Notes
to Consolidated Financial Statements
December
31, 2022
1. |
NATURE
OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Nature
of Operations
LiquidValue
Development Inc. (the “Company”), formerly known as SeD Intelligent Home Inc. and Homeownusa, was incorporated in the State
of Nevada on December 10, 2009. On December 29, 2017, the Company, acquired Alset EHome Inc. (“Alset EHome”) by reverse merger.
Alset EHome, a Delaware corporation, was formed on February 24, 2015 and named SeD Home USA, Inc. before changing its name to SeD Home,
Inc. in May of 2015. On February 6, 2020, this name was changed to SeD Home & REITs Inc., on July 7, 2020 the name was changed to
Alset iHome Inc. and on December 9, 2020 it was changed to Alset EHome Inc. Alset EHome is principally engaged in developing, selling,
managing, and leasing residential properties in the United States in current stage and may expand from residential properties to other
property types, including but not limited to commercial and retail properties. The Company is 99.99% owned by SeD Intelligent Home Inc.,
formerly known as SeD Home International, Inc., which is wholly-owned by Alset International Limited (formerly known as Singapore eDevelopment
Limited “Alset International”), a multinational public company, listed on the Singapore Exchange Securities Trading Limited
(“SGXST”).
The
Company’s current operations concentrate around two types of projects, land development and house rental business. Both of them
are included in our only reporting segment – real state. In determination of segments, the Company, together with its chief operating
decision maker, who is also our CEO, considers factors that include the nature of business activities, allocation of resources and management
structure.
On
December 9, 2022, Alset EHome entered into Stock Purchase Agreement with Alset International Limited and Alset Inc., pursuant to which
Alset EHome agreed to sell all shares of American Home REIT Inc., the company holding all of the 112 rental properties, to Alset Inc.
For further details on this transaction, refer to Note 5 to Company’s Financial Statements – Related Party Transactions and
Note 7 – Discontinued Operations.
Going
concern
To
date, the Company has incurred operating losses since inception of $10,907,442. 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. The ability
of the Company to continue as a going concern is dependent on raising capital to fund its business plan and ultimately to attain profitable
operations. The Company intends to continue to fund its business by its operations and advances from related parties as may be required.
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 the 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. The Company had obtained a
letter of financial support from Alset Inc., an indirect owner of the Company. Alset Inc. 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 2022 financial
statements.
These
financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts
and classification of liabilities that might result from this uncertainty.
Principles
of Consolidation
The
consolidated financial statements include all accounts of the entities as of the reporting period ending dates and for the reporting
periods as follows:
SCHEDULE OF ACCOUNTS OF ENTITIES
Name of consolidated subsidiary | |
State or other jurisdiction of incorporation or organization | |
Date of incorporation or formation | |
Attributable interest as of December 31, 2022 | | |
Attributable interest as of December 31, 2021 | |
Alset EHome Inc. | |
Delaware | |
February 24, 2015 | |
| 100 | % | |
| 100 | % |
SeD USA, LLC | |
Delaware | |
August 20, 2014 | |
| 100 | % | |
| 100 | % |
150 Black Oak GP, Inc. | |
Texas | |
January 23, 2014 | |
| 100 | % | |
| 100 | % |
SeD Development USA, Inc. | |
Delaware | |
March 13, 2014 | |
| 100 | % | |
| 100 | % |
150 CCM Black Oak Ltd. | |
Texas | |
January 23, 2014 | |
| 100 | % | |
| 100 | % |
SeD Ballenger, LLC | |
Delaware | |
July 7, 2015 | |
| 100 | % | |
| 100 | % |
SeD Maryland Development, LLC | |
Delaware | |
October 16, 2014 | |
| 83.55 | % | |
| 83.55 | % |
SeD Development Management, LLC | |
Delaware | |
June 18, 2015 | |
| 85 | % | |
| 85 | % |
SeD Builder, LLC | |
Delaware | |
October 21, 2015 | |
| 100 | % | |
| 100 | % |
SeD Texas Home, LLC | |
Delaware | |
June 16, 2015 | |
| 100 | % | |
| 100 | % |
SeD REIT Inc. | |
Maryland | |
August 20, 2019 | |
| 100 | % | |
| 100 | % |
Alset Solar Inc. | |
Texas | |
September 21, 2020 | |
| 80 | % | |
| 80 | % |
American Home REIT Inc. | |
Maryland | |
September 30, 2020 | |
| 100 | % | |
| n/a | |
AHR Texas Two, LLC | |
Delaware | |
September 28, 2021 | |
| 100 | % | |
| n/a | |
AHR Black Oak One, LLC | |
Delaware | |
September 29, 2021 | |
| 100 | % | |
| n/a | |
AHR Texas Three, LLC | |
Delaware | |
December 21, 2021 | |
| 100 | % | |
| n/a | |
All
intercompany balances and transactions have been eliminated. Non–controlling interest represents the minority equity investment
in the Company’s subsidiaries, plus the minority investors’ share of the net operating results and other components of equity
relating to the non–controlling interests.
