As filed with
the Securities and Exchange Commission on December 23,
2019.
Registration
No. 333-
UNITED
STATES
SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
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)
|
HF Enterprises
Inc.
4800 Montgomery
Lane, Suite 210
Bethesda,
Maryland 20814
(301)
971-3940
(Address,
including zip code, and telephone number, including area code, of
registrant’s principal executive offices)
Chan Heng
Fai
Chairman and Chief Executive
Officer
HF Enterprises
Inc.
4800 Montgomery
Lane, Suite 210
Bethesda,
Maryland 20814
(301)
971-3940
(Name, address,
including zip code, and telephone number, including area code, of
agent for service)
Copies of all communications to:
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Spencer G.
Feldman, Esq.
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Thomas Poletti,
Esq.
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Olshan Frome
Wolosky LLP
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Katherine J.
Blair, Esq.
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1325 Avenue of
the Americas, 15th Floor
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Manatt, Phelps
& Phillips, LLP
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New York, New
York 10019
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695 Town Center
Drive, 14th Floor
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Tel.: (212)
451-2300
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Costa Mesa,
California 92626
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Fax: (212)
451-2222
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Tel.: (714)
371-2501
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Email:
sfeldman@olshanlaw.com
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Fax: (714)
371-2551
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Approximate date of commencement of
proposed sale to the public: As soon as practicable after the
effective date of this registration statement.
If any of the securities being
registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box.
☒
If this Form is filed to register
additional securities for an offering pursuant to Rule 462(b) under
the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective
registration statement for the same offering.
☐
If this Form is a post-effective
amendment filed pursuant to Rule 462(c) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same offering. ☐
If this Form is a post-effective
amendment filed pursuant to Rule 462(d) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same offering. ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange
Act.
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Large Accelerated Filer ☐
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Accelerated Filer ☐
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Non-Accelerated Filer ☐
(Do not check if a smaller
reporting company)
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Smaller Reporting Company ☒
Emerging Growth
Company ☒
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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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Amount
to be
registered
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Proposed maximum
offering price per share
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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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2,990,000
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$8.00
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$23,920,000
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$3,104.82
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Underwriter
Warrant
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1 warrant
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$1.00
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-
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(3)
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Common Stock underlying Underwriter
Warrant
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260,000 shares
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$9.60
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$2,496,000
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$323.98
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Total
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$3,428.80
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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.
The registrant
hereby amends this registration statement on such date or dates as
may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall hereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933 or
until the registration statement shall become effective on such
date as the Commission, acting pursuant to said Section 8(a),
may determine.
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The information in this preliminary prospectus is not complete and
may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange
Commission is effective. This preliminary prospectus is not an
offer to sell nor does it seek an offer to buy these securities in
any jurisdiction where the offer or sale is not
permitted.
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Subject to Completion, dated December 23, 2019
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 $8.00 per share. We intend to list our shares of
common stock for trading on the Nasdaq Capital Market under the
symbol HFEN.
Investing
in our common stock involves a high degree of risk. See “Risk
Factors” beginning on page 11.
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Per
Share
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Total
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Initial public
offering price
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$
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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)
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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10
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Cautionary
Note Regarding Forward-Looking Statements
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26
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Use of
Proceeds
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27
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Dividend
Policy
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27
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Capitalization
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28
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Dilution
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29
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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31
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Business
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49
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Management
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60
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Executive
Compensation
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65
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Certain
Relationships and Related Party Transactions
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66
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Principal
Stockholders
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70
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Description
of Capital Stock
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71
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Shares
Eligible for Future Sale
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74
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Underwriting
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76
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Indemnification
for Securities Act Liabilities
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80
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Legal
Matters
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80
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Experts
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80
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Where
You Can Find More Information
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80
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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” 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 and Australia. We manage
our three principal businesses primarily through our 65.4%-owned
subsidiary, Singapore eDevelopment Ltd., a public company traded on
the Singapore Stock Exchange. Through this subsidiary (and
indirectly, through other public and private U.S. and Asian
subsidiaries), we are actively developing two significant real
estate projects near Houston, Texas and in Frederick, Maryland in
our property development segment. We have designed applications for
enterprise messaging and e-commerce software platforms in the
United States and Asia in our digital transformation technology
business unit. Our recent foray into the biohealth segment includes
research to treat neurological and immune-related diseases,
nutritional chemistry to create a natural sugar alternative,
research regarding innovative products to slow the spread of
disease, and natural foods and supplements. We opportunistically
identify global businesses for acquisition, incubation and
corporate advisory services, primarily related to our operating
business segments. We also have ownership interests outside of
Singapore eDevelopment, including an indirect 19.8% equity interest
in Holista CollTech Limited, a public Australian company that
produces natural food ingredients, and an indirect 13.7% 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 opportunistically identify global businesses
for acquisition, incubation and corporate advisory services,
primarily related to our existing operating business segments. We
also have ownership interests outside of Singapore eDevelopment,
including an indirect 19.8% equity interest in Holista CollTech
Limited, a public Australian company that produces natural food
ingredients, and an indirect 13.7% 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%, 98% and 90% of our total revenue in the first nine months of
2019 and the years ended December 31, 2018 and 2017 in the United
States, respectively, and expect that our future revenue will
continue to be concentrated in the United States.
We
generally acquire majority stakes in innovative and promising
businesses that are expected to appreciate in value over time. We
have historically favored businesses that improve an
individual’s quality of life or that improve the efficiency
of businesses through technology in various industries. Our
involvement in various companies can usually be characterized in
one of three ways: (i) businesses (typically ones that we have
either created or acquired in their early stages) that we directly
manage, while maintaining a majority ownership position; (ii)
businesses where we hold a significant ownership position, and
share management with our partners; and (iii) businesses that we
acquire and hold a minority stake in, and where we do not manage
such entity (although an affiliate of our company may serve on the
board of directors), but where we view the financial stake as
contributing to the strategic goals of our other businesses. For
example, in our real estate business, which makes up the majority
of our assets, our company’s leadership is engaged in all
aspects of the management of our projects, and intends to remain so
engaged in the future. In our biohealth segment, we are more likely
to work with partners who will play a significant role in
management. At the present time, we do not anticipate that passive
investments, where we neither participate in management nor view
the ownership position as adding particular strategic value to
other businesses, will represent a significant portion of our
company’s assets in the future.
Our
focus is on businesses where our engagement will be particularly
significant for that entity’s growth prospects. Our emphasis
is on building businesses in industries where our management team
has in-depth knowledge and experience, or where our management can
provide value by advising on new markets and expansion. We have at
times provided a range of global capital and management services to
these companies in order to gain access to Asian markets. We
believe our capital and management services provide us with a
competitive advantage in the selection of strategic acquisitions
which creates and adds value for our company and our
stockholders.
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1
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Our Current Operations
Mr.
Chan has led our Singapore
eDevelopment subsidiary since 2014. In March 2018, Mr. Chan formed
our company and subsequently assigned his equity interests in
several companies, including Singapore eDevelopment and its
subsidiaries, to us for further expansion in the United States. Mr.
Chan 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 17 employees across three countries. We are a global company with our
corporate headquarters located in Bethesda, Maryland and additional
offices in Singapore, Magnolia, Texas, 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
65.4%-owned subsidiary Singapore eDevelopment Ltd. started
developing property projects and participating in third-party
property development projects. SeD Intelligent Home Inc., a
99.9%-owned subsidiary of Singapore eDevelopment, owns, operates
and manages real estate development projects with a focus on land
subdivision developments. Development activities are generally
contracted out, including planning, design and construction, as
well as other work with engineers, surveyors, architects and
general contractors. The developed lots are then sold to builders
for the construction of new homes. SeD Intelligent Home’s
main assets are two subdivision development projects, one near
Houston, Texas, known as Black Oak, consisting of 162 acres and
currently projected to have approximately 512 units, and one in
Frederick, Maryland, known as Ballenger Run, consisting of 197
acres 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. SeD Intelligent Home will continue to focus on
off-market deals and raise appropriate financing for development
activities. We intend to embark on residential construction
activities in partnership with U.S. homebuilders and have commenced
discussions to acquire smaller U.S. residential construction
projects. These projects may be within both the for-sale and
for-rent markets. We believe these initiatives will provide a set
of solutions to stabilize the long-term revenue associated with
property development in the United States and create ancillary
service opportunities and revenue from this
business.
Digital
Transformation Technology Business. Our digital transformation technology business
unit is committed to enabling enterprises to engage in a digital
transformation by providing consulting, implementation and
development services with various technologies, including instant
messaging, blockchain, e-commerce, social media and payment
solutions. Our digital transformation technology business is
involved in mobile application product development and other
businesses, providing information technology services to end-users,
service providers and other commercial users through multiple
platforms. Our technology platform consists of instant messaging
systems, social media, e-commerce and payment systems, direct
marketing platforms, e-real estate, brand protection and
counterfeit and fraud detection. HotApp Blockchain Inc., a
99.9%-owned subsidiary of Singapore eDevelopment, focuses on
business-to-business solutions such as enterprise messaging and
workflow. Through HotApp, we have successfully implemented several
strategic platform developments for clients, including a mobile
front-end solution for network marketing, a hotel e-commerce
platform for Asia and a real estate agent management platform in
China. We have also enhanced our technological capability from
mobile application development to include blockchain architectural
design, allowing mobile-friendly front-end solutions to integrate
with blockchain platforms.
Biohealth
Business. Our biohealth
business is committed to both funding research and developing and
selling products that promote a healthy lifestyle. Since Singapore
eDevelopment became involved in the biomedical and healthcare
market through its biohealth division – Global BioMedical
Pte. Ltd. – we have successfully formed new ventures with
biomedical companies and made headway with our research. A
subsidiary of Global BioMedical Pte. Ltd. is presently one of three
shareholders in an operating entity named Global BioLife, Inc. The
other shareholders of Global BioLife include Holista CollTech (we
indirectly own 19.8% of Holista CollTech) and an entity owned by
the chief scientist overseeing Global BioLife’s projects.
Global BioLife is a company devoted to research in three main
areas: (i) the “Linebacker” project, which aims to
develop a universal therapeutic drug platform, (ii) a new sugar
substitute called “Laetose,” and (iii) a multi-use
fragrance called “3F” (Functional Fragrance
Formulation). Global BioLife has formed a working collaboration
with Chemia Corporation, a specialty manufacturer specializing in
high quality, cost effective fragrances. Together with Chemia, we
are attempting to license 3F. We have engaged a consulting firm in
the biopharmaceutical and life sciences industry, to assist in our
goal of licensing each of Linebacker, Laetose and
3F.
Through
our indirect 19.8% interest in Holista CollTech, we have
collaborative biotech operations in Australia and Malaysia,
operating in three segments – healthy food ingredients,
dietary supplements and collagen. Holista CollTech researches,
develops, markets and distributes health-oriented products to
address the growing need for natural medicine. It offers a suite of
food ingredients including low-glycemic index baked goods, low
sodium salt, low-fat fried foods and low-calorie and low-GI sugars.
Holista CollTech produces cosmetic-grade sheep (ovine) collagen
using patented extraction methods from Australia. Through Singapore
eDevelopment, we also own 53% of iGalen International Inc., a
distributor of supplements and other health products. The remaining
equity interests in iGalen International Inc. are owned by the
founder of Holista CollTech.
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2
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Other
Business Activities. While we
have identified certain main areas of focus, we will not be limited
to these three principal businesses. Along with our ownership
stakes, we provide corporate strategy and business development
services. We also provide asset management services and corporate
restructuring and leveraged buy-out expertise. These service
offerings build relationships with promising companies for
potential future collaboration and expansion. We intend at all
times to operate our business in a manner as to not become
inadvertently subject to the regulatory requirements under the
Investment Company Act of 1940 or the Investment Advisers Act of
1940.
Our Market Opportunity
In
each of our businesses, we intend to focus on solid, growing
markets and capitalize on positive demographic and market trends.
In our property development business, we intend to develop
residential real estate properties in strategic markets where we
will be able to subdivide lots for development to meet expanding
needs for housing. In addition, we are exploring the potential to
expand our set of solutions for property development in the United
States, and we may engage in financing, home management, realtor
services, insurance and home title validation. We also intend to
embark on homebuilding activities in partnership with U.S.
homebuilders in the for-sale and for-rent sectors, and have
commenced discussions to acquire small U.S. homebuilding projects
(although no such agreements are currently in place). We believe
these initiatives have the opportunity to provide us with further
revenue streams. In our digital transformation technology business,
in response to the growth of internet technologies, we are being
increasingly called upon to provide software and services to manage
large amounts of personal data, prevent the unauthorized access of
such data and maintain and improve easily accessible and navigable
IT systems for firms and individuals. In the field of biohealth,
advances in neuroscience and molecular biology are resulting in new
generations of pharmaceutical products to treat neurological and
inflammatory-derived diseases. Through our ownership interests in
Global Biomedical Pte. Ltd. and Holista CollTech, we intend to
continue to seek ways to leverage our biomedical
research.
Our Growth Strategy and Competitive Advantages
Our
goal is to develop or acquire ownership interest in companies that
possess high-growth potential, and to provide those companies with
capital markets and management services that will help them grow.
Although we are aware of other, mostly larger companies that have
utilized comparable structures to achieve their business objectives
and will compete with us for not only promising acquisition targets
but also investor capital, we believe our services that extend from
the United States into Asian markets provide us competitive
advantages. We also believe that we can build a brand that is
synonymous with integrity, strong corporate governance and
transparency with an emphasis on social responsibility. Key
elements of our growth strategy and competitive advantages
include:
Accretive
acquisitions and strategic relationships at each level of our
company. We intend to continue
to pursue acquisitions in the United States and internationally
that consolidate market share, expand our geographical footprint
and further our position as a participant in each of our three
principal businesses. In addition, we regularly engage in
negotiations with potential acquisition targets seeking capital and
management services. We seek to identify and partner with companies
with complementary technology and where our management’s
access to business extension opportunities in Asia could be
commercially beneficial to them.
Diverse and
competitive positioning of our companies. Our three principal businesses operate in highly
competitive but diverse markets which we believe balance the risk
profile of our company. We have positioned ourselves over the past
five years as a participant in these markets through a series of
strategic acquisitions, following a business philosophy implemented
by Chan Heng Fai, our founder, Chairman, Chief Executive Officer
and largest stockholder. Our business has historically focused on
property development and digital transformation technology. We have
more recently entered into the biohealth business, a space which we
believe has significant growth potential. We believe the diverse
and competitive positioning in these markets of our companies
serves as a competitive strength.
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3
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Operations
strategically located in key markets. By maintaining multiple offices in Singapore,
Magnolia, Texas, 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 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.
Mr. Chan has led Singapore eDevelopment Ltd. since 2014 and has led
our company since its inception. By providing structural and
economic alignment with the performance of our company, Mr.
Chan’s continuing controlling interest is directly aligned
with those of our investors. We believe the combination of these
characteristics has promoted long-term planning, an enhanced
culture among all of our group of companies, strategic partners and
employees, and ultimately the creation of value for our company and
our stockholders.
Selected Risks Associated with Our Business
Our
business and prospects may be limited by a number of risks and
uncertainties that we currently face, including the
following:
●
We
operate in the intensely competitive property development, digital
transformation technology and biohealth markets against a number of
large, well-known companies in each of those markets.
●
We and
our majority-owned 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 $4,534,317 for the nine months ended September 30, 2019 and net
losses of $7,490,568 and $7,085,846 for the years ended December
31, 2018 and 2017, 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.
|
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4
|
|
●
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 and Australia, particularly with
respect to increases in wages for professionals, fluctuation in the
value of foreign currencies and governmental trade policies between
nations.
In
addition, we face other risks and uncertainties that may materially
affect our business prospects, financial condition and results of
operations. You should consider the risks discussed in “Risk
Factors” and elsewhere in this prospectus before investing in
our common stock.
Implications of Our Being an “Emerging Growth
Company”
As
a company with less than $1.07 billion in revenue during our last
completed fiscal year, we qualify as an “emerging growth
company” under the Jumpstart Our Business Startups Act of
2012, or the JOBS Act. An emerging growth company may take
advantage of specified reduced reporting requirements that are
otherwise generally applicable to public companies. In particular,
as an emerging growth company, we:
●
are not required to
obtain an attestation and report from our auditors on our
management’s assessment of our internal control over
financial reporting pursuant to the Sarbanes-Oxley
Act;
●
are not required to
provide a detailed narrative disclosure discussing our compensation
principles, objectives and elements and analyzing how those
elements fit with our principles and objectives (commonly referred
to as “compensation discussion and
analysis”);
●
are not required to
obtain a non-binding advisory vote from our stockholders on
executive compensation or golden parachute arrangements (commonly
referred to as the “say-on-pay,”
“say-on-frequency” and
“say-on-golden-parachute” votes);
●
are exempt from
certain executive compensation disclosure provisions requiring a
pay-for-performance graph and CEO pay ratio
disclosure;
●
may present only
two years of audited financial statements and only two years of
related Management’s Discussion and Analysis of Financial
Condition and Results of Operations, or MD&A; and
●
are eligible to
claim longer phase-in periods for the adoption of new or revised
financial accounting standards under §107 of the JOBS
Act.
We intend to take advantage of all of these
reduced reporting requirements and exemptions, including the longer
phase-in periods for the adoption of new or revised financial
accounting standards under §107 of the JOBS Act. Our election
to use the phase-in periods may make it difficult to compare our
financial statements to those of non-emerging growth companies and
other emerging growth companies that have opted out of the phase-in
periods under §107 of the JOBS Act. Please see “Risk
Factors” on page 21 (“We are an ‘emerging
growth company’. . . .”).
Certain
of these reduced reporting requirements and exemptions were already
available to us due to the fact that we also qualify as a
“smaller reporting company” under SEC rules. For
instance, smaller reporting companies are not required to obtain an
auditor attestation and report regarding internal control over
financial reporting, are not required to provide a compensation
discussion and analysis, are not required to provide a
pay-for-performance graph or CEO pay ratio disclosure, and may
present only two years of audited financial statements and related
MD&A disclosure.
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5
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|
Under
the JOBS Act, we may take advantage of the above-described reduced
reporting requirements and exemptions for up to five years after
our initial sale of common equity pursuant to a registration
statement declared effective under the Securities Act of 1933, or
such earlier time that we no longer meet the definition of an
emerging growth company. The JOBS Act provides that we would cease
to be an “emerging growth company” if we have more than
$1.07 billion in annual revenue, have more than $700 million in
market value of our common stock held by non-affiliates, or issue
more than $1 billion in principal amount of non-convertible
debt over a three-year period. Further, under current SEC rules, we
will continue to qualify as a “smaller reporting
company” for so long as we have a public float (i.e., the
market value of common equity held by non-affiliates) of less than
$250 million as of the last business day of our most recently
completed second fiscal quarter.
Status as a Controlled Company
Upon
the completion of this offering, we expect to be considered a
“controlled company” within the meaning of the listing
standards of Nasdaq. Under these rules, a “controlled
company” may elect not to comply with certain corporate
governance requirements, including the requirement to have a board
that is composed of a majority of independent directors. We intend
to take advantage of these exemptions following the completion of
this offering. These exemptions do not modify the independence
requirements for our audit committee, and we intend to comply with
the applicable requirements of the Sarbanes-Oxley Act and rules
with respect to our audit committee within the applicable time
frame. For more information, please see “Management –
Status as a Controlled Company.”
Organizational Background and Corporate Information
HF
Enterprises Inc. was incorporated in the State of Delaware on March
7, 2018. The following chart illustrates the current corporate
structure of our key operating entities:
The
percentages in the chart above indicate the ownership of such
entities. The indirect ownership omits 100% owned intermediate
holding companies. Our consolidated financial statements include
the financial results of all the entities listed except for Holista
CollTech Limited and Vivacitas Oncology Inc., for which we own only
a minority interest.
This
prospectus gives effect to the following internal restructuring
transactions, completed on October 1, 2018, by which we issued a
total of 10,000,000 shares of our common stock to HFE Holdings
Limited:
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6
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|
●
100% of the
ownership interest in Hengfai International Pte. Ltd. was
transferred from Chan Heng Fai (an officer and director of our
company) to HF Enterprises Inc. in exchange for 8,500,000 shares of
our common stock to be held by HFE Holdings Limited. Hengfai
International Pte. Ltd., a Singapore limited company, is the sole
stockholder of Hengfai Business Development Pte. Ltd., which is the
owner of 761,185,294 ordinary shares of Singapore eDevelopment
Limited and warrants to purchase 359,834,471 ordinary shares of
Singapore eDevelopment Limited.
●
100% of the
ownership interest in Global eHealth Limited was transferred from
Chan Heng Fai to HF Enterprises Inc. in exchange for 1,000,000
shares of our common stock to be held by HFE Holdings Limited.
Global eHealth Limited, a Hong Kong company, is the owner of
46,226,673 ordinary shares of Holista CollTech
Limited.
●
100% of the
ownership interest in Heng Fai Enterprises Pte. Ltd. was
transferred from Chan Heng Fai to HF Enterprises Inc. in exchange
for 500,000 shares of our common stock to be held by HFE Holdings
Limited. Heng Fai Enterprises Pte. Ltd., a Singapore limited
company, owns 2,480,000 shares of common stock of Vivacitas
Oncology Inc.
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, 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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7
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|
THE OFFERING
The
summary below describes the principal terms of this offering. The
“Description of Capital Stock” section of this
prospectus contains a more detailed description of our common
stock.
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|
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|
Common
stock offered by us
|
2,600,000
shares
|
|
|
|
|
|
|
|
|
Underwriter’s over-allotment
option
|
We have
granted the underwriter a 60-day option to purchase up to an
additional 390,000 shares of our common stock from us at the
initial public offering price less underwriting discounts and
commissions, to cover over-allotments, if any.
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|
|
|
|
|
|
|
|
Common stock to be outstanding
after this offering
|
12,601,000
shares.(1)
|
|
|
|
|
|
|
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|
Use of
proceeds after expenses
|
We
estimate that the net proceeds of the sale of our common stock in
this offering will be approximately $15,239,171 (or approximately
$17,614,271 if the underwriter exercises its option in full to
purchase additional shares of our common stock), based on an
assumed initial public offering price of $7.00 per share, which is
the midpoint of the range set forth on the cover page of this
prospectus, after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by
us.
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|
|
|
|
|
|
|
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|
We intend to use the net proceeds of this offering (i) to fund possible acquisitions of new
companies and additional properties, and (ii) for working capital
and general corporate purposes. See “Use of Proceeds”
for more information.
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|
|
|
|
|
|
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|
Dividend
policy
|
We have never declared or paid any cash dividends on our common
stock. We anticipate that we will retain any earnings to support
operations and to finance the growth and development of our
business. Accordingly, we do not expect to pay cash dividends on
our common stock in the foreseeable future.
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|
|
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|
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. Under these rules, a
“controlled company” may elect not to comply with
certain corporate governance requirements, including the
requirement to have a board that is composed of a majority of
independent directors. We have elected to take advantage of these
exemptions.
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|
|
|
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|
Risk
factors
|
Investing in our common stock involves a high degree of risk. See
“Risk Factors” and other information included in this
prospectus for a discussion of factors you should carefully
consider before deciding to invest in shares of our common
stock.
|
|
|
|
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|
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|
Proposed Nasdaq
Capital Market symbol
|
HFEN
(2)
|
|
|
|
______________________________
(1)
In this prospectus,
except as otherwise indicated, the number of shares of our common
stock that will be outstanding immediately after this offering and
the other information based thereon:
●
assumes an initial
public offering price of $7.00 per share of common stock, which is
the midpoint of the range set forth on the cover page of this
prospectus;
●
excludes 500,000
shares of our common stock reserved for future issuance under our
2018 Incentive Compensation Plan; and
●
no exercise of the
underwriter’s option to purchase up to 390,000 additional
shares from us in this offering to cover over-allotments, if
any.
(2)
We have reserved
the trading symbol HFEN in connection with our application to have
our common stock listed for trading on the Nasdaq Capital
Market.
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8
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|
SUMMARY CONSOLIDATED FINANCIAL DATA
We derived the
summary consolidated statements of operations data for the years
ended December 31, 2018 and 2017 from our audited consolidated
financial statements included elsewhere in this prospectus. The
summary consolidated statements of operations for the nine months
ended September 30, 2019 and 2018 and the summary consolidated
balance sheet data as of September 30, 2019 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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|
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|
Nine Months ended
September 30,
|
Years ended December 31,
|
||
|
Consolidated
Statements of Operations Data:
|
2019
|
2018
|
2018
|
2017
|
|
|
(unaudited)
|
|
(As
Restated)
|
|
|
Revenues
|
$22,944,498
|
$16,389,892
|
$20,380,940
|
$10,757,093
|
|
Operating
expenses
|
27,802,144
|
19,000,426
|
24,611,252
|
15,658,660
|
|
Loss from
operations
|
(4,857,646)
|
(2,610,534)
|
(4,230,312)
|
(4,901,567)
|
|
Net loss
attributable to common shareholders
|
(3,097,115)
|
(2,996,889)
|
(4,989,870)
|
(4,308,511)
|
|
Loss per share
– basic and diluted
|
(0.31)
|
(0.31)
|
(0.51)
|
(0.45)
|
|
Weighted average
common shares outstanding – basic and diluted
|
10,001,000
|
10,001,000
|
10,001,000
|
10,001,000
|
|
|
The
following table summarizes our consolidated balance sheet data as
of September 30, 2019, 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 $7.00 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 September 30, 2019.
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|
As
of September 30, 2019
|
|
|
Consolidated Balance Sheet Data:
|
Actual
|
As
Adjusted
|
|
|
(unaudited)
|
|
|
Cash and restricted
cash
|
$11,413,896
|
$26,653,067
|
|
Working capital
(deficit)
|
9,415,285
|
24,654,465
|
|
Total
assets
|
38,570,814
|
53,809,985
|
|
Total
indebtedness
|
8,875,375
|
8,875,375
|
|
Total
liabilities
|
14,776,532
|
14,776,532
|
|
Total
stockholders’ equity
|
23,794,282
|
39,033,453
|
|
|
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|
9
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 nine months ended September 30, 2019 and the years ended
December 31, 2018 and 2017, we had revenue of $22,944,498,
$20,380,940 and $10,757,093, and net losses of $4,534,317,
$7,490,568 and $7,085,846, respectively. There can be no assurance
that our future operations will result in net income. Our failure
to increase our revenues or improve our gross margins will harm our
business. We may not be able to achieve, sustain or increase
profitability on a quarterly or annual basis in the future. If our
revenues grow more slowly than we anticipate, our gross margins
fail to improve or our operating expenses exceed our expectations,
our operating results will suffer. The prices we charge for our
properties, products and services may decrease, which would reduce
our revenues and harm our business. If we are unable to sell our
properties, products and services at acceptable prices relative to
our costs, or if we fail to develop and introduce on a timely basis
new products or services from which we can derive additional
revenues, our financial results will suffer.
We and our subsidiaries have limited operating histories and
therefore we cannot ensure the long-term successful operation of
our business or the execution of our growth strategy.
Our
prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by growing companies in new and
rapidly evolving markets. We must meet many challenges
including:
●
establishing and
maintaining broad market acceptance of our products and services
and converting that acceptance into direct and indirect sources of
revenue;
●
establishing and
maintaining adoption of our technology on a wide variety of
platforms and devices;
●
timely and
successfully developing new products and services and increasing
the features of existing products and services;
●
developing products
and services that result in high degrees of customer satisfaction
and high levels of customer usage;
●
successfully
responding to competition, including competition from emerging
technologies and solutions;
●
developing and
maintaining strategic relationships to enhance the distribution,
features, content and utility of our products and services;
and
●
identifying,
attracting and retaining talented technical and sales services
staff at reasonable market compensation rates in the markets in
which we operate.
Our
growth strategy may be unsuccessful and we may be unable to address
the risks we face in a cost-effective manner, if at all. If we are
unable to successfully address these risks our business will be
harmed.
We
have a holding company ownership structure and will depend on
distributions from our majority owned 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.
10
Our significant ownership interests in public companies listed on
limited public trading markets subjects us to risks relating to the
sale of their shares and the fluctuations in their stock
prices.
We own
indirect interests in several publicly traded companies –
most significantly, Singapore eDevelopment Ltd., whose shares are
listed on the Singapore Stock Exchange, and Holista CollTech
Limited, whose shares are listed on the Australian Stock Exchange
(SeD Intelligent Home Inc. and HotApp Blockchain Inc. are not
currently traded on any exchange). Although the publicly traded
shares of Singapore eDevelopment Ltd. 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.
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.
11
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;
12
●
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 Mr. Chan could have a material
adverse effect on our growth, revenues and prospective business. If
Mr. Chan 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. 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.
13
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 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 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).
14
Neither
we nor any of our majority-owned 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 subsidiaries will own assets will
in turn be majority-owned 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 subsidiaries, are a holding company and do not
intend to invest or trade in securities. Rather, through our
majority-owned 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 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.
15
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.
16
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 nine months ended September 30, 2019
and 2018, we earned $15 million and $14 million in cash from
lot sales to NVR, respectively. During 2018 and 2017, we earned
$12.0 million and $5.5 million in cash from lot sales to NVR,
respectively. Therefore, at the present time, a significant portion
of our business depends largely on NVR’s continued
relationship with us. A decision by NVR to discontinue or limit its
relationship with us could have a material adverse impact on our
property development business and our entire company
overall.
We may face liability for information displayed on or accessible
via our website, and for other content and commerce-related
activities, which could reduce our net worth and working capital
and increase our operating losses.
We
could face claims for errors, defamation, negligence or copyright
or trademark infringement based on the nature and content of
information displayed on or accessible via our website, which could
adversely affect our financial condition. Even to the extent that
claims made against us do not result in liability, we may incur
substantial costs in investigating and defending such
claims.
Our
insurance, if any, may not cover all potential claims to which we
are exposed or may not be adequate to indemnify us for all
liabilities that may be exposed. Any imposition of liability that
is not covered by insurance or is in excess of insurance coverage
would reduce our net worth and working capital and increase our
operating losses.
Any failure of our network could lead to significant disruptions in
our businesses, which could damage our reputation, reduce our
revenues or otherwise harm our businesses.
All of
our businesses and, in particular, our digital transformation
technology business unit, are dependent upon providing our
customers with fast, efficient and reliable services. A reduction
in the performance, reliability or availability of our network
infrastructure may harm our ability to distribute our products and
services to our customers, as well as our reputation and ability to
attract and retain customers and content providers. Our systems and
operations are susceptible to, and could be damaged or interrupted
by outages caused by fire, flood, power loss, telecommunications
failure, Internet or mobile network breakdown, earthquakes and
similar events. Our systems are also subject to human error,
security breaches, power losses, computer viruses, break-ins,
“denial of service” attacks, sabotage, intentional acts
of vandalism and tampering designed to disrupt our computer systems
and network communications, and our systems could be subject to
greater vulnerability in periods of high employee turnover. A
sudden and significant increase in traffic on our customers’
websites or demand from mobile users could strain the capacity of
the software, hardware and telecommunications systems that we
deploy or use. This could lead to slower response times or system
failures. Our failure to protect our network against damage from
any of these events could harm our business.
17
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.
18
Our competitors may have greater financial and other resources than
we do and those advantages could make it difficult for us to
compete with them.
Our
three principal businesses, property development, digital
transformation technology and biohealth activities are each highly
competitive and constantly changing. We expect that competition
will continue to intensify. Increased competition may result in
price reductions, reduced margins, loss of customers, and changes
in our business and marketing strategies, any of which could harm
our business. Current and potential competitors may have longer
operating histories, greater name recognition, more employees and
significantly greater financial, technical, marketing, public
relations and distribution resources than we do. In addition, new
competitors with potentially unique or more desirable products or
services may enter the market at any time. The competitive
environment may require us to make changes in our products,
pricing, licensing, services or marketing to maintain and extend
our current brand and technology. Price concessions or the
emergence of other pricing, licensing and distribution strategies
or technology solutions of competitors may reduce our revenue,
margins or market share, any of which will harm our business. Other
changes we have to make in response to competition could cause us
to expend significant financial and other resources, disrupt our
operations, strain relationships with partners, or release products
and enhancements before they are thoroughly tested, any of which
could harm our operating results and stock price.
Since some members of our board of directors are not residents of
the United States and certain of our assets are located outside of
the United States, you may not be able to enforce a U.S. judgment
for claims you may bring against such directors or
assets.
Several
members of our senior management team, including Chan Heng Fai,
have their primary residences and business offices in Asia, and a
portion of our assets and a substantial portion of the assets of
these directors are located outside the United States. As a result,
it may be more difficult for you to enforce a lawsuit within the
United States against these non-U.S. residents than if they were
residents of the United States. Also, it may be more difficult for
you to enforce any judgment obtained in the United States against
our assets or the assets of our non-U.S. resident management
located outside the United States than if these assets were located
within the United States. We cannot assure you that foreign courts
would enforce liabilities predicated on U.S. federal securities
laws in original actions commenced in such foreign jurisdiction, or
judgments of U.S. courts obtained in actions based upon the civil
liability provisions of U.S. federal securities laws.
We may be required to record a significant charge to earnings if
our real estate property become impaired.
Our
policy is to obtain an independent third-party valuation for each
major project in the United States to test 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.
For
example, 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, we applied a fair value-based
impairment test to the net book value of assets and recorded
approximately a $3.9 million impairment on Black Oak’s net
book value. There can be no assurance that we will not record
additional impairment charges in the future.
Fluctuations in foreign currency exchange rates affect our
operating results in U.S. dollar terms.
A
portion of our revenues arises from international operations.
Revenues generated and expenses incurred by our international
subsidiaries are often denominated in the currencies of the local
countries. As a result, our consolidated U.S. dollar financial
statements are subject to fluctuations due to changes in exchange
rates as the financial results of our international subsidiaries
are translated from local currencies into U.S. dollars. In
addition, our financial results are subject to changes in exchange
rates that impact the settlement of transactions in non-local
currencies.
19
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 $36.6 million, $41.1
million and $42.8 million on September 30, 2019, December 31, 2018
and 2017, 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 2019 and
2020, 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.
20
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.
21
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.
22
If we are unable to address the weaknesses in our internal control
over financial reporting, investors may lose confidence in our
company.
We
have identified material weaknesses in our internal control over
financial reporting, which resulted in the need to restate our
consolidated financial statements. If we do not remediate the
material weaknesses in our internal control over financial
reporting, we may not be able to accurately report our financial
results or file our periodic reports in a timely manner, which may
cause investors to lose confidence in our reported financial
information and may lead to a decline in the market price of our
common stock.
Our business is subject to reporting requirements that continue to
evolve and change, which could continue to require significant
compliance effort and resources.
Because
our common stock will be publicly traded, we will be subject to
certain rules and regulations of federal, state and financial
market exchange entities charged with the protection of investors
and the oversight of companies whose securities are publicly
traded. These entities, including the Public Company Accounting
Oversight Board (PCAOB), the SEC and the Nasdaq Capital Market
(assuming our common stock has been approved for listing),
periodically issue new requirements and regulations and legislative
bodies also review and revise applicable laws. As interpretation
and implementation of these laws and rules and promulgation of new
regulations continues, we will continue to be required to commit
significant financial and managerial resources and incur additional
expenses to address such laws, rules and regulations, which could
in turn reduce our financial flexibility and create distractions
for management.
Any of
these events, in combination or individually, could disrupt our
business and adversely affect our business, financial condition,
results of operations and cash flows.
Risks Related to Ownership of Our Common Stock and this
Offering
Our stock price may be volatile and your investment could decline
in value.
The
market price of our common stock following this offering may
fluctuate substantially as a result of many factors, some of which
are beyond our control. These fluctuations could cause you to lose
all or part of the value of your investment in our common stock.
Factors that could cause fluctuations in the market price of our
common stock include the following:
●
quarterly
variations in our results of operations;
●
results of
operations that vary from the expectations of securities analysts
and investors;
●
results of
operations that vary from those of our competitors;
●
changes in
expectations as to our future financial performance, including
financial estimates by securities analysts;
●
publication of
research reports about us or the industries in which we
participate;
●
announcements by us
or our competitors of significant contracts, acquisitions or
capital commitments;
●
announcements by
third parties of significant legal claims or proceedings against
us;
●
changes affecting
the availability of financing for smaller publicly traded companies
like us;
●
regulatory
developments in the property development, digital transformation
technology or biohealth businesses;
●
significant future
sales of our common stock, and additions or departures of key
personnel;
●
the realization of
any of the other risk factors presented in this prospectus;
and
●
general economic,
market and currency factors and conditions unrelated to our
performance.
In
addition, the stock market in general has experienced significant
price and volume fluctuations that have often been unrelated or
disproportionate to operating performance of individual companies.
These broad market factors may seriously harm the market price of
our common stock, regardless of our operating performance. In the
past, following periods of volatility in the market price of a
company’s securities, securities class action litigation has
often been instituted. A class action suit against us could result
in significant liabilities and, regardless of the outcome, could
result in substantial costs and the diversion of our
management’s attention and resources.
Our common stock has no prior market and our stock price may
decline after the offering.
