PART II
INFORMATION TO BE INCLUDED IN REPORT
CAUTIONARY NOTE REGARDING FORWARD-LOOKING
STATEMENTS
This document contains
forward-looking statements. All statements other than statements of historical facts contained in this document, including statements
regarding our future results of operations and financial position, business strategy, and likelihood of success and other plans and objectives
of management for future operations, and future results of current and anticipated products are forward-looking statements. These statements
involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements
to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
In some cases, you can
identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,”
“plan,” “aim,” “anticipate,” “could,” “intend,” “target,” “project,”
“contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue”
or the negative of these terms or other similar expressions. The forward-looking statements in this document are only predictions. We
have based these forward-looking statements largely on our current expectations and projections about future events and financial trends
that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as
of the date of this document and are subject to a number of risks, uncertainties and assumptions (“Risk Factors”) no matter
whether these Risk Factors are described in this document or not. Forward-looking statements are subject to inherent risks and uncertainties,
some of which cannot be predicted or quantified and some of which are beyond our control. The events and circumstances reflected in our
forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking
statements. Moreover, new risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict
all risk factors and uncertainties that we may face. Except as required by applicable law, we do not plan to publicly update or revise
any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or
otherwise.
Item 1. Business
General development of
business.
UC
Asset LP partnership (“UC Asset,” the “Company,” the “Partnership”, “we,” or “us”)
is a limited partnership formed on February 01, 2016 under the laws of the State of Delaware. We invest in our portfolio investments
for the purpose of capital appreciation. According to our bylaws, the overwhelming majority of our portfolio investments must be allocated
to real estate in metropolitan areas. Our portfolio investments are owned through a number of subsidiaries.
Starting
from April 01, 2022, our principal office address has changed to 537 Peachtree Street NE, Atlanta, GA 30308, in downtown Atlanta area.
Our previous principal office address was 2299 Perimeter Park Drive, Suite 120, Atlanta, GA 30341.
Our partnership is managed
by our general partner, UCF Asset LLC under the terms of our partnership’s Limited Partnership Agreement.
General Partner
UCF Asset LLC is a limited
liability company formed on January 26, 2016, under the law of the State of Georgia. The principal office of our general partner is the
same as that of our partnership.
The individuals who, directly
or indirectly, own and control our general partner are “Larry” Xianghong Wu with an 80% interest and Jason Armstrong with
a 10% interest, with the other 10% held by the Company. Gregory Bankston was the managing member of our general partner. Starting from
May 01, 2023, Jason Armstrong has been hired as a manager to take over the managerial role of Greg Bankston.
UCF Asset LLC does not conduct
any business activities other than management of our partnership.
Except for limited conditions
defined in our limited partnership agreement, UCF Asset LLC, acting as general partner, has authority to exercise full management of
our partnership. Limited partners are passive investors and have limited power over our partnership and our general partner.
The general partner may be
removed, upon consent of the limited partners representing at least sixty-six and two-thirds percent (66 2/3%) of the outstanding common
units voting as a single class, where (i) the general partner has been convicted of fraud, embezzlement, or a similar felony by a court
of competent jurisdiction in a final judgment, or (ii) the general partner materially and willfully breaches our limited partnership
agreement.
The general partner may,
at any time, assign all or a portion of its partnership interest to any affiliate and, in the general partner’s sole discretion,
admit the affiliate as an additional or substitute general partner.
The general partner is paid
an annual management fee, in four payments made quarterly, at 2.0% of net asset under management of the partnership.
Business Operations
Our
business strategy is to invest in properties that are considerably undervalued or have considerable potential to appreciate in the near
future. This often involves innovative investment models, under which we will invest in emerging industries where the property value
is expected to experience dramatic increases, due to the emergence of new technologies, new economic factors, and/or new regulations.
Cannabis Property Investment
On September 29, 2021, the
Company announced that we will expand our portfolio into cannabis properties.