As
of December 31, 2022 and 2021, the aggregate noncontrolling interest was $74,260 and $51,536, respectively, which are separately disclosed
on the Consolidated Balance Sheets.
On
December 29, 2017, the Company, SeD Acquisition Corp., a Delaware corporation and wholly owned subsidiary of the Company (the “Merger
Sub”), Alset EHome Inc., a Delaware corporation, and SeD Intelligent Home Inc., a Delaware corporation entered into an Acquisition
Agreement and Plan of Merger (the “Agreement”) pursuant to which the Merger Sub was merged with and into Alset EHome, with
Alset EHome surviving as a wholly owned subsidiary of the Company. The closing of this transaction (the “Closing”) also took
place on December 29, 2017 (the “Closing Date”). Prior to the Closing, SeD Intelligent Home Inc. was the owner of 100% of
the issued and outstanding common stock of Alset EHome and was also the owner of 99.96% of the Company’s issued and outstanding
common stock. The Company acquired all of the outstanding common stock of Alset EHome from SeD Intelligent Home Inc. in exchange for
issuing to SeD Intelligent Home Inc. 630,000,000 shares of the Company’s common stock. Accordingly, SeD Intelligent Home Inc. remains
the Company’s largest shareholder, and the Company is now the sole shareholder of Alset EHome. The Agreement and the transactions
contemplated thereby were approved by the Board of Directors of each of the Company, the Merger Sub, SeD Intelligent Home Inc., and Alset
EHome.
The
Agreement is considered a business combination of companies under common control and therefore, the consolidated financial statements
include the financial statements of both companies.
Basis
of Presentation
The
Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States of America (“US GAAP”).
Use
of Estimates
The
preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements.
Actual results could differ from those estimates.
When
the Company purchases properties but does not receive the assessment information from the county, the Company allocates the values between
land and building based on the data of similar properties. The Company makes appropriate adjustments once the assessment from the county
is received. At the same time, any necessary adjustments to depreciation expense are made in the income statement. On December 31, 2022
and 2021 the Company adjusted $4,791,997 and $821,417 between building and land, respectively. During the year of 2022 and 2021, the
Company adjusted depreciation expenses $197,609 and $0, respectively.
Earnings
(Loss) per Share
Basic
income (loss) per share is computed by dividing the net income (loss) attributable to the common stockholders by weighted average number
of shares of common stock outstanding during the period. Fully diluted income (loss) per share is computed similar to basic income (loss)
per share except that the denominator is increased to include the number of additional common shares that would have been outstanding
if the potential common shares had been issued and if the additional common shares were dilutive. There were no dilutive financial instruments
issued or outstanding for the periods ended December 31, 2022 or 2021.
Fair
Value of Financial Instruments
For
purpose of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced sale or liquidation. The carrying amount of the Company’s short-term
financial instruments approximates fair value due to the relatively short period to maturity for these instruments.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with a maturity of three months or less at the date of acquisition to be cash equivalents.
There were no cash equivalents as of December 31, 2022 and 2021.
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 December 31, 2022 and 2021, the total balance of these two accounts was $309,219 and $4,399,984,
respectively.
Accounts
Receivable
Accounts
receivable include all receivables from buyers, contractors and all other parties. The Company records an allowance for doubtful accounts
based on a review of the outstanding receivables, historical collection information and economic conditions. No allowance was necessary
at December 31, 2022 and 2021.
Property
and Equipment and Depreciation
Property
and equipment are recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged
to operations as incurred. Depreciation is computed by the straight-line method (after taking into account their respective estimated
residual values) over the estimated useful lives, which are 3 years.
Real
Estate Assets
|
● |
Land
Development Assets |
Real
estate assets are recorded at cost, except when real estate assets are acquired that meet the definition of a business combination in
accordance with Financial Accounting Standards Board (“FASB”) ASC 805, “Business Combinations,” which acquired
assets are recorded at fair value. Interest, property taxes, insurance and other incremental costs (including salaries) directly related
to a project are capitalized during the construction period of major facilities and land improvements. The capitalization period begins
when activities to develop the parcel commence and ends when the asset constructed is completed. The capitalized costs are recorded as
part of the asset to which they relate and are reduced when lots are sold.
In
addition to our annual assessment of potential triggering events in accordance with ASC 360, the Company applies a fair value-based impairment
test to the net book value assets on an annual basis and on an interim basis if certain events or circumstances indicate that an impairment
loss may have occurred.
The
Company did not record impairment on any of its projects during the year ended on December 31, 2022, nor for the year ended December
31, 2021.
|
● |
Investments
in Single-Family Residential Properties |
The
Company accounts for its investments in single-family residential properties as asset acquisitions and records these acquisitions at
their purchase price. The purchase price is allocated between land, building, improvements and existing leases based upon their relative
fair values at the date of acquisition. The purchase price for purposes of this allocation is inclusive of acquisition costs which typically
include legal fees, title fees, property inspection and valuation fees, as well as other closing costs.