Before
this offering, there has been no public market for shares of our
common stock. Although we have applied to have our common stock
listed for trading on the Nasdaq Capital Market, an active trading
market for our common stock may not develop or, if it develops, may
not be sustained after this offering. Our company and the
underwriters will negotiate to determine the initial public
offering price. The initial public offering price may be higher
than the market price of our common stock after the offering and
you may not be able to sell your shares of our common stock at or
above the price you paid in the offering. As a result, you could
lose all or part of your investment.
23
Investors purchasing common stock in this offering will experience
immediate dilution.
The
initial public offering price of shares of our common stock is
higher than the pro forma as adjusted net tangible book value per
outstanding share of our common stock. You will incur immediate
dilution of $4.55 per share in the pro forma as adjusted net
tangible book value of shares of our common stock, based on an
assumed initial public offering price of $7.00 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 December 23, 2019, we will have 20,000,000 shares
of common stock authorized and 12,601,000 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, 10,001,000
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.
24
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 Mr. Chan 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.
25
Our certificate of incorporation has an exclusive forum for
adjudication of disputes provision which limits the forum to the
Delaware Court of Chancery for actions against us, except where
there is exclusive federal jurisdiction.
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. It is possible
that a court could rule that this provision is not applicable or is
unenforceable. Any person or entity purchasing or otherwise
acquiring shares of our capital stock will be deemed to have notice
of and consented to this provision of our certificate of
incorporation. However, this sole and exclusive forum provision
will not apply in those instances where there is exclusive federal
jurisdiction, including but not limited to actions arising under
the Securities Act or the Exchange Act.
While
management believes limiting the forum is a benefit, some
stockholders could be inconvenienced by not being able to bring an
action in another forum they find favorable.
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; and
●
our ability to
effectively manage our growth and future expenses.
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.
26
USE OF PROCEEDS
We
estimate that the net proceeds from the sale of our common stock in
this offering will be approximately $15,239,171 (or approximately
$17,614,271 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 $7.00 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
|
$13,715,254
|
90%
|
|
Working capital and
general corporate purposes
|
1,523,917
|
10%
|
|
Total
|
$15,239,171
|
100.0%
|
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 $312,097 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 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.
27
CAPITALIZATION
The
following table sets forth our cash and cash equivalents and total
capitalization as of September 30, 2019:
●
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 $7.00 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 September 30, 2019.
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 September
30, 2019
|
|
|
|
Actual
|
As
Adjusted
|
|
|
(Unaudited)
|
(Unaudited)
|
|
Cash and restricted
cash
|
$11,413,896
|
$26,653,067
|
|
Debt, net of debt
discount
|
8,875,375
|
8,875,375
|
|
Long-term debt, net
of current portion
|
6,491,490
|
6,491,490
|
|
Stockholders’
equity
|
16,857,694
|
32,096,865
|
|
|
|
|
|
Common stock,
$0.001 par value
|
10,001
|
12,601
|
|
Additional paid-in
capital
|
53,876,032
|
69,112,603
|
|
Accumulated
deficit
|
(38,360,765)
|
(38,360,765)
|
|
Accumulated Other
Comprehensive Income
|
1,332,426
|
1,332,426
|
|
Stockholders’
equity
|
16,857,694
|
32,096,865
|
|
Non-controlling
interests
|
6,936,588
|
6,936,588
|
|
Total
stockholders’ equity
|
$23,794,282
|
$39,033,453
|
|
Total
capitalization
|
$30,285,772*
|
$45,524,943*
|
*Total
capitalization = Long-term debt + Total stockholders'
equity
28
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
September 30, 2019, we had a net tangible book value of $16,857,694
or $1.69 per share of common stock. 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
September 30, 2019.
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 $7.00 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 September 30, 2019, would have been
approximately $32,096,865 or $2.55 per share of common stock. This
represents an immediate increase in the pro forma net tangible book
value of $0.86 per share to existing stockholders and an immediate
dilution of $4.45 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
|
$7.00
|
|
Pro forma net
tangible book value before offering
|
1.69
|
|
Increase in pro
forma net tangible book value attributable to new
investors
|
0.86
|
|
Pro forma as
adjusted net tangible book value after offering
|
$2.55
|
|
Dilution in pro
forma net tangible book value to new investors
|
$4.55
|
Each
$1.00 increase (decrease) in the assumed initial public offering
price of $7.00 per share would increase (decrease) the pro forma as
adjusted dilution to new investors to $0.82 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 $2.65 per share, the increase in the pro forma net tangible book
value per share to existing stockholders would be $0.97 per share
and the dilution per share to new investors purchasing common stock
in this offering would be $4.35 per share.
The
following table illustrates, on an as adjusted basis as of
September 30, 2019, 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 $7.00 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.
29
|
|
Shares
Purchased
|
Total
Consideration
|
Average Price
Per
|
||
|
|
Number
|
Percent
|
Amount
|
Percent
|
Share
|
|
Existing
stockholders
|
10,001,000
|
79.4%
|
$16,857,694
|
48.1%
|
$1.69
|
|
New
investors
|
2,600,000
|
20.6%
|
$18,200,000
|
51.9%
|
$7.00
|
|
Total
|
12,601,000
|
100.0%
|
$35,057,694
|
100.0%
|
|
The
number of shares of common stock shown above to be outstanding
after this offering is based on 10,001,000 shares of our common
stock outstanding as of September 30, 2019, 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 23.0% 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
10,001,000 shares of common stock outstanding as of
September 30, 2019, 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.
30
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 and Australia. We manage our three
principal businesses primarily through our 65.4%-owned subsidiary,
Singapore eDevelopment Ltd., a public company traded on the
Singapore Stock Exchange. Through this subsidiary (and indirectly,
through other public and private U.S. and Asian subsidiaries), we
are actively developing two significant real estate projects near
Houston, Texas and in Frederick, Maryland in our property
development segment. We have designed applications for enterprise
messaging and e-commerce software platforms in the United States
and Asia in our digital transformation technology business unit.
Our recent foray into the biohealth segment includes research to
treat neurological and immune-related diseases, nutritional
chemistry to create a natural sugar alternative, research regarding
innovative products to slow the spread of disease, and natural
foods and supplements. We opportunistically identify global
businesses for acquisition, incubation and corporate advisory
services, primarily related to our operating business segments. We
also have ownership interests outside of Singapore eDevelopment,
including an indirect 19.8% equity interest in Holista CollTech
Limited, a public Australian company that produces natural food
ingredients, and an indirect 13.7% 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
opportunistically identify global businesses for acquisition,
incubation and corporate advisory services, primarily related to
our existing operating business segments. We also have ownership
interests outside of Singapore eDevelopment, including an indirect
19.8% equity interest in Holista CollTech Limited, a public
Australian company that produces natural food ingredients, and an
indirect 13.7% 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 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 nine months ended September 30, 2019 and the
years ended December 31, 2018 and 2017 were $22,944,498,
$20,380,940 and $10,757,093, respectively. Our net loss for the
nine months ended September 30, 2019 was $4,534,317, and net losses
for the years ended December 31, 2018 and 2017 were $7,490,568 and
$7,085,847, 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 94%, sales of biohealth products accounted for
approximately 6% and digital transformation technology consulting
fees accounted for approximately 0% of our total revenue in the
first nine months of 2019, sales of properties accounted for
approximately 87%, sales of biohealth products accounted for
approximately 12% and digital transformation technology consulting
fees accounted for approximately 1% of our total revenue in 2018.
Sales of properties accounted for approximately 67%, sales of
biohealth products accounted for approximately 27%, digital
transformation technology consulting fees accounted for
approximately 1% and management services fees from other businesses
for approximately 6% of our total revenue in 2017.
From a
geographical perspective, we recognized 100%, 98% and 90% of our
total revenue in the first nine months of 2019 and the years ended
December 31, 2018 and 2017 in the United States, respectively,
followed by 0%, 2% and 1% of our total revenue in the first nine
months of 2019 and the years 2018 and 2017 in the People’s
Republic of China (which includes Hong Kong). Revenue in Australia
and Singapore accounted for the remainder of our 2017 total revenue
at 9%.
31
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 and
biohealth businesses and future business acquisitions.
Matters that May or Are Currently Affecting Our
Business
The
primary challenges and trends that could affect or are affecting
our financial results include:
●
Our ability to
improve our revenue through cross-selling and revenue-sharing
arrangements among our diverse group of companies;
●
Our ability to
identify complementary businesses for acquisition, obtain
additional financing for these acquisitions, if and when needed,
and profitably integrate them into our existing
operation;
●
Our ability to
attract competent, skilled technical and sales personnel for each
of our businesses at acceptable prices to manage our overhead;
and
●
Our ability to
control our operating expenses as we expand each of our businesses
and product and service offerings.
Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The Common Control
Transactions resulted in the following basis of accounting for the
financial reporting periods:
●
The
acquisitions of Heng Fai Enterprises and Global eHealth were
accounted for prospectively as of October 1, 2018 and they did not
represent a change in reporting entity.
●
The
consolidated financial statements were retrospectively adjusted for
the acquisition of Hengfai International and the operating results
of Singapore eDevelopment as of January 1, 2017 for comparative
purposes as the entities were under common control.
●
On May 9, 2017,
SeD Capital Pte. Ltd., a subsidiary of the Company, entered into a
sale and purchase agreement with Chan Heng Fai to purchase the
entire shares in LiquidValue Asset Management Pte. Ltd. ("LVAM"
formerly Hengfai Asset Management Pte. Ltd, "HFAM") amounting to
100% of the issued and paid-up share capital of LVAM. The
consideration for the acquisition of LVAM was $441,780.
The consolidated financial statements
were retrospectively adjusted for this acquisition and its
operating results as of January 1, 2017, for comparative purpose as
the entities were under common
control.
ASC 805-50-45
defines the transfer of a business among entities under common
control at carrying amount with retrospective adjustment of prior
period financial statements when reporting entity is changed. ASC
250 defines a change in the reporting entity as a change that
results in financial statements that, in effect, are those of a
different reporting entity. Our management believed that the
acquisitions of Hengfai International and LVAM led to change in the
reporting entities and the acquisitions of Heng Fai Enterprises and
Global eHealth did not.
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”).
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.
32
Revenue Recognition and Cost of Sales
The
following represents a disaggregation of our revenue recognition
policies by segment:
Property
Development
● Rental Income. We temporarily lease
units to customers before selling or under rental guarantee
program. The Company and customer enter into a lease agreement with
set pricing and length. The lease usually is for one year and
rental price is set by considering local market price. Our
obligation is to provide the property for lease during the term.
Revenue is recognized over the life of the lease. The rental
business is not a continuing business for us at the present time
and not our major real estate business; however, we may expand
housing rental operations in the future.
● Property Sales. Our main business is
land development. We purchase land and develop it into residential
communities. The developed lots are then sold to builders (or
customers) for the construction of new homes. The builders enter
into sales contracts with us which set forth the prices and
timeline. 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 or continuing
involvement once title is transferred.
● Cost of Sales of Properties. Costs of
property sales, including land acquisition costs, are allocated pro
rata to each lot based on the size of the lot relative to the total
size of all lots within 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.
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. Costs
to obtain or fulfill a contract are expensed as incurred when the
amortization period is less than one-year. 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. In general, 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.
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 $415,844
and $1,178,220 and capitalized construction costs of $8,262,297 and
$5,899,103 for the years ended December 31, 2018 and 2017,
respectively.
For the
nine months ended September 30, 2019 and 2018, we capitalized
interest from the third-party borrowings of $514,985 and $369,912
and capitalized construction costs of $5,023,396 and $5,100,135,
respectively.
33
On
December 31, 2018, total real estate property under development was
$38.8 million, including:
● land
held for development in the amount of $19.7 million (consisting of
$9.3 million for Black Oak, $9.8 million for Ballenger Run and $0.6
million for our Perth project);
● capitalized
development costs in the amount of $12.2 million (consisting of
$3.3 million for Black Oak and $8.9 million for Ballenger Run);
and
● capitalized
finance costs were $6.9 million.
On
September 30, 2019, total real estate property under development
was $22.4 million, including:
● land
held for development in the amount of $14.4 million (consisting of
$6.9 million for Black Oak, $7.0 million for Ballenger Run and $0.5
million for our Perth project);
● capitalized
development costs in the amount of $3.8 million (consisting of $2.3
million for Black Oak and $1.5 million for Ballenger Run and $0.1
million for our Perth Project); and
● capitalized
finance costs were $4.2 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.
During
the nine months ended September 30, 2019, Black Oak recognized
additional real estate impairment of approximately $3.9
million.
34
On
September 30, 2019, the capitalized construction costs were as
follows:
|
|
Ballenger Run
|
Black Oak
|
Perth Project
|
Total
|
|
Land
held for development
|
$7,010,590
|
$6,886,937
|
$491,355
|
$14,388,882
|
|
Capitalized
development Costs
|
|
|
|
|
|
Hard
Construction Costs
|
16,623,859
|
7,905,736
|
|
24,529,595
|
|
Engineering
|
2,664,874
|
1,789,150
|
|
4,454,024
|
|
Consultation
|
323,163
|
104,867
|
|
428,029
|
|
Project
Management
|
1,531,470
|
2,126,762
|
|
3,658,232
|
|
Legal
|
314,157
|
223,048
|
|
537,205
|
|
Taxes
|
979,507
|
392,919
|
|
1,372,426
|
|
Other
Services
|
479,014
|
33,253
|
44,065
|
556,332
|
|
BAN
reimbursement
|
|
(4,987,889)
|
|
(4,987,889)
|
|
Impairment
Reserve
|
|
(3,938,769)
|
|
(3,938,769)
|
|
Construction
- Sold Lots
|
(21,400,070)
|
(1,364,805)
|
|
(22,764,875)
|
|
Total
capitalized development costs
|
$1,515,974
|
$2,284,272
|
$44,065
|
$3,844,310
|
|
|
|
|
|
|
|
Capitalized
finance costs
|
|
|
|
$4,188,205
|
|
|
|
|
|
|
|
Total
property under development
|
|
|
|
$22,421,397
|
On
December 31, 2018, the capitalized construction costs were as
follows:
|
|
Ballenger Run
|
Black Oak
|
Perth Project
|
Total
|
|
|
|
|
|
|
|
Land
held for development
|
$9,843,587
|
$9,320,441
|
$513,264
|
$19,677,292
|
|
Capitalized
construction Costs
|
|
|
|
|
|
Hard
construction costs
|
14,842,916
|
5,883,149
|
|
20,726,065
|
|
Engineering
|
2,173,718
|
1,463,718
|
|
3,637,436
|
|
Consultation
|
328,663
|
134,687
|
|
463,350
|
|
Project
management
|
2,352,754
|
800,505
|
|
3,153,259
|
|
Legal
|
275,311
|
205,199
|
|
480,510
|
|
Taxes
|
708,386
|
838,382
|
|
1,546,768
|
|
Other
services
|
437,591
|
74,653
|
32,071
|
544,315
|
|
BAN
reimbursement
|
|
(4,667,080)
|
|
(4,667,080)
|
|
Impairment
reserve
|
|
(1,455,326)
|
|
(1,455,326)
|
|
Construction
- Sold Lots
|
(12,242,418)
|
|
|
(12,242,418)
|
|
Total
capitalized development costs
|
$8,876,921
|
$3,277,887
|
$32,071
|
$12,186,879
|
|
|
|
|
|
|
|
Capitalized
finance costs
|
|
|
|
$6,910,765
|
|
|
|
|
|
|
|
Total
property under development
|
|
|
|
$38,774,936
|
35
Through
September 30, 2019, there were no sales from the Perth project. In
addition, no sales agreement had been signed for this
project.
On
January 18, 2019, Black Oak sold 124 lots based on its Purchase and
Sale Agreement with Houston LD, LLC signed on July 3, 2018. The
purchase price was $6,175,000. An impairment of real estate of
approximately $1.5 million related to this sale was recorded on
December 31, 2018. The revenue was recognized in January 2019, when
the sale was closed, and the margin was 0% as a result of the
impairment recorded in FY 2018.
During
the nine months ended September 30, 2019, Black Oak recognized an
additional real estate impairment of approximately $3.9
million.
Results of Operations
Summary
of Statements of Operations for the Nine Months Ended September 30,
2019 and 2018
|
|
Nine Months ended
|
|
|
|
September
30,
2019
|
September
30,
2018
|
|
Revenue
|
$22,944,498
|
$16,389,892
|
|
Operating
Expenses
|
$27,802,144
|
$19,000,426
|
|
Other Income
(Expense)
|
$327,041
|
$(1,861,874)
|
|
Net
Loss
|
$(4,534,317)
|
$(4,552,671)
|
Revenue
The
following table sets forth period-over-period changes in revenues
for each of our reporting segments:
|
|
Nine Months
ended September 30,
|
Change
|
||
|
|
2019
|
2018
|
Dollars
|
Percentage
|
|
Property
development
|
21,509,197
|
14,209,199
|
7,299,998
|
51%
|
|
Biohealth
|
1,406,951
|
2,021,121
|
(614,170)
|
-30%
|
|
Digital
transformation technology
|
-
|
135,515
|
(135,515)
|
-100%
|
|
Other
|
28,350
|
24,057
|
4,293
|
18%
|
|
Total
revenue
|
22,944,498
|
16,389,892
|
6,554,606
|
40%
|
Revenue
was $22,944,498 for the nine months ended September 30, 2019,
compared to $16,389,892 for the nine months ended September 30,
2018. This increase in revenue was primarily attributable to an
increase in property sales from the Ballenger Project and first
sale of a section of Black Oak Project. 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 to Houston LD, LLC for a
total purchase price of $6,175,000. As for our Ballenger Project,
builders are required to purchase a minimum number of lots based on
their applicable sale agreements. We collect revenue only from the
sale of lots to builders. We are not involved in the construction
of homes at the present time.
36
Revenues from our
biohealth segment come from the direct sales by iGalen Inc.
(formerly known as iGalen USA, LLC), which is 100% owned by iGalen
International Inc., Singapore eDevelopment’s 53%-owned
subsidiary. During the nine months ended September 30, 2019 and
2018, the revenues from iGalen Inc. were $1,406,951 and $2,021,121,
respectively. The decrease was mainly due to the slow sales of
current products and delay of the new product’s
promotion.
The
category described as “Other” includes corporate and
financial services and new venture businesses. "Other" includes
certain costs that are not allocated to the reportable segments,
primarily consisting of unallocated corporate overhead costs,
including administrative functions not allocated to the reportable
segments from global functional expenses.
The
financial services and new venture businesses are small and
diversified, and accordingly they are not each separately addressed
as one independent category. In the nine months ended September 30,
2019 and 2018, the revenue from other businesses was $28,350 and
$24,057, respectively, generated by fund management
services.
Operating
Expenses
The following table sets forth period-over-period
changes in cost of sales for each of our reporting
segments:
|
|
Nine months
ended September 30,
|
Change
|
||
|
|
2019
|
2018
|
Dollars
|
Percentage
|
|
Property
development
|
18,819,865
|
12,144,497
|
6,675,368
|
55%
|
|
Biohealth
|
357,935
|
635,539
|
(277,604)
|
-44%
|
|
Digital
transformation technology
|
-
|
74,111
|
(74,111)
|
-100%
|
|
Other
|
-
|
-
|
-
|
-
|
|
Total cost of
sales
|
19,177,800
|
12,854,147
|
6,323,653
|
49%
|
Cost of
sales increased from $12,854,147 in the nine months ended September
30, 2018 to $19,177,800 in the nine months ended September 30,
2019, as a result of the increase 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 increased from $3,535,745 to $3,766,698 in the nine
months ended September 30, 2018 and 2019, respectively. Our
Ballenger project gross margin increased from $2,422,969 to
$2,684,372 in the nine months ended September 30, 2018 and 2019,
respectively, due to the increase of the sales. The gross margin
from sales of Black Oak section one lots was approximately $0 after
real estate impairment of $1.5 million was recorded in
2018.
37
The
following table sets forth period-over-period changes in operating
expenses for each of our reporting segments
|
|
Nine months
ended September 30,
|
Change
|
||
|
|
2019
|
2018
|
Dollars
|
Percentage
|
|
Property
development
|
4,598,112
|
762,630
|
3,835,482
|
503%
|
|
Biohealth
|
2,134,850
|
3,333,360
|
(1,198,510)
|
-36%
|
|
Digital
transformation technology
|
193,959
|
300,994
|
(107,035)
|
-36%
|
|
Other
|
1,697,423
|
1,749,295
|
(51,872)
|
-3%
|
|
Total
operating expenses
|
8,624,344
|
6,146,279
|
2,478,065
|
40%
|
Other
Income (Expense)
In the
nine months ended September 30, 2019, the Company had other
expenses of $8,624,344 compared to other expenses of $6,146,279 in
the nine months ended September 30, 2018. The change from
unrealized gain (loss) on securities investment and foreign
exchange transactions explained the volatility in these two
periods. In the nine months ended September 30, 2019 and 2018, the
unrealized loss on securities investment was $146,470 and
$2,508,245, respectively. Foreign exchange transaction gain was
$438,608 in the nine months ended September 30, 2019, compared to
$974,937 gain in the nine months ended September 30,
2018.
Net
Loss
In the
nine months ended September 30, 2019, the Company had a net loss of
$4,534,317 compared to a net loss of $4,552,671 in the nine months
ended September 30, 2018. The gross margin of the Ballenger project
increased from $2,422,969 to $2,684,372 in the nine months ended
September 30, 2018 and 2019, respectively. The prices of the lots
of the Black Oak project are based on the market prices when the
sales agreements are signed. During
the nine months ended September 30, 2019, the Company recognized $3,938,769
impairment on Black Oak as operating expense.
Liquidity
and Capital Resources
Our
real estate assets have decreased to $22,557,645 as of September
30, 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 and
impairment recorded on the Black Oak project. Our cash has
increased from $1,387,209 as of December 31, 2018 to $4,230,902 as
of September 30, 2019. Our liabilities declined from $19,500,842 at
December 31, 2018 to $14,776,532 at September 30, 2019. Our total
assets have decreased to $38,570,814 as of September 30, 2019 from
$48,702,456 as of December 31, 2018 due to the decrease of our real
estate assets.
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, were are 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.
Currently the Black
Oak project does not have any financing from third parties. On July
20, 2018, Black Oak LP was reimbursed $4,592,079 from the Harris
County Improvement District 17 for previous expenses incurred by
Black Oak LP in the development and installation of infrastructure
within the Black Oak project. The future development timeline of
Black Oak 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.
38
On
November 29, 2016, SeD Home Ltd. entered into three $500,000 bonds
for a total of $1.5 million that were to incur annual interest at
8% and the principal was paid in full on November 29,
2019.
During
the year ended on December 31, 2017, Mr. Chan lent non-interest
loans of $7,156,680, for the general operations of the Company. The
loans are interest free, not tradable, unsecured, and repayable on
demand. On October 15, 2018, a formal lending agreement between the
Singapore eDevelopment Ltd and Mr. Chan was executed. Under the
agreement, Mr. Chan provides a lending credit limit of
approximately $10 million for Singapore eDevelopment Ltd with an
interest rate of 6% per annum for the outstanding borrowed amount,
which commenced retroactively from January 1, 2018. The loans are
still not tradable, unsecured and repayable on demand. As of
September 30, 2019 and December 31, 2018, the outstanding principal
balance of the Related Party Loan was $5,667,640 and $8,517,490,
respectively. Interest started to accrue on January 1, 2018 at 6%
per annum. During the nine months ended September 30, 2019 and
2018, the interest expenses were $268,847 and $357,048,
respectively. As of September 30, 2019 and December 31, 2018, the
accrued interest total was $736,756 and $476,063,
respectively.
On May 1, 2018, Rajen Manicka, CEO and one of the directors of
iGalen International Inc. which holds 100% of iGalen Inc., provided
a loan of approximately $367,246 to iGalen Inc. (the “2018
Related Party Loan”). The term of this loan is ten years. The
2018 Related Party Loan has an interest rate of 4.7% per annum. On
March 8 and March 27, 2019, iGalen borrowed an additional $150,000
and $30,000, respectively, from Rajen Manicka (the “2019
March Related Party Loan”), with the same terms as the 2018
Related Party Loan. As of September 30, 2019 and December 31, 2018,
the total outstanding principal balance of the 2018 and 2019 March
Related Party Loans was $573,850 and $345,706, respectively, and
was included in the Notes Payable – Related Parties balance
on the Company’s Consolidated Balance Sheets. During the nine
months ended September 30, 2019 and 2018, the Company incurred
$8,084 and $1,410 of interest expense, respectively.
From
January to September 2019, the Company sold 361,500 shares of
HotApp Blockchain to international investors with the amount of
$229,500, 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.
39
Summary
of Statements of Operations for the Year ended December 31, 2018
and 2017
|
|
Year
ended December 31,
|
|
|
|
2018
|
2017
|
|
Revenue
|
$20,380,940
|
$10,757,093
|
|
Operating
Expenses
|
24,611,252
|
15,658,660
|
|
Other Income
(Expense)
|
(3,163,507)
|
(2,551,921)
|
|
Net
Loss
|
(7,490,568)
|
(7,085,846)
|
Revenue
The
following table sets forth period-over-period changes in revenues
for each of our reporting segments:
|
|
Years ended
December 31,
|
Change
|
||
|
|
2018
|
2017
|
Dollars
|
Percentage
|
|
Property
development
|
$17,675,034
|
$7,191,507
|
$10,483,527
|
146%
|
|
Biohealth
|
2,532,852
|
2,879,542
|
(346,690)
|
-12%
|
|
Digital
transformation technology
|
140,652
|
197,073
|
(56,421)
|
-29%
|
|
Other
|
32,402
|
488,971
|
(456,569)
|
-93%
|
|
Total
revenue
|
$20,380,940
|
$10,757,093
|
$9,623,847
|
89%
|
Revenue
was $20,380,940 for the year ended December 31, 2018, compared to
$10,757,093 for the year ended December 31, 2017. This increase in
revenue was primarily attributable to the property development
segment, specifically, an increase in property sales from the
Ballenger Project. Property sales were $17,675,034 in the year
ended December 31, 2018 and $7,191,507 in the year ended December
31, 2017. Revenue from biohealth and other businesses both
decreased by approximately $0.5 million.
Operating
Expenses
The following table sets forth period-over-period
changes in cost of sales for each of our reporting
segments:
|
|
Years ended
December 31,
|
Change
|
||
|
|
2018
|
2017
|
Dollars
|
Percentage
|
|
Property
development
|
$14,777,546
|
$6,565,491
|
$8,212,055
|
125%
|
|
Biohealth
|
682,026
|
894,559
|
(212,533)
|
-24%
|
|
Digital
transformation technology
|
74,129
|
67,552
|
6,577
|
10%
|
|
Other
|
-
|
-
|
-
|
-
|
|
Total cost of
sales
|
$15,533,701
|
$7,527,602
|
$8,006,099
|
106%
|
40
Cost of
sales increased to $15,533,701 for the year ended December 31, 2018
from $7,527,602 for the year ended December 31, 2017. This change
was primarily driven by the property development segment,
specifically, due to the increase in sales from the Ballenger Run
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
|
||
|
|
2018
|
2017
|
Dollars
|
Percentage
|
|
Property
development
|
$2,206,093
|
$1,019,926
|
$1,186,167
|
116%
|
|
Biohealth
|
2,846,048
|
3,610,583
|
(764,535)
|
-21%
|
|
Digital
transformation technology
|
518,175
|
406,495
|
111,680
|
27%
|
|
Other
|
3,507,235
|
3,094,054
|
413,181
|
-13%
|
|
Total
operating expenses
|
$9,077,551
|
$8,131,058
|
$946,493
|
12%
|
Operating expenses
increased to $9,077,551 for the year ended December 31, 2018 from
$8,131,058 for the year ended December 31, 2017. 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 2014 to 2016. At same time, the Biohealth
operating expenses went down as the sales went down.
Other
Income (Expense)
In the
years ended December 31, 2018 and 2017, the Company had other
expense of $3,163,507 and $2,551,920, respectively. In 2018, the
unrealized loss of $3,366,958 on investment in securities at fair
value was the major contributor to this expense. In 2017, the
unrealized gain of $2,838,713 in investment on securities at fair
value was recorded in Other Comprehensive Income. The other
expenses in 2017 primarily consisted of the foreign exchange
transactions loss of $2,739,991. 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
2018, the interest expense of $476,063 from the loan Chan Heng Fai
lent to the Company was the main contributor to the total interest
expense. Chan Heng Fai’s loan started to accrue on January 1,
2018 but has not been paid off yet. In 2017, Chan Heng Fai’s
loan was interest free.
Net
Loss
Net
loss increased from $7,085,846 in the year ended December 31, 2017
to $7,490,568 in the year ended December 31, 2018. Approximately
$3.4 million of an unrealized loss from investments in securities
is one of the major reasons for this loss.
Liquidity
and Capital Resources
Our
real estate assets have decreased to $38,911,184 as of December 31,
2018 from $50,652,657 as of December 31, 2017. 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 $1,241,336 as of December 31, 2017 to
$1,387,209 as of December 31, 2018. Our liabilities declined from
$25,433,377 at December 31, 2017 to $19,500,842 at December 31,
2018. Our total assets have decreased to $48,702,456 as of December
31, 2018 from $60,178,972 as of December 31, 2017.
41
Summary of Cash Flows for the Nine Months ended September 30, 2019
and 2018
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
2018
|
|
Net
cash provided by operating activities
|
$8,964,900
|
$8,405,987
|
|
Net
cash used in investing activities
|
$ 36,000
|
$59,518
|
|
Net
cash used in financing activities
|
$3,032,489
|
$7,420,297
|
Cash
Flows from Operating Activities
Net
cash provided by operating activities was $8,964,900 in the first
nine months of 2019, as compared to $8,405,987 in the same period
of 2018. The higher sales and less property development expenses
explain the increased cash flow provided by operating activities.
We received approximately $15.3 million from sales in the Ballenger
Run project and approximately $6.2 million from sales in the Black
Oak project for the nine months ended September 30, 2019 and
invested approximately $5.0 million in land development projects of
both Ballenger Run and Black Oak during the nine months ended
September 30, 2019.
Cash
Flows from Financing Activities
Net
cash used in financing activities was $3,032,489 and $7,420,297 for
the nine months ended September 30, 2019 and 2018, respectively.
During the nine months ended September 30, 2019, we received cash
proceeds of $229,500 from the sale of our HotApp shares to
individual investors. We paid-off the remaining principal amount of
$13,899 of the Union Bank loan and repaid approximately $2.3
million back to the director who made an operation loan to the
Company. The Company also distributed $740,250 to one minority
interest investor. During nine months ended September 30, 2018, we
repaid approximately $7.9 million back to the Union Bank loan and
borrowed $0.5 million from the directors of the Company for
operations.
42
Summary of Cash Flows for the Years ended December 31, 2018 and
2017
|
|
2018
|
2017
As
Restated
|
|
Net
cash provided by (used in) operating activities
|
$8,025,640
|
$(7,146,236)
|
|
Net
cash (used in) investing activities
|
$(85,645)
|
$(530,538)
|
|
Net
cash provided by (used in) financing activities
|
$(6,593,932)
|
$6,221,842
|
Cash
Flows from Operating Activities
Net
cash provided by operating activities was $8.0 million in 2018, as
compared to cash used in operating activities of $7.1 million in
2017. This increase was primarily due to the increased sales of
Ballenger Run lots: approximately $17.3 million in 2018 compared to
$5.5 million in the same period of 2017. Ballenger Run development
costs were approximately $14.8 million in 2018 compared to $4.7
million in 2017. 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. At the same time, on
July 20, 2018, Black Oak received approximately $4.6 million in
reimbursement for previous construction costs. Cash received from
and spent for biohealth and other businesses were 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 2017, we invested $500,000 in equity
securities and mutual fund.
Cash
Flows from Financing Activities
Net
cash used in financing activities was $6.6 million in 2018, as
compared to net cash provided of $6.2 million for 2017.
In 2017, the Company received
approximately $4.5 million from stock issuances and $1 million the
Union Bank Revolving Loan. At same time, the Company borrowed $7.2
million from a related party to pay off Revere Loan at $6.3 million
and to support the operations. In 2018, we borrowed $1.6 million
from a related party for operations and at the same time, repaid
$8.3 million on the Union Bank Revolving
Loan.
43
Real Property Financing Arrangements
Through
Singapore eDevelopment, we have three property development
projects. Ballenger Run and Black Oak projects are the major
projects. The following tables show our forecasts of the phases of
the development 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
|
December
2019
|
|
Phase
3
|
10,170,000
|
September
2020
|
|
Phase
4
|
3,460,000
|
December
2020
|
|
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
|
183,060
|
January
2020
|
|
Phase
3
|
485,943
|
March
2021
|
|
Phase
4
|
203,472
|
April
2022
|
|
Phase
5
|
3,323,149
|
September
2021
|
|
Total
|
$11,275,624
|
|
The
Company’s Perth project in Australia is relatively small,
representing approximately 2% of the Company’s total projects
included in the estimated property costs and forecasted revenue,
and the development plan of this project is contingent on the local
market. The Company has been monitoring the local market, which has
seen no significant improvement to date, and the Company will
consider development once it is more confident in the market. The
Company has recorded impairment based on the market
conditions.
Black
Oak
Black
Oak is a 162-acre land infrastructure and subdivision project
situated in Magnolia, Texas, north of Houston. This project is
owned by certain subsidiaries of Singapore
eDevelopment.
44
On July
20, 2018, Black Oak LP 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 Black Oak LP and will be
released upon receipt of the evidence of (a) execution of a
purchase agreement between Black Oak LP 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 2018, $446,745 was released
to reimburse the construction costs leaving a balance of $1,203,256
on December 31, 2018. In the first nine months of 2019, an
additional $796,715 was released leaving a balance of $406,541 on
September 30, 2019.
Ballenger
Run
In
November 2015, through SeD Intelligent Home, we completed the
$15.65 million acquisition of Ballenger Run, a 197-acre land
subdivision development located in Frederick County, Maryland.
Previously, on May 28, 2014, the RBG Family, LLC entered into the
Assignable Real Estate Sales Contract with NVR, Inc.
(“NVR”) by which RBG Family, LLC would sell the 197
acres for $15 million to NVR. On December 10, 2014, NVR assigned
this contract to SeD Maryland Development, LLC in the Assignment
and Assumption Agreement and entered into a series of Lot Purchase
Agreements by which NVR would purchase subdivided lots from SeD
Maryland Development, LLC (the “Lot Purchase
Agreements”).
On
November 23, 2015, SeD Maryland Development, LLC and Union Bank
(formerly Xenith Bank and The Bank of Hampton Roads) entered into a
Construction Loan Agreement, as amended by the Loan Modification
Commitment Letter, as further amended by the Loan Modification
Commitment Letter, dated as of August 30, 2017 and as further
amended by the Third Loan Modification Agreement, dated as of
September 18, 2017 (the “Union Bank Revolving Loan”).
The Union Bank Revolving Loan closed simultaneous with the
settlement on the land on November 23, 2015, and provided (i) for a
maximum of $11 million outstanding; (ii) maturity on December 31,
2019; and (iii) an $800,000 letter of credit facility, with an
annual rate of 15% on all issued letters of credit. On September
30, 2019 and December 31, 2018, the principal balances were $0 and
$13,899, respectively. As part of the transaction, we incurred loan
origination fees and closing fees, totaling $480,947, which were
recorded as debt discount and were amortized over the life of the
loan. The unamortized debt discounts were $0 on both September 30,
2019 and December 31, 2018.
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
September 30, 2019, the principal balance of the 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 into
construction in process.
45
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 31.8% 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 shares 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 19.8% 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 September 30, 2019 and December 31, 2018, the fair
value (calculated by market trading prices on the end dates of the
periods) of total held equity stock of Amarantus, Holista and DSS
were $2,519,163 and $2,656,240, respectively.
Investment Securities at Cost
The
Company has a holding of 13.7% 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.
46
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
On April 25,
2018, BioLife Sugar, Inc. ("BioLife"), a subsidiary consolidated
under Singapore eDevelopment, entered into joint venture agreement
with Quality Ingredients, LLC ("QI"). The agreement created an
entity called Sweet Sense, Inc. ("Sweet Sense"), which was 50%
owned by Biolife and 50% owned by QI. Management believes its
investment of 50% represents significant influence over Sweet Sense
and accounts for the investment under the equity method of
accounting. As of December 31, 2018, BioLife had contributed
$55,000 to the joint venture and recorded its proportionate share
losses totaling $45,948 recorded as loss on investment in security
by equity method in the Condensed Consolidated Statements of
Operations and Other Comprehensive Loss. As of September 30, 2019,
the total investment in joint venture was equal to $91,000 and the
proportionate losses totaled $76,118. During the nine months ended
September 30, 2019, the Company recorded its proportionate share of
losses of $30,166 as loss on investment in security by equity
method in the Condensed Consolidated Statements of Operations and
Other Comprehensive Loss.
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 nine months ended September 30, 2019 or the
years ended December 31, 2018 and 2017. 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 $36.6 million, $41.1
million and $42.8 million on September 30, 2019, December 31, 2018
and 2017, 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 2019 and
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.
47
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, 2018.
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, 2018, 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.
48
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 and Australia. We manage our three
principal businesses primarily through our 65.4%-owned subsidiary,
Singapore eDevelopment Ltd., a public company traded on the
Singapore Stock Exchange. Through this subsidiary (and indirectly,
through other public and private U.S. and Asian subsidiaries), we
are actively developing two significant real estate projects near
Houston, Texas and in Frederick, Maryland in our property
development segment. We have designed applications for enterprise
messaging and e-commerce software platforms in the United States
and Asia in our digital transformation technology business unit.