On May 01, 2023, we made
our first cannabis property investment in 50% ownership of a $3.2 million property in the State of Oklahoma. We hold this investment
through AZO Properties LLC(“AZO”) , a State of Oklahoma LLC, of which we own 50% membership interest that is non-managerial.
Starting from August 01,
2023, we are receiving $12,000 per month of distributions from AZO generated from our cannabis investment. We expect to continue receiving
distributions as such, but there is no assurance that this investment will continue to generate this amount or any amount of distributions.
Historic Landmark
In the third quarter of 2021,
the company, through its wholly-owned subsidiary Atlanta Landsight LLC (“ALS”), acquired the historic Rufus Rose House in
downtown Atlanta. The property is a federally registered historic building as it is the oldest residential property and the only standing
Victoria-style mansion in downtown Atlanta. After acquisition, ALS partially renovated the interior of the building. As of and by December
31, 2023, ALS held the Rufus Rose House and was applying for a special permit to renovate the whole building.
Other Investments
Historically, the Company
invested in residential, “short rental” properties and farmlands. The Company has exited most investments in these properties.
As of and by December 31, 2023, the Company still held a few of these properties, through the two wholly owned subsidiaries listed below.
Atlanta Landsight LLC (“ALS”) held a residential property and SHOC Holdings LLC (“SHOC”)
held an empty multiple family lot.
The Company purchased a piece
of farmland in Dallas TX for the consideration of approximately $800,000, in the year 2017, which the Company sold for $1,900,000, in
January 2023.
The Company also invests
less than 20% of its net equity in debt instruments of real estate financing.
Narrative description of business.
The business purpose of our
Partnership is to invest in real estate for capital appreciation.
Our
business model is to invest in properties that are undervalued or have considerable potential to appreciate in the near future. This
often involves innovative investment models which will either introduce a property to a new niche market, or facilitate new business
relationships surrounding a property, under which the value of the property may reach its maximum potential. It also requires visionary
thinking, to invest in properties before the market situation may experience dramatic change due to the emergence of new technologies,
new economic factors, and/or new regulations.
As of and by December 31,
2023, our major business focus has shifted to investing primarily in cannabis properties. To our knowledge, we are one of only four SEC
(“Security and Exchange Commission”)-reporting public companies investing in cannabis properties. The other three are Innovative
Industrial Properties, Inc (NYSE: IIPR), Power REIT (NYSE/American: PW), and NewLake Capital Partners, Inc (OTCQX: NCLP).
Cannabis Property Investment
On May 01, 2023, we invested
in a $3.2 million medical cannabis cultivation property located in Edmond, Oklahoma (the “Edmond Property”). Edmond is a
city in the Oklahoma City metropolitan area. We acquired a 50% equity ownership in this property by acquiring a 50% ownership interest
of AZO Properties LLC(“AZO”), a State of Oklahoma limited liability company, which holds the title of the property lien-free.
As of and by June 30, 2023, AZO has no other business operations other than owning and managing the Edmond Property.
Our 50% ownership in AZO
is non-managerial. As the non-managerial member, we are entitled to receive a preferred distribution at a “base” amount of
$12,000 per month, before the managing member will have the right to receive distribution or other compensation. The preferred distribution
is cumulative, in the sense that any unpaid dividend will be accumulated as debt by AZO to us, which will bear a market-rate interest.
After paying off the preferred distribution, AZO may pay a dividend to the managing member for a maximum amount which equals the amount
of preferred distribution (the “catch-up distribution”). The catch-up distribution payable to the managing member is non-cumulative,
in the sense that any unpaid catch-up distribution for a month shall be irrevocably waived and cancelled by the end of that month.
We began to receive the aforesaid
preferred distribution starting from August 2023.