Building
improvements and buildings are depreciated over estimated useful lives of approximately 10 to 27.5 years, respectively, using the straight-line
method.
The
Company assesses its investments in single-family residential properties for impairment whenever events or changes in business circumstances
indicate that carrying amounts of the assets may not be fully recoverable. When such events occur, management determines whether there
has been impairment by comparing the asset’s carrying value with its fair value. Should impairment exist, the asset is written
down to its estimated fair value. The Company did not recognize any impairment losses during the years ended on December 31, 2022 and
2021.
Revenue
Recognition
|
● |
Land
Development Revenue Recognition |
ASC
606, Revenue from Contracts with Customers (“ASC 606”), establishes principles for reporting information about the nature,
amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers.
The Company adopted this new standard on January 1, 2018 under the modified retrospective method. The adoption of this new standard did
not have a material effect on our financial statements.
In
accordance with ASC 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized
reflects the consideration to which we expect to be entitled to receive in exchange for these goods or services. The provisions of ASC
606 include a five-step process by which we determine revenue recognition, depicting the transfer of goods or services to customers in
amounts reflecting the payment to which we expect to be entitled in exchange for those goods or services. ASC 606 requires us to apply
the following steps: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine
the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when,
or as, we satisfy the performance obligation. A detailed breakdown of the five-step process for the revenue recognition of our Ballenger
project, which earned majority of the revenue of the Company in 2021, is as follows:
a)
Identify the contract with a customer.
The
Company has signed agreements with the builders for developing the raw land to ready to build lots. The contract has agreed upon prices,
timelines, and specifications for what is to be provided.
b)
Identify the performance obligations in the contract.
Performance
obligations of the company include delivering developed lots to the customer, which are required to meet certain specifications that
are outlined in the contract. The customer inspects all lots prior to accepting title to ensure all specifications are met.
c)
Determine the transaction price.
The
transaction price is specified in the contract. Any subsequent change orders or price changes are required to be approved by both parties.
d)
Allocate the transaction price to performance obligations in the contract.
Each
lot is considered to be a separate performance obligation, for which the specified price in the contract is allocated to.
e)
Recognize revenue when (or as) the entity satisfies a performance obligation.
The
builders do the inspections to make sure all conditions/requirements are met before taking title of lots. The Company recognizes revenue
when title is transferred. The Company does not have further performance obligations once title is transferred.
|
● |
Rental
Revenue Recognition |
The
Company leases real estate properties to its tenants under leases that are predominately classified as operating leases, in accordance
with ASC 842, Leases (“ASC 842”). Real estate rental revenue is comprised of minimum base rent and revenue from the collection
of lease termination fees.
Rent
from tenants is recorded in accordance with the terms of each lease agreement on a straight-line basis over the initial term of the lease.
Rental revenue recognition begins when the tenant controls the space and continues through the term of the related lease. Generally,
at the end of the lease term, the Company provides the tenant with a one year renewal option, including mostly the same terms and conditions
provided under the initial lease term, subject to rent increases.
The
Company defers rental revenue related to lease payments received from tenants in advance of their due dates. These amounts are presented
within deferred revenues and other payables on the Company’s consolidated balance sheets.
Rental
revenue is subject to an evaluation for collectability on several factors, including payment history, the financial strength of the tenant
and any guarantors, historical operations and operating trends of the property, and current economic conditions. If our evaluation of
these factors indicates that it is not probable that we will recover substantially all of the receivable, rental revenue is limited to
the lesser of the rental revenue that would be recognized on a straight-line basis (as applicable) or the lease payments that have been
collected from the lessee. Differences between rental revenue recognized and amounts contractually due under the lease agreements are
credited or charged to straight-line rent receivable or straight-line rent liability, as applicable. For the year ended December 31,
2022 and 2021, the Company did not recognize any deferred revenue and collected all rents due.
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 $ million. To recognize revenue of FFB
assessment, both our and NVR’s performance obligation have to be satisfied. Our performance obligation is completed once we complete
the construction of water and sewer facility and close the lot sales with NVR, which inspects these water and sewer facility prior to
close lot sales to ensure all specifications are met. NVR’s performance obligation is to sell homes they build to homeowners. Our
FFB revenue is recognized on quarterly basis after NVR closes sales of homes to homeowners. The agreement with these FFB investors is
not subject to amendment by regulatory agencies and thus our revenue from FFB assessment is not either. During the years ended on December
31, 2022 and 2021, we recognized revenue $ and $from FFB assessment, respectively.
Contract
Assets and Contract Liabilities
Based
on our contracts, we invoice customers once our performance obligations have been satisfied, at which point payment is unconditional.
Accordingly, our contracts do not give rise to contract assets or liabilities under ASC 606. Accounts receivable are recorded when the
right to consideration becomes unconditional. We disclose receivables from contracts with customers separately on the balance sheets.
