2% as of December 31, 2019 and 2018,
respectively). 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 LiquidValue Development, 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 Alset International,
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 LiquidValue Development,
performs consulting services for LiquidValue
Development 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 Alset
International at a price
approximately $0.03 per share. Alset International
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 Alset
International
On July 31, 2019
500,000 warrants of Alset
International were exercised by an unrelated
shareholder at a price approximately $0.03 per share. Alset International received
$14,858. After these 500,000 warrants were exercised, the total
number of outstanding ordinary shares of Alset International
was
1,101,956,707. The Company’s ownership percentage
of Alset International
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 Alset
International at a price approximately $0.03 per
share. Alset
International 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
Alset
International 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 Alset International 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
|
HotApps Information Technology Co. Ltd.
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:
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)
|
Impact BioMedical Inc.
On April 27,
2020, Global BioMedical Pte Ltd (“GBM”), one of our
subsidiaries, entered into a share exchange agreement with DSS
BioHealth Security, Inc. (“DBHS”), a wholly owned
subsidiary of Document Securities Systems Inc. (“DSS”),
pursuant to which, DBHS will acquire all of the outstanding capital
stock of Impact BioMedical Inc., through a share exchange. The
aggregate consideration to be issued to GBM for the Impact
BioMedical shares will be the following: (i) 483,334 newly issued
shares of our common stock, nominally valued at $3,132,000, or
$6.48 per share; and (ii) 46,868 newly issued shares of a new
series of our perpetual 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 convertible preferred
stock will be convertible into shares of DSS common stock at a
conversion price of $6.48 of preferred stock stated value per share
of common stock, subject to a 19.9% beneficial ownership conversion
limitation (a so-called “blocker”) based on the total
issued outstanding shares of common stock of DSS beneficially owned
by GBM. Holders of the 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 convertible
preferred stock. The holders of convertible preferred stock will be
entitled to a liquidation preference of $1,000 per share, and DSS
will have the right to redeem all or any portion of the then
outstanding shares of convertible preferred stock, pro rata among
all holders, at a redemption price per share equal to such
liquidation value per share. On August 21, 202, the transaction was
closed and Impact BioMedical Inc became a direct wholly owned
subsidiary of DBHS.
On
August 21, 2020, the transaction closed and Impact BioMedical Inc
became a direct wholly owned subsidiary of DBHS. GBM received
483,334 shares of DSS common stock and 46,868 shares of DSS
preferred stock, which preferred shares could be converted to
7,232,716 common shares (however, any conversion will be subject to
the blocker GBM has agreed to, as described above). After this
transaction, we hold 500,001 shares of the common stock of DSS,
representing 9.7% of the outstanding common stock of DSS. Our CEO,
Chan Heng Fai owns an additional 14.5% of the common stock of DSS
(not including any common or preferred shares we hold) and is the
executive chairman of the board of directors of DSS.
The Company has elected the fair
value option for the DSS common stock that would otherwise be
accounted for under the equity method of accounting. ASC 820, Fair
Value Measurement and Disclosures, defines fair value of the
financial assets. We value DSS common stock under level 1 category
through quoted prices and preferred stock under level 2 category
through the value of the common shares into which the preferred
shares are convertible. The quoted price of DSS common stock was
$6.95 as of August 21, 2020. The total fair value of DSS common and
preferred stocks GBM receive as consideration for the disposal of
Impact BioMedical was $53,626,548. As of August 21, 2020, net asset
value of Impact BioMedical was $57,143. The difference of
$53,569,405 was recorded as additional paid in capital. We did not
recognize gain or loss from this transaction as it was a related
party transaction.