Our recent foray into the biohealth segment includes research to
treat neurological and immune-related diseases, nutritional
chemistry to create a natural sugar alternative, research regarding
innovative products to slow the spread of disease, and natural
foods and supplements. We opportunistically identify global
businesses for acquisition, incubation and corporate advisory
services, primarily related to our operating business segments. We
also have ownership interests outside of Singapore eDevelopment,
including an indirect 19.8% equity interest in Holista CollTech
Limited, a public Australian company that produces natural food
ingredients, and an indirect 13.7% 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 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 of Singapore
eDevelopment and that Singapore eDevelopment, in turn, owns no less
than a majority of SeD Intelligent Home 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
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, SeD Intelligent Home Inc., a 99.9%-owned U.S.
subsidiary of Singapore eDevelopment, which owns, operates and
manages real estate development projects with a focus on land
subdivision developments. 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. SeD
Intelligent Home’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).
49
Houston, Texas
Property. Black Oak is a land infrastructure and subdivision
development project consisting of 162 acres, currently projected to
have approximately 512 units, as we are presently attempting to
revise the site plan at Black Oak to allow for such number of
residential lots. Through a partnership with 150 CCM Black Oak,
Ltd., we had contracts to purchase seven contiguous parcels of
land. Our initial equity ownership in 150 CCM Black Oak, Ltd. was
$4.3 million for 60% ownership in the partnership. Since then we
have increased our ownership to 100%. We are presently in
negotiations with multiple builders, and we anticipate that our
involvement in this project will take approximately three to five
additional years to complete. On January 18, 2019, the first sale
of lots at Black Oak was completed and 124 lots were
sold.
The
site plan at Black Oak is being revised to allow for approximately
512 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
|
$ 183,060
|
January
2020
|
|
Phase
3
|
$ 485,943
|
March
2021
|
|
Phase
4
|
$ 203,472
|
April
2022
|
|
Phase
5
|
$ 3,323,149
|
September
2021
|
|
Total
|
$11,275,624
|
|
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 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 $2.4 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.
During
the nine months ended September 30, 2019, we applied fair
value-based impairment test to the net book value of assets and
recorded an approximately $3.9 million impairment on Black
Oak’s net book value.
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 #17 from time to time.
On July
20, 2018, Black Oak LP 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 Black Oak LP and will be
released upon receipt of the evidence of (a) execution of a
purchase agreement between Black Oak LP 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 2018, $446,745 was released
to reimburse the construction costs leaving a balance of $1,203,256
on December 31, 2018. In the first nine months of 2019, an
additional $796,715 was released, leaving a balance of $406,541 as
of September 30, 2019.
Frederick,
Maryland Property. In November
2015, through SeD Intelligent Home, 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”).
50
SeD
Maryland’s acquisition of the 197 acres was funded in part
from a $5.6 million deposit from NVR. The balance of $10.05 million
was derived from a total equity contribution of $15.2 million by
SeD Ballenger, LLC (“SeD Ballenger”) and CNQC Maryland
Development LLC (a unit of Qingjian International Group Co, Ltd,
China, “CNQC”). The project is owned by SeD. SeD
Maryland is 83.55% owned by SeD Ballenger and 16.45% by
CNQC.
Our
indirect subsidiary SeD Development Management, LLC is the manager
of Ballenger Run pursuant to a Management Agreement dated as of
July 15, 2015, by and between SeD Maryland and SeD Development
Management, LLC (the “Management Agreement”). Under the
Management Agreement, SeD Development Management, LLC manages,
operates and administers SeD Maryland’s day-to-day
operations, business and affairs, subject to the supervision of SeD
Maryland, and shall have only such functions and authority as SeD
Maryland may delegate to it. For performing these services, SeD
Development Management, LLC is entitled to a base management fee of
five percent of the gross revenue (including reimbursements) of
Ballenger Run. The base management fee is earned and paid in
monthly installments of $38,650, subject to adjustment after gross
revenue is determined. SeD Development Management, LLC may also
earn incentive compensation of 20% of any profit distributions to
SeD Maryland above a 30% pre-tax internal rate of
return.
SeD
Maryland entered into a Project Development and Management
Agreement for Ballenger Run with MacKenzie Development Company, LLC
and Cavalier Development Group, LLC on February 25, 2015 (the
“Project Development and Management Agreement”).
Pursuant to that agreement, MacKenzie Development Company, LLC
assigned its rights and obligations to this agreement to Adams
Aumiller Properties, LLC on September 9, 2017. Pursuant to the
Project Development and Management Agreement, Adams Aumiller, LLC
and Cavalier Development Group, LLC coordinate and manage the
construction, financing, and development of Ballenger Run. SeD
Maryland compensates Adams Aumiller LLC and Cavalier Development
Group, LLC with a monthly aggregate fee of $14,667 until all single
family and townhome lots have been sold. The monthly aggregate fee
will then adjust to $11,000, which will continue for approximately
eight months to allow all close out items to be finished, including
the release of guarantees and securities as required by the
government authorities. The Project Development and Management
Agreement for Ballenger Run also requires SeD Maryland to pay a fee
of $1,200 and $500 for each single-family and townhome,
respectively, sold to a third party. Finally, SeD Maryland will
also pay a fee of $50,000 upon the sale of certain portions of the
parcel.
We
anticipate that the completion of our involvement in this project
will take approximately three years from the date of this
prospectus.
Revenue
from Ballenger Run is anticipated to come from three main
sources:
●
sale
of 479 entitled and constructed residential lots to
NVR;
●
sale
of the lot for the 210 entitled multi-family units;
and
●
sale
of 479 front foot benefit assessments.
The
estimated construction costs and completion date for each phase are
as follows:
|
Ballenger
Run
|
Estimated
Construction Costs
|
Expected
Completion Date
|
|
Phase
1
|
$13,786,000
|
Completed
|
|
Phase
2
|
10,210,000
|
December
2019
|
|
Phase
3
|
10,170,000
|
September
2020
|
|
Phase
4
|
3,460,000
|
March
2020
|
|
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
September 30, 2019 and December 31,
2018, the principal balances were $0 and $13,899, respectively. As
part of the transaction, we incurred loan origination fees and
closing fees, totaling $480,947, which were recorded as debt
discount and were amortized over the life of the loan. The
unamortized debt discounts were $0 on both September
30, 2019 and December 31,
2018.
51
The
loan was secured by a deed of trust on the property, $2,600,000 of
collateral cash, and a Limited Guaranty Agreement with SeD
Ballenger. In September 2017, SeD Maryland and the Union Bank
modified the related Revolving Credit Note, which increased the
original principal amount from $8,000,000 to $11,000,000 and
extended the maturity date of the loan and letter of credit to
December 31, 2019.
The
Union Bank Revolving Loan was intended to fund the development of
the first 276 lots, the multi-family parcel and senior living
parcel, the amenities associated with these phases, and certain
road improvements. The Union Bank Revolving Loan was repaid in
January 2019.
On
April 17, 2019, SeD Maryland Development LLC and Union Bank
terminated the Revolving Credit Note. After termination, Union Bank
still held $602,150 as collateral for current outstanding Letters
of Credit (L/C). The L/C collateral was released in June, 2019,
when all L/Cs were transferred to the M&T Bank L/C
Facility.
On
April 17, 2019, SeD Maryland Development LLC entered into a
Development Loan Agreement with Manufacturers and Traders Trust
Company (“M&T Bank”) in the principal amount not to
exceed at any one time outstanding the sum of $8,000,000, with a
cumulative loan advance amount of $18,500,000. The line of credit
bears interest of LIBOR plus 375 basis points. SeD Maryland
Development LLC was also provided with a L/C Facility in an
aggregate amount of $900,000. The L/C commission will be 1.5% per
annum on the face amount of the L/C. Other standard lender fees
will apply in the event L/C is drawn down. The loan is a revolving
line of credit. The L/C Facility is not a revolving loan, and
amounts advanced and repaid may not be re-borrowed. Repayment of
the Loan Agreement is secured by $2.6 million collateral fund and a
Deed of Trust issued to the Lender on the property owned by SeD
Maryland.
As of September 30, 2019, the principal balance of the loan was
$0. As part of the transaction, we incurred loan origination fees
and closing fees in the amount of $381,823 and capitalized them
into construction in process.
The
proceeds of 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. SeD
Intelligent Home 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 second 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 SeD Home 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. 114 lots were sold in
the nine months ended September 30, 2019, compared to 102 lots sold in the year
ended December 31, 2018.
52
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 $200,000 would be made
once the needed approvals are 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
SeD Intelligent Home and its subsidiaries, we have established a
front foot benefit 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
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 nine months ended September 30, 2019 and the
years ended December 31, 2018 and 2017, our property development
business accounted for 94%, 87% and 66% of our total revenues,
respectively.
53
Digital
Transformation Technology
Our
digital transformation technology business unit is committed to
enabling enterprises to engage in a digital transformation by
providing consulting, implementation and development services with
various technologies including blockchain, e-commerce, social media
and payment solutions. We commenced our technology business in 2015
through HotApp Blockchain, Inc., a 99.9% owned subsidiary of
Singapore eDevelopment. Its technology platform focuses on
business-to-business, or B2B, solutions, such as communications and
workflow, through instant messaging, international calling, social
media, e-commerce and payment systems and direct marketing. Using
its platform, consumers can discover and build their own
communities based on interests, location or their existing
networks. The HotApp platform tools empower these communities to
share their ideas and information across the multiple channels. As
these communities grow, they provide the critical mass that
attracts enterprises. The system is designed to ultimately help
enterprises and community users to transform their business models
in a more effective manner.
HotApp Blockchain
Subsidiary. Through HotApp, we have successfully implemented
several strategic platform developments for clients, including a
mobile front-end solution for network marketing, a hotel e-commerce
platform for a company in Asia and a real estate agent management
platform in China. We have also enhanced our technological
capability from mobile application development to include
architectural design, allowing mobile-friendly front-end solutions
to integrate with software platforms. HotApp’s main digital
assets at the present time are its applications. HotApp’s
emphasis will be on developing solutions and providing
services.
In
February 2017, HotApp entered into a revenue-sharing agreement with
iGalen Inc. Under the agreement, HotApp customized a secure app for
iGalen Inc.’s communication and management system. The app
enables mobile friendly backend access for iGalen Inc. members,
among other functions. HotApp is continuing to improve this secure
app. In particular, HotApp intends to utilize blockchain supply
logistics to improve its functions (the original iGalen app did not
utilize the latest distributed ledger technology). Once the
improvements to this technology are completed, and initially
utilized by iGalen, HotApp intends to then attempt to sell similar
services to other companies engaged in network marketing. This app
can be modified to meet the specific needs of any network marketing
company. We believe that these technologies will, among other
benefits, make it easier for network marketing companies to
securely and effectively manage their systems of compensation. Our
current plan is to commence sales of this technology in
2020.
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.
54
Biohealth
Business
With
populations aging and a growing focus on healthcare issues,
biohealth science has become increasingly vital. We recently
entered the biomedical and healthcare market by forming our
biohealth division, which is engaged in developing, researching,
testing, manufacturing, licensing and distributing (through retail,
direct selling, network marketing and e-commerce) biohealth
products and services. We strive to leverage our scientific
know-how and intellectual property rights to provide solutions to
pending healthcare issues. By tapping into the scientific expertise
of our subsidiaries and collaborating partners, we are undertaking
a concerted effort in the research and development, drug discovery
and development for the prevention, inhibition and treatment of
neurological, oncology and immune-related diseases.
Global BioLife Inc.
Our indirect majority-owned subsidiary Global BioLife Inc. has
biomedical intellectual property which was assigned to it by one of
the other shareholders in Global BioLife (such other shareholder is
owned by the chief scientist for the project). Most significantly,
this intellectual property portfolio includes patents for our
universal therapeutic drug platform, “Linebacker,”
which has demonstrated promising results in treating a range of
diseases including neurological, anti-microbial, anti-viral and
oncology diseases. Unlike the traditional approach to treat
individual diseases with specific drugs, the Linebacker platform
seeks to offer a breakthrough therapeutic option for multiple
diseases. Linebacker is designed to work by inhibiting a cascade of
inflammatory responses responsible for many diseases. Its design is
in direct contrast to the traditional approach of targeting
individual diseases with specific drugs. Charles River Laboratories
International, Inc., which an independent company that provides
services to help pharmaceutical and biotechnology companies,
government agencies and leading academic institutions around the
globe, has performed the studies needed for our Linebacker research
and drug development efforts. Linebacker is presently in the
development phase.
Through
Global BioLife, we have established a collaboration with U.S.-based
Chemia Corporation to develop specialized fragrances to counter
mosquito-borne diseases such as Zika and Dengue, among other
medical applications. The 3F mosquito fragrance product, which is
made from specialized oils sourced from botanicals that mosquitos
avoid, has shown promising results in repelling mosquitos in
laboratory testing. Global BioLife is seeking to commercialize this
product. In addition to the 3F mosquito fragrance, Global BioLife
is working with Chemia to develop additional 3F functional
fragrances for other applications.
We have
also developed a low-calorie, low glycemic level, natural modified
sugar through Global BioLife. The product, “Laetose,”
is a functional sugar with from 30% to 50% lower calorie count than
regular sugar, possesses low glycemic properties, and also
mitigates inflammation. This product is at the commercialization
stage. We are presently seeking to license Laetose.
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 19.8% 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.
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 14.2% at December 31, 2018
and 13.7% at September 30, 2019, 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.
55
Our
current financial statements do not yet reflect the acquisition of
our interests in Holista CollTech and Vivacitas Oncology, and we do
not consolidate or 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.
Global
Systematic Multi-Strategy Fund. Global Systematic
Multi-Strategy Fund (the "GSMS Fund"), a fund managed by one of our
indirect subsidiaries, LiquidValue Asset Management Pte. Ltd.
("LVAM") achieved a net return of approximately 20% for the year
ended December 31, 2017. 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. LVAM is a registered fund management company regulated
by the Monetary Authority of Singapore. LVAM intends to close the
GSMS Fund during the first half of 2020.
BMI Capital
Partners. Singapore eDevelopment's wholly-owned Hong
Kong subsidiary, BMI Capital Partners International Limited is a
boutique consultancy with a special focus on grooming clients to
become eligible to seek a stock exchange listing and offers debt
restructuring services. We have also been in negotiations with
various potential clients seeking business incubation, including
capital market opportunities in China. Recently, for example, we
have secured projects which include a feasibility study for a Hong
Kong firm to explore capital market options such as a potential
public listing on the Hong Kong Stock Exchange and a consultancy
contract to restructure a U.S. OTC-listed medical company.
As of September
30, 2019 and December 31, 2018 and 2017, the value of our interests
in the other business activities described above represented less
than 10% 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.
56
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.
57
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.
58
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 6,529 square feet,
under leases expiring on various dates from April 2020 to October,
2020. The leases have rental rates ranging from $2,409 to $10,814
per month. Our total rent expense under these office leases was
approximately $315,426 and $272,716 in 2018 and 2017, respectively.
We expect total rent expense to be approximately $295,041 under
office leases in 2019. We believe our present office space and
locations are adequate for our current operations and for near-term
planned expansion.
Employees
As of
December 23, 2019, we had a total of 17 full-time employees. In
addition to our full-time employees, we occasionally hire part-time
employees and independent contractors to assist us in various
operations, including property development, research and product
development and production.
Our
future success will depend in part on our ability to attract,
retain and motivate highly qualified technical and sales personnel
for whom competition is intense. Our employees are not represented
by any collective bargaining unit. We believe our relations with
employees and contractors are good.
Legal Proceedings
On
September 27, 2019, iGalen International Inc., one of our
majority-owned subsidiaries, and iGalen Inc., its wholly-owned
subsidiary, filed a complaint in the Superior Court of the State of
California, County of San Diego, Central Division, against Gara
Group, Inc., a Delaware corporation, and certain affiliated or
related entities, including the Chief Executive Officer of the Gara
Group (collectively these entities are referred to herein as the
“Gara Group”). A similar complaint had been filed in
Utah on September 26, 2019, but subsequently re-filed in
California. The complaint, as amended on October 24, 2019,
enumerates causes of action for breach of contract, breach of
covenant of good faith and fair dealing and intentional
interference with economic relations.
iGalen
Inc. and Gara Group are parties to a Specialized Services
Agreement, dated March 29, 2017 (the “Specialized Services
Agreement”). iGalen Inc. contracted with Gara Group to
provide for services that include, among other things, (i) product
fulfillment; (ii) software development and maintenance of an onsite
“Platform,” which includes a company website and
interactive portal referred to as the “Back Office”;
and (iii) managing iGalen’s social media sites. The Gara
Group had previously claimed that iGalen Inc. owed Gara Group
certain amounts, including (i) $125,000 for “Back Office
Fees”; (ii) $150,000 for “Speaking Fees”; and
(iii) $67,299 for services related to iGalen’s merchant
account, back office, and shipping fulfillment, invoiced on August
28 and 31, and September 15, 2019. iGalen Inc.’s amended
complaint notes that no provision in the Specialized Services
Agreement allows for the particular “Back Office Fees”
of $125,000 and that no provision in the Specialized Services
Agreement allows for the so-called “Speaking Fees” of
$150,000. Gara Group cut off services to iGalen following
iGalen’s indication that it was disputing the amounts owed.
iGalen’s amended complaint notes that the actions of Gara
Group and Mr. Gara have caused, and continue to cause, iGalen to
suffer substantial harm by, among other things, making it so iGalen
was unable to communicate with distributors via its website and
Back Office, fulfill orders made by distributors, or pay commission
to distributors. iGalen is seeking damages.
On
October 10, 2019, Gara Group filed a complaint in the Superior
Court of the State of California, County of San Diego, Central
Division against iGalen International Inc., iGalen Inc., Singapore
eDevelopment Limited, Chan Heng Fai, Dr. Rajen Manicka and David
Price, an executive of iGalen Inc. Gara Group’s complaint for
damages asserts that the Gara Group is entitled to general damages
of $9,000,000 and liquidated damages of $50,000,000. iGalen Inc.
intends to vigorously contest this matter. No trial date has been
set as of the date of this prospectus.
In
addition, from time to time, during the normal course of our
businesses, we may be subject to various litigation claims and
legal disputes, including in the area of intellectual property
(e.g., trademarks, copyrights and patents). Our intellectual
property rights extend to our technology, business processes and
the content on our website. We use the intellectual property of
third parties in marketing and providing our services through
contractual and other rights. Despite our efforts, from time to
time, third parties may allege that we have violated their
intellectual property rights.
Although the
results of claims, lawsuits and proceedings in which we may be
involved cannot be predicted with certainty, we do not currently
believe that the final outcome of the matters discussed above will
have a material adverse effect on our business, financial condition
or results of operations. However, defending and prosecuting any
such claims is costly and may impose a significant burden on our
management and employees. In addition, we may receive unfavorable
preliminary or interim rulings in the course of litigation, and
there can be no assurances that favorable final outcomes will be
obtained. With regard to intellectual property matters which may
arise, if we are unable to obtain an outcome which sufficiently
protects our rights, successfully defends our use or allows us time
to develop non-infringing technology and content or to otherwise
alter our business practices on a timely basis in response to the
claims against us, our business, prospects and competitive position
may be adversely affected.
59
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 December 23, 2019:
|
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
|
59
|
Executive
Director
|
|
Wong Tat
Keung
|
49
|
Director
Nominee
|
|
Charles
MacKenzie
|
48
|
Director Nominee
and Chief Development Officer
|
|
John
Thatch
|
57
|
Director
Nominee
|
|
Robert
Trapp
|
64
|
Director
Nominee
|
|
Michael
Gershon
|
47
|
Chief Legal
Officer
|
The
principal occupations for the past five years of each of our
executive officers, directors, director nominees and key employees
are as follows:
Executive Officers and Directors
Chan Heng Fai founded HF Enterprises
Inc. and has served as our Chairman of the Board and Chief
Executive Officer since inception. Mr. Chan is an expert in banking
and finance, with 45 years of experience in these industries. He
has restructured numerous companies in various industries and
countries during the past 40 years. Mr. Chan has served as the
Chief Executive Officer of our subsidiary Singapore eDevelopment
Ltd. since April 2014. Mr. Chan joined the Board of Directors of
Singapore eDevelopment, Ltd. in May 2013. From 1992 to 2015, Mr.
Chan served as Managing Chairman of Hong Kong-listed ZH
International Holdings, Ltd. (“ZH Holdings,” formerly
known as Heng Fai Enterprises Limited), an investment holding
company. 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 of 2018. He has
also served as a non-executive director of our indirect subsidiary
SeD Intelligent Home Inc. since January 2017. Mr. Chan has also
served as a non-executive director of Holista CollTech Ltd., since
July 2013. Mr. Chan has served as a non-executive director of
Singapore eDevelopment’s 99.98%-owned subsidiary HotApp
Blockchain Inc. since October 2014. Mr. Chan has also served as
director of Heng Fai Enterprises Limited since September
1992.
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.
60
Lui Wai Leung Alan has been our Co-Chief
Financial Officer since March 2018. Mr. Lui has been the Chief
Financial Officer of Singapore eDevelopment since November 2016 and
served as its Acting Chief Financial Officer since June 2016. Mr.
Lui has served as a director of BMI Capital Partners International
Ltd, a Hong Kong investment consulting company, since October 2016.
He has also served as a director of LiquidValue Asset Management
Pte Limited, a Singapore fund management company, since April 2018.
Both companies are wholly owned subsidiaries of Singapore
eDevelopment. Mr. Lui has served as the Co-Chief Financial Officer
of SeD Intelligent Home Inc. since December 2017 and has served as
the Co-Chief Financial Officer of SeD Home 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 ZH
International Holdings Ltd., 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 SeD Intelligent Home Inc. since March 2017.
Mr. Wei is a finance professional with more than 15 years of
experience working in public and private corporations in the United
States. As the Chief Financial Officer of SeD Development
Management LLC, Mr. Wei is responsible for oversight of all
finance, accounting, reporting and taxation activities for that
company. Prior to joining SeD Development Management LLC in August
2016, Mr. Wei worked for several different U.S. multinational and
private companies including serving as Controller at American Silk
Mill, LLC, a textile manufacturing and distribution company, from
August 2014 to July 2016, serving as a Senior Financial Analyst at
Air Products & Chemicals, Inc., a manufacturing company, from
January 2013 to June 2014, and serving as a Financial/Accounting
Analyst at First Quality Enterprise, Inc., a personal products
company, from 2011 to 2012. Mr. Wei served as a member of the Board
Directors of Amarantus Bioscience Holdings, Inc., a biotech
company, from February to May 2017, and has served as Chief
Financial Officer of that company from February 2017 until November
2017. Before Mr. Wei came to the United States, he worked as an
equity analyst at Hong Yuan Securities, an investment bank in
Beijing, China, concentrating on industrial and public company
research and analysis. Mr. Wei is a certified public accountant and
received his Master of Business Administration from the University
of Maryland and a Master of Business Taxation from the University
of Minnesota. Mr. Wei also holds a Master in Business degree from
Tsinghua University and a Bachelor’s degree from Beihang
University.
Ang Hay Kim Aileen has been our
Executive Director since March 2018. Ms. Ang has more than 20 years
of experience in finance and treasury, legal, human resources and
office administration. She is the Senior Vice President, Corporate
Services of Singapore eDevelopment, a position she has held since
2013 and a director of various indirect subsidiaries of our
company. She also holds a Cert-in-CEHA (Singapore real estate
industry certificate) and operates her own real estate business,
Ideal Realty Pte Ltd., since 2015. Ms. Ang was General Manager,
Corporate Services of Singapore Exchange listed Singxpress Ltd.
(now known as SingHaiyi Group Ltd.) from 2002 to 2013. She was
Senior Sales Director, Resale Division with DTZ Property Network
Pte. Ltd., a Singapore real estate company, from 2005 to
2011.
Ms.
Ang’s day-to-day operational leadership of our various
businesses and her knowledge of property development and the real
estate business make her well-qualified as a member of the
Board.
Wong Tat Keung has agreed to join the
Board of Directors of our company upon the closing of this
offering. Since 2010, Mr. Wong has served as the director of Aston
Wong CPA Limited. He has been an independent non-executive director
of Singapore eDevelopment since January 2017. Mr. Wong has been an
independent non-executive director of Roma Group Limited, a
valuation and technical advisory firm, since March 2016, and has
served as an independent non-executive director of Lerthai Group
Limited, a property, investment, management and development
company, since December 2018. Previously, he served as the director
and sole proprietor of Aston Wong & Co., a registered certified
public accounting firm, from January 2006 to February 2010. From
January 2005 to December 2005, he was a Partner at Aston Wong, Chan
& Co., Certified Public Accountants. From April 2003 to
December 2004, he served at Gary Cheng & Co., Certified Public
Accountants as Audit Senior. He served as an Audit Junior to
Supervisor of Hui Sik Wing & Co., certified public accountants
from April 1993 to December 1999. He served as an independent
non-executive director of SingHaiyi from July 2009 to July 2013 and
ZH Holdings from December 2009 to July 2015. Mr. Wong is a
Certified Public Accountant admitted to practice in Hong Kong. He
is a Fellow Member of Association of Chartered Certified
Accountants and an Associate Member of the Hong Kong Institute of
Certified Public Accountants. He holds a Master in Business
Administration degree (financial services) from the University of
Greenwich, London, England.
Mr.
Wong demonstrates extensive knowledge of complex, cross-border
financial, accounting and tax matters highly relevant to our
business, as well as working experience in internal corporate
controls, making him well-qualified to serve as an independent
member of the board.
Charles MacKenzie has agreed to join the
Board of Directors of our company upon the closing of this
offering. Mr. MacKenzie was appointed our Chief Development Officer
in December of 2019. Mr. MacKenzie has served as a member of the
Board of Directors of SeD Intelligent Home since December of
2017. He has served as Chief Executive Officer of SeD Home
Inc. since September 2019 and has served as the Chief Development
Officer for SeD Development Management, a subsidiary of SeD Home,
since July of 2015. Mr. MacKenzie also serves as a member of the
Board of Directors of SeD Home since October of 2017. He was
previously the Chief Development Officer for Inter-American
Development (IAD), a subsidiary of Heng Fai Enterprises from April
of 2014 to June of 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.
61
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 35 years of cross-cultural business
experience with both public and privately-owned companies in Asia,
the United States and Canada, in a diverse range of industries
including hospitality, finance, property, mining, software, biotech
and consumer goods. Mr. Trapp is the Chief Executive Officer of BMI
Capital International LLC, a FINRA broker-dealer, a position he has
held since June 2015. Mr. Trapp also served as General Manager of
SeD Development Management LLC, a subsidiary of Singapore
eDevelopment, a position he held from September 2015 to February
2018. In addition, Mr. Trapp presently serves on the Board of
Directors of several of the subsidiaries of Singapore eDevelopment.
Mr. Trapp has served on the Board of Directors of AVANT Diagnostics
Inc., since November 2017. Previously, Mr. Trapp served on the
Board of Directors of Amarantus Bioscience Holdings Inc. from
February 2017 until May 2017 and on the Board of Directors of
HotApp International Inc. from December 2014 until June 2016. Mr.
Trapp served as President and Director at Master of Real Estate
LLC, a subsidiary of ZH International Holdings Ltd. (formerly 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 ZH International Holdings Ltd, from
October 2013 to August 2015. Mr. Trapp served as a Director of
eBanker USA.com, a subsidiary of ZH International Holdings Ltd,
from August 1998 to August 2015, and served as General Manager and
Rep Director with Hotel Plaza Miyazaki, a subsidiary of eBanker
USA.com, from September 2009 to May 2013. Mr. Trapp holds a
Bachelor of Commerce degree from the University of Calgary and a
Bachelor of Applied Arts in Hospitality & Tourism Management
from Ryerson University in Toronto, Canada.
Mr.
Trapp’s hands-on experience in operational management,
administration, financial management, marketing, and regulatory
compliance in diverse industries qualifies him to serve as a member
of the Board.
Key Employees
Michael Gershon has been our Chief Legal
Officer since October 2018. Mr. Gershon has served as Chief Legal
Officer of our subsidiary SeD Development Management LLC since
April 2019 and from February 2017 until April 2019 served as
Associate Corporate Counsel of that subsidiary. Prior to joining
our company, Mr. Gershon served as an attorney adviser with the
Division of Corporation Finance at the U.S. Securities and Exchange
Commission from November 2015 until November 2016 and served as an
associate at the law firm of Wuersch & Gering LLP from August
2004 until January 2015. Mr. Gershon received a B.A. degree in
economics from Boston College and a J.D. from Georgetown University
Law Center.
Status
as a Controlled Company
Chan
Heng Fai, through HFE Holdings Limited controls a majority of the
combined voting power of all classes of our voting stock. As a
result, we qualify as a “controlled company” within the
meaning of the listing standards of Nasdaq, and we have elected not
to comply with certain Nasdaq corporate governance requirements.
Therefore, we do not have a majority of independent directors
serving on our board and have individuals serving on our
compensation committee that do not qualify as independent according
to Nasdaq listing standards and the rules and regulations of the
SEC. Following this offering, we intend to utilize certain of these
exemptions. As a result, we will not have a majority of independent
directors on our board of directors.
The
“controlled company” exemption does not modify the
independence requirements for the audit committee, and we will
comply with the requirements of the SEC and Nasdaq Marketplace
Rules requiring that our audit committee be composed exclusively of
independent directors, subject to the phase-in provisions of the
applicable listing requirements and the SEC’s rules, which
permit up to one committee member that does not satisfy the
applicable independence requirements for up to one year after the
date of the offering. Nominations and corporate governance
functions will initially be managed by our full Board.
Our
board of directors has determined that Mr. Wong and Mr. Thatch are
independent within the meaning of Nasdaq
Rule 5605(a)(2).
We
are in the process of identifying other qualified independent
directors.
62
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 Mr. Chan, 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.
63
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.
64
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, 2018 and 2017; and
(ii) each other individual that served as an executive officer
of our company at the conclusion of the years ended December 31,
2018 and 2017 and who received more than $100,000 in the form of
salary and bonus during such year. While our company was not
incorporated until March 7, 2018, we have included the information
for certain individuals who were employed and compensated by our
majority-owned subsidiary Singapore eDevelopment. Such compensation
was paid solely for services rendered to such subsidiary. For
purposes of this prospectus, these individuals are collectively the
“named executive officers” of our Company.
|
Name and
Position
|
Years
|
Salary($)
|
Bonus
|
Stock
Awards
|
Option
Awards
|
Non-equity
Incentive Plan Compensation
|
Non-qualified
Deferred Compensation Earnings
|
All Other
Compensation
|
Total
($)
|
|
Chan Heng Fai
|
2018
|
77,793
|
-
|
-
|
-
|
-
|
-
|
-
|
77,793
|
|
Chairman and Chief Executive
Officer
|
2017
|
309,521
|
-
|
-
|
-
|
-
|
-
|
-
|
309,521
|
|
Lui Wai Leung
Alan
|
2018
|
113,422
|
-
|
-
|
-
|
-
|
-
|
-
|
113,422
|
|
Co-Chief Financial
Officer
|
2017
|
104,899
|
-
|
-
|
-
|
-
|
-
|
-
|
104,899
|
|
Rongguo Wei
|
2018
|
118,800
|
-
|
-
|
-
|
-
|
-
|
-
|
118,800
|
|
Co-Chief Financial
Officer
|
2017
|
112,800
|
-
|
-
|
-
|
-
|
-
|
-
|
112,800
|
_____________
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,
2018.
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. Mr. Chan and
Ms. Ang have been compensated by our majority-owned subsidiary,
Singapore eDevelopment, for their services as directors of that
company. Our board of directors will review director compensation
annually and adjust it according to then current market conditions
and good business practices.
65
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
Recent Internal Restructuring. 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 761,185,294 ordinary shares of Singapore eDevelopment Ltd.
and warrants to purchase 359,834,471 ordinary shares of Singapore
eDevelopment Ltd.
Chan
Heng Fai transferred 100% of the ownership interest in Global
eHealth Limited to HF Enterprises Inc. in exchange for 1,000,000
shares of our common stock to be held by HFE Holdings Limited.
Global eHealth Limited, a Hong Kong company, is the owner of
46,226,673 ordinary shares, or 19.8%, 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 14.2% at December 31, 2018 and
13.7% at September 30, 2019, 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.
Personal Guarantees by Directors. On
December 31, 2017, certain directors of Singapore eDevelopment
provided personal guarantees amounting to approximately $5,500,000
to secure external loans and borrowings from financial institutions
for Singapore eDevelopment.
Compensation of Key Management Personnel -
Directors’ Interests in Employee Share Option Plan.
During 2018, options to purchase 530,667 shares of Singapore
eDevelopment were forfeited due to the resignation of two directors
of Singapore eDevelopment; and in 2017, options to purchase
1,326,667 shares were forfeited. As of December 31, 2018, options
to purchase 1,061,333 shares of Singapore eDevelopment were
outstanding; and as of December 31, 2017, options to purchase
1,592,000 shares of Singapore eDevelopment were
outstanding.
66
Purchase of Subsidiary from a Director.
SeD Capital Pte. Ltd., a subsidiary of Singapore eDevelopment,
entered into a sale and purchase agreement on May 9, 2017 to
purchase all shares of LiquidValue Asset Management Pte. Ltd.
(“LVAM”). The consideration for the acquisition of LVAM
was approximately $441,780.
On
December 22, 2016, Singapore eDevelopment acquired 74,015,730
shares, representing 99.96% of the outstanding shares of SeD
Intelligent Home Inc. from Cloudbiz International Pte. Ltd.
(“Cloudbiz”) for a cash consideration of approximately
$68,000. Chan Heng Fai, our Chairman and Chief Executive Officer,
is the ultimate beneficial owner of Cloudbiz.
Revenue from a Related Party. On March
1, 2018, the Company’s subsidiary HotApp International Ltd.
entered into an Outsource Technology Development Agreement with
Document Security Systems, Inc. (“DSS”) which could be
terminated by either party on 30-days’ notice. The purpose of
such agreement was to facilitate DSS’ development of a
software application to be included as part of DSS’
AuthentiGuard® Technology suite. Under this agreement, DSS
agreed to pay $23,000 per month for access to HotApp International
Ltd.’s software programmers. This agreement was terminated on
July 31, 2018. Chan Heng Fai is a member of our Board of Directors
and, through his control of our majority stockholder, the
beneficial owner of a majority of our common stock. Chan Heng Fai
is also the Chairman of the Board of DSS and a stockholder of
DSS.
Sale of HotApp Blockchain to DSS Asia.
On October 25, 2018, HIP, a wholly owned subsidiary of HotApp
Blockchain, entered into an equity purchase agreement (the
“HotApps Purchase Agreement”) with DSS Asia, a Hong
Kong subsidiary of DSS International, pursuant to which HIP agreed
to sell to DSS Asia all of the issued and outstanding shares of
HotApps Information Technology Co. Ltd., also known as Guangzhou
HotApps, a wholly owned subsidiary of HIP. Guangzhou HotApps is
primarily engaged in engineering work for software development, as
well as, a number of outsourcing projects related to real estate
and lighting. Chan Heng Fai is the CEO of DSS Asia and DSS
International.
iGalen Inc. Affiliates. iGalen
Philippines and iGalen SDN are related party entities which are
owned by Dr. Rajen Manicka and are not owned by HFE. iGalen Inc.
provides use of its platform to collect sale revenue and payment of
expenses for these entities without service fees. On September 30,
2019 and December 31, 2018, iGalen owed $369,596 and $246,722,
respectively to iGalen Philippines and iGalen SDN.
Medi
Botanics Sdn Bhd, a subsidiary of Holista CollTech, is one of the
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
$372,594 and $575,581 of raw materials and products to iGalen in
the nine months ended September 30, 2019 and 2018, respectively. On
September 30, 2019 and December 31, 2018, iGalen owed $988,277 and
$719,395, 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
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%. In the
nine months ended on September 30, 2019 and 2018, the management
fee and performance fee charged to the Fund were $4,425 and $4,118,
respectively. On September 30, 2019 and December 31, 2018, the Fund
owed $72,743 and $69,478 respectively.
Convertible Notes. On February 21,
2014, a subsidiary, of Singapore eDevelopment, Singapore
Construction & Development Pte. Ltd. (“SCD”),
issued 20 convertible notes (the “Convertible Notes”)
in the amount of $175,000 each, totaling $3.5 million. These
convertible notes carry an interest rate of 18% per annum which is
payable to the noteholders upon the first anniversary of the
applicable note.
Unless
converted into Singapore eDevelopment’s ordinary shares or
converted into SCD’s ordinary shares at the holder’s
option at the rate of $0.04 per share, subject to anti-dilution and
adjustment provisions, the holder of each Convertible Note has the
right to require SCD to redeem the convertible note on February 2,
2017 at 106% of the principal amount. The Convertible Notes are
callable at the option of SCD at the first or second anniversary of
the issue date, at 102% and 104% of the principal amount,
respectively.
On May
19, 2016 SCD exercised its option to redeem the Convertible Notes
at 104% of the principal amount, and entered into an agreement with
the noteholders to fully redeem the Convertible Notes.
