Notes to Consolidated Financial
Statements
March
31, 2021 (Unaudited)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Nature of Operations
LiquidValue
Development Inc. (the “Company”), was incorporated in
the State of Nevada on December 10, 2009. On July 8, 2020 the
Company changed its name from SeD Intelligent Home Inc. to
LiquidValue Development Inc. Alset EHome Inc., a Delaware
corporation, was incorporated on February 24, 2015 and was formerly
known as SeD Home & REITs Inc and Alset iHome Inc. Alset EHome
Inc., a wholly-owned subsidiary of the Company, is principally
engaged in developing, selling, managing, and leasing residential
properties in the United States, and may expand from residential
properties to other property types, including but not limited to
commercial and retail properties. 99.99% of the Company’s
common stock is owned by a wholly-owned subsidiary of Alset
International Limited (“Alset International”), a
multinational public company listed on the Singapore Exchange
Securities Trading Limited (“SGXST”).
Principles of Consolidation
The
consolidated financial statements include all accounts of the
following entities as of the reporting period ending dates and for
the reporting periods as follows:
Name
of consolidated subsidiary
|
State
or other jurisdiction of incorporation or organization
|
Date of incorporation or
formation
|
Attributable interest
|
Alset
EHome Inc.
|
Delaware
|
February 24,
2015
|
100%
|
SeD
USA, LLC
|
Delaware
|
August
20, 2014
|
100%
|
150
Black Oak GP, Inc.
|
Texas
|
January
23, 2014
|
100%
|
SeD
Development USA, Inc.
|
Delaware
|
March
13, 2014
|
100%
|
150 CCM
Black Oak Ltd.
|
Texas
|
March
17, 2014
|
100%
|
SeD
Ballenger, LLC
|
Delaware
|
July 7,
2015
|
100%
|
SeD
Maryland Development, LLC
|
Delaware
|
October
16, 2014
|
83.55%
|
SeD
Development Management, LLC
|
Delaware
|
June
18, 2015
|
85%
|
SeD
Builder, LLC
|
Delaware
|
October
21, 2015
|
100%
|
SeD
Texas Home, LLC
|
Delaware
|
June
16, 2015
|
100%
|
SedHome
Rental, Inc.
|
Texas
|
December 19,
2018
|
100%
|
SeD
REIT Inc.
|
Maryland
|
August
20, 2019
|
100%
|
Alset
Solar Inc.
|
Texas
|
September 21,
2020
|
80%
|
All
intercompany balances and transactions have been eliminated.
Non–controlling interest represents the minority equity
investment in the Company’s subsidiaries, plus the minority
investors’ share of the net operating results and other
components of equity relating to the non–controlling
interest.
As of
March 31, 2021 and December 31, 2020, the aggregate non-controlling
interest in Alset EHome Inc. was $1,838,460 and $1,914,791,
respectively, which is separately disclosed on the Consolidated
Balance Sheets.
Basis of Presentation
The
Company’s consolidated financial statements have been
prepared in accordance with the accounting principles generally
accepted in the United States of America (“US
GAAP”).
The
unaudited financial information furnished herein reflects all
adjustments, consisting solely of normal recurring items, which in
the opinion of management are necessary to fairly state the
financial position of the Company and the results of its operations
for the periods presented. This report should be read in
conjunction with the Company’s consolidated financial
statements and notes thereto included in the Company’s Form
10-K for the year ended December 31, 2020 filed on March 22, 2021.
The Company assumes that the users of the interim financial
information herein have read or have access to the audited
financial statements for the preceding fiscal year and the adequacy
of additional disclosure needed for a fair presentation may be
determined in that context. The consolidated balance sheet at
December 31, 2020 was derived from the audited financial statements
but does not include all disclosures required by accounting
principles generally accepted in the United States of America. The
results of operations for the interim periods presented are not
necessarily indicative of results for the year ending December 31,
2021.
Use of Estimates
The
preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts in the consolidated financial
statements. The Company's significant estimates are the valuation
of real estate. Actual results could differ from those
estimates.