The composition of assets and liabilities included in discontinued
operations is as follows:
|
|
December
31,
2019
|
December
31,
2018
|
|
Assets
|
|
|
|
Cash
|
$108,731
|
$35,375
|
|
Prepaid
Expense
|
30,700
|
22,761
|
|
Investment in
Security by Equity Method
|
-
|
9,052
|
|
Total
Assets
|
$139,431
|
$67,188
|
|
|
|
|
|
Liabilities
|
|
|
|
Accounts
Payable
|
$7,021
|
$77,018
|
|
Total
Liabilities
|
$7,021
|
$77,018
|
The financial results of discontinued operations are as
follows:
|
|
2019
|
2018
|
|
Operating
Expense
|
|
|
|
Research &
Development
|
$108,394
|
$461,752
|
|
General and
Administrative
|
414,767
|
592,835
|
|
Total
Operating Expense
|
$523,161
|
$1,054,587
|
|
|
|
|
|
Other
Expense
|
|
|
|
Loss
from Security Investment by Equity Method
|
$44,053
|
$45,948
|
|
Loss from
Acquisition
|
90,001
|
-
|
|
Other
|
545
|
683
|
|
Total
Other Expense
|
$134,599
|
$46,631
|
|
|
|
|
|
Loss from
Discontinued Operations
|
$(657,760)
|
$(1,101,218)
|
The cash flows
attributable to the discounted operation are as
follows:
|
|
2019
|
2018
|
|
|
|
|
|
Operating
|
$(616,542)
|
$(1,095,110)
|
|
Investing
|
(127,000)
|
(55,000)
|
|
Financing
|
-
|
-
|
|
Net Cash
Outflows
|
$(743,542)
|
$(1,150,110)
|
|
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
|
|
Market
Value
|
|
|
|
12/31/2019
|
Shares
|
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
|
|
|
|
|
|
|
|
|
Vivacitas (Related Party)
|
N/A
|
2,480,000
|
200,128
|
Investment
in Securities at Cost
|
|
|
|
|
|
|
|
|
|
Total Equity Securities
|
3,189,617
|
|
|
|
Share
price
|
|
Market
Value
|
|
|
|
12/31/2018
|
Shares
|
12/31/2018
|
Valuation
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
Vivacitas (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
|
|
|
|
|
AMBS
(Unaudited)
|
$3,480,000
|
$31,216,000
|
$(3,767,000)
|
|
Holista
|
$5,240,181
|
$2,020,432
|
$(1,638,673)
|
|
DSS
|
$15,279,786
|
$7,705,453
|
$1,464,969
|
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.,
Alset International, 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.
Alset
International Limited Stock Option Plans
On November 20,
2013, Alset International 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 Alset International 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, Alset iHome Inc. (“Alset
iHome”), a wholly-owned subsidiary of
LiquidValue Development (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 Alset iHome 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 Alset iHome. 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.
Reorganization of Certain Biohealth Activities
On
April 27, 2020, Global BioMedical Pte Ltd (“GBM”), one
of our subsidiaries, entered into a share exchange agreement with
DSS BioHealth Security, Inc. (“DBHS”), a wholly owned
subsidiary of Document Securities Systems Inc. (“DSS”),
pursuant to which, DBHS will acquire all of the outstanding capital
stock of Impact BioMedical Inc., through a share exchange. The
aggregate consideration to be issued to GBM for the Impact
BioMedical shares will be the following: (i) 483,334 newly issued
shares of our common stock, nominally valued at $3,132,000, or
$6.48 per share; and (ii) 46,868 newly issued shares of a new
series of our perpetual 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 convertible preferred
stock will be convertible into shares of DSS common stock at a
conversion price of $6.48 of preferred stock stated value per share
of common stock, subject to a 19.9% beneficial ownership conversion
limitation (a so-called “blocker”) based on the total
issued outstanding shares of common stock of DSS beneficially owned
by GBM. Holders of the 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 convertible
preferred stock. The holders of convertible preferred stock will be
entitled to a liquidation preference of $1,000 per share, and DSS
will have the right to redeem all or any portion of the then
outstanding shares of convertible preferred stock, pro rata among
all holders, at a redemption price per share equal to such
liquidation value per share. On August 21, 202, the transaction was
closed and Impact BioMedical Inc became a direct wholly owned
subsidiary of DBHS. DSS owns 9.25% of
the issued and outstanding stock of Alset
International.
Changes of ownership percentage of Alset
International
From
July 1 to August 14, 2020, Alset
International issued 385,975,662 common shares. During the period
from July 13, 2020 to August 20, 2020, the Company’s
ownership of Alset International was in the range of 49.62% to
49.11%. On August 20, 2020, the Company acquired 30,000,000 common
shares from Chan Heng Fai in exchange with a two-year no interest
note of $1,333,429. After that transaction, the Company’s
ownership was 51.04%. The Company’s ownership is 51.04% as of
September 18, 2020.
Singapore eDevelopment changed name to Alset
International
On September 9, 2020, Singapore eDevelopment Ltd, one of our
subsidiaries, changed its name to “Alset International
Limited”.