Under the terms of the operating
agreement, the “base” amount of the preferred distribution will increase by a 5% compound rate, every 24 months after the
first 36 months. In other words, “base” amount of preferred distribution will become $12,600 per month starting from August
2026, and will become $13,230 per month starting from August 2028, and so on.
AZO may pay extra distributions
to us and the managing member, if it has net cash available in any given month after paying the preferred distribution and catch-up distribution.
Extra distributions shall be allocated evenly (50/50) between us and the managing member.
We paid $1 million cash and
issued 500,000 shares of Series B Preferred Units of UC Asset (“Series B”), in exchange for our 50% ownership of AZO. A significant
part of the $1 million paid will be used to expand the Edmond Property by adding approximately 50% of cultivation space. The 500,000
Series B shares are issued at the face value of $1.20 per share. Holders of our Series B are not entitled to receive any dividend from
UC Asset, and they have no voting power on the business matter of UC Asset.
Each Series B share may be
converted into one common unit of UC Asset. However, Series B is only eligible for conversion, when UC Asset will receive a permanent
increase of preferred distribution above the “base” amount. The number of Series B shares eligible for conversion is linked
to the amount of permanent increase of the preferred distribution. This conversion mechanism is designed to motivate the managing member
to improve the performance of AZO. The underlying principle is that managing member can only convert his Series B shares into common
shares when AZO outperforms and distributes more than the “base” amount of preferred distribution.
Cannabis Industry Overview:
Fast Growth and Its Potential
The cannabis industry, which
includes the cultivation, production, and sales of cannabis products for medical and/or recreational use, is a high-growth emerging industry
in the United States. While California legalized medical cannabis use as early as in 1996, it was only in the past decade that the legalization
of recreational use of cannabis products started at the state level. In November 2012, Colorado and Washington became the first two states
legalizing recreational cannabis use. Since then, the medical use of cannabis has been legalized in 40 states and the District of Columbia(“DC”),
and the recreational or adult-use of cannabis has been approved in DC and 22 states.
The legalized cannabis market
is worth $64 billion, nearly tripling over the last three years as legalization efforts swept the nation, according to a Coresight Research
report.
The legalized cannabis market
has the potential to grow further, if more states opt to legalize medical and recreational use in coming years. If federal legalization
should occur, this would remarkably increase the size of cannabis market, and would create a nation-wide market to allow interstate commerce
in cannabis products.
The public opinion, at this
moment, is strongly in favor of legalization of cannabis use. A Pew Research Center survey from October 2022 found that 88% of U.S. adults
support legalization of medical cannabis use, and 59% support legalization of recreational cannabis use.
Cannabis Property Investment
Cannabis property makes up
the majority of capital expenditures for cannabis farming businesses. Based on our own research, it accounts for 85%-95% of total capital
needed to start a cannabis farming business.
To date, the status of state-licensed
cannabis under federal law has limited the ability of state-licensed industry participants to fully access the U.S. banking system and
traditional financing sources. This creates a higher-than-average demand within cannabis industry for alternative capital options, including
demand for investments from companies like us.
The current economic and
legal status of cannabis property investment, we believe, creates opportunities for investors to purchase incoming-producing cannabis
properties at a higher cap-rate (in other words, at a lower average price) than if investors purchase other incoming-producing properties.
Uncertainties and Risks
in Cannabis Property Investment
Notwithstanding the foregoing
market opportunity and trends, and despite legalization at the state level, we continue to believe that the current state of federal
law creates significant uncertainty and potential risks associated with investing in regulated cannabis facilities. Further, there are
economic trends that may increase the risk of cannabis property investment.
Unit Pricing for Regulated
Cannabis Products
Many states continue to experience
significant declines in unit pricing for regulated cannabis products, with that decline more pronounced in certain states than in others,
which compresses operating margins for operators. As a result, certain regulated cannabis operators have recently announced that they
are consolidating operations or shuttering certain operations to reduce costs, which if prolonged, could have a material negative impact
on the demand for cannabis properties.