Earnings (Loss) per Share
Basic
income (loss) per share is computed by dividing the net income
(loss) attributable to the common stockholders by weighted average
number of shares of common stock outstanding during the period.
Fully diluted loss per share is computed similarly to basic loss
per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding
if the potential common shares had been issued and if the
additional common shares were dilutive. There were no potentially
dilutive financial instruments issued or outstanding for the
periods ended March 31, 2021 or March 31, 2020.
Fair Value of Financial Instruments
For
purpose of this disclosure, the fair value of a financial
instrument is the amount at which the instrument could be exchanged
in a current transaction between willing parties, other than in a
forced sale or liquidation. The carrying amount of the
Company’s short-term financial instruments approximates fair
value due to the relatively short period to maturity for these
instruments.
Cash and Cash Equivalents
The
Company considers all highly liquid investments with a maturity of
three months or less at the date of acquisition to be cash
equivalents. There were no cash equivalents as of March 31, 2021
and December 31, 2020.
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 a portion of cash proceeds from lot sales. The fund
in the escrow account is specifically used for the payment of the
loan from M&T Bank. The fund is required to remain in the
escrow account for the loan payment until the loan agreement
terminates. As of March 31, 2021 and December 31, 2020, the total
balance of these two accounts was $8,099,096 and $5,729,067,
respectively.
Accounts Receivable and Allowance for Doubtful
Accounts
Accounts receivable
include all receivables from buyers, contractors and all other
parties. The Company records an allowance for doubtful accounts
based on a review of the outstanding receivables, historical
collection information and economic conditions. No allowance was
necessary at either March 31, 2021 or December 31,
2020.
Property and Equipment and Depreciation
Property and
equipment are recorded at cost, less accumulated depreciation.
Expenditures for major additions and betterments that extend the
useful life or functionality are capitalized. Maintenance and
repairs are charged to operations as incurred. Depreciation is
computed by the straight-line method (after taking into account
their respective estimated residual values) over the estimated
useful lives, which are 3 years.
Real Estate Assets
Real
estate assets are recorded at cost, except when real estate assets
are acquired that meet the definition of a business combination in
accordance with Financial Accounting Standards Board
(“FASB”) ASC 805, “Business Combinations,”
which acquired assets are recorded at fair value. Interest,
property taxes, insurance and other incremental costs (including
salaries) directly related to a project are capitalized during the
construction period of major facilities and land improvements. The
capitalization period begins when activities to develop the parcel
commence and ends when the asset constructed is completed. The
capitalized costs are recorded as part of the asset to which they
relate and are reduced when lots are sold.
In
addition to our annual assessment of potential triggering events in
accordance with ASC 360, the Company applies a fair-value based
impairment test to the net book value assets on an annual basis and
on an interim basis, if certain events or circumstances indicate
that an impairment loss may have occurred.
The Company did not record impairment on any of
its projects during the three months ended on March
31, 2021, nor for the three months
ended March 31, 2020.
Revenue Recognition
ASC
606, Revenue from Contracts with Customers ("ASC 606"), establishes
principles for reporting information about the nature, amount,
timing and uncertainty of revenue and cash flows arising from the
entity's contracts to provide goods or services to customers. The
Company adopted this new standard on January 1, 2018 under the
modified retrospective method. The adoption of this new standard
did not have a material effect on our financial
statements.
In
accordance with ASC 606, revenue is recognized when a customer
obtains control of promised goods or services. The amount of
revenue recognized reflects the consideration to which we expect to
be entitled to receive in exchange for these goods or services. The
provisions of ASC 606 include a five-step process by which we
determine revenue recognition, depicting the transfer of goods or
services to customers in amounts reflecting the payment to which we
expect to be entitled in exchange for those goods or services. ASC
606 requires us to apply the following steps: (1) identify the
contract with the customer; (2) identify the performance
obligations in the contract; (3) determine the transaction price;
(4) allocate the transaction price to the performance obligations
in the contract; and (5) recognize revenue when, or as, we satisfy
the performance obligation. A detailed breakdown of the five-step
process for the revenue recognition of our Ballenger and Black Oak
projects, which were essentially all of the revenue of the Company
in 2021 and 2020, is as follows:
●
Identify
the contract with a customer.