Cost
of Revenue
|
● |
Cost of Real Estate Sale |
All
of the costs of real estate sales are from our land development business. Land acquisition costs are allocated to each lot based on the
area method, the size of the lot comparing to the total size of all lots in the project. Development costs and capitalized interest are
allocated to lots sold based on the total expected development and interest costs of the completed project and allocating a percentage
of those costs based on the selling price of the sold lot compared to the expected sales values of all lots in the project.
If
allocation of development costs based on the projection and relative expected sales value is impracticable, those costs could also be
allocated based on area method, the size of the lot comparing to the total size of all lots in the project.
Cost
of rental revenue consists primarily of the costs associated with management and leasing fees to our management company, repairs and
maintenance, depreciation and other related administrative costs. Utility expenses are paid directly by tenants.
Income
Taxes
Deferred
income tax assets and liabilities are determined based on the estimated future tax effects of net operating loss and credit carry-forwards
and temporary differences between the tax basis of assets and liabilities and their respective financial reporting amounts measured at
the current enacted tax rates. The differences relate primarily to net operating loss carryforward from date of acquisition and to the
use of the cash basis of accounting for income tax purposes. The Company records an estimated valuation allowance on its deferred income
tax assets if it is more likely than not that these deferred income tax assets will not be realized.
The
Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained
on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated
financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized
upon ultimate settlement. The Company has not recorded any unrecognized tax benefits.
The
Company’s tax returns for 2021, 2020 and 2019 remain open to examination.
Recent
Accounting Pronouncements
In
March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of Reference Rate Reform on Financial Reporting.
The amendments in this Update provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP)
to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments
in this Update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate
expected to be discontinued because of reference rate reform. The Company’s line of credit agreement provides procedures for determining
a replacement or alternative rate in the event that LIBOR is unavailable. The amendments in this Update are effective for all entities
as of March 12, 2020 through December 31, 2022. The Company doesn’t believe that ASU 2020-04 will have significant impact on its
future consolidated financial statements.
In
October 2021, the FASB issued ASU No. 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract
Liabilities from Contracts with Customers.” ASU 2021-08 requires the company acquiring contract assets and contract liabilities
obtained in a business combination to recognize and measure them in accordance with ASC 606, “Revenue from Contracts with Customers”.
At the acquisition date, the company acquiring the business should record related revenue, as if it had originated the contract. Before
the update such amounts were recognized by the acquiring company at fair value. The amendments in this Update are effective for fiscal
years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including
in interim periods, for any financial statements that have not yet been issued. The Company plans to adopt these requirements prospectively,
effective on the first day of year 2023.
2.
CONCENTRATION OF CREDIT RISK
The
Company maintains cash balances at various financial institutions. These balances are secured by the Federal Deposit Insurance Corporation.
At times, these balances may exceed the federal insurance limits. On December 31, 2022 and 2021, uninsured cash balances were $1,354,302
and $6,137,775, respectively.
The
Company had only two customers in the years ended December 31, 2022 and 2021 for its Ballenger project, NVR Inc. (“NVR”),
a NYSE publicly listed US homebuilding and mortgage company, who is the only purchaser of 479 residential lots and Western Utility, the
purchaser of the FFBs of Ballenger project. During the year ended December 31, 2022, the Company earned revenues from property sales
from these two customers representing approximately 81% and 19%, respectively. During the year ended December 31, 2021, the Company earned
revenues from property sales from these two customers representing approximately 97% and 3%, respectively.
3.
BUILDER DEPOSITS
In
November 2015, SeD Maryland Development, LLC (“Maryland”) entered into lot purchase agreements with NVR, Inc. (“NVR”)
relating to the sale of single-family home and townhome lots to NVR in the Ballenger Run Project. The purchase agreements were amended
two times thereafter. Based on the agreements, NVR is entitled to purchase 479 lots for a price of approximately $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 from 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 December 31, 2022 and 2021, there was $0 and $31,553 outstanding, respectively.
4.
NOTES PAYABLE
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, 2022 and 2021, the outstanding balance of the revolving loan was $0. On March 15, 2022 approximately
$2,300,000 was released from collateral, leaving approximately $300,000 as collateral for outstanding letters of credit.
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. The loan in the amount of $664,810, together with all accrued interests of $25,225, was paid
off on May 28, 2021. The loan was closed in June 2021. Additionally, the debt discount of $42,907 was fully amortized during the first
six months of 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. In April, 2022
the Company received confirmation that the loan was fully forgiven.
5.
RELATED PARTY TRANSACTIONS
Loan
from SeD Home Limited
Alset
EHome receives advances from SeD Home Limited (an affiliate of Alset International), to fund development and operation costs. The advances
bear interest at 10% and are payable on demand. As of December 31, 2022 and 2021, Alset EHome had outstanding principal due of $0 and
$0, respectively and accrued interest of $228,557 and $228,557, respectively.