Approximately $3 million in principal of the Convertible Notes held
by two of the SCD directors (one of whom resigned in 2016), were
fully redeemed. SCD paid an early redemption premium of $117,000
and interest of $651,000.
The
fair value of the derivative liability component on May 19, 2016
was $413,280. Accordingly, a net fair value gain of $336,559 on
derivative liability was recognized as Other Income and a loss
$283,631 on early redemption of exchangeable notes was recognized
as Other Expenses in the Statement of Operations and Other
Comprehensive Income on such Date.
Notes Payable. On August 24, 2015,
Hengfai Business Development Pte. Ltd. (“HBD”), a
substantial shareholder of Singapore eDevelopment and a company
wholly-owned by Chan Heng Fai, provided a loan with a $15 million
credit limit to Singapore eDevelopment (the “Heng Fai
Business Development Loan”). On September 30, 2015, $10.5
million was drawn and used to finance the land purchase by a
subsidiary. The loan was unsecured, repayable upon demand and
interest-free. In 2016, this loan was assigned from a wholly owned
subsidiary of Singapore eDevelopment to Singapore eDevelopment,
extending its Convertible Notes to December 31, 2017. On April 5,
2017, the entire Heng Fai Business Development Loan of $10.5
million was converted into 372,855,000 ordinary shares of Singapore
eDevelopment at an issue price of approximately $0.03 per share,
and Singapore eDevelopment also issued 1,864,275,000 detachable
warrants at an exercise price of approximately $0.036 to Heng Fai
Business Development.
67
Management Fees
Black
Oak LP was obligated under the Limited Partnership Agreement (as
amended) to pay a $6,500 per month management fee to Arete Real
Estate and Development Company (Arete), a related party through
common ownership and $2,000 per month to American Real Estate
Investments LLC (AREI), a related party through common ownership.
Arete was also entitled to a developer fee of 3% of all development
costs excluding certain costs. The fees are to be accrued until
$1,000,000 is received in revenue and/or builder deposits relating
to the Black Oak project.
On
December 31, 2017, Singapore eDevelopment owed $314,630 to Arete in
accounts payable and accrued expenses.
On
December 31, 2017, Singapore eDevelopment owed $48,000 to AREI in
accounts payable and accrued expenses.
On
April 26, 2018, SeD Development USA, a wholly-owned subsidiary of
Singapore eDevelopment, Arete and AREI reached an agreement to
terminate the terms related to management fees and developer fees
in the Limited Partnership Agreement. Pursuant to the terms of the
termination agreement, Black Oak LP owes Arete $300,000 and AREI
$30,000, which will remain outstanding until Black Oak LP has
obtained $4,000,000 from district reimbursement revenue. The
reduction of the accruals was offset against real estate on the
balance sheet. On July 20, 2018, Black Oak LP received $4,592,079
in district reimbursement and these fees were paid.
SeD
Maryland Development, LLC was obligated under the terms of a
Project Development and Management Agreement with MacKenzie
Development Company LLC (“MacKenzie”) and Cavalier
Development Group LLC (“Cavalier”) to provide various
services for the development, construction and sale of the project.
MacKenzie is partially owned by a family member of a director of a
subsidiary of SeD Intelligent Home, a 99.99%-owned subsidiary of
Singapore eDevelopment. The developers were entitled to certain
fees based on time and performance related milestones. SeD
Intelligent Home incurred fees with MacKenzie of $0 and $176,000
for the years ended December 31, 2018 and 2017, respectively. SeD
Intelligent Home incurred fees with MacKenzie of $0 for the nine
months ended on both September 30, 2019 and 2018. These fees were
capitalized as part of real estate on the balance sheet. There were
no amounts owed to this related party at September 30, 2019 or
December 31, 2018, respectively. On September 15, 2017, MacKenzie
assigned its rights and obligations under the Project Development
and Management Agreement to Adams-Aumiller Properties,
LLC.
MacKenzie Equity
Partners, owned by Charles MacKenzie, who serves as our Chief
Development Officer, a director of SeD Intelligent Home, an officer
of certain of our subsidiaries, and is a nominee to join our Board,
has had a consulting agreement with Singapore eDevelopment via SeD
Development Management since 2015. Pursuant to the terms of the
agreement, as amended on January 1, 2018, SeD Development
Management paid a monthly fee of $15,000 with an additional $5,000
per month to be paid when the property development cash flow
milestones have been met. From January 2019, SeD Development
Management pays a monthly fee of $20,000 for the consulting fee.
Singapore eDevelopment incurred expenses of $240,000 and $222,930
for the years ended December 31, 2018 and 2017, respectively, and
$180,000 and $135,000 for the nine months ended on both September
30, 2019 and 2018, respectively, which were capitalized as part of
Real Estate on the balance sheet as the services relate to property
and project management. There were $0 and $60,000 owed to this
related party at September 30, 2019 and December 31, 2018,
respectively.
68
Consulting Services
A law
firm owned by Conn Flanigan, a director of SeD Intelligent Home, a
99.99%-owned subsidiary of Singapore eDevelopment, performs
consulting services for that company. Singapore eDevelopment
incurred expenses of $101,979 and $110,334 for the years ended 2018
and 2017, respectively and $52,723 and $88,030 for the nine months
ended September 30, 2019 and 2018, respectively. On September 30,
2019 and December 31, 2018, Singapore eDevelopment owed this
related party $7,587 and $8,000, respectively.
Rajen
Manicka, the Chief Executive Officer of Holista CollTech and
Co-founder of iGalen International Inc., performs consulting
services for iGalen Inc. at a rate of $120,000 per
year.
Notes Payable
During
the year ended on December 31, 2017, a director of the Company lent
non-interest loans of $7,156,680, for the general operations of
Singapore eDevelopment. The loans are interest free, not tradable,
unsecured, and repayable on demand. On October 15, 2018, a formal
lending agreement between Singapore eDevelopment Ltd and Chan Heng
Fai was executed. Under the agreement, Chan Heng Fai provides a
lending credit limit of approximately $10 million for Singapore
eDevelopment Ltd with an interest rate of 6% per annum for the
outstanding borrowed amount, which commenced retroactively from
January 1, 2018. The loans are still not tradable, unsecured and
repayable on demand. As of September 30, 2019 and December 31,
2018, the outstanding principal balance of the loan was $5,667,640
and $8,517,490, respectively. Chan Heng Fai confirmed through a
letter that he would not demand the repayment within a year from
December 23, 2019. Interest started to accrue on January 1, 2018 at
6% per annum. During the nine months ended September 30, 2019 and
2018, the interest expenses were $268,847 and $357,048,
respectively. As of September 30, 2019 and December 31, 2018, the
accrued interest total was $736,756 and $476,063,
respectively.
Prior
to this offering, Chan Heng Fai also provided interest free
short-term loan to our company for the general operations during
the IPO period. As of September 30, 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
September 30, 2019 and December 31, 2018, the total outstanding
principal balance of the 2018 and 2019 March Rajen Loan are
$573,850 and $345,706 respectively, and included in the Notes
Payable – Related Parties balance on the Company’s
Consolidated Balance Sheets. During the nine months ended September
30, 2019 and 2018, the Company incurred $8,084 and $1,410 of
interest expense, respectively.
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.”
69
PRINCIPAL STOCKHOLDERS
The
following table and accompanying footnotes set forth certain
information with respect to the beneficial ownership of our common
stock as of December 23, 2019, 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 10,001,000 shares
of common stock outstanding as of the Beneficial Ownership Date and
11,501,000 shares of common stock outstanding immediately after
this offering, assuming that the underwriter will not exercise its
option to purchase up to 150,000 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.
|
|
Shares of Common
Stock Beneficially Owned Immediately Before this
Offering
|
Shares of Common
Stock Beneficially Owned Immediately After this
Offering
|
||
|
Name and Address
of Beneficial Owner
|
Number of
Shares
|
Percentage
|
Number of
Shares
|
Percentage
|
|
|
|
|
|
|
|
Directors
and Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
Chan Heng Fai
(1)
|
10,001,000
|
100%
|
10,001,000
|
87%
|
|
Lui Wai Leung
Alan
|
0
|
-
|
0
|
-
|
|
Rongguo
Wei
|
0
|
-
|
0
|
-
|
|
Ang Hay Kim
Aileen
|
0
|
-
|
0
|
-
|
|
Wong Tat
Keung
|
0
|
-
|
0
|
-
|
|
Charles
MacKenzie
|
0
|
-
|
0
|
-
|
|
John
Thatch
|
0
|
-
|
0
|
-
|
|
Robert
Trapp
|
0
|
-
|
0
|
-
|
|
|
|
|
|
|
|
All directors and
executive officers as a group (5 persons)
|
10,001,000
|
100%
|
10,001,000
|
87%
|
______________
(1)
Represents shares
of common stock owned of record by HFE Holdings Limited, of which
Mr. Chan has sole voting and investment power with respect to such
shares.
70
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 December 23, 2019, there were
10,001,000 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.
71
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:
72
●
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. It is
possible that a court could rule that this provision is not
applicable or is unenforceable. Any person or entity purchasing or
otherwise acquiring shares of our capital stock will be deemed to
have notice of and consented to this provision of our certificate
of incorporation. However, this sole and exclusive forum provision
will not apply in those instances where there is exclusive federal
jurisdiction, including but not limited to actions arising under
the Securities Act or the Exchange Act.
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.
73
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 12,601,000 shares of common stock outstanding immediately
after the completion of this offering based on the number of shares
outstanding on December 23, 2019 and assuming no exercise of
options after such date (or 12,991,000 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 10,001,000
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
●
10,001,000 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 (126,010 shares immediately
after this offering or 129,910 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 126,010 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.
74
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.
75
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
|
$
|
$
|
$
|
76
We
estimate that the total expenses of the offering payable by us,
excluding underwriting discounts and commissions, will be
approximately $1,140,829, including a3% unaccountable expense
allowance. We have agreed to reimburse the underwriters for certain
of their expenses, including fees of counsel in connection with
filing with FINRA, in an amount not to exceed $75,000. A
non-refundable retainer of $50,000 has been previously paid to the
representative.
As
additional compensation to the underwriter, upon consummation of
this offering, we will issue to the underwriter or its designees a
warrant to purchase an aggregate number of shares of our common
stock equal to 10% of the number of shares of common stock issued
in this offering, at an exercise price per share equal to 120% of
the initial public offering price (the “Underwriter
Warrant”). The Underwriter Warrant and the underlying shares
of common stock will not be exercised, sold, transferred, assigned,
or hypothecated or be the subject of any hedging, short sale,
derivative, put or call transaction that would result in the
effective economic disposition of the Underwriter Warrant by any
person for a period of 180 days from the effective date of the
registration statement for this offering in accordance with FINRA
Rule 5110. The Underwriter Warrant will expire on the fifth
anniversary of the effective date of the registration statement for
this offering.
Right of First Refusal
In
connection with this offering, we granted the Representative a
right of first refusal for a period of three years following the
closing of this offering or until an offering occurs which the
Representative declined, to effect a proposed U.S. public offering
of any debt or equity securities (other than bank debt or similar
financing) by us or any of our majority owned or controlled U.S.
subsidiaries, on terms as favorable as previously offered in
writing by a reputable investment banker, subject to certain
exceptions.
Stabilization
In
accordance with Regulation M under the Exchange Act, the
underwriters may engage in activities that stabilize, maintain or
otherwise affect the price of our common stock, including short
sales and purchases to cover positions created by short positions,
stabilizing transactions, syndicate covering transactions, penalty
bids and passive market making.
|
●
|
Short
positions involve sales by the underwriters of shares in excess of
the number of shares the underwriters are obligated to purchase,
which creates a syndicate short position. The short position may be
either a covered short position or a naked short position. In a
covered short position, the number of shares involved in the sales
made by the underwriters in excess of the number of shares they are
obligated to purchase is not greater than the number of shares that
they may purchase by exercising their option to purchase additional
shares. In a naked short position, the number of shares involved is
greater than the number of shares in their option to purchase
additional shares. The underwriters may close out any short
position by either exercising their option to purchase additional
shares or purchasing shares in the open market.
|
|
●
|
Stabilizing
transactions permit bids to purchase the underlying security as
long as the stabilizing bids do not exceed a specific maximum
price.
|
|
●
|
Syndicate
covering transactions involve purchases of our common stock in the
open market after the distribution has been completed to cover
syndicate short positions. In determining the source of shares to
close out the short position, the underwriters will consider, among
other things, the price of shares available for purchase in the
open market as compared to the price at which they may purchase
shares through the underwriters’ option to purchase
additional shares. If the underwriters sell more shares than could
be covered by the underwriters’ option to purchase additional
shares, thereby creating a naked short position, the position can
only be closed out by buying shares in the open market. A naked
short position is more likely to be created if the underwriters are
concerned that there could be downward pressure on the price of the
shares in the open market after pricing that could adversely affect
investors who purchase in the offering.
|
|
●
|
Penalty
bids permit the representative to reclaim a selling concession from
a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate
covering transaction to cover syndicate short
positions.
|
|
●
|
In
passive market making, market makers in our common stock who are
underwriters or prospective underwriters may, subject to
limitations, make bids for or purchase shares of our common stock
until the time, if any, at which a stabilizing bid is
made.
|
77
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:
78
|
●
|
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.
79
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Section 145 of
the Delaware General Corporation Law, as amended, authorizes us to
indemnify any director or officer under certain prescribed
circumstances and subject to certain limitations against certain
costs and expenses, including attorney’s fees actually and
reasonably incurred in connection with any action, suit or
proceeding, whether civil, criminal, administrative or
investigative, to which a person is a party by reason of being one
of our directors or officers if it is determined that such person
acted in accordance with the applicable standard of conduct set
forth in such statutory provisions. Our certificate of
incorporation contains provisions relating to the indemnification
of director and officers and our bylaws extend such indemnities to
the full extent permitted by Delaware law. We may also
purchase and maintain insurance for the benefit of any director or
officer, which may cover claims for which we could not indemnify
such persons.
Insofar
as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling us
pursuant to the foregoing provisions, or otherwise, we have been
advised that in the opinion of the SEC, such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable.
Olshan
Frome Wolosky LLP, New York, New York, as our counsel, will pass
upon the validity of the issuance of the shares of our common stock
being offered by this prospectus. Manatt, Phelps & Phillips,
LLP, Costa Mesa, California, is acting as counsel for the
underwriter in connection with this offering.
The
consolidated financial statements of HF Enterprises Inc. as of
December 31, 2018 and 2017 included in this prospectus and in this
registration statement have been so included in reliance on the
report of Rosenberg Rich Baker Berman, P.A., an independent
registered public accounting firm, appearing elsewhere herein and
in this registration statement, given on the authority of said firm
as experts in auditing and accounting.
We have
filed with the SEC a registration statement on Form S-1 (including
the exhibits, schedules and amendments to the registration
statement) under the Securities Act with respect to the shares of
our common stock offered by this prospectus. This prospectus
does not contain all the information set forth in the registration
statement. For further information with respect to us and the
shares of our common stock to be sold in this offering, we refer
you to the registration statement. Statements contained in
this prospectus as to the contents of any contract, agreement or
other documents to which we make reference are not necessarily
complete. In each instance, we refer you to the copy of such
contract, agreement or other document filed as an exhibit to the
registration statement.
Following this
offering, we will be subject to the reporting and information
requirements of the Exchange Act and, as a result, we will file
annual, quarterly and current reports, and other information with
the SEC. You may read and copy this information at the Public
Reference Room of the SEC located at 100 F Street, N.E.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for
further information on the operation of the Public Reference Room.
Copies of all or any part of the registration statement may be
obtained from the SEC’s offices upon payment of fees
prescribed by the SEC. The SEC maintains an internet site that
contains periodic and current reports, information statements and
other information regarding issuers that file electronically with
the SEC. The address of the SEC’s website is
http://www.sec.gov.
We will
provide a copy of our annual report to stockholders, including our
audited consolidated financial statements, at no charge upon
written request sent to HF Enterprises Inc., 4800 Montgomery Lane,
Suite 210, Bethesda, Maryland 20814. Our corporate website is
located at http://www.hfenterp.com. The information on, or
that can be accessed through, our website is not incorporated by
reference into this prospectus and should not be considered to be a
part of this prospectus.
80
HF Enterprises Inc. and Subsidiaries
Table of Contents
For Nine Months Ended September 30, 2019 and 2018
|
Condensed
Consolidated Balance Sheets
|
F-1
|
|
|
|
|
Condensed
Consolidated Statements of Operations and Other Comprehensive
Loss
|
F-2
|
|
|
|
|
Condensed
Consolidated Statements of Stockholders’ Equity
|
F-3-
F-4
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows
|
F-5
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
F-6 -
F-35
|
HF
Enterprises Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
|
|
September 30,
|
December 31,
|
|
|
2019
|
2018
|
|
|
(Unaudited)
|
|
|
Assets:
|
|
|
|
Current
Assets:
|
|
|
|
Cash
|
$4,230,902
|
$1,387,209
|
|
Restricted
Cash
|
7,182,994
|
4,120,989
|
|
Account
Receivables, Net
|
857,325
|
564,759
|
|
Prepaid
Expenses
|
123,858
|
140,442
|
|
Inventory
|
220,070
|
198,817
|
|
Investment
in Securities at Fair Value
|
2,852,895
|
3,026,766
|
|
Investment
in Securities at Cost
|
200,128
|
200,128
|
|
Investment
in Securities by Equity Method
|
14,882
|
9,052
|
|
Deposits
|
65,532
|
23,603
|
|
Current
Assets of Discontinued Operations
|
-
|
14,317
|
|
Operating
Lease Right-Of-Use Asset
|
181,855
|
-
|
|
Total
Current Assets
|
15,930,441
|
9,686,082
|
|
Real
Estate
|
|
|
|
Properties
under Development
|
22,421,397
|
38,774,936
|
|
Real
Estate Held For Sale
|
136,248
|
136,248
|
|
Total
Real Estate
|
22,557,645
|
38,911,184
|
|
|
|
|
|
Property
and Equipment, Net
|
82,728
|
103,425
|
|
Non-Current
Assets of Discontinued Operations
|
-
|
1,765
|
|
Total
Assets
|
$38,570,814
|
$48,702,456
|
|
|
|
|
|
Liabilities
and Stockholders' Equity:
|
|
|
|
Current
Liabilities:
|
|
|
|
Accounts
Payable and Accrued Expenses
|
$3,125,122
|
$4,394,853
|
|
Accrued
Interest - Related Parties
|
736,756
|
476,063
|
|
Deferred
Revenue
|
48,531
|
84,998
|
|
Builder
Deposits
|
768,870
|
1,296,062
|
|
Operating
Lease Liability
|
188,748
|
-
|
|
Note
Payable
|
151,290
|
13,899
|
|
Bonds
Payable, Net of Debt Discount of $4,161 and $43,651
|
|
|
|
on
September 30, 2019 and December 31, 2018, respectively
|
1,495,839
|
1,456,349
|
|
Current
Liabilities of Discontinued Operations
|
-
|
174,606
|
|
Total
Current Liabilities
|
6,515,156
|
7,896,830
|
|
Long-Term
Liabilities:
|
|
|
|
Builder
Deposits
|
1,769,886
|
2,582,780
|
|
Note
Payable
|
-
|
158,036
|
|
Notes
Payable - Related Parties
|
6,491,490
|
8,863,196
|
|
Total
Liabilities
|
14,776,532
|
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 September 30, 2019
|
|
|
|
and
December 31, 2018, respectively
|
10,001
|
10,001
|
|
Additional
Paid In Capital
|
53,876,032
|
53,717,424
|
|
Accumulated
Deficit
|
(38,360,765)
|
(35,263,650)
|
|
Accumulated
Other Comprehensive Income
|
1,332,426
|
1,582,788
|
|
Total
Stockholders' Equity
|
16,857,694
|
20,046,563
|
|
Non-controlling
Interests
|
6,936,588
|
9,155,051
|
|
Total
Stockholders' Equity
|
23,794,282
|
29,201,614
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
$38,570,814
|
$48,702,456
|
See accompanying notes to condensed consolidated financial
statements.
F-1
HF Enterprises Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Other
Comprehensive Loss
For the Three and Nine Months Ended September 30, 2019 and
2018
(Unaudited)
|
|
Three Months Ended on September 30,
|
Nine Months Ended on September 30,
|
||
|
|
2019
|
2018
|
2019
|
2018
|
|
Revenue
|
|
|
|
|
|
Property
Sales
|
$4,938,017
|
$7,908,864
|
$21,509,197
|
$14,209,199
|
|
Biohealth
Product Sales
|
360,351
|
678,309
|
1,406,951
|
2,021,121
|
|
Digital
Transformation Technology
|
-
|
33,221
|
-
|
135,515
|
|
Others
|
8,495
|
8,963
|
28,350
|
24,057
|
|
|
5,306,863
|
8,629,357
|
22,944,498
|
16,389,892
|
|
Operating
Expenses
|
|
|
|
-
|
|
Cost
of Sales
|
4,130,484
|
6,933,091
|
19,177,800
|
12,854,147
|
|
General
and Administrative
|
1,552,538
|
1,819,317
|
4,592,441
|
5,688,733
|
|
Research
and Development
|
4,245
|
27,503
|
93,134
|
457,546
|
|
Impairment
of Real Estate
|
-
|
-
|
3,938,769
|
-
|
|
|
5,687,267
|
8,779,911
|
27,802,144
|
19,000,426
|
|
|
|
|
|
|
|
Loss
From Operations
|
(380,404)
|
(150,554)
|
(4,857,646)
|
(2,610,534)
|
|
|
|
|
|
|
|
Other
Income (Expense)
|
|
|
|
|
|
Interest
Income
|
16,440
|
10,027
|
44,021
|
22,198
|
|
Interest
Expense
|
(86,440)
|
(110,323)
|
(286,805)
|
(356,584)
|
|
Gain
on Disposal of Subsidiary
|
-
|
-
|
299,255
|
-
|
|
Foreign
Exchange Transaction Gain (Loss)
|
757,068
|
162,354
|
438,608
|
974,937
|
|
Unrealized
Gain (Loss) on Securities Investment
|
507,727
|
(254,655)
|
(146,470)
|
(2,508,245)
|
|
Loss
on Investment on Security by Equity Method
|
(17,356)
|
-
|
(30,166)
|
-
|
|
Other
Income (Expense)
|
2,887
|
5,707
|
8,598
|
5,820
|
|
|
1,180,326
|
(186,890)
|
327,041
|
(1,861,874)
|
|
|
|
|
|
|
|
Net
Income (Loss) Before Income Taxes
|
799,922
|
(337,444)
|
(4,530,605)
|
(4,472,408)
|
|
|
|
|
|
|
|
Income
Tax Benefit (Expense)
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
Net
Income (Loss) from Continuing Operations
|
799,922
|
(337,444)
|
(4,530,605)
|
(4,472,408)
|
|
|
|
|
|
|
|
Loss
from Discontinued Operations, Net of Tax
|
-
|
(32,143)
|
(3,712)
|
(80,263)
|
|
Net
Income (Loss)
|
799,922
|
(369,587)
|
(4,534,317)
|
(4,552,671)
|
|
|
|
|
|
|
|
Net
Income (Loss) Attributable to Non-Controlling Interest
|
36,181
|
(107,006)
|
(1,437,202)
|
(1,555,782)
|
|
|
|
|
|
|
|
Net
Income (Loss) Attributable to Common Stockholders
|
$763,741
|
$(262,581)
|
$(3,097,115)
|
$(2,996,889)
|
|
|
|
|
|
|
|
Other
Comprehensive Income (Loss), Net
|
|
|
|
|
|
Unrealized
Gain (Loss) on Securities Investment
|
(53,681)
|
289
|
(36,747)
|
(20,060)
|
|
Foreign
Currency Translation Adjustment
|
(584,561)
|
241,779
|
(325,518)
|
(49,049)
|
|
Other
Comprehensive Gain (Loss)
|
161,680
|
(127,519)
|
(4,896,582)
|
(4,621,780)
|
|
|
|
|
|
|
|
Comprehensive
Loss Attributable to Non-controlling Interests
|
(160,972)
|
(32,231)
|
(1,549,106)
|
(1,577,130)
|
|
|
|
|
|
|
|
Comprehensive
Income (Loss) Attributable to Common Stockholders
|
$322,652
|
$(95,288)
|
$(3,347,476)
|
$(3,044,650)
|
|
|
|
|
|
|
|
Net
Loss Per Share - Basic and Diluted
|
|
|
|
|
|
Continuing
Operations
|
$0.08
|
$(0.03)
|
$(0.31)
|
$(0.30)
|
|
Discontinued
Operations
|
$-
|
$-
|
$(0.00)
|
$(0.01)
|
|
Net
(Loss) Income Per Share
|
$0.08
|
$(0.03)
|
$(0.31)
|
$(0.31)
|
|
|
|
|
|
|
|
Weighted
Average Common Shares Outstanding - Basic and Diluted
|
10,001,000
|
10,001,000
|
10,001,000
|
10,001,000
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial
statements.
F-2
HF Enterprises Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from
Selling Subsidiary Equity
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
Unrealized Gain on Investment
|
|
|
|
|
|
22
|
|
10
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency Translations
|
|
|
|
|
|
104,762
|
|
46,825
|
151,587
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Dividend
Distribution
|
|
|
|
|
|
|
|
(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
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from
Selling Subsidiary Equity
|
|
|
|
|
20,733
|
|
|
9,267
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
Unrealized Gain on Investment
|
|
|
|
|
|
(37,099)
|
|
(16,582)
|
(53,681)
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency Translations
|
|
|
|
|
|
(403,990)
|
|
(180,571)
|
(584,561)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
|
|
763,741
|
36,181
|
799,922
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
September 30, 2019
|
|
|
10,001,000
|
$10,001
|
$53,876,032
|
$1,332,426
|
$(38,360,765)
|
$6,936,588
|
$23,794,282
|
See accompanying notes to condensed consolidated
financial statements.
F-3
HF Enterprises Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
For
Nine Months Ended September 30, 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
|
$(32,235,614)
|
$11,723,524
|
$34,745,595
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
Unrealized Loss on Investment
|
|
|
|
|
|
(14,063)
|
|
(6,286)
|
(20,349)
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency Translations
|
|
|
|
|
|
532,659
|
|
238,082
|
770,741
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
Gains Reclassification
|
|
|
|
|
|
(1,961,835)
|
1,961,835
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
|
|
|
|
(2,812,674)
|
(1,331,748)
|
(4,144,422)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
March 31, 2018
|
|
|
10,001,000
|
$10,001
|
$51,324,448
|
$2,479,997
|
$(33,086,453)
|
$10,623,572
|
$31,351,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency Translations
|
|
|
|
|
|
(733,650)
|
|
(327,919)
|
(1,061,569)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
(Loss)
|
|
|
|
|
|
|
78,367
|
(117,029)
|
(38,662)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
June 30, 2018
|
|
|
10,001,000
|
$10,001
|
$51,324,448
|
$1,746,347
|
$(33,008,086)
|
$10,178,624
|
$30,251,334
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
Unrealized Loss on Investment
|
|
|
|
|
|
200
|
|
89
|
289
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency Translations
|
|
|
|
|
|
167,093
|
|
74,686
|
241,779
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
|
|
|
|
(262,581)
|
(107,006)
|
(369,587)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
September 30, 2018
|
|
|
10,001,000
|
$10,001
|
$51,324,448
|
$1,913,640
|
$(33,270,667)
|
$10,146,393
|
$30,123,815
|
See accompanying notes to condensed consolidated financial
statements.
F-4
HF Enterprises Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2019 and 2018
(Unaudited)
|
|
2019
|
2018
|
|
|
|
|
|
Cash
Flows From Operating Activities
|
|
|
|
Net
Loss from Continuing Operations
|
$(4,530,605)
|
$(4,472,408)
|
|
Adjustments
to reconcile net income (loss) to net cash from operating
activities:
|
|
|
|
Depreciation
|
20,697
|
35,799
|
|
Amortization
of Right -Of - Use Asset
|
55,726
|
-
|
|
Gain
on Disposal of subsidiary
|
(299,255)
|
-
|
|
Foreign
Exchange Transaction Gain
|
(438,608)
|
(974,937)
|
|
Unrealized
Loss on Security Investment
|
146,470
|
2,508,245
|
|
Impairment
of Real Estate
|
3,938,769
|
-
|
|
Changes
in Operating Assets and Liabilities
|
|
|
|
Real
Estate
|
12,565,198
|
11,180,697
|
|
Trade
Receivables
|
(125,855)
|
389,372
|
|
Prepaid
Expense
|
(14,335)
|
31,926
|
|
Deferred
Revenue
|
(36,467)
|
(27,255)
|
|
Inventory
|
(21,253)
|
(109,950)
|
|
Accounts
Payable and Accrued Expenses
|
(1,192,527)
|
726,070
|
|
Accrued
Interest - Related Parties
|
275,245
|
357,048
|
|
Operating
Lease Liability
|
(62,707)
|
-
|
|
Tenant
Security Deposits
|
-
|
(1,400)
|
|
Builder
Deposits
|
(1,340,086)
|
(1,162,354)
|
|
Net
Cash Provided by Continuing Operating Activities
|
8,940,407
|
8,480,853
|
|
Net
Cash Provided by (Used In) Discontinued Operating
Activities
|
24,493
|
(74,866)
|
|
Net
Cash Provided by Operating Activities
|
8,964,900
|
8,405,987
|
|
|
|
|
|
Cash
Flows From Investing Activities
|
|
|
|
Purchase
of Fixed Assets
|
-
|
(4,518)
|
|
Investment
in Joint Venture
|
(36,000)
|
(55,000)
|
|
Net
Cash Used in Continuing Investing Activities
|
(36,000)
|
(59,518)
|
|
Net
Cash Used in Discontinued Investing Activities
|
-
|
-
|
|
Net
Cash Used in Investing Activities
|
(36,000)
|
(59,518)
|
|
|
|
|
|
Cash
Flows From Financing Activities
|
|
|
|
Proceeds
from Sale of Subsidiary Shares
|
229,500
|
-
|
|
Repayments
of Note Payable
|
(13,899)
|
(7,874,959)
|
|
Acquisition
of Minority Interest
|
-
|
(60,000)
|
|
Distribution
to Minority Shareholder
|
(740,250)
|
-
|
|
Net
Proceeds (Paid to) from Notes Payable - Related
Parties
|
(2,507,840)
|
486,160
|
|
Net
Cash Used In Continuing Financing Activities
|
(3,032,489)
|
(7,448,799)
|
|
Net
Cash Provided By Discontinued Financing Activities
|
-
|
28,502
|
|
Net
Cash Used In Financing Activities
|
(3,032,489)
|
(7,420,297)
|
|
|
|
|
|
Net
Increase in Cash and Restricted Cash
|
5,896,411
|
926,172
|
|
Effects
of Foreign Exchange Rates on Cash
|
9,287
|
38,184
|
|
|
|
|
|
Cash
and Restricted Cash - Beginning of Year
|
5,508,198
|
4,137,041
|
|
Cash
and Restricted Cash- End of Period
|
$11,413,896
|
$5,101,397
|
|
|
|
|
|
Supplementary
Cash Flow Information
|
|
|
|
Cash
Paid For Interest
|
$4,663
|
$284,778
|
|
Cash
Paid For Taxes
|
$-
|
$-
|
|
|
|
|
|
Supplemental
Disclosure of Non-Cash Investing and Financing
Activities
|
|
|
|
Convert
Related Party Loan to Common Stock
|
$-
|
$10,500,000
|
|
Amortization
of Debt Discount Capitalized
|
$381,823
|
$77,604
|
See accompanying notes to condensed consolidated financial
statements.
F-5
HF Enterprises Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
1.
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of Operations
HF
Enterprises Inc. (the “Company” or “HFE”)
was incorporated in the State of Delaware on March 7, 2018 and
1,000 shares of common stock was issued to Chan Heng Fai, the
founder, Chairman and Chief Executive Officer of the Company. HFE
is a diversified holding company principally engaged in property
development, digital transformation technology, biohealth and other
related business activities with operations in the United States,
Singapore, Hong Kong, and Australia. The Company manages its
principal businesses primarily through its 69.08% as of September
30, 2019 and 69.11% as of December 31, 2018, owned subsidiary,
Singapore eDevelopment Ltd. (“SeD Ltd”), a public
company traded on the Singapore Stock Exchange.
On
October 1, 2018, Chan Heng Fai transferred his 100% interest in
Hengfai International Pte. Ltd. (“Hengfai
International”) to HF Enterprises Inc. in exchange for
8,500,000 shares of the Company’s common stock. Hengfai
International holds a 100% interest in Hengfai Business Development
Pte. Ltd. (“Hengfai Business Development”). Both
Hengfai International and Hengfai Business Development are holding
companies with no business operations. Hengfai Business Development
holds 761,185,294 shares and 359,834,471 warrants of SeD Ltd, or
69.08% as of September 30, 2019 and 69.11% as of December 31, 2018,
of the outstanding shares of SeD Ltd, which is the primary
operating company of HFE.
Also on
October 1, 2018, Chan Heng Fai transferred his 100% ownership
interest in Heng Fai Enterprises Pte. Ltd. (“Heng Fai
Enterprises”) and Global eHealth Limited (“Global
eHealth”) to HF Enterprises Inc. in exchange for 500,000 and
1,000,000 shares of the Company’s common stock, respectively.
Both Heng Fai Enterprises and Global eHealth are holding companies
with no business operations.
The
contributions to HFE on October 1, 2018 of Hengfai International,
Heng Fai Enterprises, and Global eHealth from Chan Heng Fai
represented transactions under common control.
The
Company has four operating segments based on the products and
services offered. These include our three principal businesses
– property development, digital transformation technology and
biohealth – as well as a fourth category consisting of
certain other business activities.
Property Development
The
Company’s property development segment is comprised of SeD
Intelligent Home Inc. (“SeD Intelligent Home”) and SeD
Perth Pty Ltd.
In
2014, Singapore eDevelopment Ltd. commenced operations developing
property projects and participating in third-party property
development projects. SeD Intelligent Home Inc., a 99.9%-owned
subsidiary of Singapore eDevelopment, owns, operates and manages
real estate development projects with a focus on land subdivision
developments.
Development
activities are generally contracted out, including planning, design
and construction, as well as other work with engineers, surveyors,
architects and general contractors. The developed lots are then
sold to builders for the construction of new homes. SeD Intelligent
Home’s main assets are two subdivision development projects,
one near Houston, Texas, known as Black Oak, consisting of 162
acres and currently projected to have approximately 512 units, and
one in Frederick, Maryland, known as Ballenger Run, consisting of
197 acres and currently projected to have approximately 689
units.
Digital Transformation Technology
The
Company’s digital transformation technology segment is
comprised of HotApp Blockchain Inc. and its
subsidiaries.
The
Company’s digital transformation technology business is
involved in mobile application product development and other
businesses, providing information technology services to end-users,
service providers and other commercial users through multiple
platforms. This technology platform consists of instant messaging
systems, social media, e-commerce and payment systems, direct
marketing platforms, e-real estate, brand protection and
counterfeit and fraud detection. HotApp Blockchain Inc.
(“HotApp Blockchain" or “HotApp”), a 99.9%-owned
subsidiary of Singapore eDevelopment, focuses on
business-to-business solutions such as enterprise messaging and
workflow. Through HotApp, the Company has successfully implemented
several strategic platform developments for clients, including a
mobile front-end solution for network marketing, a hotel e-commerce
platform for Asia and a real estate agent management platform in
China.
F-6
HF Enterprises Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
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 14
– Discontinued Operations and Note 11 – Related Party
Transactions.
Biohealth
The
Company’s biohealth segment is comprised of Singapore
BioMedical Pte. Ltd. and Health Wealth Happiness Pte.
Ltd.
The
Company’s biohealth business is committed to both funding
research and developing and selling products that promote a healthy
lifestyle. Global BioLife is one of the entities within this
segment, focusing on research in three main areas: (i) development
of a universal therapeutic drug platform; (ii) a new sugar
substitute; and (iii) a multi-use fragrance. Global BioLife
established a joint venture, Sweet Sense, Inc., with Quality
Ingredients, LLC for the development, manufacture, and global
distribution of the new sugar substitute. On November 8, 2019,
Impact BioMedical Inc., a subsidiary of the Company, purchased 50%
of Sweet Sense Inc. from Quality Ingredients, LLC for
$91,000. Sweet Sense Inc. is now 81.8% owned subsidiary of
Singapore eDevelopment.
Currently,
all revenues from our biohealth segment come from the direct sales
by iGalen Inc. (formerly known as iGalen USA, LLC), which is 100%
owned by iGalen International Inc., Singapore eDevelopment’s
53%-owned subsidiary. During the nine months ended September 30,
2019 and 2018, the revenues from iGalen Inc. were $1,406,951 and
$2,021,121, respectively.
Other Business Activities
In
addition to the segments identified above, the Company provides
corporate strategy and business development services, asset
management services, corporate restructuring and leveraged buy-out
expertise. These service offerings build relationships with
promising companies for potential future collaboration and
expansion. We believe that our other business activities complement
our three principal businesses.
The
Company’s other business activities segment is primarily
comprised of Singapore eDevelopment Ltd, SeD Capital Pte. Ltd., BMI
Capital Partners International Limited and Singapore Construction
& Development Pte. Ltd.