The
Company has signed agreements with the builders for developing the
raw land to ready to build lots. The contract has agreed upon
prices, timelines, and specifications for what is to be
provided.
●
Identify
the performance obligations in the contract.
Performance
obligations of the Company include delivering developed lots to the
customer, which are required to meet certain specifications that
are outlined in the contract. The customer inspects all lots prior
to accepting title to ensure all specifications are
met.
●
Determine
the transaction price.
The
transaction price is 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 when title is transferred. The Company
does not have further performance obligations 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
three months ended on March 31, 2021 and 2020, we recognized
revenue $107,071 and $40,322 from FFB assessment,
respectively.
Contract Assets and Contract Liabilities
Based
on our contracts, we invoice customers once our performance
obligations have been satisfied, at which point payment is
unconditional. Accordingly, our contracts do not give rise to
contract assets or liabilities under ASC 606. Accounts receivable
are recorded when the right to consideration becomes unconditional.
We disclose receivables from contracts with customers separately on
the balance sheets.
Cost of 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.
Recent Accounting Pronouncements
In June
2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit
Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments, which requires entities to use a forward-looking,
expected loss model to estimate credit losses. It also requires
entities to consider additional disclosures related to credit
quality of trade and other receivables, including information
related to management’s estimate of credit allowances. ASU
2016-13 was further amended in November 2018 by ASU 2018-19,
Codification Improvements to Topic 236, Financial Instrument-Credit
Losses. For public business entities that are U.S. Securities and
Exchange Commission (SEC) filers excluding smaller reporting
companies, the amendments are effective for fiscal years beginning
after December 15, 2019, including interim periods within those
fiscal years. For all other public business entities, the
amendments are effective for fiscal years beginning after December
15, 2020, including interim periods within those fiscal years. On
October 16, 2019, FASB voted to delay implementation of ASU No.
2016-13, “Financial Instruments-Credit Losses (Topic 326) -
Measurement of Credit Losses on Financial Instruments.” For
all other entities, the amendments are now effective for fiscal
years beginning after December 15, 2021, and interim periods within
fiscal years beginning after December 15, 2022. Early adoption is
permitted for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2018. The Company continues to
evaluate the impact of these amendments to the Company’s
financial position and results of operations and currently expect
no material impact of the adoption of the amendments on the
Company’s 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 three
months ended March 31, 2021, or to our net deferred tax assets
as of March 31, 2021.
2. CONCENTRATION OF CREDIT
RISK
The
group maintains cash balances at various financial institutions.
These balances are secured by the Federal Deposit Insurance
Corporation. At times, these balances may exceed the federal
insurance limits. At March 31, 2021 and December 31, 2020,
uninsured cash and restricted cash balances were $8,734,579 and
$6,937,716, respectively.
3. BUILDER DEPOSITS
In
November 2015, SeD Maryland Development, LLC (“SeD
Maryland”) entered into lot purchase agreements with NVR,
Inc. (“NVR”) relating to the sale of single-family home
and townhome lots to NVR in the Ballenger Run Project. The purchase
agreements were amended three times thereafter. Based on the
agreements, NVR is entitled to purchase 479 lots for a price of
approximately $64 million, which escalates 3% annually after June
1, 2018.
As part
of the agreements, NVR was required to give a deposit in the amount
of $5,600,000. Upon the sale of lots to NVR, 9.9% of the purchase
price is taken as payback of the deposit. A violation of the
agreements by NVR would cause NVR to forfeit the deposit. On
January 3, 2019 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 March
31, 2021 and December 31, 2020, there were $928,565 and $1,262,336
held on deposit, respectively.