Inflation and Supply Chain
Constraints
The U.S. economy is experiencing
a sustained increase in inflation rates, which we believe is negatively impacting tenants of cannabis facilities. This inflation has
impacted costs for labor and production inputs for regulated cannabis operators, in addition to increasing costs of construction for
development and redevelopment projects. Ongoing labor shortages and global supply chain issues also continue to adversely impact costs
and timing for completion of these development and redevelopment projects, which in turn may result in cost overruns and delays in collecting
rent from cannabis properties.
Historic Landmark Investment
Historic landmark buildings
may present unique investment opportunities. Many historic landmark buildings only have their exterior appearance protected as historic
heritage, while the interior can be renovated and remodeled for commercial use. Some historic buildings were constructed as commercial
properties and have remained so. Thus, a historic building has standard commercial value, plus extra financial value which may be significant
from its historic heritage. For example, the Empire State Building is an office building as well as a historic landmark. Its tourism
revenue, which represents monetization of its historic value, almost equals its office rent revenue, while using much less floor space.
For many historic landmarks
not as prominent as the Empire State Building, monetizing historic value through tourism may not be practical since they will not attract
enough tourists. There may not be any obvious means to monetize their historic value. Therefore, those historic buildings are usually
sold at prices that only represent their commercial value. These are investment opportunities for investors who have plans to monetize
historic value.
We believe that the development
of new technology, such as block-chain based Non-fungible Tokens (“NFT”), can be used to monetize historic value of properties,
which would otherwise be difficult to.
In the beginning of the third
quarter of 2021, our wholly owned subsidiary Atlanta Landsight LLC (“ALS”) acquired the historic Rufus Rose House in downtown
Atlanta. We will partner with technology companies to issue NFTs based on certain derivative rights related to that property. As of the
date of filing, we have issued no NFTs.
Residential Property Investment
From the date of our incorporation
till to the end of 2019, our primary investment model was the so-called “house-flip” model, which was to acquire undervalued
residential properties in metropolitan areas, mostly Atlanta, GA, and then resell those, with or without renovations. These residential
investments were primarily conducted through our wholly owned subsidiary ALS.
This investment model was
attractive when there was an abundant supply of undervalued properties, as the residential property market hit its lowest point in 2012.
After 2018, investment opportunities suitable for this model decreased, and we stopped acquiring residential properties after August
2019. We exited most of our investments in residential property in 2020 and 2021. We sold one more residential property and one residential
lot in 2022. As of December 31, 2023, we had only one residential property in our portfolio. We have no plan to purchase additional residential
properties in the foreseeable future.
“Short Rental” property investment
Short rentals, through platforms
such as Airbnb (NASDAQ: ABNB) and Vrbo, have become trendy and are perceived as alternatives to conventional hotels. We set up a wholly
owned subsidiary SHOC holdings LLC (“SHOC “) in the year 2020, to invest in short-rent properties in downtown Atlanta. We
made our first investment in early 2021 purchasing a multiple-family property in downtown Atlanta, for $750,000. We planned to renovate
this property and then partner with a local Airbnb management company to operate it.
However, the regulatory environment
on short-rental business in downtown Atlanta experienced major changes in the year 2022, which caused delays on our renovation plan,
and made the prospect of operating a short-rental property less desirable.
On December 08, 2022, a fire
destroyed the property. Since the property was fully insured, this should not result in any significant diminishment in the value of
our portfolio. As a matter of fact, we received an insurance payment of $560,000, for the full value of above-ground structure of this
property in April 2023. After receiving the insurance payment, we still own the intact lot which has a historical book value of about
$370,000. As of April 2024, we are listing this intact lot for sale at the price of $409,000.
We may still purchase and
operate a few short-rental properties in the near future.