Loan
to/from SeD Intelligent Home Inc. (f.k.a. SeD Home International)
The
Company receives advances from or loans funds to SeD Intelligent Home, the owner of 99.99% of the Company. The advances or the loans
bore interest of 18% until August 30, 2017 when the interest rate was adjusted to 5% and have no set repayment terms. On December 31,
2022, the Company owed $26,443,055 of advance principal and $1,154,462 of accrued interest. On December 31, 2021, the Company owed $19,891,734
of advance principal and $144,588 of accrued interest.
Management
Fees
MacKenzie
Equity Partners, LLC, an entity owned by a Charles MacKenzie, a Director of the Company, has had a consulting agreement with a majority-owned
subsidiary of the Company since 2015. Per the terms of the agreement, as amended on January 1, 2018, the Company’s subsidiary paid
a monthly fee of $20,000 for consulting services. Pursuant to an agreement entered into in June of 2022, the Company’s subsidiary
has paid $25,000 per month for consulting services, effective as of January, 2022.
In
addition, MacKenzie Equity Partners will be paid certain bonuses, including (i) a sum of $50,000 on June 30, 2022; (ii) a sum of $50,000
upon the successful financing of 100 homes owned by American Housing REIT Inc. with an entity not affiliated with SeD Development Management
LLC (a subsidiary of the Company); and (iii) a sum of $50,000 upon the successful leasing of 30 homes in the Alset of Black Oak development.
The
Company incurred expenses of $350,000 and $360,000 in the years ended December 31, 2022 and 2021, respectively, which were capitalized
as part of Real Estate on the balance sheet as the services relate to property and project management. In 2021, MacKenzie Equity Partners
was paid a bonus payment of $120,000. In June, 2022, MacKenzie Equity Partners accrued an additional $50,000 bonus payment (as described
above). On December 31, 2022 and 2021, the Company owed this related party $25,000 and $80,000, respectively.
On
December 29, 2020, the Company entered into a Management Services Agreement (the “Management Services Agreement”) with Alset
International, pursuant to which the Company paid Alset International a one-time payment of $360,000 for the services of certain Alset
International staff members the Company received in 2020, and agreed to pay Alset International $30,000 per month for services to be
provided in 2021. This Management Services Agreement had a term that ended December 31, 2021. Alset International provided 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 years ended December 31, 2022 and 2021
the Company incurred expense of $0 and $360,000, respectively, and owed this related party $720,000 as of December 31, 2022 and 2021.
This balance due is included in the loan amount from SeD Intelligent Home Inc., which in turn owes the funds to Alset International.
Advance
to Alset Inc.
The
Company pays some operating expenses for Alset Inc., a related party under the common control of Mr. Chan Heng Fai, the CEO of the
Company. The advances are interest free with no set repayment terms. On December 31, 2022 and December 31, 2021, the balance of
these advances was $0
and $26,566,
respectively.
6.
SHAREHOLDERS’ EQUITY
Cash
Dividend Distributions
During
the year ended December 31, 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 $15,500,000. Accordingly,
the minority member of SeD Maryland Development LLC received a distribution in the amount of $2,549,750, with the remainder being distributed
to a subsidiary of the Company, which was eliminated upon consolidation.
The
Company did not authorize any distribution during the year ended December 31, 2022.
7.
DISCONTINUED OPERATIONS
On
December 9, 2022 Alset EHome Inc. (Alset EHome), a subsidiary of the Company, entered into stock purchase agreement with Alset International
Limited (“Alset International”) and Alset Inc., pursuant to which Alset Inc. agreed to purchase all of the outstanding shares
of American Home REIT Inc., a wholly owned subsidiary of Alset EHome. American Home REIT Inc. is the owner of 112 rental homes. Alset
EHome is a majority-owned, indirect subsidiary of Alset International, while Alset International is a majority-owned, indirect subsidiary
of Alset Inc. The purchase price of the transaction was established at $26,250,933. Pursuant to the stock purchase agreement the purchase
price should be satisfied by (i) a cash payment from Alset Inc. to Alset EHome of $1,000,000 in immediate available funds; (ii) the offset
of amount owned by Alset International to Alset Inc. in the amount of $13,900,000, and simultaneously Alset International will offset
the same amount owed by Alset EHome to Alset International in an the same amount; and (iii) the issuance of the Promissory Note by Alset
Inc. to Alset EHome in the amount of $11,350,933. The closing of this sale is subject to the approval of shareholders of Alset International.