2.
GOING CONCERN
The
accompanying financial statements have been prepared on the basis
that the Company is a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal
course of business. The Company has experienced net losses over the
past 9 months. As of and for the nine months ended September 30,
2019, the Company had an accumulated deficit of $38,360,765 a net
loss of $4,534,317, and net cash provided by operating activities
of $8,964,900.
As a
result, these conditions may raise substantial doubt regarding our
ability to continue as a going concern 12 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 September 30,
2019, the Company had cash and restricted cash of $11,413,896,
compared to $5,508,198 as of December 31, 2018. 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. Concurrently, management will work with the
related party debtors on a plan to repay the related party loans,
which are repayable on demand, to ensure the Company’s
operation cash requirement is its’ first
priority.
During
the nine months ended September 30, 2019, the revenue from lot
sales was approximately $21.5 million and cash flow provided by
operating activities from property development was approximately
$10.7 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 12 months from the date of issuance of
our 2019 interim financial statements if the need
arises.
F-7
HF Enterprises Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
As a
result of management’s plans, high volume cash in bank
accounts, favorable operating cash flow from operations in nine
months ended on September 30, 2019 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, 2019 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, 2018, as filed
with the SEC.
The balance sheet as of December 31, 2018 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.
F-8
HF Enterprises Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
The Company's condensed consolidated financial statements include
the financial position, results of operations and cash flows of the
following entities as of September 30, 2019 and December 31, 2018,
and for the three and nine months periods ended September 30, 2019
and 2018 as follows:
|
|
|
|
Attributable interest
|
|
|
|
|
|
as of,
|
|
|
Name of subsidiary consolidated under HFE
|
|
State
or other jurisdiction of incorporation or
organization
|
September 30,
2019
|
December 31,
2018
|
|
|
|
|
%
|
%
|
|
Hengfai
International Pte. Ltd
|
|
Singapore
|
100
|
100
|
|
Hengfai
Business Development Pte. Ltd
|
|
Singapore
|
100
|
100
|
|
Singapore
eDevelopment Ltd.
|
|
Singapore
|
69.08
|
69.11
|
|
Singapore
Construction & Development Pte Ltd.
|
|
Singapore
|
69.08
|
69.11
|
|
Art
eStudio Pte. Ltd.
|
|
Singapore
|
35.24*
|
35.25*
|
|
Singapore
Construction Pte. Ltd.
|
|
Singapore
|
69.08
|
69.11
|
|
Global
BioMedical Pte. Ltd (f.k.a Singapore BioMedical Pte.
Ltd.)
|
|
Singapore
|
69.08
|
69.11
|
|
SeD
BioLife International Inc.
|
|
United
States of America
|
69.08
|
69.11
|
|
SeD
BioMedical International Inc.
|
|
United
States of America
|
69.08
|
69.11
|
|
Global
BioMedical Inc.
|
|
United
States of America
|
62.80
|
62.83
|
|
Global
BioLife Inc.
|
|
United
States of America
|
43.96*
|
43.98*
|
|
SeD
Investment Pte. Ltd. (f.ka SingLife Regenerate Pte.
Ltd.)
|
|
Singapore
|
69.08
|
69.11
|
|
Health
Wealth Happiness Pte. Ltd.
|
|
Singapore
|
69.08
|
69.11
|
|
iGalen
International Inc.
|
|
United
States of America
|
36.61*
|
36.63*
|
|
iGalen
Inc (f.k.a iGalen USA LLC)
|
|
United
States of America
|
36.61*
|
36.63*
|
|
SeD
Capital Pte. Ltd.
|
|
Singapore
|
69.08
|
69.11
|
|
LiquidValue
Asset Management Pte. Ltd.
|
|
Singapore
|
69.08
|
69.11
|
|
SeD
Home Limited
|
|
Hong
Kong
|
69.08
|
69.11
|
|
Global
Lite Food Pte. Ltd.
|
|
Singapore
|
69.08
|
69.11
|
|
Global
Techfund of Fund Pte. Ltd.
|
|
Singapore
|
69.08
|
69.11
|
|
Singapore
eChain Logisitic Pte. Ltd. (f.k.a CloudTV Pte. Ltd.)
|
|
Singapore
|
69.08
|
69.11
|
|
BMI
Capital Partners International Limited.
|
|
Hong
Kong
|
69.08
|
69.11
|
|
SeD
Perth Pty Ltd.
|
|
Australia
|
69.08
|
69.11
|
|
SeD
Home International, Inc.
|
|
United
States of America
|
69.08
|
69.11
|
|
SeD
Intelligent Home Inc.
|
|
United
States of America
|
69.07
|
69.10
|
|
SeD
Home, Inc.
|
|
United
States of America
|
69.07
|
69.10
|
|
SeD
USA, LLC
|
|
United
States of America
|
69.07
|
69.10
|
|
150
Black Oak GP, Inc.
|
|
United
States of America
|
69.07
|
69.10
|
|
SeD
Development USA, Inc.
|
|
United
States of America
|
69.07
|
69.10
|
|
150
CCM Black Oak Ltd.
|
|
United
States of America
|
69.07
|
69.10
|
|
SeD
Texas Home, LLC
|
|
United
States of America
|
69.07
|
69.10
|
|
SeD
Ballenger, LLC
|
|
United
States of America
|
69.07
|
69.10
|
|
SeD
Maryland Development, LLC
|
|
United
States of America
|
57.70
|
57.73
|
|
SeD
Development Management, LLC
|
|
United
States of America
|
58.71
|
58.74
|
|
SeD
Builder, LLC
|
|
United
States of America
|
69.07
|
69.10
|
|
HotApp
Blockchain, Inc.
|
|
United
States of America
|
69.07
|
69.10
|
|
HotApps
International Pte. Ltd.
|
|
Singapore
|
69.07
|
69.10
|
|
HotApps
Call Pte. Ltd.
|
|
Singapore
|
69.07
|
69.10
|
|
Guangzhou
HotApps Technology Ltd.
|
|
China
|
0
|
69.10
|
|
HotApp
International Limited
|
|
Hong
Kong
|
69.07
|
69.10
|
|
HWH
International Inc.
|
|
United
States of America
|
69.08
|
69.11
|
|
Health,
Wealth & Happiness Inc.
|
|
United
States of America
|
69.08
|
69.11
|
|
HWH
Multi-Strategy Investment Inc.
|
|
United
States of America
|
69.08
|
69.11
|
|
Impact
Biomedical Inc.
|
|
United
States of America
|
69.08
|
69.11
|
|
Biolife
Sugar, Inc.
|
|
United
States of America
|
43.89*
|
43.91*
|
|
Happy
Sugar, Inc.
|
|
United
States of America
|
43.89*
|
43.91*
|
|
SeD
Home Rental, Inc.
|
|
United
States of America
|
69.07
|
69.10
|
|
Crypto
Exchange, Inc.
|
|
United
States of America
|
69.07
|
69.10
|
|
HWH
World Inc.
|
|
United
States of America
|
69.07
|
69.10
|
|
HWH
World Pte. Ltd. (f.k.a Crypto Exchange Pte. Ltd.)
|
|
Singapore
|
69.07
|
69.10
|
*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.
F-9
HF Enterprises Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
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.
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 September 30, 2019 and December 31,
2018.
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 September 30,
2019 the total balance of these two accounts was
$6,641,177.
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
$35,276 in a non-interest-bearing account. As of September 30, 2019
and December 31, 2018, the account balance was $35,276. These funds
will remain as collateral for the loans until paid in
full.
On July
20, 2018, Black Oak LP 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
Black Oak LP and will be released upon receipt of the evidence of:
(a) the execution of a purchase agreement between Black Oak LP and
a home builder with respect to the Black Oak development and (b)
the completion, finishing and readying for home construction of at
least 105 unfinished lots in the Black Oak development. 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 $406,541 and $1,203,256 on September 30, 2019 and
December 31, 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 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 September 30, 2019 and December 31, 2018, the balance
in the reserve account was $100,000 and $156,303, respectively. The
fund will not be fully refunded to the Company until the service
agreement with GPG terminates.
F-10
HF Enterprises Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
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 accounts
receivable reserve. 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
general reserves. Generally, the amount of allowance is primarily
decided by division management’s historical experiences, the
delinquency trends, the resolution rates, the aging of receivables,
the credit quality indicators and financial health of specific
customers. As of September 30, 2019 and December 31, 2018, 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 September 30, 2019 and December 31, 2018,
inventory consisted of finished goods, our iGalen Inc. health
supplement products and raw materials to make these products. The
Company evaluates a potential reserve for obsolescence and possible
price concessions required to liquidate inventories below net
realizable value. On September 30, 2019 and December 31, 2018, the
reserve was $0.
Investment Securities
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.
F-11
HF Enterprises Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
The
Company has significant influence over Document Securities Systems
Inc. (“DSS”) as our Chief Executive Officer is the
beneficial owner of approximately 31.8% of the outstanding shares
of DSS and is a member 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 shares 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 19.8% of the outstanding shares
of Holista and our CEO holds a position on Holista's Board of
Directors. 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.
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) (“2015-07”). As of September 30,
2019 and December 31, 2018 the Company maintains an investment in a
real estate fund, The Global Opportunity Fund. This fund invests
primarily in the U.S. and meets the criteria within Accounting
Standards Codification (“ASC”) 2015-07. 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.
These investments can never be redeemed with the fund.
Distributions from the fund will be received as the underlying
investments of the fund are liquidated. The management of the fund
intends to liquidate the fund during the first half of 2020. The
fund intends to sell 100 percent of the total investment in this
class. Because it is not probable that any individual investment
will be sold, the fair value of each individual investment has been
estimated using the net asset value of the Company’s
ownership interest in partners’ capital. Once it has been
determined which investments will be sold and whether those
investments will be sold individually or in a group, the
investments will be sold in an action process. The investee
fund’s management must obtain approval from the buyer before
the sale of the investments can be completed.
The
changes in the fair values of the investment were recorded directly
to accumulated other comprehensive income (loss). Due to the
inherent uncertainty of these estimates, these values may differ
materially from the values that would have been used had a ready
market for these investments existed.
Investment Securities at Cost
The
Company has an equity holding in Vivacitas Oncology Inc.
(“Vivacitas”), a private company that is currently not
listed on an exchange. Vivacitas was acquired after the adoption of
ASU 2016-01. The Company applied ASC 321 and elected the
measurement alternative for equity investments that do not have
readily determinable fair values and do not qualify for the
practical expedient in ASC 820 to estimate fair value using the NAV
per share. Under the alternative, we measure Vivacitas at cost,
less any impairment, plus or minus changes resulting from
observable price changes in orderly transactions for an identical
or similar investment of the same issuer.
There
has been no indication of impairment or changes in observable
prices via transactions of similar securities and investment is
still carried at cost.
Investment Securities under Equity Method Accounting
BioLife
Sugar, Inc. (“BioLife’), a subsidiary consolidated
under SeD Ltd., entered into a joint venture agreement on April 25,
2018 with Quality Ingredients, LLC (“QI”). The
agreement created an entity called Sweet Sense, Inc. (“Sweet
Sense”) which is 50% owned by Biolife and 50% owned by QI.
Management believes its 50% investment of 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 $45,948 recorded as loss on
investment on security by equity method in the Condensed
Consolidated Statements of Operations and Other Comprehensive Loss.
As of September 30, 2019, the total investment in joint venture was
equal to $91,000 and the proportionate losses totaled $76,118.
During the nine months ended on September 30, 2019, the Company
recorded its proportionate share losses of $30,166 as loss on
investment in security by equity method in the Condensed
Consolidated Statements of Operations and Other Comprehensive
Loss.
F-12
HF Enterprises Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
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 $514,985 and $369,912 for the nine months ended
September 30, 2019 and 2018, respectively. The Company capitalized
construction costs of $5,023,396 and $5,100,135 for the nine months
ended September 30, 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 test 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.
Properties held for sale
Properties
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
in selling 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 September 30, 2019 and December
31, 2018, real estate held for sale on the Company’s balance
sheet represents the El Tesoro project in the amount of
$136,248.
F-13
HF Enterprises Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
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.
Property and Equipment
Property
and equipment are recorded at cost. 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
dismantlement, 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
|
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 a disaggregation of 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 85% of the
Company’s revenue in the nine months ended on September 30,
2019 and 2018, is as follows:
F-14
HF Enterprises Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
●
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 at a point in time when title is
transferred. The Company does not have further performance
obligations or continuing involvement once title is
transferred.
Contract Assets and Contract Liabilities
Based
on contracts, customers are invoiced once all performance
obligations have been satisfied, at which point payment is
unconditional. Accordingly, the Company’s contracts do not
give rise to contract assets or liabilities under ASC 606. Accounts
receivable are recorded when the right to consideration becomes
unconditional. The Company discloses receivables from contracts
with customers separately in the statement of financial
position.
Cost of Sales
Land
acquisition costs are allocated to each lot based on the area
method, the size of the lot comparing to the total size of all lots
in the project. Development costs and capitalized interest are
allocated to lots sold based on the total expected development and
interest costs of the completed project and allocating a percentage
of those costs based on the selling price of the sold lot compared
to the expected sales values of all lots in the
project.
If
allocation of development costs and capitalized interest based on
the projection and relative expected sales value is impracticable,
those costs could also be allocated based on area method, the size
of the lot comparing to the total size of all lots in the
project.
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.
F-15
HF Enterprises Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
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 for
access to certain back office services and corporate events. 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 on the Company’s performance
obligation to transfer products and are recorded to net the
shipping and handling expenses paid by the Company and are not
considered as separate revenues under ASC 606. Shipping and
handling expenses netting of service charges from customers were
$183,138 and $201,210 for the nine months ended September 30, 2019
and 2018, respectively. Shipping and handling costs paid by the
Company are included in general and administrative
expenses.
Contract assets and contract liabilities
Based
on the terms of the Company’s contracts, customers are
usually invoiced once performance obligations have been satisfied,
at which point payment is unconditional. Accordingly, the
Company’s contracts do not give rise to contract assets or
liabilities under ASC 606. Accounts receivable are recorded when
the right to consideration becomes unconditional.
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.
Contract assets and contract liabilities
Based
on the terms of the Company’s contracts, customers are
usually invoiced once performance obligations have been satisfied,
at which point payment is unconditional. Accordingly, the
Company’s contracts do not give rise to contract assets or
liabilities under ASC 606. Accounts receivable are recorded when
the right to consideration becomes unconditional.
Remaining performance obligations
As of
September 30, 2019 and December 31, 2018, there are no remaining
performance obligations or continuing involvement, as all projects
within the information technology segment have been
completed.
F-16
HF Enterprises Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
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.
Contract assets and contract liabilities
Based
on the terms of the Company’s contracts, customers are
usually invoiced on monthly basis once performance obligations have
been satisfied, at which point payment is unconditional.
Accordingly, the Company’s contracts do not give rise to
contract assets or liabilities under ASC 606. Accounts receivable
are recorded when the right to consideration becomes
unconditional.
Remaining performance obligations
As of
September 30, 2019 and December 31, 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 nine months ended
September 30, 2019 and 2018 were $156,882 and $140,838,
respectively.
Foreign currency
Functional and reporting currency
Items
included in the financial statements of each entity in the Company
are measured using the currency of the primary economic environment
in which the entity operates (“functional currency”).
The financial statements of the Company are presented in US dollars
(the “reporting currency”).
The
functional and reporting currency of the Company is the United
States dollar (“U.S. dollar”). The financial records of
the Company’s subsidiaries located in Singapore, Hong Kong
and Australia are maintained in their local currencies, the
Singapore Dollar (S$), Hong Kong Dollar (HK$) and Australian Dollar
(“AUD”), 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
Company’s majority 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. During the nine months ended on September 30, 2019 and
2018, gains on foreign exchange were $438,608 and $974,937,
respectively.
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 AUD, Hong Kong
Dollar and Singapore Dollar, 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. Revenues,
expenses, 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).
F-17
HF Enterprises Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
For the
nine months ended on September 30, 2019 and 2018, the Company
recorded other comprehensive loss from translation loss of $325,518
and $49,049, respectively, in the condensed consolidated financial
statements.
Earnings per share
The
Company presents basic and diluted earnings per share data for its
ordinary shares. Basic earnings 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 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 September 30, 2019 and December 31,
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, separately from equity attributable to owners of the
Company.
On
September 30, 2019 and December 31, 2018, the aggregate
non-controlling interests in the Company were $6,936,588 and
$9,155,051 respectively, which is separately disclosed on the
Consolidated Balance Sheets.
Recent Accounting Pronouncements
Accounting pronouncement adopted
In
November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230):
Restricted Cash (“ASU 2016-18”), which requires
that restricted cash and cash equivalents be included as components
of total cash and cash equivalents as presented on the statement of
cash flows. ASU 2016-18 was effective for fiscal years, and interim
periods within those years, beginning after December 15, 2017 and a
retrospective transition method is required. This guidance did not
impact financial results, but resulted in a change in the
presentation of restricted cash and restricted cash equivalents
within the statement of cash flows. The Company adopted this
guidance effective January 1, 2017.
F-18
HF Enterprises Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
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 Release
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.
The
FASB also issued ASU 2018-05 to amend SEC paragraphs in ASC 740 -
Income Taxes, to reflect
SAB 118, which provides guidance for companies that are not able to
complete their accounting for the income tax effects of the Tax
Cuts and Jobs Act in the period of enactment. The Company has
adopted ASC 2018-05 as of January 1, 2018 and determined that this
ASU does not have a material impact on the condensed consolidated
financial statements as of September 30, 2019 and December 31,
2018.
In
February 2018, the FASB issued ASU 2018-02, which permits - but
does not require - companies to reclassify stranded tax effects
caused by 2017 tax reform from accumulated other comprehensive
income to retained earnings. Additionally, this ASU requires new
disclosures by all companies, whether they opt to do the
reclassification or not. The Company has adopted ASC 2018-02 as of
January 1, 2018 and determined that this ASU does not have a
material impact on the condensed consolidated financial statements
as of September 30, 2019 and December 31, 2018.
F-19
HF Enterprises Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
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 on
leasing, this standard does not have material impact on the
Company. The balances of operating lease right-of-use assets and
operating lease liabilities as of September 30, 2019 were $181,855
and $188,748, 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 non-controlling 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 as of September 30, 2019 and
December 31, 2018.
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 is currently
evaluating the impact of ASU 2018-13 on its future consolidated
financial statements.
In
October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted
Improvements to Related Party Guidance for Variable Interest
Entities. (“ASU 2018-17”) expands the accounting
alternative that allows private companies the election not to apply
the variable interest entity guidance to qualifying common control
leasing arrangements. ASU 2018-17 broadens the scope of the private
company alternative to include all common control arrangements that
meet specific criteria (not just leasing arrangements). ASU 2018-17
also eliminates the requirement that entities consider indirect
interests held through related parties under common control in
their entirety when assessing whether a decision-making fee is a
variable interest. Instead, the reporting entity will consider such
indirect interests on a proportionate basis. The amendments are
effective for fiscal years ending after December 15, 2019. Early
adoption is permitted. The Company is currently assessing the
timing and impact of adopting the updated provisions to its
consolidated financial statements.
F-20
HF Enterprises Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
4.
CONCENTRATION
OF CREDIT RISK
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 September 30, 2019 and
December 31, 2018, uninsured cash and restricted cash balances were
$10,313,420 and $4,125,113, respectively.
For the
nine months ended September 30, 2019, two customers accounted for
approximately 70% and 29% of the Company’s property and
development revenue. For the nine months ended September 30, 2018,
two customers accounted for approximately 62% and 37% of the
Company’s property and development revenue.
For the
nine months ended September 30, 2018, one customer accounted for
100% of the Company’s digital transformation technology
revenue. No revenue was recognized by the Company’s digital
transformation technology during the nine months ended on September
30, 2019.
As of
December 31, 2018, one related party customer accounted for
approximately 80% and a second customer accounted for approximately
20% of Company’s digital transformation technology accounts
receivable. As of September 30, 2019, accounts receivable on
Company’s digital transformation technology’s Condensed
Consolidated Balance Sheet was $0.
For the
nine months ended September 30, 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
September 30, 2019 and 2018, one customer accounted for
approximately 80% of the Company’s Other Business Segment
accounts receivable and the second customer accounted for
approximately 20%.
No
other concentrations were identified within the Biohealth segment
for the nine months ended on September 30, 2019 and
2018.
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 Chief Executive Officer. 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.
F-21
HF Enterprises Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
The
following table summarizes the Company’s segment information
for the following balance sheet dates presented, and for the nine
months ended September 30, 2019 and 2018:
|
|
Property Development
|
Digital Transformation Technology
|
Biohealth Business
|
Other
|
Total
|
|
Nine Months ended September 30, 2019
|
|
|
|
|
|
|
Revenue
|
$21,509,197
|
$-
|
$1,406,951
|
$28,350
|
$22,944,498
|
|
Cost
of Sales
|
(18,819,865)
|
-
|
(357,935)
|
-
|
(19,177,800)
|
|
Gross
Margin
|
2,689,332
|
-
|
1,049,016
|
28,350
|
3,766,698
|
|
Operating
Expenses
|
(4,598,112)
|
(193,959)
|
(2,134,850)
|
(1,697,423)
|
(8,624,344)
|
|
Operating
Income (Loss)
|
(1,908,780)
|
(193,959)
|
(1,085,834)
|
(1,669,073)
|
(4,857,646)
|
|
Other
Income (Expense)
|
34,433
|
296,726
|
756
|
(4,874)
|
327,041
|
|
Net
Income (Loss) Before Income Tax
|
(1,874,347)
|
102,767
|
(1,085,078)
|
(1,673,947)
|
(4,530,605)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months ended September 30, 2018
|
|
|
|
|
|
|
Revenue
|
$14,209,199
|
$135,515
|
$2,021,121
|
$24,057
|
$16,389,892
|
|
Cost
of Sales
|
(12,144,497)
|
(74,111)
|
(635,539)
|
-
|
(12,854,147)
|
|
Gross
Margin
|
2,064,702
|
61,404
|
1,385,582
|
24,057
|
3,535,745
|
|
Operating
Expenses
|
(762,630)
|
(300,994)
|
(3,333,360)
|
(1,749,295)
|
(6,146,279)
|
|
Operating
Income (Loss)
|
1,302,072
|
(239,590)
|
(1,947,778)
|
(1,725,238)
|
(2,610,534)
|
|
Other
Income (Expense)
|
22,168
|
(49,766)
|
(89,312)
|
(1,744,964)
|
(1,861,874)
|
|
Net
Loss Before Income Tax
|
1,324,240
|
(289,356)
|
(2,037,090)
|
(3,470,202)
|
(4,472,408)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
|
|
|
|
Cash
and Restricted Cash
|
$8,929,903
|
$60,655
|
$150,170
|
$2,273,168
|
$11,413,896
|
|
Total
Assets
|
32,144,863
|
209,863
|
869,942
|
5,346,146
|
38,570,814
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
Cash
and Restricted Cash
|
$4,683,040
|
$118,044
|
$174,183
|
$532,931
|
$5,508,198
|
|
Total
Assets
|
43,786,046
|
136,211
|
753,492
|
4,026,706
|
48,702,456
|
6.
REAL
ESTATE ASSETS
As of
September 30, 2019 and December 31, 2018, real estate assets
consisted of the following:
|
|
September 30,
2019
|
December 31,
2018
|
|
|
|
|
|
Construction
in Progress
|
$8,032,515
|
$19,097,644
|
|
Land
Held for Development
|
14,388,882
|
19,677,292
|
|
Total
Properties Under Development
|
22,421,397
|
38,774,936
|
|
|
|
|
|
Real
Estate Held for Sale
|
136,248
|
136,248
|
|
Total
Real Estate Assets
|
$22,557,645
|
$38,911,184
|
F-22
HF Enterprises Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
7.
PROPERTY
AND EQUIPMENT
As of
September 30, 2019 and December 31, 2018, property and equipment
consisted of the following:
|
|
September 30,
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
|
(236,911)
|
(216,294)
|
|
Total
|
$82,728
|
$103,425
|
The
Company recorded depreciation expense of $20,697 and $35,799 during
the nine months ended September 30, 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 September 30, 2019 and December 31, 2018, amounts
held on deposit from NVR were $2,538,756 and $3,878,842,
respectively.
9.
BONDS
PAYABLE
As of
September 30, 2019 and December 31, 2018, bonds payable consisted
of the following:
|
|
September
30,
2019
|
December 31,
2018
|
|
SeD Home Ltd
Bonds
|
$1,500,000
|
$1,500,000
|
|
Less: Debt
Discount
|
(4,161)
|
(43,651)
|
|
Total bonds
payable
|
$1,495,839
|
$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, as facilitated by SeD. 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
September 30, 2019 and December 31, 2018, the principal balances
were both $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 $4,161 and $43,651 on September 30, 2019 and December 31, 2018,
respectively.
F-23
HF Enterprises Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
10.
NOTES
PAYABLE
As of
September 30, 2019 and December 31, 2018, notes payable consisted
of the following:
|
|
September
30,
2019
|
December
31,
2018
|
|
Union Bank
Loan
|
$-
|
$13,899
|
|
M&T Bank
Loan
|
-
|
-
|
|
Australia
Loan
|
151,290
|
158,036
|
|
Total notes
payable
|
$151,290
|
$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.
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 September 30, 2019, the outstanding balance
of the revolving loan was $0.
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 Chief Executive Officer, Chan
Heng Fai and by Rajen Manicka, the Chief Executive Officer 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 6.03% to 6.35% per
annum for the year ended December 31, 2018 and from 5.55% to 6.06%
per annum for the year ended December 31, 2017. On September 7,
2017 the Australia Loan was amended to reduce the maximum borrowing
capacity to approximately $179,000 and on February 6, 2019 the
terms of the Australia Loan were further amended to reflect an
extended maturity date of March 31, 2020.
F-24
HF Enterprises Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
As of September 30, 2019 and December 31, 2018 the balance
outstanding on the Australia Loan was $151,290 and $158,036,
respectively.
11.
RELATED
PARTY TRANSACTIONS
Personal guarantees by directors
As of
both September 30, 2019 and December 31, 2018, certain directors of
the Company had provided personal guarantees amounting to
approximately $5,500,000 to secure external loans and borrowings
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 the Company’s Board of Directors
and, through his control of the Company’s majority
stockholder, the beneficial owner of a majority of the
Company’s common stock. Chan Heng Fai is also a member of the
Board of DSS and a stockholder of DSS. For the nine months ended on
September 30, 2019 and 2018, the revenue from DSS was $0 and
$92,000.
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. For further details on this transaction, refer to
Note 14 – Discontinued
Operations.
Notes Payable
During the year ended on December 31, 2017, a director of the
Company lent non-interest loans of $7,156,680, for the general
operations of the Company. The loans are interest free, not
tradable, unsecured, and repayable on demand. On October 15, 2018,
a formal lending agreement between the Singapore eDevelopment Ltd
and Chan Heng Fai was executed. Under the agreement, Chan Heng Fai
provides a lending credit limit of approximately $10 million for
Singapore eDevelopment Ltd with 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 September 30, 2019 and December 31, 2018
the outstanding principal balance of the loan is $5,667,640 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
nine months ended on September 30, 2019 and 2018, the interest
expenses were $268,847 and $357,048, respectively. As of September
30, 2019 and December 31, 2018, the accrued interest total was
$736,756 and $476,063, respectively. Chan Heng Fai confirmed no
demand for Loan repayment within one year.
Chan
Heng Fai also provide interest free short-term loan to HF
Enterprise for the general operations during the IPO
period.
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 $150,000, $30,000 and
$50,000, respectively, from Rajen Manicka, total $230,000 (the
“2019 Rajen Loan”). 2019 Rajen Loan is interest free,
not tradable, unsecured, and repayable on demand. As of September
30, 2019 and December 31, 2018, the total outstanding principal
balance of the loans was $573,850 and $345,706 and was included in
the Notes Payable – Related Parties balance on the
Company’s Consolidated Balance Sheets. During the nine months
ended September 30, 2019 and 2018, the Company incurred $8,084 and
$1,410 of interest expense, respectively.
F-25
HF Enterprises Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
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 Chief Executive Officer. The term of such 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.
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 Chief
Executive Officer to HF Enterprises Inc. in exchange for 8.5
million shares of the Company. Hengfai International holds 100% of
Hengfai Business Development Pte. Ltd. (“Hengfai Business
Development”), which holds 761,185,294 shares of SeD Ltd and
359,834,471 warrants. Both Hengfai International and Hengfai
Business Development are holding companies without any business
operations.
Heng Fai Enterprises Pte. Ltd.
On October 1, 2018, 100% of the ownership interest in Heng Fai
Enterprises Pte. Ltd. (“Heng Fai Enterprises”) was
transferred from Chan Heng Fai, our founder, Chairman and Chief
Executive Officer to HF Enterprises Inc. in exchange for 500,000
shares of the Company. Heng Fai Enterprises holds 2,730,000 shares
(13.72% as of September 30, 2019 and 14.2% as of December 31,
2018). Of Vivacitas Oncology Inc., a U.S.-based biopharmaceutical
company. Heng Fai Enterprises cost to purchase these Vivacitas
shares was $200,128, which is recorded at cost by the Company
because it does not have a readily determinable fair value as it is
a private US company. Heng Fai Enterprises is a holding company
without any business operations.
Global eHealth Limited
On October 1, 2018, 100% of Global eHealth Limited (“Global
eHealth”) was transferred from Chan Heng Fai, a director of
the Company, to the Company in exchange for 1,000,000 shares of the
Company. There was no other consideration exchange in conjunction
with this transaction. Global eHealth holds 46,226,673 shares
(19.8%) of Holista CollTech Limited, a public Australian company
that produces natural food ingredients. Global eHealth is a holding
company without any business operations.
Management Fees
MacKenzie
Equity Partners, owned by Charles MacKenzie, a Director of the
Company's subsidiary SeD Intelligent Home Inc., has had a
consulting agreement with the Company since 2015. Per the terms of
the agreement, as amended on January 1, 2018, the Company pays a
monthly fee of $15,000 with an additional $5,000 per month due upon
the close of the sale to Houston LD, LLC. Since January of 2019,
the Company has paid a monthly fee of $20,000 for these consulting
services. The Company incurred expenses of $180,000 and $135,000
for the nine months ended September 30, 2019 and 2018,
respectively, which were capitalized as part of Real Estate on the
Company’s Consolidated Balance Sheet as the services relate
to property and project management. As of September 30, 2019, and
December 31, 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 Black Oak LP
On July 23, 2018, SeD Development USA, LLC, a wholly owned
subsidiary of SeD, entered into two partnership interest purchase
agreements (the “Black Oak Purchase Agreements”)
through which it purchased an aggregate of 31% of Black Oak LP for
$60,000. In addition, if and when Black Oak LP 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), Black
Oak LP shall pay Fogarty Family Trust II, one of two previous
partners of Black Oak LP, an amount equal to 10% of the net
reimbursement receivable proceeds received from HC17 and/or Aqua
Texas, Inc. that exceeds $15,000,000; 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 Black Oak LP through
its 68.5% limited partnership interest and its ownership of the
General Partner, 150 Black Oak GP, Inc, a 0.5% owner in Black Oak
LP. As a result of the purchase, the Company, through its
subsidiaries, now owns 100% of Black Oak LP.
F-26
HF Enterprises Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
Consulting Services
A law
firm owned by Conn Flanigan, a Director of SeD Intelligent Home,
performs consulting services for SeD Intelligent Home and some
subsidiaries of the Company. The Company incurred expenses of
$52,723 and $88,030 for the nine months ended September 30, 2019
and 2018, respectively. On September 30, 2019 and December 31,
2018, we owed this related party $7,587 and $8,000,
respectively.
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 $180,000
and $180,000 for the nine months ended September 30, 2019 and 2018,
respectively. On September 30, 2019 and December 31, 2018, iGalen
owed this related party fees for consulting services in the amount
of $611,403 and $465,331, 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 HFE. iGalen Inc.
provides use of its platform to collect sale revenue and payment of
expenses for these entities without service fees. On September 30,
2019 and December 31, 2018, iGalen owed $369,596 and $246,722,
respectively to iGalen Philippines and iGalen SDN.
Medi
Botanics Sdn Bhd, a subsidiary of Holista CollTech, is one of the
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
$372,594 and $575,581 raw materials and products to iGalen in the
nine months ended September 30, 2019 and 2018, respectively. On
September 30, 2019 and December 31, 2018, iGalen owed $988,277 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. 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%. In the nine months ended on September 30, 2019 and 2018,
the management fee and performance fee charged to the Fund were
$4,425 and $4,118, respectively. On September 30, 2019 and December
31, 2018, the Fund owed $72,743 and $69,478
respectively.
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 September 30, 2019 and December 31, 2018, there were 10,001,000
common shares issued and outstanding.
From
January to September, 2019, the Company sold 361,500 shares of
HotApp Blockchain to international investors with the amount of
$229,500, 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.
From
January to September, 2019, SeD Maryland Development LLC Board
approved three payment distribution plans to members and paid total
$740,250 in distributions to the minority shareholder.
On July
31, 2019 500,000 warrants of Singapore eDevelopment were exercised
by an unrelated shareholder. After these 500,000 warrants were
exercised, the total number of outstanding ordinary shares of
Singapore eDevelopment was 1,101,956,707. The Company’s
ownership percentage of Singapore eDevelopment has changed from
69.11% to 69.08%.
F-27
HF Enterprises Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
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 Nine Month Ended on September 30, 2019
|
|
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
|
(25,396)
|
(224,966)
|
(250,362)
|
|
|
|
|
|
|
Balance
at September 30, 2019
|
$(49,175)
|
$1,381,601
|
$1,332,426
|
Changes in Accumulated Other Comprehensive Income by
Component
For Nine Month Ended on September 30, 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
|
(13,863)
|
(33,898)
|
(47,761)
|
|
|
|
|
|
|
Amount
Reclassified From Accumulated Other Comprehensive
Income
|
(1,961,835)
|
-
|
(1,961,835)
|
|
|
|
|
|
|
Balance
at September 30, 2018
|
$(13,863)
|
$1,927,503
|
$1,913,640
|
14.
DISCONTINUED
OPERATIONS
On
October 25, 2018, HotApps International Pte. Ltd.
(“HIP”) entered into an Equity Purchase Agreement with
DSS Asia Limited (“DSS Asia”), a Hong Kong subsidiary
of DSS International Inc. (“DSS International”),
pursuant to which HIP agreed to sell to DSS Asia all of the issued
and outstanding shares of HotApps Information Technology Co. Ltd.,
also known as Guangzhou HotApps Technology Ltd. (“Guangzhou
HotApps”). Guangzhou HotApps was a wholly owned subsidiary of
HIP, which was primarily engaged in engineering work for software
development, mainly voice over internet protocol. Guangzhou HotApps
was also involved in a number of outsourcing projects, including
projects related to real estate and lighting.
The
parties to the Equity Purchase Agreement agreed that the purchase
price for this transaction would be $100,000, which would be paid
in the form of a two-year, interest free, unsecured, demand
promissory note in the principal amount of $100,000, and that such
note would be due and payable in full in two years. The closing of
the Equity Purchase Agreement was subject to certain conditions;
these conditions were met and the transaction closed on January 14,
2019.
F-28
HF Enterprises Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
The
composition of assets and liabilities included in discontinued
operations was as follows:
|
|
January
14,
2019
|
December
31,
2018
|
|
Assets
|
|
|
|
Current
Assets
|
|
|
|
Cash
|
$31,060
|
$9,268
|
|
Deposit
and other receivable
|
5,136
|
5,049
|
|
Total
Current Assets
|
36,196
|
14,317
|
|
|
|
|
|
Fixed
assets, net
|
1,717
|
1,765
|
|
Total
Assets
|
$37,913
|
$16,082
|
|
|
|
|
|
Liabilities and
Stockholders' Deficit
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
Accounts
payable and accrued expenses
|
$202,848
|
$174,606
|
|
Total
Current Liabilities
|
202,848
|
174,606
|
|
|
|
|
|
Total
Liabilities
|
$202,848
|
$174,606
|
The
aggregate financial results of discontinued operations were as
follows:
|
Revenues:
|
Three
Months
Ended
September
30,
2019
|
Three
Months
Ended
September
30,
2018
|
Nine
Months
Ended
September
30,
2019
|
Nine
Months
Ended
September
30,
2018
|
|
Project
fee-others
|
$-
|
$-
|
$-
|
$7,437
|
|
|
-
|
-
|
-
|
7,437
|
|
|
|
|
|
|
|
Cost
of revenues
|
-
|
-
|
-
|
4,596
|
|
Gross
profit
|
$-
|
$-
|
$-
|
$2,841
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
Depreciation
|
-
|
1,193
|
48
|
$5,989
|
|
General and
administrative
|
-
|
21,279
|
3,662
|
68,413
|
|
Total
operating expenses
|
-
|
22,472
|
3,710
|
74,402
|
|
|
|
|
|
|
|
Loss
from operations
|
-
|
(22,472)
|
(3,710)
|
(71,561)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
(expenses):
|
|
|
|
|
|
Other sundry
income
|
-
|
81
|
-
|
421
|
|
Foreign exchange
loss
|
-
|
(9,752)
|
(2)
|
(9,123)
|
|
Total
other expenses
|
-
|
(9,671)
|
(2)
|
(8,702)
|
|
Loss
from discontinued operations
|
$-
|
$(32,143)
|
$(3,712)
|
$(80,263)
|
F-29
HF Enterprises Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
The
cash flows attributable to the discontinued operation are as
follows:
|
|
Nine Months
Ended
September
30,
2019
|
Nine Months
Ended
September
30,
2018
|
|
Operating
|
$24,493
|
$(74,866)
|
|
Investing
|
-
|
-
|
|
Financing
|
-
|
28,502
|
|
Net
cash (outflows)/inflows
|
$24,493
|
$(46,364)
|
15.