Other Investments
Debt Investment
Occasionally, UC Asset LP
may invest in private debts and other non-property-based opportunities. Also, UC Asset may provide seller financing when selling our
properties, which will result in UC Asset holding debt instruments. As of December 31, 2023 and December 31, 2022, respectively, UC Asset
LP held debt investments of approximately $781,000 and $779,000 in total. None of these debts are secured. Revenue from our debt investments,
mostly interest, was approximately $78,000 and $179,000 in 2023 and 2022, respectively. We plan to reduce our holdings in debt instruments
in the year 2024.
Farmland
In November 2016, we formed
UCF Development LLC (“UCFD”), a Texas limited liability company, and UCFD then acquired a 72-acre farm in Farmersville, Texas.
The total cost of acquisition was approximately $850,000. In October 2020, the farmland was sold for $1.30 million, and UCFD was then
dissolved. In 2022, we executed a buy-back option after the buyer defaulted on its payment. We bought back the land for $1.35 million
in September 2022, and then sold again it for $1.90 million in January 2023.
Competitive Position in the Industry and
Methods of Competition
1.
Unique Legal Structure
UC Asset is structured as
a Master Limited Partnership (MLP) rather than a real estate investment trust (REIT) in order to focus on long-term value growth. The
Company is among one of the very few real estate MLPs trading on US public markets.
This unique legal structure
empowers UC Asset to take a longer-term approach to real estate investments, because MLPs do not have to constantly make cash distributions
as REITs are required to do. Our partnership does not have a term limit. This means we may hold any investment indefinitely for the purpose
of capital appreciation, or we may exist any investment at any time. Such flexibility empowers us to potentially make better investment
decisions and to achieve better returns on investments.
2.
Innovative Investment Strategies
Real estate is widely considered
a “conventional” industry and has limited room for innovation. However, the advancement of new technologies, particularly,
information technology (“IT”), are redefining our living and working space and we believe that these developments will disrupt
conventional wisdom in the real estate industry.
The management of UC Asset
has background in IT and internet and has closely followed the application of new technologies in real estate. We will always look for
and will invest in companies which have innovative and disruptive business models in response to new technologies.
In recent years, we have
explored innovative business models, including the application of block-chain technology and non-fungible token (NFT) technology into
real estate development and operations, and the development of cannabis cultivation properties.
3.
Unique Strategy in Cannabis Property Investment
We are one of only four SEC-reporting
public companies investing in cannabis properties. According to their SEC-filings, the other three invest in a variety of cannabis properties,
in different states, and lease to different tenants. This, in our interpretation, represents a conventional wisdom of “diversification”
in investment.
We chose not to diversify
our investment in cannabis properties. We believe that since cannabis is an emerging industry, failure rate of businesses will be much
higher than in a matured industry. In fact, we believe that the majority of cannabis businesses may fail in a few years. Meanwhile, the
few “winners” will grow exponentially and seize a disproportionately large share of the market. Diversification, therefore,
is a less desirable strategy. Instead, investors should identify potential “winners” of cannabis farmers, to invest in cannabis
property operated by those farmers, and grow our portfolio when those farmers expand their operations. This is the strategy we are applying.
As far as we know, no other cannabis property investors on the public market are applying a strategy similar to ours.
Number of Employees
As of December 31, 2023,
the Company has two full-time employees, who are the two members of our General Partner, UCF Asset LLC. The Company has one part-time
employees namely an accountant.
Reports to Security Holders
The Company files regular
reports, i.e., 1-Ks and 1-SAs, under Regulation A - Conditional Small Issues Exemption from the Securities Act of 1933(the “Securities
Act”) on the EDGAR platform.
The SEC maintains an internet
site that contains reports, proxy and information statements, and other information regarding issuers that file electronically
with the Commission. The address of that site is http://www.sec.gov
Specifically, our reports can be found at:
https://www.sec.gov/edgar/browse/?CIK=1723517
Item 2.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
You should read the following
discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes
and other financial information included elsewhere in this Annual Report. Some of the information contained in this discussion and analysis
or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes
forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results described
in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
Despite being a slow year
for real estate in general, we performed better than the year before and made a moderate net profit of approximately $0.03 per share.