Under
ASU 2014-08, a disposal transaction meets the definition of a discontinued operation if all of the following criteria are met:
|
1. |
The
disposal group constitutes a component of an entity or a group of components of an entity. |
|
|
|
|
2. |
The
component of an entity (or group of components of an entity) meets the held-for-sale classification criteria, is disposed of by sale,
or is disposed of other than by sale (e.g., “by abandonment, in an exchange measured based on the recorded amount of the nonmonetary
asset relinquished, or in a distribution to owners in a spinoff”). |
|
|
|
|
3. |
The
disposal of a component of an entity (or group of components of an entity) “represents a strategic shift that has (or will
have) a major effect on an entity’s operations and financial results”. |
American
Home REIT Inc., is the owner of all rental properties of the Company’s rental business. The transaction described above is a disposal
by sale and has a major effect on our financial results. Since it meets all of the test criteria set forth above, we have treated this
disposal transaction as a discontinued operations in our financial statements.
The
closing of this transaction was completed on January 13, 2023.
The
composition of assets and liabilities included in discontinued operations are as follows:
SCHEDULE
OF DISCONTINUED OPERATIONS
| |
December 31,2022 | | |
December 31,2021 | |
| |
($) | | |
($) | |
Assets: | |
| | | |
| | |
Real Estate | |
| | | |
| | |
Land | |
$ | 4,908,590 | | |
$ | 9,470,950 | |
Building and Improvements | |
| 21,933,889 | | |
| 15,469,814 | |
Real Estate Gross | |
| 26,842,479 | | |
| 24,940,764 | |
Less: Accumulated Depreciation | |
| (973,257 | ) | |
| (120,511 | ) |
Total Real Estate | |
| 25,869,222 | | |
| 24,820,253 | |
| |
| | | |
| | |
Cash | |
| 1,186,658 | | |
| 197,750 | |
Accounts Receivable | |
| 34,744 | | |
| 10,200 | |
Related Party Receivable | |
| 4,800 | | |
| - | |
Prepaid Expenses | |
| 4,413 | | |
| 107,041 | |
Total Assets | |
$ | 27,099,037 | | |
$ | 25,135,244 | |
| |
| | | |
| | |
Liabilities: | |
| | | |
| | |
| |
| | | |
| | |
Accounts Payable and Accrued Expenses | |
$ | 1,112,932 | | |
$ | 86,621 | |
Total Liabilities | |
$ | 1,112,932 | | |
$ | 86,621 | |
The
aggregate financial results of discontinued operations were as follows:
| |
December 31, 2022 | | |
December 31, 2021 | |
Income Statement Disclosures Attributable to Discontinued
Operation | |
| | |
| |
Rental Revenue | |
$ | 1,810,011 | | |
$ | 327,296 | |
| |
| | | |
| | |
Expenses | |
| | | |
| | |
General and Administrative | |
| 237,665 | | |
| 64,669 | |
Cost of Revenues | |
| 1,087,471 | | |
| 171,396 | |
Depreciation Expense | |
| 852,746 | | |
| 120,511 | |
| |
| | | |
| | |
Total Operating Expenses | |
| 2,177,882 | | |
| 356,576 | |
| |
| | | |
| | |
Loss From Operations | |
| (367,871 | ) | |
| (29,280 | ) |
| |
| | | |
| | |
Bank Charges | |
| 123 | | |
| - | |
Total Other Expense | |
| 123 | | |
| - | |
| |
| | | |
| | |
Loss from Discontinued Operations | |
$ | (367,994 | ) | |
$ | (29,280 | ) |
The
cash flows attributable to the discontinued operations are as follows:
| |
Year Ended
December 31, 2022 | | |
Year Ended
December 31, 2021 | |
Cash Flows Attributable
to Discontinued Operations | |
| | |
| |
Operating | |
$ | 1,172,688 | | |
$ | 60,611 | |
Investing | |
| (1,490,054 | ) | |
| (24,940,764 | ) |
Financing | |
| - | | |
| - | |
Net Change in Cash | |
$ | (317,366 | ) | |
$ | (24,880,153 | ) |
8.
COMMITMENTS AND CONTINGENCIES
Leases
The
Company leases office space in Texas and Maryland. The lease for the Company’s Texas office is currently on a month-to-month basis,
while lease of our Maryland expires on March 31, 2024. The monthly rental payments ranged between $2,335 and $8,143, respectively.
Rent expense was $116,869 and $116,379 for the years ended December 31, 2022 and 2021, respectively. The below table summarizes future
payments due under these leases as of December 31, 2022.
The
balance of the operating lease right-of-use asset and operating lease liability as of December 31, 2022 was $108,950 and $110,431, respectively.
Supplemental
Cash Flow and Other Information Related to Operating Leases are as follows:
SCHEDULE OF SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION RELATED TO OPERATING LEASES
| |
Year Ended
December 31, 2022 | |
Weighted Average Remaining Operating Lease Term (in years) | |
| 1.25 | |
The
below table summarizes future payments due under these leases as of December 31, 2022.