INVESTMENTS
MEASURED AT FAIR VALUE
Financial
assets measured at fair value on a recurring basis are summarized
below and disclosed on the consolidated balance sheet as of
September 30, 2019 and December 31, 2018:
|
|
|
Fair
Value Measurement Using
|
|
||
|
|
Amount
at Cost
|
Level
1
|
Level
2
|
Level
3
|
Amount
at Fair Value
|
|
September 30, 2019
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Investment
securities- Fair Value Option
|
$3,457,056
|
$2,519,163
|
$-
|
$-
|
$2,519,163
|
|
Investment
securities- Trading
|
16,016
|
15,654
|
-
|
-
|
15,654
|
|
Convertible
note receivable
|
50,000
|
-
|
-
|
40,746
|
40,746
|
|
Total
|
$3,523,072
|
$2,534,817
|
$-
|
$40,746
|
$2,575,563
|
|
Investment
securities- Fair Value NAV as practical expedient
|
|
|
|
|
277,332
|
|
Total
Investment in securities at Fair Value
|
|
|
|
|
$2,852,895
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Investment
securities- Fair Value Option
|
$3,457,056
|
$2,656,240
|
$-
|
$-
|
$2,656,240
|
|
Investment
securities- Trading
|
16,016
|
15,701
|
-
|
-
|
15,701
|
|
Convertible
note receivable
|
50,000
|
-
|
-
|
78,723
|
78,723
|
|
Total
|
$3,523,072
|
$2,671,941
|
$-
|
$78,723
|
$2,750,664
|
|
Investment
securities- Fair Value NAV as practical expedient
|
|
|
|
|
276,102
|
|
Total
Investment in securities at Fair Value
|
|
|
|
|
$3,026,766
|
Unrealized loss on investment securities for the nine months ended
September 30, 2019 and 2018 was $146,470 and $2,508,245,
respectively.
F-30
HF Enterprises Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
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 September 30, 2019 and December 31,
2018, respectively.
|
|
|
Share price
|
|
|
|
Market Value
|
|
|
|
|
|
9/30/2019
|
|
Shares
|
|
9/30/2019
|
|
Valuation
|
|
DSS (Related Party)
|
|
0.385
|
|
500,000
|
|
192,500
|
|
Investment
in Securities at Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
AMBS (Related Party)
|
|
0.018
|
|
20,000,000
|
|
360,000
|
|
Investment
in Securities at Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
Holista (Related Party)
|
|
0.043
|
|
46,226,673
|
|
1,966,663
|
|
Investment
in Securities at Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
Others
|
|
|
|
|
|
15,654
|
|
Investment
in Securities at Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 1 Equity Securities
|
|
2,534,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vivacitas (Related Party)
|
|
N/A
|
|
2,480,000
|
|
200,128
|
|
Investment
in Securities at Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity Securities
|
|
2,734,945
|
|
|
|
|
|
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
|
|
|
F-31
HF Enterprises Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
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 six months ended September
30, 2019 and 2018:
|
|
Total
|
|
Balance at December
31, 2018
|
$78,723
|
|
Total
losses
|
(37,977)
|
|
Purchases, sales,
and settlements
|
-
|
|
Balance
at September 30, 2019
|
$40,746
|
|
|
Total
|
|
Balance at December
31, 2017
|
$50,000
|
|
Total
gains
|
28,723
|
|
Purchases, sales,
and settlements
|
-
|
|
Balance
at September 30, 2018
|
$78,723
|
The
fair value of the Sharing Services
Convertible Note as of September 30, 2019 and December 31,
2018 was calculated using a Black-Scholes valuation model valued
with the following weighted average assumptions:
|
|
September
30,
2019
|
December
31,
2018
|
|
|
|
|
|
Dividend
yield
|
0.00%
|
0.00%
|
|
Expected
volatility
|
151.01%
|
162.68%
|
|
Risk free interest
rate
|
1.75%
|
1.98%
|
|
Contractual term
(in years)
|
3.02
|
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.
Additionally,
the Company maintains an investment in mutual funds which is
measured at fair value on a recurring basis using net asset value
per share as a practical expedient. As of September 30, 2019 and
December 31, 2018, the balance of this investment was $277,332 and
$276,102, respectively, and was included as part of Investment
Securities at Fair Value on the Company’s consolidated
balance sheet.
16.
COMMITMENTS
AND CONTINGENCIES
Commercial leases
The
Company has entered into 4 commercial leases in Bethesda, Maryland,
Magnolia, Texas, Singapore, and Hong Kong, relating to the rental
of office premises. These leases have tenure of between one and
three years with a renewal options. 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.
F-32
HF Enterprises Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
Annual
future minimum lease payments under these long-term building leases
for the next five years and thereafter are as follows:
|
December 31,
|
|
|
Remaining
2019
|
$80,458
|
|
2020
|
212,934
|
|
2021
|
-
|
|
2022
|
-
|
|
Thereafter
|
-
|
|
|
$293,392
|
Rent
expense for the nine months ended September 30, 2019 and 2018 were
$232,566 and $230,550, respectively.
The
Company’s leases are accounted for as operating leases.
Operating lease right-of-use assets and operating lease liability
is included on the face of the condensed consolidated balance
sheet. The Company elected the practical expedient to not recognize
operating lease right-of-use assets and operating lease liabilities
for lease agreements with terms less than 12 months or de
minimis.
The
balance of the operating lease right-of-use asset and operating
lease liability as of September 30, 2019 was $181,855 and $188,748,
respectively.
Supplemental
Cash Flow and Other Information Related to Operating Leases as
follows:
|
|
Nine Months
Ended
September
30,
2019
|
|
Operating Cash
Flows
|
$209,274
|
|
Weighted Average
Remaining Operating Lease Term (in years)
|
1.1
|
|
Weighted Average
Operating Lease Discount Rate
|
6.1%
|
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 nine months ended on September 30, 2019, NVR
purchased 114 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.
F-33
HF Enterprises Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
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 nine months ended September 30, 2019
and 2018, the Company incurred royalty expenses of $0 and $169,520,
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”). The amended complaint, filed by
iGalen International Inc. and iGalen on October 24, 2019,
enumerates causes of action for (i) breach of contract; (ii) breach
of covenant of good faith and fair dealing; and (iii) 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 certain services. 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 has caused, and continue to
cause iGalen to suffer substantial harm by, among other things,
making it so iGalen was unable to communicate with distributors via
its website and Back Office, fulfill orders made by distributors,
or pay commission to distributors. iGalen is seeking
damages.
On
October 10, 2019, Gara Group filed a complaint in the Superior
Court of the State of California, County of San Diego, Central
Division against iGalen International Inc., iGalen Inc., Singapore
eDevelopment Limited, Chan Heng Fai, Dr. Rajen Manicka and David
Price, an executive of iGalen Inc. Gara Group’s
complaint for damages asserts that the Gara Group is entitled to
general damages of $9,000,000 and liquidated damages of
$50,000,000. iGalen Inc. intends to vigorously contest this
matter. No trial date has been set as of the date
hereof.
17.
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 September 30, 2019 and December 31, 2018,
there have been no options granted.
F-34
HF Enterprises Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
Singapore eDevelopment Stock Option plans
On
November 20, 2013, SeD Ltd approved a Stock Option Plan (the
“2013 Plan”). Employees, executive directors, and
non-executive directors (including the independent directors) are
eligible to participate in the 2013 Plan.
The
following tables summarize stock option activity under the 2013
Plan for the nine months ended September 30, 2019:
|
|
|
Weighted
Average
|
|
||
|
|
Options
for
|
|
|
Remaining
|
Aggregate
|
|
|
Common
Shares
|
Exercise
Price
|
Grant-Date Fair
Value
|
Contractual
Term
|
Intrinsic
Value
|
|
Outstanding as of
December 31, 2018
|
1,061,333
|
$0.09
|
$-
|
5.00
|
$-
|
|
Granted
|
-
|
-
|
-
|
|
|
|
Exercised
|
-
|
-
|
-
|
|
|
|
Forfeited,
cancelled, expired
|
-
|
-
|
-
|
|
|
|
Outstanding as of
September 30, 2019
|
1,061,333
|
$0.09
|
$-
|
4.25
|
$-
|
|
Vested and
exercisable at September 30, 2019
|
1,061,333
|
$0.09
|
$-
|
4.25
|
$-
|
18.
SUBSEQUENT
EVENTS
The
Company evaluated the events and transactions subsequent to
September 30, 2019, the balance sheet date, through December 23,
2019, the date the consolidated financial statements were available
to be issued.
Distribution to Minority Shareholders
On
October 7, 2019, 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
eliminates upon consolidation.
Purchased stock of Sweet Sense Inc.
On
November 8, 2019, Impact BioMedical Inc., a subsidiary of the
Company, purchased 50% of Sweet Sense Inc. from Quality
Ingredients, LLC for $91,000. Sweet Sense is now 81.8% owned
subsidiary of Singapore eDevelopment. In addition, Sweet
Sense Inc. granted Quality Candy Company, LLC, an affiliate of
Quality Ingredients, LLC a Five (5) year, non-exclusive license for
the production and sale of Laetose and products containing
Laetose. Pursuant to this license, Quality Candy Company, LLC
will pay Sweet Sense a royalty of Two percent (2%) of (i) any sales
of Laetose made by Quality Candy Company, LLC; or a royalty of One
percent (1%) of any sales of any product, including but not limited
to candy, that shall contain Laetose. Sweet Sense may
terminate this license at its discretion during its term by paying
Quality Candy Company, LLC an amount of between $50,000 and
$300,000, based on royalties paid to Sweet Sense during the
term.
iGalen loan from related party
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.
Exercised Warrants of Singapore
eDevelopment
On
December 19, 2019, Document Security Systems, Inc. exercised
warrants to acquire 61,977,577 shares of Singapore eDevelopment.
Mr. Chan, our Chief Executive Officer, Chairman of our Board and
controlling shareholder, is also Chairman of the Board of Document
Security Systems, Inc. and a significant shareholder of Document
Security Systems, Inc. As a result of the exercise of these
warrants, the percent of Singapore eDevelopment that our company
owns has been reduced from 69.1% to 65.4%.
F-35
HF Enterprises Inc. and Subsidiaries
Table of Contents
For Years Ended December 31, 2018 and 2017
|
Independent
Auditor’s Report
|
|
F-37
|
|
|
|
|
|
Consolidated
Balance Sheets
|
|
F-38
|
|
|
|
|
|
Consolidated
Statements of Operations and Other Comprehensive Loss
|
F-39
|
|
|
|
|
|
|
Consolidated
Statements of Stockholders' Equity
|
|
F-40
|
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
|
F-41
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
F-42 -
F-88
|
F-36
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, 2018 and 2017,
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, 2018,
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, 2018 and 2017, and the
results of its operations and its cash flows for each of the years
in the two-year period ended December 31, 2018, in conformity with
accounting principles generally accepted in the United States of
America.
Restatement of Previously Issued Financial Statements
As discussed in Note 4, the Company has restated its 2017 financial
statements to correct errors.
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.
August 12, 2019, except for the subsequent event discussed in Note
20 to the consolidated financial statements relating to the
subsequent impairment of the Black Oak project, as to which the
date is November 12, 2019
We have served as the Company’s auditor since
2018.
Somerset, New Jersey
F-37
HF Enterprises Inc. and Subsidiaries
Consolidated Balance Sheets
As of December 31, 2018 and 2017
|
|
2018
|
2017
|
|
|
|
(As
Restated)
|
|
Assets:
|
|
|
|
Current
Assets:
|
|
|
|
Cash
|
$ 1,387,209
|
$ 1,241,336
|
|
Restricted
Cash
|
4,120,989
|
2,895,705
|
|
Account
Receivables, Net
|
564,759
|
905,859
|
|
Prepaid
Expenses
|
140,442
|
127,288
|
|
Inventory
|
198,817
|
63,853
|
|
Investment
in Securities at Fair Value
|
3,026,766
|
4,102,756
|
|
Investment
in Securities at Cost
|
200,128
|
-
|
|
Investment
in Securities by Equity Method
|
9,052
|
-
|
|
Deposits
|
23,603
|
23,603
|
|
Current
Assets of Discontinued Operations
|
14,317
|
35,038
|
|
Total
Current Assets
|
9,686,082
|
9,395,438
|
|
Real
Estate
|
|
|
|
Properties
under Development
|
38,774,936
|
50,516,409
|
|
Real
Estate Held For Sale
|
136,248
|
136,248
|
|
Total
Real Estate
|
38,911,184
|
50,652,657
|
|
|
|
|
|
Property
and Equipment, Net
|
103,425
|
122,568
|
|
Non-Current
Assets of Discontinued Operations
|
1,765
|
8,309
|
|
Total
Assets
|
$ 48,702,456
|
$ 60,178,972
|
|
|
|
|
|
Liabilities
and Stockholders' Equity:
|
|
|
|
Current
Liabilities:
|
|
|
|
Accounts
Payable and Accrued Expenses
|
$ 4,394,853
|
$ 2,690,849
|
|
Accrued
Interest - Related Parties
|
476,063
|
-
|
|
Deferred
Revenue
|
84,998
|
114,110
|
|
Builder
Deposits
|
1,296,062
|
1,477,876
|
|
Notes
Payable, Net of Debt Discount of $0 and $140,277
|
|
|
|
on
December 31, 2018 and 2017, respectively
|
13,899
|
8,306,897
|
|
Bonds
Payable, Net of Debt Discount of $43,651 and $0
|
|
|
|
on
December 31, 2018 and 2017, respectively
|
1,456,349
|
-
|
|
Current
Liabilities of Discontinued Operations
|
174,606
|
171,566
|
|
Total
Current Liabilities
|
7,896,830
|
12,761,298
|
|
Long-Term
Liabilities:
|
|
|
|
Builder
Deposits
|
2,582,780
|
3,878,842
|
|
Notes
Payable
|
158,036
|
-
|
|
Bonds
Payable, Net of Debt Discount of $0 and $90,980
|
|
|
|
on
December 31, 2018 and 2017, respectively
|
-
|
1,409,020
|
|
Notes
Payable - Related Parties
|
8,863,196
|
7,384,217
|
|
Total
Liabilities
|
19,500,842
|
25,433,377
|
|
|
|
|
|
Commitments
and Contingencies
|
-
|
-
|
|
|
|
|
|
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, 2018 and 2017,
respectively
|
10,001
|
10,001
|
|
Additional
Paid In Capital
|
53,717,424
|
51,324,448
|
|
Accumulated
Deficit
|
(35,263,650)
|
(32,235,614)
|
|
Accumulated
Other Comprehensive Income
|
1,582,788
|
3,923,236
|
|
Total
Stockholders' Equity
|
20,046,563
|
23,022,071
|
|
Non-controlling
Interests
|
9,155,051
|
11,723,524
|
|
Total
Stockholders' Equity
|
29,201,614
|
34,745,595
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
$ 48,702,456
|
$ 60,178,972
|
See accompanying notes to consolidated financial
statements.
F-38
HF Enterprises Inc. and Subsidiaries
Consolidated Statements of Operations and Other Comprehensive
Loss
For the Years Ended December 31, 2018 and 2017
|
|
2018
|
2017
|
|
|
|
(As
Restated)
|
|
Revenue
|
|
|
|
Property
Sales
|
$ 17,675,034
|
$ 7,191,507
|
|
Biohealth
Product Sales
|
2,532,852
|
2,879,542
|
|
Digital
Transformation Technology
|
140,652
|
197,073
|
|
Others
|
32,402
|
488,971
|
|
|
20,380,940
|
10,757,093
|
|
Operating
Expenses
|
|
|
|
Cost
of Sales
|
15,533,701
|
7,527,602
|
|
General
and Administrative
|
7,160,473
|
7,780,596
|
|
Research
and Development
|
461,752
|
350,462
|
|
Impairment
of Real Estate
|
1,455,326
|
-
|
|
|
24,611,252
|
15,658,660
|
|
|
|
|
|
Loss
From Operations
|
(4,230,312)
|
(4,901,567)
|
|
|
|
|
|
Other
Income (Expense)
|
|
|
|
Interest
Income
|
59,346
|
25,894
|
|
Interest
Expense
|
(509,208)
|
-
|
|
Foreign
Exchange Transaction Gain (Loss)
|
691,099
|
(2,739,991)
|
|
Unrealized
Loss on Investment on Securities at Fair Value
|
(3,366,958)
|
-
|
|
Loss
on Investment on Securities by Equity Method
|
(45,948)
|
-
|
|
Other
Income
|
11,511
|
277,354
|
|
Other
Expense
|
(3,349)
|
(115,177)
|
|
|
(3,163,507)
|
(2,551,920)
|
|
|
|
|
|
Net
Loss Before Income Taxes
|
(7,393,819)
|
(7,453,487)
|
|
|
|
|
|
Income
Tax Benefit
|
-
|
588,659
|
|
|
|
|
|
Net
Loss from Continuing Operations
|
(7,393,819)
|
(6,864,828)
|
|
|
|
|
|
Net
Loss from Discontinued Operations, Net of Tax
|
(96,749)
|
(221,018)
|
|
Net
Loss
|
(7,490,568)
|
(7,085,846)
|
|
|
|
|
|
Net
Loss Attributable to Non-Controlling Interests
|
(2,500,698)
|
(2,777,335)
|
|
|
|
|
|
Net
Loss Attributable to Common Stockholders
|
$ (4,989,870)
|
$ (4,308,511)
|
|
|
|
|
|
Other
Comprehensive Income (Loss), Net
|
|
|
|
Unrealized
(Loss) Gain on Securities Investment
|
(34,408)
|
2,838,713
|
|
Foreign
Currency Translation Adjustment
|
(513,435)
|
1,222,746
|
|
|
(547,843)
|
4,061,459
|
|
|
|
|
|
Comprehensive
Loss
|
(8,038,411)
|
(3,024,387)
|
|
|
|
|
|
Comprehensive
Loss Attributable to Non-controlling Interests
|
(2,669,927)
|
(1,522,750)
|
|
|
|
|
|
Comprehensive
Loss Attributable to Common Stockholders
|
$ (5,368,484)
|
$ (1,501,637)
|
|
|
|
|
|
Net
Loss Per Share - Basic and Diluted
|
|
|
|
Continuing
Operations
|
$ (0.50)
|
$ (0.43)
|
|
Discontinued
Operations
|
$ (0.01)
|
$ (0.02)
|
|
Net
Loss Per Share
|
$ (0.51)
|
$ (0.45)
|
|
|
|
|
|
Weighted
Average Common Shares Outstanding - Basic and Diluted
|
10,001,000
|
10,001,000
|
See accompanying notes to consolidated financial
statements.
F-39
HF Enterprises Inc. and Subsidiaries
Consolidated Statements of Stockholders’
Equity
For the Years Ended December 31, 2018 and December 31,
2017
(As
Restated for year ended on December 31, 2017)
|
|
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,
2017
|
|
|
10,001,000
|
$ 10,001
|
$ 40,938,283
|
$ 1,116,362
|
$ (27,927,103)
|
$ 8,603,985
|
$ 22,741,528
|
|
|
|
|
|
|
|
|
|
||
|
Proceeds from
shareholder
|
|
|
|
|
3,129,615
|
|
|
1,398,840
|
4,528,455
|
|
|
|
|
|
|
|
|
|
||
|
Loan Converted to
Equity
|
|
|
|
|
7,256,550
|
|
|
3,243,450
|
10,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency
Translations
|
|
|
|
|
|
845,039
|
|
377,706
|
1,222,745
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
Gain on Securities Investment
|
|
|
|
|
1,961,835
|
|
876,878
|
2,838,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
(4,308,511)
|
(2,777,335)
|
(7,085,846)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1,
2018
|
|
|
10,001,000
|
$ 10,001
|
$ 51,324,448
|
$ 3,923,236
|
$ (32,235,614)
|
$ 11,723,524
|
$ 34,745,595
|
|
|
|
|
|
|
|
|
|
|
|
|
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 December 31,
2018
|
|
|
10,001,000
|
$ 10,001
|
$ 53,717,424
|
$ 1,582,788
|
$ (35,263,650)
|
$ 9,155,051
|
$ 29,201,614
|
See accompanying notes to consolidated financial
statements.
F-40
HF Enterprises Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2018 and 2017
|
|
2018
|
2017
|
|
|
|
(As
Restated)
|
|
Cash
Flows From Operating Activities
|
|
|
|
Net
Loss from Continuing Operations
|
$ (7,393,819)
|
$ (6,864,828)
|
|
Adjustments
to reconcile net loss to net cash from operating
activities:
|
|
|
|
Depreciation
|
41,197
|
58,032
|
|
Loss
on Disposal of PP&E
|
8,303
|
131
|
|
Impairment
of Real Estate
|
1,455,326
|
-
|
|
Foreign
Exchange Transaction (Gain) Loss
|
(691,099)
|
2,739,991
|
|
Unrealized
Loss on Security Investment
|
3,366,958
|
-
|
|
Changes
in Operating Assets and Liabilities
|
|
|
|
Real
Estate
|
10,152,944
|
(1,448,306)
|
|
Trade
Receivables
|
321,325
|
(488,009)
|
|
Office
Deposit
|
7,640
|
6,469
|
|
Prepaid
Expense
|
11,970
|
5,416
|
|
Inventory
|
(134,964)
|
(63,853)
|
|
Accounts
Payable and Accrued Expenses
|
2,474,888
|
131,498
|
|
Deferred
Revenue
|
(29,112)
|
114,110
|
|
Tenant
Security Deposits
|
(1,400)
|
(2,550)
|
|
Accrued
Income Tax Expense
|
-
|
(588,659)
|
|
Builder
Deposits
|
(1,477,876)
|
(543,282)
|
|
Net
Cash Provided by (Used In) Continuing Operating
Activities
|
8,112,281
|
(6,943,840)
|
|
Net
Cash Used In Discontinued Operating Activities
|
(86,641)
|
(202,395)
|
|
Net
Cash Provided by (Used In) Operating Activities
|
8,025,640
|
(7,146,235)
|
|
|
|
|
|
Cash
Flows From Investing Activities
|
|
|
|
Purchase
of Fixed Assets
|
(30,645)
|
(30,538)
|
|
Purchase
of Investment Securities
|
-
|
(150,000)
|
|
Equity
Method Investment Contributions
|
(55,000)
|
-
|
|
Investment
in Development Fund
|
-
|
(350,000)
|
|
Net
Cash Used in Continuing Investing Activities
|
(85,645)
|
(530,538)
|
|
Net
Cash Provided by Discontinued Investing Activities
|
-
|
-
|
|
Net
Cash Used in Investing Activities
|
(85,645)
|
(530,538)
|
|
|
|
|
|
Cash
Flows From Financing Activities
|
|
|
|
Proceeds
from Issuance of Ordinary Shares
|
-
|
4,528,455
|
|
Share
Issuing Expenses
|
-
|
(90,428)
|
|
Acquisition
of Minority Interest
|
(60,000)
|
-
|
|
Proceeds
from Notes Payable
|
-
|
1,052,350
|
|
Proceeds
from Sale of Subsidiary Shares
|
83,500
|
-
|
|
Repayments
of Note Payable
|
(8,258,398)
|
(6,315,215)
|
|
Financing
Fees Paid
|
-
|
(110,000)
|
|
Net
Proceeds from Notes Payable - Related Parties
|
1,640,966
|
7,156,680
|
|
Net
Cash (Used in) Provided By Continuing Financing
Activities
|
(6,593,932)
|
6,221,842
|
|
Net
Cash Provided By Discontinued Financing Activities
|
-
|
-
|
|
Net
Cash (Used in) Provided By Financing Activities
|
(6,593,932)
|
6,221,842
|
|
|
|
|
|
Net
Increase (Decrease) in Cash and Restricted Cash
|
1,346,063
|
(1,454,931)
|
|
Effects
of Foreign Exchange Rates on Cash
|
25,094
|
(14,045)
|
|
|
|
|
|
Cash
and Restricted Cash - Beginning of Year
|
4,137,041
|
5,606,017
|
|
Cash
and Restricted Cash- End of Year
|
$ 5,508,198
|
$ 4,137,041
|
|
|
|
|
|
Supplementary
Cash Flow Information
|
|
|
|
Cash
Paid For Interest
|
$ 418,067
|
$ 1,233,228
|
|
Cash
Paid For Taxes
|
$ -
|
$ -
|
|
|
|
|
|
Supplemental
Disclosure of Non-Cash Investing and Financing
Activities
|
|
|
|
Convert
Related Party Loan to Common Stock
|
$ -
|
$ 10,500,000
|
|
Amortization
of Debt Discount Capitalized
|
$ 190,277
|
$ 375,111
|
|
Stock
Capital Contribution
|
$ 2,470,930
|
$ -
|
See accompanying notes to consolidated financial
statements.
F-41
HF Enterprises Inc. and Subsidiaries
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 were 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, China, Hong Kong, and Australia. The
Company manages its principal businesses primarily through its
69.11% owned subsidiary, Singapore eDevelopment Ltd. (“SeD
Ltd”), a public company traded on the Singapore Stock
Exchange.
On October 1, 2018, Chan Heng Fai transferred his 100% interest in
Hengfai International Pte. Ltd. (“Hengfai
International”) to HF Enterprises Inc. in exchange for
8,500,000 shares of the Company’s common stock. Hengfai
International holds a 100% interest in Hengfai Business Development
Pte. Ltd. (“Hengfai Business Development”). Both
Hengfai International and Hengfai Business Development are holding
companies with no business operations. Hengfai Business Development
holds 761,185,294 shares and 359,834,471 warrants of SeD Ltd, or
69.11% of the outstanding shares of SeD Ltd, which is the primary
operating company of HFE.
Also on October 1, 2018, Chan Heng Fai transferred his 100%
ownership interest in Heng Fai Enterprises Pte. Ltd. (“Heng
Fai Enterprises”) and Global eHealth Limited (“Global
eHealth”) to HF Enterprises Inc. in exchange for 500,000 and
1,000,000 shares of the Company’s common stock, respectively.
Both Heng Fai Enterprises and Global eHealth are holding companies
with no business operations.
The contributions to HFE on October 1, 2018 of Hengfai
International, Heng Fai Enterprises, and Global eHealth from Chan
Heng Fai (the “Common Control Transactions”)
represented transactions under common control.
The
Company has four operating segments based on the products and
services offered. These include our three principal businesses-
property development, digital transformation technology and
biohealth- as well as a fourth category consisting of certain other
business activities.
Property Development
The
Company’s property development segment is comprised of SeD
Intelligent Home Inc. (“SeD Intelligent Home”) and SeD
Perth Pty Ltd.
In
2014, Singapore eDevelopment Ltd. commenced operations developing
property projects and participating in third-party property
development projects. SeD Intelligent Home Inc., a 99.9%-owned
subsidiary of Singapore eDevelopment, owns, operates and manages
real estate development projects with a focus on land subdivision
developments.
F-42
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Development
activities are generally contracted out, including planning, design
and construction, as well as, other work with engineers, surveyors,
architects and general contractors. The developed lots are then
sold to builders for the construction of new homes. SeD Intelligent
Home’s main assets are two subdivision development projects,
one near Houston, Texas, known as Black Oak, consisting of 162
acres and currently projected to have approximately 512 units, and
one in Frederick, Maryland, known as Ballenger Run, consisting of
197 acres and currently projected to have approximately 689
units.
Digital Transformation Technology
The
Company’s digital transformation technology segment is
comprised of HotApp Blockchain Inc. and its
subsidiaries.
The
Company’s digital transformation technology business is
involved in mobile application product development and other
businesses, providing information technology services to end-users,
service providers and other commercial users through multiple
platforms. This technology platform consists of instant messaging
systems, social media, e-commerce and payment systems, direct
marketing platforms, e-real estate, brand protection and
counterfeit and fraud detection. HotApp Blockchain Inc
(“HotApp Blockchain" or “HotApp”), a 99.9%-owned
subsidiary of Singapore eDevelopment, focuses on
business-to-business solutions such as enterprise messaging and
workflow. Through HotApp, the Company has successfully implemented
several strategic platform developments for clients, including a
mobile front-end solution for network marketing, a hotel e-commerce
platform for Asia and a real estate agent management platform in
China.
On
October 25, 2018, HotApps International Pte. Ltd.
(“HIP”) entered into an Equity Purchase Agreement with
DSS Asia Limited (“DSS Asia”), a Hong Kong subsidiary
of DSS International Inc. (“DSS International”),
pursuant to which HIP agreed to sell to DSS Asia all of the issued
and outstanding shares of HotApps Information Technology Co. Ltd.,
also known as Guangzhou HotApps Technology Ltd. (“Guangzhou
HotApps”). The transaction closed on January 14, 2019. Chan
Heng Fai is the CEO of DSS Asia and DSS International. See Note 15
- Discontinued Operations and Note 12 - Related Party
Transactions.
Biohealth
The
Company’s biohealth segment is comprised of Singapore
BioMedical PL 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. Global BioLife is one of the entities within this
segment, 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 has
established a joint venture with Quality Candy Company, LLC for the
development, manufacture, and global distribution of the new sugar
substitute. iGalen Inc. is one of subsidiaries under Health Wealth
Happiness Pte. Ltd. and focuses on distribution of supplements and
other health products.
F-43
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Other Business Activities
In
addition to the segments identified above, the Company provides
corporate strategy and business development services, 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 believe our other business activities complement our
three principal businesses.
The
Company’s other business activities segment is primarily
comprised of Singapore eDevelopment Ltd, SeD Capital Pte Ltd, BMI
Capital Partners International Limited and Singapore Construction
& Development Pte. Ltd.
2.
GOING
CONCERN
The
accompanying financial statements have been prepared on the basis
that the Company is a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal
course of business. The Company has experienced net losses over the
past 2 years. As of and for the year ended December 31, 2018, the
Company had an accumulated deficit of $35,263,650 a net loss of
$7,490,568, and net cash provided by operating activities of
$8,025,640. As of and for the year ended December 31, 2017, the
Company had an accumulated deficit of $32,235,614, net loss of
$7,085,847, and net cash used in operating activities of
$7,146,236.
As a
result, these conditions may raise substantial doubt regarding our
ability to continue as a going concern 12 months from the date of
issuance of our 2018 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 December
31, 2018, the Company had cash and restricted cash of $5,508,198,
compared to $4,137,041 as of December 31, 2017. 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. Concurrently, management will work with the
related party debtors on a plan to repay the related party loans,
which are repayable on demand, to ensure the Company’s
operation cash requirement is its’ first
priority.
In the
budgeting for the Company’s cash flows and funding
requirements, the Company considered that the Company had entered
into agreements with a customer for its land subdivision
development, the securing of an agreement with an external
unrelated purchaser in respect of the sale of its 124 residential
dwelling units in respect of its Black Oak project in Magnolia,
Texas in January 2019, as well as the proceeds arising from the
sale of biomedical products. During the 6 months ended June 30,
2019, the revenue from lot sales was approximately $16.6 million
and cash flow provided by operating activities from property
development was approximately $8.8 million. Furthermore, the
Company had not defaulted on any principal and interest repayment
on its loans and borrowings and had substantially 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 12 months from the date of issuance of our 2018 financial
statements if the need arises.
As a
result of management’s plans, high volume cash in bank
accounts, favorable operating cash flow from operations in 2018 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.
F-44
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
3.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The Common Control Transactions resulted in the following basis of
accounting for the financial reporting periods:
●
The
acquisitions of Heng Fai Enterprises and Global eHealth were
accounted for prospectively as of October 1, 2018 and they did not
represent a change in reporting entity.
●
The
consolidated financial statements were retrospectively adjusted for
the acquisition of Hengfai International and the operating results
of SeD Ltd as of January 1, 2017 for comparative purposes as the
entities were under common control.
●
On
May 9, 2017, SeD Capital Pte. Ltd., a subsidiary of the Company,
entered into a sale and purchase agreement with Chan Heng Fai to
purchase the entire shares in Liquid Value Asset Management Pte.
Ltd.(“LVAM” f.k.a. Hengfai Asset Management Pte. Ltd,
“HFAM”) amounting to 100% of the issued and paid-up
share capital of LVAM. The consideration for the acquisition of
LVAM is $441,780. The operating results of the Company in 2017
consolidated financial statements were retrospectively adjusted for
this acquisition and its operating results as if the transaction
happened on of January 1, 2017, for comparative purpose as the
entities were under common control.
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. The Management believed
that the acquisitions of Hengfai International and LVAM led to
change in the reporting entities and the acquisitions of Heng Fai
Enterprises and Global eHealth did not.
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”).
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 consolidated the operations of the following entities
as of December 31, 2018 and 2017 as follows:
|
|
State
or other jurisdiction of
|
Attributable
interest
|
|
|
|
incorporation
or organization
|
as of
December 31,
|
|
|
Name
of subsidiary consolidated under HFE
|
|
2018
|
2017
|
|
|
|
%
|
%
|
|
Hengfai
International Pte. Ltd
|
Singapore
|
100
|
0
|
|
Hengfai
Business Development Pte. Ltd
|
Singapore
|
100
|
0
|
|
Singapore
eDevelopment Ltd.
|
Singapore
|
69.11
|
69.11
|
|
Singapore
Construction & Development Pte Ltd.
|
Singapore
|
69.11
|
69.11
|
|
Art
eStudio Pte. Ltd.
|
Singapore
|
35.25
|
35.25
|
|
Singapore
Construction Pte. Ltd.
|
Singapore
|
69.11
|
69.11
|
|
Global
BioMedical Pte. Ltd (f.k.a Singapore BioMedical Pte.
Ltd.)
|
Singapore
|
69.11
|
69.11
|
|
SeD
BioLife International Inc.
|
United
States of America
|
69.11
|
69.11
|
|
SeD
BioMedical International Inc.
|
United
States of America
|
69.11
|
69.11
|
|
Global
BioMedical Inc.
|
United
States of America
|
62.83
|
62.83
|
|
Global
BioLife Inc.
|
United
States of America
|
43.98
|
43.98
|
|
SeD
Investment Pte. Ltd (f.ka SingLife Regenerate Pte.
Ltd.)
|
Singapore
|
69.11
|
69.11
|
|
Health
Wealth Happiness Pte. Ltd.
|
Singapore
|
69.11
|
69.11
|
|
iGalen
International Inc.
|
United
States of America
|
36.63
|
36.63
|
F-45
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
|
iGalen
Inc. (f.k.a iGalen USA LLC)
|
United
States of America
|
36.63
|
36.63
|
|
SeD
Capital Pte. Ltd.
|
Singapore
|
69.11
|
69.11
|
|
SeD
BioMedical International Pte. Ltd.
|
Singapore
|
0.00
|
69.11
|
|
SeD
BioMedical Inc.
|
United
States of America
|
0.00
|
55.29
|
|
SeD
BioMedical Pte. Ltd.
|
Singapore
|
0.00
|
55.29
|
|
SeD
BioMedical Limited
|
Hong
Kong
|
0.00
|
55.29
|
|
SeD
BioMedical Sdn Bhd
|
Malaysia
|
0.00
|
55.29
|
|
LiquidValue
Asset Management Pte. Ltd.
|
Singapore
|
69.11
|
69.11
|
|
SeD
Home Limited
|
Hong
Kong
|
69.11
|
69.11
|
|
Global
Lite Food Pte. Ltd.
|
Singapore
|
69.11
|
69.11
|
|
BMI
Asset Management Pte. Ltd. (f.k.a SeD Global Management Pte.