4. NOTES
PAYABLE
M&T Bank Loans
On April 17, 2019, SeD Maryland Development LLC entered into a
Development Loan Agreement with Manufacturers and Traders Trust
Company (“M&T Bank”) in the principal amount not to
exceed at any one time outstanding the sum of $8,000,000, with a
cumulative loan advance amount of $18,500,000. The line of credit
bears interest rate on LIBOR plus 375 basis points. SeD Maryland
Development LLC was also provided with a Letter of Credit
(“L/C”) Facility in an aggregate amount of up to
$900,000. The L/C commission will be 1.5% per annum on the face
amount of the L/C. Other standard lender fees will apply in the
event L/C is drawn down. The loan is a revolving line of credit.
The L/C Facility is not a revolving loan, and amounts advanced and
repaid may not be re-borrowed. Repayment of the Loan Agreement is
secured by $2,600,000 collateral fund and a Deed of Trust issued to
the Lender on the property owned by SeD Maryland. As of March 31,
2021 and December 31, 2020, the outstanding balance of the
revolving loan was $0.
On June 18, 2020, Alset EHome Inc. entered into a Loan Agreement
with M&T Bank. Pursuant to the Loan Agreement, M&T Bank
provided a non-revolving loan to Alset EHome Inc. in an aggregate
amount of up to $2,990,000. The line of credit bears interest
rate on LIBOR plus 375 basis points. Repayment of this loan is
secured by a Deed of Trust issued to M&T Bank on the property
owned by certain subsidiaries of Alset EHome Inc. The maturity date
of this Loan is July 1, 2022. The Company together with one of its
subsidiaries, SeD Maryland Development LLC, are both the guarantors
of this Loan.
As of March 31, 2021, the principal 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 are amortized
over the term of the loan. In the three months ended March 31, 2021
the Company accrued $6,627 interest on this loan. The remaining
unamortized debt discount was $34,862 as of March 31,
2021.
Paycheck Protection Program Loan
On
February 11, 2021, the Company entered into a five year 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 sixteen months of principal
and interest deferred or until we apply for the loan
forgiveness. The PPP Term Note may be accelerated upon the
occurrence of an event of default.
The
PPP Term Note is unsecured and guaranteed by the United States
Small Business Administration. The Company may apply to M&T
Bank for forgiveness of the PPP Term Note, with the amount which
may be forgiven equal to at least 60% of payroll costs and other
eligible payments incurred by the Company, calculated in accordance
with the terms of the CARES Act. At this time, we are not in a
position to quantify the portion of the PPP Term Note that will be
forgiven. As of March 31, 2021, we own $68,502 to M&T
Bank.
5. RELATED PARTY TRANSACTIONS
Loan from SeD Home Limited
The
Company receives advances from SeD Home Limited (an affiliate of Alset
International) to fund development and operation costs. The
advances bear interest of 10% and are payable on demand. As of
March 31, 2021 and December 31, 2020, Alset EHome Inc. had
outstanding principal due of $0 and accrued interest of
$228,557.
Loan to/from SeD Intelligent Home Inc. (f.k.a. SeD Home
International)
The Company receives advances from or loans to SeD Intelligent
Home, the owner of 99.99% of the Company. The advances or the loans
bore interest of 18% until August 30, 2017 when the interest rate
was adjusted to 5% and have no set repayment terms. On March 31,
2021, the Company owned $2,116,321 of advance principal and $21,298
of accrued advance interest. On December 31, 2020, SeD Intelligent
Home owed the Company $98,680 in loan principal and $19,261 in
accrued loan interest. During the three months ended March 31, 2021
and 2020, the Company earned interest income of $0 and $19,261,
respectively.
Management Fees
MacKenzie Equity Partners, owned by a Charles MacKenzie, a Director
of the Company, has a consulting agreement with the Company since
2015. Per the terms of the agreement, as amended on January 1,
2018, the Company pays a monthly fee of $15,000 with an additional
$5,000 per month due upon the close of the sale to Houston LD, LLC.