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
|
$ 3,429
|
|
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
|
300,000
|
|
Transfer agent
fees
|
10,000
|
|
Miscellaneous
|
1,200
|
|
Total
|
$ 794,829
|
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 Alset
International Limited and warrants to purchase 359,834,471
ordinary shares of Alset International
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.
|
|
|
Certificate
of Incorporation of HF Enterprises Inc.
|
||
|
Bylaws
of HF Enterprises Inc.
|
||
|
Second
Amended and Restated Certificate of Incorporation of HF Enterprises
Inc.
|
||
|
Third
Amended and Restated Certificate of Incorporation of HF Enterprises
Inc.
|
||
|
Specimen
Common Stock Certificate.
|
||
|
Opinion
of Sichenzia Ross Ference LLP, as to the legality of
the common stock.
|
||
|
HF
Enterprises Inc. 2018 Incentive Compensation Plan.
|
||
|
Office
Lease (Full-Service Gross), dated as of July 21, 2015, by and
between Hampden Square Corporation and SeD Home, Inc.
|
||
|
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.
|
||
|
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.
|
||
|
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.
|
||
|
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.
|
||
|
Form
of Lot Purchase Agreement for Ballenger Run, by and between SeD
Maryland Development, LLC and NVR, Inc. d/b/a Ryan
Homes.
|
||
|
Management
Agreement, entered into as of July 15, 2015, by and between SeD
Maryland Development, LLC and SeD Development Management,
LLC.
|
||
|
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.
|
||
|
Consulting
Services Agreement, dated as of May 1, 2017, by and between SeD
Development Management LLC and MacKenzie Equity Partners
LLC.
|
||
|
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.
|
||
|
Assignment
and Assumption Agreement, dated as of September 15, 2017, by and
between MacKenzie Development Company, LLC and Adams-Aumiller
Properties, LLC.
|
||
|
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.
|
||
|
Intentionally
Omitted.
|
||
|
Lot
Purchase Agreement, dated as of July 20, 2016, by and between SeD
Maryland Development, LLC and Orchard Development
Corporation.
|
||
|
Partnership
Interest Purchase Agreement, dated as of July 23, 2018, by and
between SeD Development USA, Inc and 150 CCM Black Oak,
Ltd.
|
||
|
Partnership
Interest Purchase Agreement, dated as of July 23, 2018, by and
between SeD Development USA, Inc and 150 CCM Black Oak,
Ltd.
|
||
|
Loan
Conversion Agreement, dated as of July 13, 2015, by and between
HotApp International Inc. and Singapore eDevelopment
Limited.
|
||
|
Agreement
for Services, dated as of January 25, 2017, by and between HotApp
International Inc. and IGalen International Inc.
|
||
|
Loan
Conversion Agreement, dated as of March 27, 2017, by and between
HotApp International Inc. and Singapore eDevelopment
Limited.
|
||
|
Preferred
Stock Cancellation Agreement, dated as of March 27, 2017, by
and between HotApp International Inc. and Singapore eDevelopment
Limited.
|
||
|
Outsource
Technology Development Agreement, dated as of March 1, 2018, by and
between Document Security Systems, Inc. and HotApp International
Ltd.
|
||
|
Term
Sheet, dated as of September 14, 2018, by and between HotApps
International Pte Ltd and The Alpha Mind Pte Ltd.
|
||
|
Construction
Loan Agreement, dated as of November 23, 2015, by and between SeD
Maryland Development, LLC and The Bank of Hampton
Roads.
|
||
|
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.
|
||
|
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.
|
||
|
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.
|
||
|
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.
|
||
|
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.
|
||
|
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.
|
||
|
Purchase
and Sale Agreement, by and among 150 CCM Black Oak, Ltd. and
Houston LD, LLC, dated as of July 3, 2018.
|
||
|
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.
|
||
|
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.
|
||
|
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 Limited, 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.
|
||
|
10.40**
|
Promissory Note
from HF Enterprises Inc. to Chan Heng Fai, dated as of August 20,
2020.
|
|
|
Code
of Conduct.
|
||
|
Code
of Ethics for the CEO and Senior Financial Officers.
|
||
|
Subsidiaries
of HF Enterprises Inc.
|
||
|
Consent
of Sichenzia Ross Ference LLP (included in the opinion
filed as Exhibit 5.1).
|
||
|
Consent
of Rosenberg Rich Baker Berman, P.A.
|
||
|
Consent
of Wong Tat Keung.
|
||
|
Consent
of Robert Trapp.
|
||
|
Consent
of John Thatch.
|
||
|
Consent
of Charles MacKenzie.
|
||
|
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. 2 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
September 18, 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. 2 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
|
|
September 18,
2020
|
|
Chan
Heng Fai
|
|
Chief
Executive Officer
(principal
executive officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Lui
Wai Leung Alan
|
|
Co-Chief
Financial Officer
|
|
September 18,
2020
|
|
Lui Wai
Leung Alan
|
|
(co-principal
financial and accounting officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Rongguo Wei
|
|
Co-Chief
Financial Officer
|
|
September 18,
2020
|
|
Rongguo
Wei
|
|
(co-principal
financial and accounting officer)
|
|
|
|
/s/ Ang
Hay Kim Aileen
|
|
Director
|
|
September
18, 2020
|
|
Ang Hay
Kim Aileen
|
|
|
|
|
|
|
|
|
|
|
II-6