Ltd.)
|
Singapore
|
0.00
|
69.11
|
|
SeD
Medical Solution Pte. Ltd.
|
Singapore
|
0.00
|
69.11
|
|
SeD
Health Solution Pte. Ltd.
|
Singapore
|
0.00
|
69.11
|
|
Global
Techfund of Fund Pte. Ltd.
|
Singapore
|
69.11
|
69.11
|
|
Singapore
eChain Logisitic Pte. Ltd. (f.k.a CloudTV Pte. Ltd.)
|
Singapore
|
69.11
|
69.11
|
|
BMI
Capital Partners International Limited
|
Hong
Kong
|
69.11
|
69.11
|
|
SeD
Perth Pty Ltd
|
Australia
|
69.11
|
69.11
|
|
SeD
Home International, Inc.
|
United
States of America
|
69.11
|
69.11
|
|
SeD Intelligent Home Inc.
|
United
States of America
|
69.10
|
69.10
|
|
SeD Home, Inc..
|
United
States of America
|
69.10
|
69.10
|
|
SeD
USA, LLC
|
United
States of America
|
69.10
|
69.10
|
|
150
Black Oak GP, Inc.
|
United
States of America
|
69.10
|
69.10
|
|
SeD
Development USA, Inc.
|
United
States of America
|
69.10
|
69.10
|
|
150
CCM Black Oak Ltd
|
United
States of America
|
69.10
|
47.69
|
|
SeD
Texas Home, LLC
|
United
States of America
|
69.10
|
69.10
|
|
SeD
Ballenger, LLC
|
United
States of America
|
69.10
|
69.10
|
|
SeD
Maryland Development, LLC
|
United
States of America
|
57.73
|
57.73
|
|
SeD
Development Management, LLC
|
United
States of America
|
58.74
|
58.74
|
|
SeD
Builder, LLC
|
United
States of America
|
69.10
|
69.10
|
|
HotApp
Blockchain, Inc.
|
United
States of America
|
69.10
|
69.10
|
|
HotApps
International Pte. Ltd
|
Singapore
|
69.10
|
69.10
|
|
HotApps
Call Pte. Ltd
|
Singapore
|
69.10
|
69.10
|
|
Guangzhou
HotApps Technology Ltd
|
China
|
69.10
|
69.10
|
|
HotApp
International Limited
|
Hong
Kong
|
69.10
|
69.10
|
|
HWH
International Inc.
|
United
States of America
|
69.11
|
69.11
|
|
Health,
Wealth & Happiness Inc.
|
United
States of America
|
69.11
|
69.11
|
|
HWH
Multi-Strategy Investment Inc
|
United
States of America
|
69.11
|
69.11
|
|
Impact
Biomedical Inc.
|
United
States of America
|
69.11
|
0.00
|
|
Biolife
Sugar, Inc.
|
United
States of America
|
43.91
|
0.00
|
|
Happy
Sugar, Inc.
|
United
States of America
|
43.91
|
0.00
|
|
SeD
Home Rental, Inc.
|
United
States of America
|
69.10
|
0.00
|
|
Crypto
Exchange, Inc.
|
United
States of America
|
69.10
|
0.00
|
|
HWH
World Inc.
|
United
States of America
|
69.10
|
0.00
|
|
HWH
World Pte. Ltd (f.k.a Crypto Exchange Pte. Ltd.)
|
Singapore
|
69.10
|
69.10
|
*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.
F-46
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
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.
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 December 31, 2018 and 2017.
Restricted Cash
As a
condition to the loan agreement with the Union Bank (formerly known
as Xenith Bank, f/k/a The Bank of Hampton Roads), the Company was
required to maintain a minimum of $2,600,000 in an interest-bearing
account maintained by the lender as additional security for the
loans. As of December 31, 2018 and 2017, the account balance was
$2,726,154 and $2,656,670, respectively. The funds were required to
remain as collateral for the loans until the loans are paid off in
full. The loan has been fully paid off in January 2019 and all
remaining amount in this account was released on April 19,
2019.
As a
condition to the loan agreement with National Australian Bank
Limited in conjunction with the Perth project, an Australia real
estate development project, the Company is required to maintain
$35,276 in a non-interest-bearing account. As of December 31, 2018
and 2017, the account balance was $35,276. These funds will remain
as collateral for the loans until paid in full.
On July
20, 2018, Black Oak LP received $4,592,079 in district
reimbursement payment for previous construction costs incurred in
land development. Of this amount, $1,650,000 will remain on deposit
in the District’s Capital Projects Fund for the benefit of
Black Oak LP and will be released upon receipt of the evidence of:
(a) the execution of a purchase agreement between Black Oak LP and
a home builder with respect to the Black Oak development and (b)
the completion, finishing and readying for home construction of at
least 105 unfinished lots in the Black Oak development. The balance
was $1,203,256 on December 31, 2018.
F-47
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
As a
condition to use the credit card services provided by Global
Payroll Gateway, Ltd. (“GPG”), a financial service
company, the Company is required to deposit 10% revenue from 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 December 31, 2018 and 2017, the balance in the reserve
account were $156,303 and $200,000, respectively. These funds will
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 accounts
receivable reserve. The Company’s allowance for doubtful
accounts represents an estimate of the losses expected to be
incurred. Generally, the amount of allowance is primarily decided
by division management’s historical experiences, the
delinquency trends, the resolution rates, the aging of receivables,
the credit quality indicators and financial health of specific
customers. As of December 31, 2018 and 2017, 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 December 31, 2018 and 2017, inventory
consisted of finished goods, our iGalen Inc. health supplement
products. The Company evaluates a potential reserve for
obsolescence and possible price concessions required to liquidate
inventories below net realizable value. The reserve on December 31,
2018 and 2017 was $0.
Investment Securities
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 effects,
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.
F-48
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
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.
The
Company has significant influence over Amarantus BioScience
Holdings (“AMBS”) is the beneficial owner of
approximately 19.5% of the common shares 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 has significant influence over Holista CollTech Limited
(“Holista”) as the Company and its CEO are the
beneficial owner of approximately 19.8% of the outstanding shares
of Holista and our CEO holds a position on the Holista Board of
Directors. The Company did not have a controlling interest and
therefore the Company’s investment would be accounted for
under equity method accounting or choose the fair value
accounting.
The
Company has significant influence over Document Security Systems
Inc., (“DSS”) as our Chief Executive Officer is the
beneficial owner of approximately 31.8% of the outstanding shares
of DSS and is a member 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 has elected the FVO 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.
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) (“2015-07”). As of December 31, 2018
and 2017 the Company maintains an investment in a real estate fund,
The Global Opportunity Fund. This fund invests primarily in the
U.S. and meets the criteria within Accounting Standards
Codification (“ASC”) 2015-07. 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.
These investments can never be redeemed with the funds.
Distributions from each fund will be received as the underlying
investments of the funds are liquidated. It is estimated that the
underlying assets of the fund will be liquidated over the next 1 to
10 years. The fund intends to sell 100 percent of the total
investment in this class. However, the individual investments that
will be sold have not yet been determined. Because it is not
probable that any individual investment will be sold, the fair
value of each individual investment has been estimated using the
net asset value of the Company’s ownership interest in
partners’ capital. Once it has been determined which
investments will be sold and whether those investments will be sold
individually or in a group, the investments will be sold in an
action process. The investee fund’s management must approve
of the buyer before the sale of the investments can be
completed.
F-49
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
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 in Vivacitas Oncology Inc.
(“Vivacitas”) a private equity holding 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, 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 cost.
Investment Securities under Equity Method Accounting
BioLife
Sugar, Inc. (“BioLife”), a subsidiary consolidated
under SeD Ltd., entered into a joint venture agreement on April 25,
2018 with Quality Ingredients, LLC (“QI”). The
agreement created an entity called Sweet Sense, Inc. (“Sweet
Sense”) which is 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. BioLife contributed $55,000 to the
joint venture during 2018 and recorded its proportionate share
losses totaling $45,948 recorded as loss on investment in security
by equity method in the Consolidated Statements of Operations and
Other Comprehensive Loss.
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 construction costs $8,262,297 and $5,899,103
and capitalized interest from the third-party borrowings of
$415,844 and $1,178,220 for the years ended December 31, 2018 and
2017, respectively.
The
Company’s policy is to obtain an independent third-party
valuation for each major project in the United Sates to test for
impairment. The 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.
F-50
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
On
October 12, 2018, 150 CCM Black Oak, Ltd. entered into an 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 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.
Properties held for sale
Properties
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
in selling 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 have been met, the property is classified as
“held for sale”. As of December 31, 2018 and 2017, real
estate held for sale on the Company’s balance sheet
represents the El Tesoro project in the amount of
$136,248.
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.
F-51
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Property and Equipment
Property
and equipment are recorded at cost. 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
dismantlement, 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
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
|
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.
F-52
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
The
following represents a disaggregation of 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 85% of the
Company’s revenue in 2018 and 2017, 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 at a point in time when title is
transferred. The Company does not have further performance
obligations or continuing involvement once title is
transferred.
Contract Assets and Contract Liabilities
Based
on contracts, customers are invoiced once all performance
obligations have been satisfied, at which point payment is
unconditional. Accordingly, the Company’s contracts do not
give rise to contract assets or liabilities under ASC 606. Accounts
receivable are recorded when the right to consideration becomes
unconditional. The Company discloses receivables from contracts
with customers separately in the statement of financial
position.
Cost of Sales
Land
acquisition costs are allocated to each lot based on the area
method, the size of the lot comparing to the total size of all lots
in the project. Development costs and capitalized interest are
allocated to lots sold based on the total expected development and
interest costs of the completed project and allocating a percentage
of those costs based on the selling price of the sold lot compared
to the expected sales values of all lots in the
project.
If
allocation of development costs and capitalized interest based on
the projection and relative expected sales value is impracticable,
those costs could also be allocated based on area method, the size
of the lot comparing to the total size of all lots in the
project.
F-53
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
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 for
access to certain back office services and corporate events. 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 on the Company’s performance
obligation to transfer products and are therefore recorded within
net the shipping and handling expenses paid by the Company and are
not considered as separate revenues under ASC 606. Shipping and
handling expenses after netting service charges from customers were
$304,307 and $67,194 for the years ended December 31, 2018, and
2017, respectively. Shipping and handling expenses paid by the
Company are included in general and administrative
expenses.
F-54
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Contract assets and contract liabilities
Based
on the terms of the Company’s contracts, customers are
usually invoiced once performance obligations have been satisfied,
at which point payment is unconditional. Accordingly, the
Company’s contracts do not give rise to contract assets or
liabilities under ASC 606. Accounts receivable are recorded when
the right to consideration becomes unconditional.
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.
Contract assets and contract liabilities
Based
on the terms of the Company’s contracts, customers are
usually invoiced once performance obligations have been satisfied,
at which point payment is unconditional. Accordingly, the
Company’s contracts do not give rise to contract assets or
liabilities under ASC 606. Accounts receivable are recorded when
the right to consideration becomes unconditional.
Remaining performance obligations
As of
December 31, 2018, there were no remaining performance obligations,
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 to provide 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.
Contract assets and contract liabilities
Based
on the terms of the Company’s contracts, customers are
usually invoiced on monthly basis once performance obligations have
been satisfied, at which point payment is unconditional.
Accordingly, the Company’s contracts do not give rise to
contract assets or liabilities under ASC 606. Accounts receivable
are recorded when the right to consideration becomes
unconditional.
F-55
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Remaining performance obligations
As of
December 31, 2018, there are no remaining performance obligations,
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 December 31, 2018
and 2017 were $206,313 and $456,129, respectively.
Stock-Based Compensation
The
Company accounts for stock-based compensation in accordance with
ASC 718 - “Compensation
– Stock Compensation” (“ASC 718”)
which establishes financial accounting and reporting standards for
stock-based employee compensation. It defines a fair value-based
method of accounting for an employee stock option or similar equity
instrument. The Company accounts for compensation cost for stock
option plans in accordance with ASC 718.
The
Company recognizes all forms of share-based payments, including
stock option grants, warrants and restricted stock grants, at their
fair value on the grant date, which are based on the estimated
number of awards that are ultimately expected to vest.
Foreign currency
Functional and reporting currency
Items
included in the financial statements of each entity in the Company
are measured using the currency of the primary economic environment
in which the entity operates (“functional currency”).
The financial statements of the Company are presented in US dollars
(the “reporting currency”).
The
functional and reporting currency of the Company is the United
States dollar (“U.S. dollar”). The financial records of
the Company’s subsidiaries located in Singapore, Hong Kong
and, Australia the PRC are maintained in their local currencies,
the Singapore Dollar (S$), Hong Kong Dollar (HK$), Australian
Dollar (“AUD”) and Renminbi ("RMB"), 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
Company’s majority 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. Gain on foreign exchange transactions was $691,099 during
the year ended on December 31, 2018 and loss was $2,739,991 during
the year ended on December 31, 2017.
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 AUD, Renminbi,
Hong Kong Dollar and Singapore Dollar, 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. Revenues, expenses, 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).
F-56
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
For the
year ended on December 31, 2018, the Company recorded other
comprehensive loss from translation loss of $513,435 in the
consolidated financial statements. For the year ended on December
31, 2017, the Company recorded other comprehensive income from
translation gain of $1,222,746 in the consolidated financial
statements.
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.
F-57
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
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 has not filed its 2018 Tax Return and therefore remains
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 per share
The
Company presents basic and diluted earnings per share data for its
ordinary shares. Basic earnings 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 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. There are no potentially dilutive
securities outstanding on December 31, 2018 and 2017.
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:
F-58
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
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
December 31, 2018 and 2017, the aggregate non-controlling interests
in the Company were $9,155,051 and $11,723,524, respectively, which
is separately disclosed on the Consolidated Balance
Sheets.
Recent Accounting Pronouncements
Accounting pronouncement adopted
In
November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230):
Restricted Cash (“ASU 2016-18”), which requires
that restricted cash and cash equivalents be included as components
of total cash and cash equivalents as presented on the statement of
cash flows. ASU 2016-18 was effective for fiscal years, and interim
periods within those years, beginning after December 15, 2017 and a
retrospective transition method is required. This guidance did not
impact financial results, but resulted in a change in the
presentation of restricted cash and restricted cash equivalents
within the statement of cash flows. The Company adopted this
guidance effective January 1, 2017.
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 Release
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.
F-59
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
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.
The
FASB also issued ASU 2018-05 to amend SEC paragraphs in ASC 740 -
Income Taxes, to reflect
SAB 118, which provides guidance for companies that are not able to
complete their accounting for the income tax effects of the Tax
Cuts and Jobs Act in the period of enactment. The Company has
adopted ASC 2018-05 as of January 1, 2018 and determined that this
ASU does not have a material impact on the consolidated financial
statements as of December 31, 2018.
In
February 2018, the FASB issued ASU 2018-02, which permits - but
does not require - companies to reclassify stranded tax effects
caused by 2017 tax reform from accumulated other comprehensive
income to retained earnings. Additionally, this ASU requires new
disclosures by all companies, whether they opt to do the
reclassification or not. The Company has adopted ASC 2018-02 as of
January 1, 2018 and determined that this ASU does not have a
material impact on the consolidated financial statements as of
December 31, 2018.
F-60
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Accounting pronouncement being evaluated
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 most significant impact of adoption was the
recognition of right-of-use assets and lease liabilities for
operating leases. The Company does not expect a significant change
in its leasing activities between now and adoption. On adoption,
the Company currently expects to recognize operating lease
liabilities less than $200,000 with corresponding ROU assets of the
same amount based on the present value of the remaining rental
payments for our Bethesda Office lease on the consolidated balance
sheet. Adoption of the standard had no impact to net cash from or
used in operating, investing, or financing activities in the
Company’s consolidated statement of cash
flows.
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 is currently
evaluating the impact of ASU 2018-13 on its future consolidated
financial statements.
In
October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted
Improvements to Related Party Guidance for Variable Interest
Entities. (“ASU 2018-17”) expands the accounting
alternative that allows private companies the election not to apply
the variable interest entity guidance to qualifying common control
leasing arrangements. ASU 2018-17 broadens the scope of the private
company alternative to include all common control arrangements that
meet specific criteria (not just leasing arrangements). ASU 2018-17
also eliminates the requirement that entities consider indirect
interests held through related parties under common control in
their entirety when assessing whether a decision-making fee is a
variable interest. Instead, the reporting entity will consider such
indirect interests on a proportionate basis. The amendments are
effective for fiscal years ending after December 15, 2019. Early
adoption is permitted. The Company is currently assessing the
timing and impact of adopting the updated provisions to its
consolidated financial statements.
F-61
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
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 non-controlling interests. ASU
2017-11 is effective for the Company on January 1, 2019. The
Company is currently evaluating the impact of ASU 2017-11 on its
future consolidated financial statements.
4.
RESTATEMENT
OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENT
The
Company has restated its audited consolidated financial statements
for the year ended December 31, 2017 for the issues described
below. The effects of the restatement adjustments on (i) the
Company’s Consolidated Balance Sheet on December 31, 2017,
(ii) the Company’s Consolidated Statement of Operations and
Other Comprehensive Income for the year ended December 31, 2017,
(iii) the Company’s Consolidated Statements of
Shareholders’ Equity for the year ended December 31, 2017 and
(iv) the Company’s Consolidated Statement of Cash Flows for
the year ended December 31, 2017 are presented
below.
Restricted Cash
The
Company incorrectly classified $200,000 of restricted cash as a
receivable. The 2017 balance sheet has been restated for this
error.
Cash
The
Company incorrectly classified $20,262 of cash as a receivable. The
2017 balance sheet has been restated for this error.
Merger Reserve
Merger
reserve of $1,107,039 was incorrectly recorded in 2017 on both
Consolidated Statement of cash flow and Consolidated Statement of
Stockholders’ Equity. Since LVAM (f.k.a HFAM) was acquired under common
control and the transaction did not have any gain or loss it did
not increase additional paid in capital in 2017. The 2017 financial
statements have been restated for this error to show the retrospective
adjustment.
Employee Stock Option
Employee
stock option change as the amount of $120,301 was incorrectly
booked in 2017. The 2017 consolidated financial statements have
been restated for this error.
Tenant Security Deposits
Tenant
security deposits in the amount of $2,625 have been reclassified to
be included in Accounts Payable and Accrued Expenses.
Marketing Expense
Marketing
expense in the amount of $456,129 has been reclassified to be
included in General and Administrative Expenses.
Reclassify Bond Obligations
Bond
obligations, net of debt discount, in the amount of $1,409,020,
were incorrectly shown as a current liability. The financial
statements have been restated to reclassify this to
long-term.
F-62
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Allocate Builder Deposit between Current and long-term
liabilities
Builder
deposits in the amount of $1,477,876, were incorrectly shown as a
long-term liability. The financial statements have been restated to
reclassify this to current.
Adjust Unrealized Gain/Loss on Security Investments
The
Company incorrectly retrospectively adopted ASU 2016-01 in the year
ended December 31, 2017 and 2016 financial statements. The effect
of the corresponding unrealized gain $2,838,713 was adjusted in the
Consolidated Balance Sheets, Consolidated Statement of Operations
and Other Comprehensive Income, Consolidated Statements of
Stockholder’s Equity and Consolidated Statements of Cash
Flows.
Adjust Foreign Currency Translation Adjustment
The
Company erroneously recorded foreign exchange transaction gain
$2,873,874 from intercompany loans within Other Comprehensive
Income. These loans are expected to be repaid and are not
permanently reinvested. The Company has adjusted the effect of the
foreign exchange transaction gain/loss in the Consolidated Balance
Sheets, Consolidated Statement of Operations and Other
Comprehensive Income, Consolidated Statements of
Stockholder’s Equity and Consolidated Statements of Cash
Flows.
Disclosed the Total and Per Share Net Loss
In the
Consolidated Statement of Operations and Other Comprehensive
Income, total and per share net loss attributable to common
stockholders and the total net loss attributable to noncontrolling
interests were previously undisclosed. The Company has updated
these financials to include total net loss attributable to
non-controlling interests.
Adjust Perth Project Impairment Reversal
The
Company incorrectly reversed a prior impairment of $158,836 at the
time of a sale. The Company originally recorded other income and an
increase to the value of the asset, which was expensed into cost of
sales upon the sale. The financial statements have been restated to
reclassify the other income to cost of sales.
HotApps Discontinued Operation
On
October 25, 2018, HIP entered into an Equity 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 Guangzhou HotApps Technology Ltd.. Chan
Heng Fai is the director of the Company, the chairmen and CEO of
DSS Asia, and the director of DSS International. Guangzhou HotApps
was a wholly owned subsidiary of HIP, which was primarily engaged
in engineering work for software development, mainly voice over
internet protocol. The transaction was closed on January 14, 2019.
The 2017 and 2018 financial statements were adjusted to reflect
this discontinued operation.
F-63
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Reclassify iGalen Inc. sales commission and royalty fee and correct
revenue recognition of annual membership fee
In
2017, sales commissions of $1,053,440 and royalty fees $279,818
were reclassified from cost of goods sold to general and
administrative expense; Annual membership fees income was reduced
by $114,110, as the revenue was not yet earned. These fees were
corrected to be shown as deferred revenue. Approximately $3,000
membership fee from 2016 was recognized in 2017 and has been
restated to show this income in 2017.
Correction for withholding tax
The
Company incorrectly recorded withholding tax on intercompany
transactions. Therefore, the Company restated its financial
statements to reduce the accrual by $2,457,443, reduce the expense
by $454,441, and increase retained earnings by
$2,093,002.
Correction for real estate and additional paid in
capital
The
Company did not properly eliminate intercompany transactions
relating to imputed interest in the amount of $1,586,112 from
borrowings between SeD Intelligent Home and Hengfai Business
Development Pte. Ltd.
Correction for interest expense
The
$1.5M in bonds were taken out to fund the Black Oak project with
all interest and debt discount amortization associated with these
obligations being capitalized. The Company incorrectly expensed
interest expense of $10,000 in 2016 and $120,000 in 2017. The bond
discount amortization of $4,176 in 2016 and $50,000 in 2017 was
incorrectly included in general and administrative expense. The
financial statements have been restated to capitalize these amounts
into real estate, remove the expense from the statement of
operations and adjust accumulated deficit.
The
following table presents the Consolidated Balance Sheet as
previously reported, restatement adjustments and the Consolidated
Balance Sheet as restated at December 31, 2017:
|
|
As Previously Reported
|
Correction of Errors
|
Discontinued Operations
|
As Restated
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
|
$ 1,221,074
|
$ 20,262
|
$ -
|
$ 1,241,336
|
|
Restricted
Cash
|
2,695,705
|
200,000
|
-
|
2,895,705
|
|
Account
Receivables, Net
|
1,161,158
|
(255,299)
|
-
|
905,859
|
|
Prepaid
Expenses
|
127,288
|
-
|
-
|
127,288
|
|
Inventory
|
63,853
|
-
|
-
|
63,853
|
|
Investment
in Securities at Fair Value
|
3,736,016
|
366,740
|
-
|
4,102,756
|
|
Other
Investments
|
366,740
|
(366,740)
|
-
|
-
|
|
Deposits
|
23,603
|
-
|
-
|
23,603
|
|
Current
Assets of Discontinued Operations
|
-
|
-
|
35,038
|
35,038
|
|
Total
Current Assets
|
9,395,437
|
(35,037)
|
35,038
|
9,395,438
|
|
Real
Estate
|
|
|
|
|
|
Properties
under Development
|
52,219,636
|
(1,703,227)
|
-
|
50,516,409
|
|
Real
Estate Held For Sale
|
136,248
|
-
|
-
|
136,248
|
|
Total
Real Estate
|
52,355,884
|
(1,703,227)
|
-
|
50,652,657
|
|
|
|
|
|
|
|
Properties
and Equipment, net
|
115,231
|
7,337
|
-
|
122,568
|
|
Non-Current
Assets of Discontinued Operations
|
-
|
-
|
8,309
|
8,309
|
|
Total
Assets
|
$ 61,866,553
|
$ (1,687,581)
|
$ 43,347
|
$ 60,178,972
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity:
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
Accounts
Payable and Accrued Expenses
|
$ 5,317,233
|
$ (2,626,384)
|
$ -
|
$ 2,690,849
|
|
Deferred
Revenue
|
-
|
114,110
|
-
|
114,110
|
|
Tenant
Security Deposits
|
2,625
|
(2,625)
|
-
|
-
|
|
Builder
Deposits
|
|
1,477,876
|
-
|
1,477,876
|
|
Notes
Payable, Net of Debt Discount of $140,277
|
|
|
|
|
|
on
December 31, 2017
|
9,715,917
|
(1,409,020)
|
-
|
8,306,897
|
|
Current
Liabilities of Discontinued Operations
|
|
-
|
171,566
|
171,566
|
|
Total
Current Liabilities
|
15,035,775
|
(2,446,043)
|
171,566
|
12,761,298
|
|
Long-Term
Liabilities:
|
|
|
|
|
|
Builder
Deposits
|
5,356,718
|
(1,477,876)
|
-
|
3,878,842
|
|
Bond
Payable, Net of Debt Discount of $90,980
|
|
|
|
|
|
on
December 31, 2017
|
-
|
1,409,020
|
-
|
1,409,020
|
|
Notes
Payable - Related Parties
|
7,384,217
|
-
|
-
|
7,384,217
|
|
Total
Liabilities
|
27,776,710
|
(2,514,899)
|
171,566
|
25,433,377
|
|
|
|
|
|
|
|
Stockholders'
Equity:
|
|
|
|
|
|
Preferred
Stock, $0.001 par value; 5,000,000 shares authorized, non
issued
|
|
|
|
|
|
Common
Stock, $0.001 par value; 20,000,000 shares authorized;
10,001,000
|
|
|
|
|
|
shares
issued and outstanding
|
10,001
|
-
|
-
|
10,001
|
|
Additional
Paid In Capital
|
52,275,731
|
(951,283)
|
-
|
51,324,448
|
|
Accumulated
Deficit
|
(29,384,481)
|
(2,722,915)
|
(128,219)
|
(32,235,614)
|
|
Accumulated
Other Comprehensive (Loss) Income
|
(370,488)
|
4,293,724
|
-
|
3,923,236
|
|
Total
Stockholders' Equity
|
22,530,763
|
619,527
|
(128,219)
|
23,022,071
|
|
Non-controlling
Interests
|
11,559,079
|
164,445
|
-
|
11,723,524
|
|
Total
Stockholders' Equity
|
34,089,843
|
783,971
|
(128,219)
|
34,745,595
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
$ 61,866,553
|
$ (1,730,928)
|
$ 43,347
|
$ 60,178,972
|
F-64
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
The
following table presents the Consolidated Statement of Operations
and Other Comprehensive Income as previously reported, restatement
adjustments and the Consolidated Statement of Operations and Other
Comprehensive Income as restated for the year ended December 31,
2017:
|
|
As
Previously Reported
|
Correction
of Errors
|
Discontinued
Operations
|
As
Restated
|
|
Revenue
|
|
|
|
|
|
Property
Sales
|
$ 7,191,507
|
$ -
|
$ -
|
$ 7,191,507
|
|
Biohealth
Product Sales
|
2,990,514
|
(110,972)
|
-
|
2,879,542
|
|
Digital
Transformation Technology
|
|
197,073
|
-
|
197,073
|
|
Others
|
736,959
|
(247,988)
|
-
|
488,971
|
|
|
10,918,980
|
(161,887)
|
-
|
10,757,093
|
|
Operating
Expenses
|
|
|
|
|
|
Cost
of Sales
|
9,033,589
|
(1,505,987)
|
-
|
7,527,602
|
|
Marketing
|
456,129
|
(456,129)
|
-
|
-
|
|
General
and Administrative
|
6,093,239
|
1,687,357
|
-
|
7,780,596
|
|
Research
and Development
|
520,315
|
(169,853)
|
-
|
350,462
|
|
|
16,103,272
|
(444,612)
|
-
|
15,658,660
|
|
|
|
|
|
|
|
Loss
From Operations
|
(5,184,292)
|
282,725
|
-
|
(4,901,567)
|
|
|
|
|
|
|
|
Other
Income (Expense)
|
|
|
|
|
|
Interest
Income
|
25,894
|
-
|
-
|
25,894
|
|
Interest
Expense
|
(119,999)
|
119,999
|
-
|
-
|
|
Unrealized
Gain on Securities Investment
|
2,838,713
|
(2,838,713)
|
-
|
-
|
|
Withholding
Tax
|
(454,441)
|
454,441
|
-
|
-
|
|
Foreign
Exchange Transaction Gain (Loss)
|
129,060
|
(2,869,051)
|
-
|
(2,739,991)
|
|
Other
Income
|
277,127
|
227
|
-
|
277,354
|
|
Other
Expense
|
(115,178)
|
1
|
-
|
(115,177)
|
|
|
2,581,176
|
(5,133,096)
|
-
|
(2,551,920)
|
|
|
|
|
|
|
|
Net
Loss Before Income Taxes
|
(2,603,116)
|
(4,850,371)
|
-
|
(7,453,487)
|
|
|
|
|
|
|
|
Income
Tax Benefit
|
588,659
|
-
|
-
|
588,659
|
|
|
|
|
|
|
|
Net
Loss from Continuing Operations
|
(2,014,457)
|
(4,850,371)
|
-
|
(6,864,828)
|
|
|
|
|
|
|
|
Net
Loss from Discontinued Operations, Net of Tax
|
-
|
-
|
(221,018)
|
(221,018)
|
|
Net
Loss
|
(2,014,457)
|
(4,850,371)
|
(221,018)
|
(7,085,846)
|
|
|
|
|
|
|
|
Net
Loss Attributable to No-Controlling Interests
|
-
|
(2,777,335)
|
-
|
(2,777,335)
|
|
|
|
|
|
|
|
Net
Loss Attributable to Common Stockholders
|
$ -
|
$ (2,073,036)
|
$ (221,018)
|
$ (4,308,511)
|
|
|
|
|
|
|
|
Other
Comprehensive Income (Loss), Net
|
|
|
|
|
|
Unrealized
Gain on Securities Investment
|
-
|
2,838,713
|
-
|
2,838,713
|
|
Foreign
Currency Translation Adjustment
|
(2,868,823)
|
4,091,569
|
-
|
1,222,746
|
|
Comprehensive
Loss
|
(4,883,280)
|
2,079,911
|
(221,018)
|
(3,024,387)
|
|
|
|
|
|
|
|
Comprehensive
Loss Attributable to Non-controlling Interests
|
(2,059,897)
|
537,147
|
-
|
(1,522,750)
|
|
|
|
|
|
|
|
Comprehensive
Loss Attributable to Common Stockholders
|
$ (2,823,383)
|
$ 1,542,764
|
$ (221,018)
|
$ (1,501,637)
|
|
|
|
|
|
|
|
Net
Loss Per Share - Basic and Diluted
|
|
|
|
|
|
Continuing
Operations
|
$ -
|
$ (0.43)
|
$ -
|
$ (0.43)
|
|
Discontinued
Operations
|
$ -
|
$ -
|
$ (0.02)
|
$ (0.02)
|
|
Net
Loss
|
$ -
|
$ (0.43)
|
$ (0.02)
|
$ (0.45)
|
|
|
|
|
|
|
|
Weighted
Average Common Shares Outstanding - Basic and Diluted
|
10,001,000
|
-
|
-
|
10,001,000
|
F-65
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
The
following table presents the Consolidated Statement of
Stockholders’ Equity as previously reported, restatement
adjustments and the Consolidated Statement of Stockholders’
Equity as restated for the year ended December 31,
2017:
|
|
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 December 31,
2017 (As Previous Reported)
|
|
|
10,001,000
|
$10,001
|
$52,275,731
|
$(370,488)
|
$(29,384,481)
|
$11,559,079
|
$34,089,843
|
|
|
|
|
|
|
|
|
|
|
|
|
Correction of
Errors
|
|
|
|
|
(951,283)
|
4,293,724
|
(2,722,915)
|
164,445
|
783,971
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
Operations
|
|
|
|
|
|
|
(128,219)
|
|
(128,219)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2017 (As Restated)
|
|
|
10,001,000
|
$10,001
|
$51,324,448
|
$3,923,236
|
$(32,235,614)
|
$11,723,524
|
$34,745,595
|
F-66
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
The
following table presents the Consolidated Statement of Cash Flows
as previously reported, restatement adjustments and the
Consolidated Statement of Cash Flows as restated for the year ended
December 31, 2017:
|
|
As
Previously Reported
|
Correction
of Errors
|
Discontinued
Operations
|
As
Restated
|
|
Cash
Flows From Operating Activities
|
|
|
|
|
|
Net
Loss from Continuing Operations
|
$ (2,014,457)
|
$ (4,850,371)
|
$ -
|
$ (6,864,828)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
Depreciation
|
49,477
|
8,555
|
-
|
58,032
|
|
Loss
on Disposal of PP&E
|
-
|
131
|
-
|
131
|
|
Amortization
of Debt Discount
|
50,153
|
(50,153)
|
-
|
-
|
|
Accrued
Other Tax Expense
|
454,441
|
(454,441)
|
-
|
-
|
|
Foreign
Exchange Transaction (Gain) Loss
|
(129,060)
|
2,869,051
|
-
|
2,739,991
|
|
Unrealized
Gain on Security Investment
|
(2,979,126)
|
2,979,126
|
-
|
-
|
|
Employee
Stock Option Expense
|
(120,301)
|
120,301
|
-
|
-
|
|
Merger
Reserves
|
1,107,039
|
(1,107,039)
|
-
|
-
|
|
Changes
in Operating Assets and Liabilities
|
|
|
|
|
|
Real
Estate
|
(834,836)
|
(613,470)
|
-
|
(1,448,306)
|
|
Trade
Receivables
|
(967,776)
|
479,767
|
-
|
(488,009)
|
|
Office
Deposit
|
-
|
6,469
|
-
|
6,469
|
|
Prepaid
Expense
|
5,683
|
(267)
|
-
|
5,416
|
|
Inventory
|
(63,853)
|
-
|
-
|
(63,853)
|
|
Accounts
Payable and Accrued Expenses
|
416,360
|
(284,862)
|
-
|
131,498
|
|
Deferred
Revenue
|
-
|
114,110
|
-
|
114,110
|
|
Tenant
Security Deposits
|
(2,550)
|
-
|
-
|
(2,550)
|
|
Accrued
Income Tax Expense
|
(558,937)
|
(29,722)
|
-
|
(588,659)
|
|
Builder
Deposits
|
(543,282)
|
-
|
-
|
(543,282)
|
|
Net
Cash Used In Continuing Operating Activities
|
(6,131,025)
|
(812,815)
|
-
|
(6,943,840)
|
|
Net
Cash Used In Discontinued Operating Activities
|
-
|
-
|
(202,395)
|
(202,395)
|
|
Net
Cash Used In Operating Activities
|
(6,131,025)
|
(812,815)
|
(202,395)
|
(7,146,235)
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities
|
|
|
|
|
|
Purchase
of Fixed Assets
|
(28,615)
|
(1,923)
|
-
|
(30,538)
|
|
Investment
in Stocks
|
-
|
(150,000)
|
-
|
(150,000)
|
|
Others
Investment
|
(366,740)
|
16,740
|
-
|
(350,000)
|
|
Net
Cash Used in Continuing Investing Activities
|
(395,355)
|
(135,183)
|
-
|
(530,538)
|
|
Net
Cash Used in Discontinued Investing Activities
|
-
|
-
|
-
|
-
|
|
Net
Cash Used in Investing Activities
|
(395,355)
|
(135,183)
|
-
|
(530,538)
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities
|
|
|
|
|
|
Proceeds
from Issuance of Ordinary Shares
|
4,749,800
|
(221,345)
|
-
|
4,528,455
|
|
Share
Issuing Expenses
|
(93,500)
|
3,072
|
-
|
(90,428)
|
|
Proceeds
from Notes Payable
|
1,052,350
|
-
|
-
|
1,052,350
|
|
Repayments
of Note Payable
|
(6,282,027)
|
(33,188)
|
-
|
(6,315,215)
|
|
Financing
Fees Paid
|
(110,000)
|
-
|
-
|
(110,000)
|
|
Net
Proceeds from Notes Payable - Related Parties
|
8,021,475
|
(864,795)
|
-
|
7,156,680
|
|
Net
Cash Provided By Continuing Financing Activities
|
7,338,098
|
(1,116,256)
|
-
|
6,221,842
|
|
Net
Cash Provided By Discontinued Financing Activities
|
-
|
-
|
-
|
-
|
|
Net
Cash Provided By Financing Activities
|
7,338,098
|
(1,116,256)
|
-
|
6,221,842
|
|
|
|
|
|
|
|
Net
Increase (Decrease) in Cash and Restricted Cash
|
811,718
|
(2,064,254)
|
(202,395)
|
(1,454,931)
|
|
Effects
of Foreign Currency Translation on Cash
|
(2,214,051)
|
2,200,006
|
-
|
(14,045)
|
|
Cash
and Restricted Cash - Beginning of Years
|
5,319,113
|
286,904
|
-
|
5,606,017
|
|
Cash
and Restricted Cash- End of Years
|
$ 3,916,779
|
$ 422,657
|
$ (202,395)
|
$ 4,137,041
|
|
|
|
|
|
|
|
Supplementary
Cash Flow Information
|
|
|
|
|
|
Cash
Paid For Interest
|
$ 1,113,228
|
$ 120,000
|
$ -
|
$ 1,233,228
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Non-Cash Investing and Financing
Activities
|
|
|
|
|
|
Convert
Related Party Loan to Common Stock
|
$ 11,156,003
|
$ (656,003)
|
$ -
|
$ 10,500,000
|
|
Amortization
of Debt Discount Capitalized
|
$ 324,958
|
$ 50,153
|
$ -
|
$ 375,111
|
F-67
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
5.
CONCENTRATION
OF CREDIT RISK
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, 2018 and 2017,
uninsured cash and restricted cash balances were $4,125,113 and
$2,942,020, respectively.
For the
year ended December 31, 2018, 1 customer accounted for
approximately 70% of the Company’s property and development
revenue and the second customer accounted for approximately 30%.
For the year end December 31, 2017, 1 customer account for
approximately 76% of the Company’s property and development
revenue.
As of
December 31, 2018 and 2017, respectively, 1 customer accounted for
approximately 0% and 100% of
the Company’s property
and development accounts receivable.
For the
year ended December 31, 2018, 1 related party customer accounted
for approximately 80% of the Company’s digital transformation
technology revenue and the second customer accounted for
approximately 20%. For the year end December 31, 2017, 1 related
party customer accounted for approximately 70% of the
Company’s digital transformation technology revenue and the
second customer accounted for approximately 30%.