For
the Years Ended December 31:
SCHEDULE OF FUTURE PAYMENTS DUE UNDER LEASES
| |
| | |
2023 | |
$ | 95,104 | |
2024 | |
| 24,430 | |
Total Minimum Lease Payments | |
$ | 119,534 | |
Less: Effect of Discounting | |
| (9,102 | ) |
Present Value of Future Minimum Lease Payments | |
| 110,431 | |
Less: Current Obligation under Lease | |
| 88,032 | |
Long-term Lease Obligation | |
$ | 22,399 | |
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 years ended December 31, 2022 and 2021, NVR has purchased 3 and 88 lots, respectively.
Certain
arrangements for the sale of buildable lots to NVR require the Company to credit NVR with an amount equal to one year of the FFB assessment.
Under ASC 606, the credits to NVR are not in exchange for a distinct good or service and accordingly, the amount of the credit was recognized
as the reduction of revenue. As of December 31, 2022 and 2021, the accrued balance due to NVR was $189,475
and $188,125, respectively.
Security
Deposits
Our
rental-home lease agreements require tenants to provide a one-month security deposits. The property management company collects all security
deposits and maintains them in a trust account. The Company also has obligation to refund these deposits to the renters at the time of
lease termination. As of December 31, 2022, the security deposits held in the trust account were $271,480. Security deposits are part
of rental business which is a discontinued operation as of December 31, 2022.
Sale
of lots
On
October 28, 2022, 150 CCM Black Oak Ltd. (the “Seller”), entered into a Contract for Purchase and Sale and Escrow
Instructions (the “Agreement”) with Century Land Holdings of Texas, LLC, a Colorado limited liability company (the
“Buyer”). Pursuant to the terms of the Agreement, the Seller agreed to sell approximately 242 single-family detached
residential lots in a residential community in the city of Magnolia, Texas, known as the “Lakes at Black Oak.” The
parties agreed that the lots will be sold at a range of prices, and the Seller will also be entitled to receive a community
enhancement fee for each lot sold. The Buyer was entitled to a thirty (30) day inspection period in which to inspect the properties
and determine their suitability; during such inspection period, the Buyer was entitled to decline to proceed with the closing of these
transactions.
The aggregate purchase price and community enhancement
fees were originally anticipated to be $12,881,000, with such purchase price to be adjusted accordingly, if the total number of lots increased
or decreased prior to the closing of the transactions contemplated by the Agreement.
On November 28, 2022, the parties to the Agreement
entered into an amendment to the Agreement (the “Amendment”). Pursuant to the Amendment, the Buyer will now proceed with the
purchase of approximately 131 single-family detached residential lots, instead of 242 lots, and the anticipated purchase price has been
reduced.
The
closing of the transactions described in the Agreement depends on the satisfaction of certain conditions set forth therein. There can
be no assurance that such closings will be completed on the terms outlined herein or at all. The estimated closing date for such transaction is the second quarter of 2023.
The
Seller shall be required to develop and improve the property at the Seller’s cost pursuant to certain development plans and government
regulations prior to the closings described above.
9.
INCOME TAXES
The
components of income tax expense and the effective tax rates for the years ended December 31, 2022 and 2021 are as follows:
SCHEDULE
OF COMPONENTS OF INCOME TAX EXPENSE
| |
2022 | | |
2021 | |
| |
Year Ended December 31, | |
| |
2022 | | |
2021 | |
Current: | |
| | |
| |
Federal | |
$ | - | | |
$ | 45,736 | |
State | |
| - | | |
| 46,180 | |
Total Current | |
| - | | |
| 91,916 | |
Deferred: | |
| | | |
| | |
Federal | |
| (498,408 | ) | |
| 65,055 | |
State | |
| (145,288 | ) | |
| 27,856 | |
Total Deferred | |
| (643,697 | ) | |
| 92,911 | |
Valuation Allowance | |
| 643,697 | | |
| (92,911 | ) |
Total Income Tax Expense | |
$ | - | | |
$ | 91,916 | |
| |
| | | |
| | |
Pre-tax Income (Loss) from Discontinuing Operations | |
| (367,994 | ) | |
| (29,280 | ) |
| |
| | | |
| | |
Effective Income Tax Rate | |
| 0.0 | % | |
| 9.1 | % |
A
reconciliation of our income tax expense at federal statutory income tax rate of 21.0% to our income tax expense at the effective tax
rate is as follows:
SCHEDULE
OF RECONCILIATION OF INCOME TAX EXPENSE
| |
2022 | | |
2021 | |
| |
Year Ended December 31, | |
| |
2022 | | |
2021 | |
Tax at the Statutory Federal Rate | |
| 21.0 | % | |
| 21.0 | % |
State Income Taxes, Net of Federal Income Taxes | |
| 0.0 | % | |
| 3.6 | % |
Intercompany Management & Oversight Fees | |
| 0.0 | % | |
| 9.6 | % |
Capitalized Construction Costs | |
| 1.0 | % | |
| -28.8 | % |
Minority Interest in Partnerships | |
| 0.2 | % | |
| -7.2 | % |
Deferred Finance Cost | |
| -8.1 | % | |
| 23.5 | % |
Miscellaneous Permanent Items | |