From January 2019, the Company pays a monthly fee of $20,000 for
the consulting services. The Company incurred expenses of $60,000
in the three months ended March 31, 2021 and 2020, which were
capitalized as part of Real Estate on the balance sheet as the
services relate to property and project management. On March 31,
2021 and December 31, 2020, the Company owed this related party
$0.
On December 29, 2020, the Company entered into a Management
Services Agreement (the “Management Services
Agreement”) with Alset International, pursuant to which the
Company will pay Alset International a one-time payment of $360,000
for the services of certain Alset International staff members the
Company received in 2020, and will pay Alset International $30,000
per month for services to be provided in 2021. This Management
Services Agreement has a term that ends December 31, 2021, and can
be cancelled by either party on thirty days’ notice. Alset
International will provide the Company with services related to the
development of the Black Oak and Ballenger Run real estate projects
near Houston, Texas and in Frederick, Maryland, respectively, and
the potential development of future real estate projects. During
the three months ended March 31, 2021 the Company incurred expense
of $90,000 and owned this related party $450,000 as of March 31,
2021. This balance due is included in the loan amount from SeD
Intelligent Home Inc., which in turn owns the funds to Alset
International.
Advances to Alset EHome International Inc.
The Company pays some operating expenses for Alset EHome
International Inc., a related party under the common control of
Chan Heng Fai, the CEO of the Company. The advances are interest
free with no set repayment terms. On March 31, 2021 and December
31, 2020, the balance of these advances was $6,250 and $0,
respectively.
6. STOCKHOLDERS’ EQUITY
Cash Dividend Distributions
On January 11, 2021, the Board of Managers of SeD Maryland
Development LLC (the 83.55% owned subsidiary of the Company which
owns the Company’s Ballenger Project) authorized the payment
of distributions to its members in the amount of $500,000.
Accordingly, the minority member of SeD Maryland Development LLC
received a distribution in the amount of $82,250, with the
remainder being distributed to a subsidiary of the Company, which
is eliminated upon consolidation.
7. COMMITMENTS AND
CONTINGENCIES
Leases
The
Company leases office space in Texas and Maryland. Lease of the
Company’s Texas office expires in 2021, while lease of the
Company’s Maryland expires in 2024. The monthly rental
payments range between $2,265 and $8,143, respectively. Rent
expense was $29,007 and $31,363 for the three months ended March
31, 2021 and 2020, respectively. The below table summarizes future
payments due under these leases as of March 31, 2021.
The
balance of the operating lease right-of-use asset and operating
lease liability as of March 31, 2021 was $228,562 and $242,567,
respectively.
Supplemental
Cash Flow and Other Information Related to Operating Leases are as
follows:
|
Three Months Ended March 31, 2021
|
Weighted Average
Remaining Operating Lease Term (in years)
|
2.87
|
The
below table summarizes future payments due under these leases as of
March 31, 2021.
For
the Years Ending December 31:
2021
|
$83,644
|
2022
|
92,559
|
2023
|
95,104
|
2024
|
24,430
|
Total
Minimum Lease Payments
|
295,737
|
Less:
Effect of Discounting
|
(53,170)
|
Present
Value of Future Minimum Lease Payments
|
242,567
|
Less:
Current Obligation under Leases
|
-
|
Long-term
Lease Obligations
|
$242,567
|
Lot Sale Agreements
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, 2015, 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. During the
three months ended March 31, 2021 and 2020, NVR has purchased 27
lots and 27 lots, respectively.
8.
SUBSEQUENT EVENTS
Distribution to Minority Shareholders
On April 30, 2021, the Board of Managers of SeD
Maryland Development LLC (the 83.55% owned subsidiary of the
Company which owns the Company’s
Ballenger Project) authorized the payment of distributions to its
members in the amount of $3,000,000. Accordingly, the
minority member of SeD Maryland Development LLC received a
distribution in the amount of $493,500, with the remainder being
distributed to a subsidiary of the Company, which is eliminated
upon consolidation.