As of
December 31, 2018 and 2017, 1 related party customer accounted for
approximately 100% of the Company’s digital
transformation technology accounts receivable.
For the
year ended December 31, 2018, 1 customer accounted for
approximately 80% of the Company’s Other Business segment
revenue and the second customer accounted for approximately 20%.
For the year end December 31, 2017, 1 customer accounted for
approximately 99% of the Company’s Other Business segment
revenue.
As of
December 31, 2018, 1 customer accounted for approximately 76% of
the Company’s Other Business segment accounts receivable and
the second customer accounted for approximately 24%. For the year
end December 31, 2017, 3 customers accounted for approximately 90%
of the Company’s Other Business segment accounts
receivable.
No
other concentrations were identified within the Biohealth segment
for the years ended December 31, 2018 and 2017.
6.
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 Chief Executive Officer. 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.
F-68
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
The
following table summarizes the Company’s segment information
for the following balance sheet dates presented, and for the year
ended December 31, 2018 and December 31, 2017:
|
|
Property
Development
|
Digital
Transformation Technology
|
Biohealth
Business
|
Other
|
Total
|
|
Year ended December 31, 2018
|
|
|
|
|
|
|
Revenue
|
$ 17,675,034
|
$ 140,652
|
$ 2,532,852
|
$ 32,402
|
$ 20,380,940
|
|
Cost
of Sales
|
(14,777,546)
|
(74,129)
|
(682,026)
|
-
|
(15,533,701)
|
|
Gross
Margin
|
2,897,488
|
66,523
|
1,850,826
|
32,402
|
4,847,239
|
|
Operating
Expenses
|
(2,206,093)
|
(518,175)
|
(2,846,048)
|
(3,507,235)
|
(9,077,551)
|
|
Operating
Loss
|
691,395
|
(451,652)
|
(995,222)
|
(3,474,833)
|
(4,230,312)
|
|
Other
Income (Expense)
|
38,019
|
(51,508)
|
(6,283)
|
(3,143,735)
|
(3,163,507)
|
|
Net
Loss Before Income Tax
|
729,414
|
(503,160)
|
(1,001,505)
|
(6,618,568)
|
(7,393,819)
|
|
|
|
|
|
|
|
|
Year ended December 31, 2017 (As Restated)
|
|
|
|
|
|
|
Revenue
|
$ 7,191,507
|
$ 197,073
|
$ 2,879,542
|
$ 488,971
|
$ 10,757,093
|
|
Cost
of Sales
|
(6,565,491)
|
(67,552)
|
(894,559)
|
-
|
(7,527,602)
|
|
Gross
Margin
|
626,016
|
129,521
|
1,984,983
|
488,971
|
3,229,491
|
|
Operating
Expenses
|
(1,019,926)
|
(406,495)
|
(3,610,583)
|
(3,094,054)
|
(8,131,058)
|
|
Operating
Loss
|
(393,910)
|
(276,974)
|
(1,625,600)
|
(2,605,083)
|
(4,901,567)
|
|
Other
Income (Expense)
|
(44,566)
|
4
|
(130,333)
|
(2,377,025)
|
(2,551,920)
|
|
Net
Loss Before Income Tax
|
(438,476)
|
(276,970)
|
(1,755,933)
|
(4,982,108)
|
(7,453,487)
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
Cash
and Restricted Cash
|
$ 4,683,040
|
$ 118,044
|
$ 174,183
|
$ 532,931
|
$ 5,508,198
|
|
Total
Assets
|
43,786,046
|
136,211
|
753,492
|
4,026,706
|
48,702,456
|
|
|
|
|
|
|
|
|
December 31, 2017 (As Restated)
|
|
|
|
|
|
|
Cash
and Restricted Cash
|
$ 3,055,188
|
$ 95,038
|
$ 463,381
|
$ 523,434
|
$ 4,137,041
|
|
Total
Assets
|
54,317,387
|
276,073
|
644,287
|
4,941,225
|
60,178,972
|
F-69
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
7.
REAL
ESTATE ASSETS
As of
December 31, 208 and 2017, real estate assets consisted of the
following:
|
|
December
31,
2018
|
December
31,
2017
|
|
|
|
(As
Restated)
|
|
Construction
in Progress
|
$19,097,644
|
$27,349,033
|
|
Land
Held for Development
|
19,677,292
|
25,645,806
|
|
Total
Properties Under Development
|
38,774,936
|
50,516,409
|
|
|
|
|
|
Real
Estate Held for Sale
|
136,248
|
136,248
|
|
Total
Real Estate Assets
|
$38,911,184
|
$50,652,657
|
8.
PROPERTY
AND EQUIPMENT
As of
December 31, 2018 and 2017, property and equipment consisted of the
following:
|
|
December
31,
2018
|
December
31,
2017
|
|
|
|
|
|
Computer
Equipment
|
$175,992
|
$204,952
|
|
Furniture
and Fixtures
|
52,798
|
34,408
|
|
Vehicles
|
90,929
|
96,492
|
|
Subtotal
|
319,719
|
335,852
|
|
Accumulated
Depreciation
|
(216,294)
|
(213,284)
|
|
Total
|
$103,425
|
$122,568
|
The
Company recorded depreciation expense of $41,197 and $58,032 during
the years ended December 31, 2018 and 2017,
respectively.
9.
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 two 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 December 31, 2018 and 2017, amounts held
on deposit from NVR were $3,878,842 and $5,056,718,
respectively.
In
January 2015, Black Oak LP entered into a purchase agreement with
Lexington 26 LP (“Colina”), a building company located
in Texas. Upon execution of this agreement, Colina was required to
provide Black Oak LP with a deposit in the amount of $300,000. In
February 2018, the entire deposit of $300,000 was refunded to
Colina due to a mutual termination of the development plan. As of
December 31, 2018 and 2017, amounts held on deposit from Colina
were $0 and $300,000, respectively.
F-70
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
10.
BONDS
PAYABLE
As of
December 31, 2018 and 2017, bonds payable consisted of the
following:
|
|
December
31,
2018
|
December
31,
2017
|
|
SeD Home Ltd
Bonds
|
$1,500,000
|
$1,500,000
|
|
Less: Debt
Discount
|
(43,651)
|
(90,980)
|
|
Total bonds
payable
|
$1,456,349
|
$1,409,020
|
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, as facilitated by SeD. 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 Ltd pays the deficit.
As
December 31, 2018 and 2017 the principal balance was $1,500,000 and
$1,500,000, respectively. 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 and $90,980 on
December 31, 2018 and December 31, 2017,
respectively.
11.
NOTES
PAYABLE
As of
December 31, 2018 and 2017, notes payable consisted of the
following:
|
|
December
31,
2018
|
December
31,
2017
|
|
Union Bank
Loan
|
$13,899
|
$8,272,297
|
|
Australia
Loan
|
158,036
|
174,877
|
|
Less: Debt
Discount
|
-
|
(140,277)
|
|
Total notes
payable
|
$171,935
|
$8,306,897
|
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 amended 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.
F-71
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
As of December 31, 2018 and 2017, the principal balance was $13,899
and $8,272,297, respectively. As part of the transaction, the
Company incurred loan origination fees and closing fees, totaling
$480,947, which were recorded as debt discount and were amortized
over the life of the loan. The unamortized debt discount was $0 and
$140,277 on December 31, 2018 and December 31, 2017,
respectively.
On April 17, 2019, SeD Maryland Development LLC and Union Bank
terminated the agreement.
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, as well as, a pledged deposit of $35,276. This loan is
denominated in AUD and is provided personal guarantees amounting to
approximately $500,000 from our Chief Executive Officer, Chan Heng
Fai and Rajen Manicka, the Chief Executive Officer 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 6.03% to 6.35% per
annum for the year ended December 31, 2018 and from 5.55% to 6.06%
per annum for the year ended December 31, 2017. On September 7,
2017 the Australia Loan was amended to reduce the maximum borrowing
capacity to approximately $179,000 and on February 6, 2019 the
terms of the Australia Loan were further amended to reflect an
extended maturity date of March 31, 2020.
As
December 31, 2018 and 2017 the principal balance outstanding on the
Australia Loan was $158,036 and $174,877,
respectively.
Revere Note
On
October 7, 2015, Black Oak LP entered into a note agreement with
Revere High Yield Fund, LP ("Revere") for a principal amount of
$6,000,000 (the “Revere Note”). The Revere Note bears
interest at 13% and has a stated maturity date of October 7, 2016.
In connection with the Revere Note, Black Oak LP incurred
origination and closing fees of $524,233, which were recorded as
debt discount and amortized over the life of the note. The Revere
Note is secured by a deed of trust on the property and a limited
guarantee agreement with related parties of the Company. On October
1, 2016, the Revere Note was amended to reflect an extended
maturity date of April 1, 2017. In conjunction with this amendment,
the Company incurred legal fees of $109,285 which were recorded as
a debt discount and amortized over the extended life of the note.
On April 1, 2017, the Revere Note was again amended to extend the
maturity date to October 1, 2017. In conjunction with this
subsequent amendment, the Company incurred legal fees of $110,000
which were recorded as a debt discount and amortized over the
extended life of the note. As of October 1, 2017, the loan was
fully repaid. No outstanding principal or unamortized debt discount
remains as of December 31, 2018 or 2017.
F-72
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
12.
RELATED
PARTY TRANSACTIONS
Shares issued in Exchange Agreements with Chairman and
CEO
As discussed in Note 1, on October 1, 2018, Chan Heng Fai, the
founder, Chairman, and Chief Executive Officer of HFE, transferred
his 100% interest in Hengfai International, Heng Fai Enterprises
and Global eHealth to HF Enterprises Inc. in exchange for
8,500,000, 500,000 and 1,000,000 shares respectively of the
Company’s common stock.
Personal guarantees by directors
As of
December 31, 2018 and 2017, certain directors of the Company
provided personal guarantees amounting to approximately $5,000,000
to secure bonds issued by SeD Home Ltd and $500,000 to secure the
Australia Loan.
Purchase of subsidiary from
Chairman and CEO
On May 9, 2017, SeD Capital Pte. Ltd., a subsidiary of the Company,
entered into a sale and purchase agreement with Chan Heng Fai to
purchase the entire shares in Liquid Value Asset Management Pte.
Ltd. (“LVAM” f.k.a. Hengfai Asset Management Pte. Ltd,
“HFAM”) amounting to 100% of the issued and paid-up
share capital of LVAM. The consideration for the acquisition of
LVAM is $441,780. This was a transaction under common control and
consolidated 2017 financial statements were retrospectively
adjusted to reflect the operating results as of January 1,
2017.
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 DSSs’ development of a software application to be
included as part of DSSs’ 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 the Company’s Board of Directors
and, through his control of the Company’s majority
stockholder, the beneficial owner of a majority of the
Company’s common stock. Chan Heng Fai is also a member of the
Board of DSS and a stockholder of DSS.
The
Company recorded revenues from DSS of $115,135 for the year ended
December 31, 2018.
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, 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 15 – Discontinued
Operations.
F-73
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Notes Payable
During
the year ended on December 31, 2017, Chan Heng Fai, our founder,
Chairman and Chief Executive Officer lent non-interest loans of
$7,156,680, for the general operations of the Company. The loans
were interest free, not tradable, unsecured, and repayable on
demand. On October 15, 2018, a formal lending agreement between the
Singapore eDevelopment Ltd and Chan Heng Fai was executed. Under
the agreement, Chan Heng Fai provides a lending credit limit of
approximately $10 million for Singapore eDevelopment Ltd with an
interest rate of 6% per annum for the outstanding borrowed amount,
which commenced retroactively from January 1, 2018. During the year
ended on December 31, 2018, net borrowings were $1,190,476. As of
December 31, 2017 and 2018, the outstanding principal balance of
the Related Party Loan was $7,384,217 and $8,517,490, respectively.
As of December 31, 2018, the interest expense was $476,063 and
total amount was not paid but accrued. The loans are unsecured and
repayable on demand. Chan Heng Fai confirmed no demand for loan
repayment within one year.
On May
1, 2018, Rajen Manicka, the Chief Executive Officer of Holista
CollTech and Co-founder of iGalen Inc., provided a loan of
Malaysian ringgit (“RM”) 1,530,000 to iGalen Inc. (the
“2018 Related Party Loan”). The term of this loan is
ten years from the date of issuance, repayable in monthly
instalments beginning on June 1, 2018. The 2018 Related Party Loan
has an interest rate of 4.7% per annum. As of December 31, 2018,
the outstanding principal balance of the Related Party Loan is
$345,706 and included in the Notes Payable – Related Parties
balance on the Company’s Consolidated Balance Sheets. During
the year ended December 31, 2018 the Company incurred $33,411 of
interest expense.
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 Chief
Executive Officer to HF Enterprises Inc. in exchange for 8.5
million shares of the Company. Hengfai International holds 100% of
Hengfai Business Development Pte. Ltd. (“Hengfai Business
Development”), which holds 761,185,294 shares of SeD Ltd and
359,834,471 warrants. Both Hengfai International and Hengfai
Business Development are holding companies without any business
operations.
Heng Fai Enterprises Pte. Ltd.
On October 1, 2018, 100% of the ownership interest in Heng Fai
Enterprises Pte. Ltd. (“Heng Fai Enterprises”) was
transferred from Chan Heng Fai, our founder, Chairman and Chief
Executive Officer to HF Enterprises Inc. in exchange for 500,000
shares of the Company. Heng Fai Enterprises holds 2,480,000 shares
(14.23%) of Vivacitas Oncology Inc., a U.S.-based biopharmaceutical
company. Heng Fai Enterprises’ cost to purchase these
Vivacitas shares was $200,128, which was recorded as investment by
cost method as 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.
F-74
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Global eHealth Limited
On October 1, 2018, 100% of Global eHealth Limited (“Global
eHealth”) was transferred from Heng Fai Chan, 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
Black
Oak LP was obligated under the Limited Partnership Agreement (as
amended) to pay a $6,500 per month management fee to Arete Real
Estate and Development Company (Arete), a related party through
common ownership and $2,000 per month to American Real Estate
Investments LLC (AREI), a related party through common ownership.
Arete 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
December 31, 2017, 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, Black Oak LP paid Arete
$300,000 and AREI $30,000 to fulfil the commitments.
MacKenzie
Equity Partners, owned by Charles MacKenzie, a Director of the
Company's subsidiary SeD Intelligent Home Inc., has had a
consulting agreement with the Company since 2015. Per the terms of
the agreement, as amended on January 1, 2018, the Company pays a
monthly fee of $15,000 with an additional $5,000 per month due upon
the close of the sale to Houston LD, LLC. The Company incurred
expenses of $240,000 and $222,930 for the years ended December 31,
2018 and 2017, 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, 2018, and 2017 the outstanding balance of $60,000 and $0,
respectively.
Purchase of Minority Interest in Black Oak LP
On July 23, 2018, SeD Development USA, LLC, a wholly owned
subsidiary of SeD, entered into two partnership interest purchase
agreements (the “Black Oak Purchase Agreements”)
through which it purchased an aggregate of 31% of Black Oak LP for
$60,000. In addition, if and when Black Oak LP 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), Black
Oak LP shall pay Fogarty Family Trust II, one of two previous
partners of Black Oak LP, an amount equal to 10% of the net
reimbursement receivable proceeds received from HC17 and/or Aqua
Texas, Inc. that exceeds $15,000,000; 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 Black Oak LP through
its 68.5% limited partnership interest and its ownership of the
General Partner, 150 Black Oak GP, Inc, a 0.5% owner in Black Oak
LP. As a result of the purchase, the Company, through its
subsidiaries, now owns 100% of Black Oak LP.
F-75
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Consulting Services
A law
firm, owned by Conn Flanigan, a Director of SeD Intelligent Home,
performs consulting services for SeD Intelligent Home and its
subsidiaries. SeD Intelligent Home incurred expenses of $110,334
and $96,000 for the years ended 2018 and 2017, respectively. On
December 31, 2018 and 2017, SeD Intelligent Home and subsidiaries
owed this related party $8,000 and $18,000,
respectively.
Dr.
Rajen Manicka, the Chief Executive Officer of Holista CollTech and
Co-founder of iGalen Inc., performs consulting services for iGalen
Inc. iGalen Inc. incurred expenses of $240,000 and $240,000 for the
years ended 2018 and 2017, respectively. On December 31, 2018 and
2017, iGalen Inc. owed this related party $465,331 and $218,500,
which included both unpaid consulting fees and loan from him,
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 HFE. iGalen Inc.
provides use of its platform to collect sale revenue and payment of
expenses for these entities without service fees. On December 31,
2018 and 2017, iGalen Inc. owed $246,722 and $347,056, respectively
to iGalen Philippines and iGalen SDN.
Medi
Botanics Sdn Bhd, a subsidiary of Holista CollTech, is one of the
raw material and product suppliers of iGalen Inc. Dr. Rajen Manicka
is the controlling shareholder and the director of both Medi
Botanics Sdn Bhd and Holista CollTech. Medi Botanics Sdn Bhd
supplied $715,053 and $777,308 raw materials and products to iGalen
Inc. in the years ended on December 31, 2018 and 2017,
respectively. On December 31, 2018 and 2017, iGalen Inc. owed
$719,395 and $226,267, 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. 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% on a class of shares. During the years ended on December 31,
2018 and 2017, the management fee and performance fee charged to
the Fund were $5,709 and $4,888, respectively. On December 31, 2018
and 2017, the Fund owed $69,478 and $65,215,
respectively.
13.
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.
These shares have full voting rights. At December 31, 2018 and
2017, there were 10,001,000 common shares issued and
outstanding.
On
December 3, 2018, the Company sold 167,000 shares of HotApp
Blockchain to international investors with the amount of $83,500,
which was booked as addition paid-in capital. The Company held
500,988,889 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.
F-76
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
14.
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, 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
|
|
Reclassification Out of Accumulated Other Comprehensive
Income
|
||||
|
For Year Ended on December 31, 2018
|
|
Details
About Accumulated Other Comprehensive Income
Components
|
Amount
Reclassified from Accumulated Other Comprehensive
Income
|
Affected
Line Item in the Statement Where Net Income Is
Presented
|
|
|
|
|
|
Unrealized
Loss from Investment on Equity Securities
|
$ (1,961,835)
|
Accumulated
Deficit
|
|
Changes in Accumulated Other Comprehensive Income by
Component
|
|||||
|
For Year Ended on December 31, 2017
|
|
|
Unrealized Gains and Losses on Security Investment
|
Foreign Currency Translations
|
Total
|
|
Balance
at January 1, 2017
|
$ -
|
$ 1,116,362
|
$ 1,116,362
|
|
|
|
|
|
|
Other
Comprehensive Income
|
1,961,835
|
845,039
|
2,806,874
|
|
|
|
|
|
|
Balance
at December 31, 2017
|
$ 1,961,835
|
$ 1,961,401
|
$ 3,923,236
|
15.
DISCONTINUED
OPERATIONS
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, is primarily engaged in
engineering work for software development, as well as, a number of
outsourcing projects related to real estate and
lighting.
In
consideration for the sale of Guangzhou HotApps, DSS Asia issued to
HIP a two-year, interest free, unsecured, demand promissory note in
the principal amount of $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.
Chan Heng Fai is the Acting Chief Executive Officer Member
of the Board of Directors of HotApp Blockchain. He is also
the founder, Chairman, and Chief
Executive Officer of Singapore eDevelopment Limited, the
Chief Executive Officer and Chairman of DSS International, and a
significant shareholder and a member of the Board of Document
Security Systems Inc., a company which is the sole owner of DSS
International.
Lum Kan
Fai, a Member of the Board of Directors of HotApp Blockchain, is
also an employee of DSS International.
F-77
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
The
composition of assets and liabilities included in discontinued
operations was as follows:
|
|
December
31,
2018
|
December
31,
2017
|
|
Assets
|
|
|
|
Current
Assets
|
|
|
|
Cash
|
$9,268
|
$29,701
|
|
Deposit
and other receivable
|
5,049
|
5,337
|
|
Total
Current Assets
|
14,317
|
35,038
|
|
|
|
|
|
Fixed
assets, net
|
1,765
|
8,309
|
|
Total
Assets
|
$16,082
|
$43,347
|
|
|
|
|
|
Liabilities and
Stockholders' Deficit
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
Accounts
payable and accrued expenses
|
$174,606
|
$171,566
|
|
Total
Current Liabilities
|
174,606
|
171,566
|
|
|
|
|
|
Total
Liabilities
|
$174,606
|
$171,566
|
F-78
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
The
aggregate financial results of discontinued operations were as
follows:
|
|
Year Ended December
31,
2018
|
Year Ended December
31,
2017
|
|
Revenues
|
|
|
|
Project
fee-others
|
$7,325
|
$50,916
|
|
|
7,325
|
50,916
|
|
|
|
|
|
Cost of
revenues
|
4,527
|
13,964
|
|
|
|
|
|
Gross
profit
|
$2,798
|
$36,952
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
Research and
product development
|
$-
|
$169,853
|
|
Depreciation
|
6,544
|
26,277
|
|
General and
administrative
|
93,182
|
57,016
|
|
Total
operating expenses
|
99,726
|
253,146
|
|
|
|
|
|
(Loss) from
operations
|
(96,928)
|
(216,194)
|
|
|
|
|
|
Other income
(expenses):
|
|
|
|
Other sundry
income
|
415
|
-
|
|
Foreign exchange
gain (loss)
|
(236)
|
(4,824)
|
|
Total other income
(expenses)
|
179
|
(4,824)
|
|
|
|
|
|
Loss from
discontinued operations
|
$(96,749)
|
$(221,018)
|
F-79
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
16.
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, 2018 and December 31, 2017:
|
|
Amount
at
|
Fair
Value Measurement Using
|
Amount
at
|
||
|
|
Cost
|
Level
1
|
Level
2
|
Level
3
|
Fair
Value
|
|
December 31, 2018
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Investment
securities- Fair Value Option
|
$3,457,056
|
$2,656,240
|
$-
|
$-
|
$2,656,240
|
|
Investment
securities- Trading
|
16,016
|
15,701
|
-
|
-
|
15,701
|
|
Convertible
note receivable
|
50,000
|
-
|
-
|
78,723
|
78,723
|
|
Total
|
$3,523,072
|
$2,671,941
|
$ -
|
$78,723
|
$2,750,664
|
|
Investment
securities- Fair Value NAV as practical expedient
|
|
|
|
|
276,102
|
|
Total
Investment in securities at Fair Value
|
|
|
|
|
$3,026,766
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Investment
securities- Fair Value Option
|
$875,000
|
$3,720,000
|
$-
|
$-
|
$3,720,000
|
|
Investment
securities- Trading
|
16,016
|
16,016
|
-
|
-
|
16,016
|
|
Convertible
note receivable
|
50,000
|
-
|
-
|
50,000
|
50,000
|
|
Total
|
$941,016
|
$3,736,016
|
$ -
|
$50,000
|
$3,786,016
|
|
Investment
securities- Fair Value NAV as practical expedient
|
|
|
|
|
316,740
|
|
Total
Investment in securities at Fair Value
|
|
|
|
|
$4,102,756
|
Unrealized loss on investment securities for the year ended
December 31, 2018 was $3,366,958 and unrealized gain on investment
securities for the year ended December 31, 2017 was
$2,838,713.
F-80
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
For U.S. trading stocks, we use Bloomberg Market stock prices as
the share prices to calculate fair value. For overseas stock, we
use stock price from local stock exchange to calculate fair value.
The following chart shows details of the investment securities
under the fair value option and at cost on December 31, 2018 and
2017, respectively.
|
|
Share
price
|
Share
|
Market
Value
|
|
Fair
Value Option
|
12/31/2018
|
holding
|
12/31/2018
|
|
|
|
|
|
|
DSS (Related Party)
|
0.733
|
500,000
|
366,300
|
|
|
|
|
|
|
AMBS (Related Party)
|
0.020
|
20,000,000
|
400,000
|
|
|
|
|
|
|
Holista (Related Party)
|
0.041
|
46,226,673
|
1,889,940
|
|
|
|
|
|
|
|
|
Total
|
2,656,240
|
|
Cost
|
|
|
|
|
|
|
|
|
|
Vivacitas (Related Party)
|
N/A
|
2,480,000
|
200,128
|
|
|
Share
price
|
Share
|
Market
Value
|
|
Fair
Value Option
|
12/31/2017
|
holding
|
12/31/2017
|
|
|
|
|
|
|
DSS (Related Party)
|
1.800
|
500,000
|
900,000
|
|
|
|
|
|
|
AMBS (Related Party)
|
0.141
|
20,000,000
|
2,820,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
3,720,000
|
The company has 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.
F-81
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
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 year ended December 31,
2018:
|
|
Total
|
|
Balance at January
1, 2017
|
$50,000
|
|
Total gains and
losses Purchases, sales, and settlements
|
-
|
|
Balance at December
31, 2017
|
$50,000
|
|
Total gains and
losses
|
28,723
|
|
Purchases, sales,
and settlements
|
-
|
|
Balance
at December 31, 2018
|
$78,723
|
The
fair value of the Sharing Services
Convertible Note as of December 31, 2018 and December 31,
2017 was calculated using a Black-Scholes valuation model valued
with the following weighted average assumptions:
|
|
December
31,
2018
|
December
31,
2017
|
|
Dividend
yield
|
0.00%
|
0.00%
|
|
Expected
volatility
|
162.68%
|
162.68%
|
|
Risk free interest
rate
|
1.98%
|
1.98%
|
|
Contractual term
(in years)
|
4.77
|
5.77
|
|
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
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, 2018
|
|
|
|
|
AMBS
(Unaudited)
|
$3,480,000
|
$31,216,000
|
$(3,767,000)
|
|
Holista
|
$7,427,432
|
$2,863,760
|
$(2,203,360)
|
|
DSS
|
$15,279,786
|
$7,705,453
|
$1,464,969
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
AMBS
(Unaudited)
|
$10,238,000
|
$28,255,000
|
$(4,437,000)
|
|
Holista
|
$6,813,755
|
$3,330,243
|
$(3,174,268)
|
|
DSS
|
$17,430,777
|
$12,645,518
|
$(587,156)
|
F-82
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
17.
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.
Deferred tax assets and (liabilities) consist of the following at
December 31, 2018 and 2017:
|
|
December
31,
2018
|
December
31,
2017
|
|
Interest
Income
|
$(4,023,599)
|
$(2,957,688)
|
|
Interest
Expense
|
3,928,264
|
3,355,098
|
|
Depreciation
and Amortization
|
6,302
|
2,510
|
|
Management
Fees
|
404,342
|
276,741
|
|
Others
|
113,633
|
239,482
|
|
Net
Operating Loss
|
916,366
|
890,414
|
|
|
1,345,308
|
1,806,557
|
|
Valuation
Allowance
|
(1,345,308)
|
(1,806,557)
|
|
Net
Deferred Tax Asset
|
$-
|
$-
|
As of December 31, 2018, the Company has federal net operating loss
carry-forwards of approximately $3,800,000 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 years ended December
31, 2018 and 2017, the valuation allowance decreased by $461,249
and $142,206, respectively.
The expected tax expense (benefit) based on the statuary rate is
reconciled with actual tax benefit as follows:
|
|
2018
|
2017
|
|
US
Federal statutory rate
|
21%
|
21%
|
|
State
income tax rate
|
8.25%
|
8.25%
|
|
Federal
Benefit
|
(1.73)%
|
(1.73)%
|
|
Valuation
Allowance
|
(27.52)%
|
(27.52)%
|
|
Income
tax provision (benefit)
|
-%
|
-%
|
On
December 31, 2017, the Company’s US subsidiaries have federal
net operating loss carry-forwards of approximately $3,900,000,
which will begin to expire in 2037. The SeD Maryland net operating
loss carry-forwards of approximately $4,300,000 will begin to
expire in 2037 as well. 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, 2017, the valuation allowance decreased by $461,249
mainly because of the expected reduction in the of corporate tax
rate in the future.
F-83
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
The
federal income tax returns of the Company are subject to
examination by the IRS, generally for three years after they are
filed. The tax returns for the years ended December 31, 2018, 2017
and 2016 are still subject to examination by the taxing
authorities.
Income taxes – Other Countries
On
December 31, 2018 and 2017, foreign subsidiaries have tax losses
approximately $2,400,000 and $2,500,000, 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, 2018 and 2017.
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)
|
|
Statutory
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
|
$-
|
$-
|
$-
|
$-
|
As of December 31, 2017
|
|
SG
Companies
|
AU
Companies
|
HK
Companies
|
CN
Companies
|
Total
|
|
Cumulative
loss & other deferred tax assets before tax
|
$(12,541,616)
|
$(274,945)
|
$(2,065,306)
|
$(1,983,354)
|
$(16,865,221)
|
|
Statutory
tax rates
|
17.00%
|
30.00%
|
16.50%
|
25.00%
|
|
|
Tax
at the domestic tax rates applicable to profits in the countries
where the Company operates
|
$(2,132,075)
|
$(82,484)
|
$(340,775)
|
$(495,839)
|
$(3,051,172)
|
|
|
|
|
|
|
|
|
Tax
benefit - reverse accrued income tax in 2016
|
588,659
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments:
|
|
|
|
|
|
|
Deferred tax assets not recognized
|
$1,543,416
|
$82,484
|
$340,775
|
$495,839
|
$3,051,172
|
|
|
|
|
|
|
|
|
Income
tax expenses recognized in
profit or loss
|
$-
|
$-
|
$-
|
$-
|
$-
|
F-84
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
In
2016, $588,659 was recorded as a reserve for
debt restructuring. In 2017, after the completion of debt
restructure, no tax was required to pay and the reserves was
reversed.
18.
COMMITMENTS
AND CONTINGENCIES
Commercial leases
The
Company has entered into 6 commercial leases in Singapore, Hong
Kong, and China, relating to the rental of office premises. These
leases have tenure of between one and three years with a renewal
option. 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
escalate at a rate of 3% annually.
Annual
future minimum lease payments under these long-term building leases
are as follows:
|
For
the Years Ended December 31:
|
|
|
|
|
|
2019
|
$ 223,169
|
|
2020
|
147,859
|
|
2021
|
-
|
|
2022
|
-
|
|
Thereafter
|
-
|
|
Total
|
$ 371,028
|
Rent
expense for the years ended December 31, 2018 and 2017 was $283,432
and $272,716, respectively.
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, 2017, NVR has purchased 42
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.
F-85
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
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 will pursue the required zoning approval to change the
number of such lots from 85 to 121.
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. During 2018 and 2017, the Company incurred royalty
expenses of $ 223,632 and $ 279,818, respectively. The Exclusive
Sublicensing Agreement was terminated on January 8,
2019.
19.
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 expend their maximum efforts in the creation of
shareholder value. As of December 31, 2018 and 2017, there have
been no options granted.
F-86
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Stock Option plans SeD Ltd
On
November 20, 2013, SeD Ltd approved a Stock Option Plan (the
“2013 Plan”). Employees, executive directors, and
non-executive directors (including the independent directors) are
eligible to participate in the 2013 Plan.
The
following tables summarize stock option activity under the 2013
Plan for the years ended December 31, 2018 and 2017:
|
|
Options
for Common Shares
|
Exercise
Price
|
Remaining
Contractual Term
|
Aggregate
Intrinsic Value
|
|
Outstanding
as of January 1, 2017
|
2,918,667
|
$0.09
|
4.09
|
$-
|
|
Granted
|
-
|
$-
|
|
|
|
Exercised
|
-
|
$-
|
|
|
|
Forfeited,
cancelled, expired
|
(1,326,667)
|
$0.09
|
|
$-
|
|
Outstanding
as of December 31, 2017
|
1,592,000
|
$0.09
|
4.33
|
$-
|
|
Vested
and exercisable at December 31, 2017
|
1,592,000
|
$0.09
|
|
-
|
|
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
|
|
-
|
20.
SUBSEQUENT
EVENTS
The
Company evaluated the events and transactions subsequent to
December 31, 2018, the balance sheet date, through August 12, 2019,
the date the consolidated financial statements were available to be
issued.
Black Oak completed sale with Houston LD, LLC
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. On October 12, 2018, 150 CCM Black Oak, Ltd.
entered into an 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.
Development loan with M&T Bank
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 is 1.5% per annum on the face amount
of the L/C. Other standard lender fees will apply in the event L/C
is drawn down. The L/C Facility is not
a revolving loan, and amounts advanced and repaid may not be
re-borrowed. Repayment of the Loan Agreement is secured by a
$2,600,000 collateral fund and a Deed of Trust issued to the Lender
on the property owned by SeD Maryland.
F-87
HF Enterprises Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
Union Bank Loan Termination
On
April 17, 2019, SeD Maryland Development LLC and Union Bank
terminated the Revolving Credit Note. After termination, Union Bank
still held $602,150 as collateral for current outstanding L/Cs. On
June 10, 2019, the L/C collateral was released after all L/Cs are
transferred to the M&T Bank L/C Facility.
Cash Distributions
From
April to August, 2019, SeD Maryland Development LLC Board approved
three payment distribution plans to members and paid total $740,250
in distributions to the minority shareholder.
Exercised Warrants of Singapore eDevelopment
On July
31, 2019 500,000 warrants of Singapore eDevelopment were exercised
by an unrelated shareholder. After these 500,000 warrants were
exercised, the total number of outstanding ordinary shares of
Singapore eDevelopment was 1,101,956,707. The Company’s
ownership percentage of Singapore eDevelopment has changed from
69.11% to 69.08%.
Additional
Black Oak Impairment Recorded
As of
the June 30, 2019 reporting date, the Company determined that the
Black Oak project had additional impairment of approximately $3.9
million by using discounted estimated future cash
flows.
F-88
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
|
100,000
|
|
Transfer agent
fees
|
10,000
|
|
Miscellaneous
|
1,200
|
|
Total
|
$594,829
|
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.
II-1
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 761,185,294 ordinary shares of Singapore eDevelopment
Limited and warrants to purchase 359,834,471 ordinary shares of
Singapore eDevelopment Limited.
●
100% of the
ownership interest in Global eHealth Limited was transferred from
Chan Heng Fai to HF Enterprises Inc. in exchange for 1,000,000
shares of our common stock to be held by HFE
Holdings Limited. Global eHealth Limited, a Hong Kong
company, is the owner of 46,226,673 ordinary shares of Holista
CollTech Limited.
●
100% of the
ownership interest in Heng Fai Enterprises Pte. Ltd. was
transferred from Chan Heng Fai to HF Enterprises Inc. in exchange
for 500,000 shares of our common stock to be held by HFE
Holdings Limited. Heng Fai Enterprises Pte. Ltd., a
Singapore limited company, owns 2,480,000 shares of the common
stock of Vivacitas Oncology Inc.
The
shares of our common stock issued in the foregoing transactions
were not registered under the Securities Act of 1933 in reliance
upon the exemption from registration provided by Section 4(a)(2)
thereof, which exempts transactions by an issuer not involving any
public offering.
II-2
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 (included in Underwriting Agreement filed as
Exhibit 1.1).
|
|
|
Certificate
of Incorporation of HF Enterprises Inc.
|
||
|
Bylaws
of HF Enterprises Inc.
|
||
|
Second Amended and Restated Certificate of Incorporation of HF
Enterprises Inc.
|
||
|
Specimen
Common Stock Certificate.
|
||
|
Opinion
of Olshan Frome Wolosky 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.
|
||
II-3
|
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.
|
||
|
Code
of Conduct.
|
||
|
Code
of Ethics for the CEO and Senior Financial Officers.
|
||
|
Subsidiaries
of HF Enterprises Inc.
|
||
|
23.1
|
Consent
of Olshan Frome Wolosky 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.
|
||
|
24.1
|
Power
of Attorney (contained on signature page).
|
|
*
To be filed by
amendment.
(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.
II-4
SIGNATURES
Pursuant to the
requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the
City of Bethesda, State of Maryland, on December 23, 2019.
|
|
HF
ENTERPRISES INC.
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Chan Heng
Fai
|
|
|
|
|
Chan Heng
Fai
|
|
|
|
|
Chairman of the
Board and Chief Executive Officer
|
|
POWER OF ATTORNEY
KNOW
ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Chan Heng Fai and Michael
Gershon, and each of them, as his true and lawful attorneys-in-fact
and agents, with full power of substitution and re-substitution,
for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement and to
sign any registration statement for the same offering covered by
the Registration Statement that is to be effective upon filing
pursuant to Rule 462 promulgated under the Securities Act of
1933, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in
connection therewith and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the
requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the following persons in
the capacities and on the dates indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/
Chan Heng Fai
|
|
|
|
|
|
Chan
Heng Fai
|
|
Chairman
of the Board and Chief Executive Officer
(principal
executive officer)
|
|
December
23, 2019
|
|
|
|
|
|
|
|
/s/ Lui
Wai Leung Alan
|
|
|
|
|
|
Lui Wai
Leung Alan
|
|
Co-Chief
Financial Officer
(co-principal
financial and accounting officer)
|
|
December
23, 2019
|
|
|
|
|
|
|
|
/s/
Rongguo Wei
|
|
|
|
|
|
Rongguo
Wei
|
|
Co-Chief
Financial Officer
(co-principal
financial and accounting officer)
|
|
December
23, 2019
|
|
/s/ Ang
Hay Kim Aileen
|
|
|
|
|
|
Ang Hay
Kim Aileen
|
|
Director
|
|
December
23, 2019
|
|
|
|
|
|
|
II-5