| 4.4 | % | |
| - | % |
Valuation Allowance | |
| -18.6 | % | |
| -12.6 | % |
Effective Income Tax Rate | |
| 0.0 | % | |
| 9.1 | % |
Deferred
tax assets (liabilities) consist of the following at December 31, 2022 and 2021:
SCHEDULE
OF DEFERRED TAX ASSETS (LIABILITIES)
| |
2022 | | |
2021 | |
| |
Year Ended December 31, | |
| |
2022 | | |
2021 | |
Interest Income | |
$ | (6,304,175 | ) | |
$ | (5,660,333 | ) |
Interest Expense | |
| 5,802,873 | | |
| 5,100,076 | |
Depreciation and Amortization | |
| (140,886 | ) | |
| (10,434 | ) |
Impairment | |
| 2,253,228 | | |
| 2,253,228 | |
Accrued Expense | |
| 8,895 | | |
| 60,662 | |
Partnership Gain (Loss) | |
| 13,175 | | |
| 13,175 | |
Others | |
| 83,311 | | |
| 31,173 | |
Net Operating Loss | |
| 714,822 | | |
| - | |
Total Deferred Tax Asset before Valuation Allowance | |
| 2,431,244 | | |
| 1,787,547 | |
Valuation Allowance | |
| (2,431,244 | ) | |
| (1,787,547 | ) |
Net Deferred Tax Asset | |
$ | - | | |
$ | - | |
As
of December 31, 2022, the Company has Federal and Maryland State net operating loss carry-forwards of approximately $2,777,000 and $2,020,000,
respectively. 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, 2022,
the valuation allowance decreased by $643,697.
As
of December 31, 2022, total tax receivable is $143,574, including federal income tax receivable $111,351, and Maryland state income tax
receivable $32,223. As of December 31, 2021, total tax receivable is $151,211, including federal income tax receivable $77,390, and Maryland
state income tax receivable $73,821.
We
are subject to U.S. federal income tax as well as income tax of certain state jurisdictions. We have substantially concluded all U.S.
federal income tax and state tax matters through 2018. However, our federal tax returns for the years 2019 through 2021 remain open to
examination. State tax jurisdiction tax years remain open to examination as well, though we believe that any additional assessment would
be immaterial to the Consolidated Financial Statements.
10.
SUBSEQUENT EVENTS
On
December 9, 2022, Alset EHome Inc., a subsidiary of the Company, entered into an agreement with Alset International Limited and Alset
Inc. pursuant to which Alset EHome Inc. agreed to sell its subsidiary American Home REIT Inc., which owns 112 single-family rental homes,
to Alset Inc. The closing of the transaction contemplated by this agreement was completed on January 13, 2023.
Recent Agreements to Sell Additional Lots
Agreement to Sell 110 Lots
On March 16, 2023, the Seller entered into a Purchase
and Sale Agreement (the “Purchase and Sale Agreement”) with Rausch Coleman Homes Houston, LLC, a Texas limited liability company
(“Rausch Coleman”). Pursuant to the terms of the Purchase and Sale Agreement, the Seller has agreed to sell approximately
110 single-family detached residential lots which comprise a section of the Lakes at Black Oak. The price of the lots and certain community
enhancement fees the Seller will be entitled to receive are anticipated to equal an aggregate of $6,586,250.
The closing of the sale of these 110 lots depends
on the satisfaction of certain conditions set forth in the Purchase and Sale Agreement. There can be no assurance that such closings will
be completed on the terms outlined herein or at all. Commencing on March 16, 2023, Rausch Coleman has a thirty (30) day inspection period
in which to inspect the properties and determine their suitability; during such inspection period, Rausch Coleman may decline to proceed
with the closing of these transactions.
The Seller shall be required to complete certain improvements
at the property at the Seller’s cost prior to the closing.
Agreement to Sell 189 Lots
On March 17, 2023, the Seller entered into a Contract
of Sale (the “Contract of Sale”) with Davidson Homes, LLC, an Alabama limited liability company (“Davidson Homes”).
Pursuant to the terms of the Contract of Sale, the Seller has agreed to sell approximately 189 single-family detached residential lots
comprising an additional section of the Lakes at Black Oak. The price of the lots and certain community enhancement fees the Seller will
be entitled to receive are anticipated to equal an aggregate of $10,022,500.
The closing of the transactions described in the Contract
of Sale depends on the satisfaction of certain conditions set forth therein. There can be no assurance that such closings will be completed
on the terms outlined herein or at all. Davidson Homes has agreed to purchase the lots in stages, comprising an initial closing of 94
lots, the remaining lots to be purchase on or before December 29, 2023. Commencing on March 17, 2023, Davidson Homes shall have a thirty
(30) day inspection period in which to inspect the properties and determine their suitability; during such inspection period, Davidson
Homes may decline to proceed with the closing of these transactions.
The Seller shall be required to complete certain improvements
at the property at the Seller’s cost prior to the closing.