For most part of the year
2023, the whole real estate industry slowed down due to higher interest rate. According to a report published in January 2024, by the
National Association of Realtors, existing U.S. home sales totaled $4.09 million in 2023, an 18.7% decline from 2022. That is the weakest
year for home sales since 1995 and the biggest annual decline since 2007, which was the start of the housing slump of the late 2000s.
However, we managed to sell
our Dallas farmland for a price of $1.9 million in the beginning of the year, booking almost half million gross profit from this single
deal. We could not make more sales for the rest of the year.
Our investment in cannabis
property became successful for the year of 2023. As of April 2023, we are receiving an annualized distribution of 14.4% from our cannabis
investment. However, the overall capital market environment is not in favor for investing in cannabis industry, which has limited our
ability to raise more capital and expand our portfolio of cannabis properties. According to Viridian Capital Advisors (“Viridian”),
total equity and debt capital raising for public and private cannabis companies in North America decreased by 68% in 2022 versus 2021.
That situation did not improve during the year 2023.
Material Changes in Financial Statements
Change of Annual Revenue
and Gross Profit
Total revenue increased from
approximately $83,600 in the fiscal year 2022, to approximately $1.94 million in the fiscal year 2023. This increase was primarily the
result of i) increase of our sales of real estate from approximately $0.68 million in the year 2022 to $1.81 million in the year 2023;
ii) change of our revenue from dealing with marketable securities, which we had an unrealized gain/loss of negative $750,000 in the year
2022, and a realized gain/loss of approximately negative $68,000 in the year 2023; iii) changes of gains from settlement of loans, from
a negative $39,100 in the year 2022 to a positive 108,210 in the year of 2023; and iv) decrease of our income from interests.
| | |
2023 | | |
2022 | |
| INCOME | |
| | |
| |
| Sales of real estate | |
$ | 1,813,600 | | |
$ | 679,791 | |
| Rental income | |
| 11,800 | | |
| 13,500 | |
| Unrealized gain on marketable securities | |
| - | | |
| (750,000 | ) |
| Realized gain on sales of marketable securities | |
| (67,749 | ) | |
| - | |
| Gains from settlement of loans | |
| 108,120 | | |
| (39,100 | ) |
| Interest income | |
| 78,843 | | |
| 179,383 | |
| Total income | |
$ | 1,944,614 | | |
$ | 83,574 | |
| Total Cost of sales | |
$ | 1,350,250 | | |
$ | 690,302 | |
| Gross Margin | |
$ | 594,364 | | |
$ | (606,728 | ) |
Overall, the real estate
market was slow for both year of 2022 and 2023, due to higher interest rates. In either year, we sold only one property. Increase of
sales of real estate reflects the fact that the property we sold in the year 2023 was of much higher value than the property we sold
in 2022.
Our realized gain/loss in
securities and our gains from settlement of loans was the result of the same one deal, under which we traded a debt note held against
us by Puration Inc (OTC: PURA), for us to cancel 100 million restricted shares of PURA held by us. Since the market value of those shares
was lower than the amount of the debt, we had a gain from the settlement.
Our cost of sales remained
proportional to our sales. As a result, our gross profit from real estate sales was proportionally larger in the year 2023 than the previous
year, since we had larger amount of sales.
The increase of profit from
real estate sale, in combination with the improvement of dealing with debts and marketable securities, resulted in a substantial improvement
of our gross margin, from a negative $606,728 to a positive $594,364.
Change of Operating Expenses
| | |
2023 | | |
2022 | |
| OPERATING EXPENSES | |
| | |
| |
| Management fees | |
$ | 127,784 | | |
$ | 188,316 | |
| Professional fees | |
| 140,284 | | |
| 174,485 | |
| Other operating expenses | |
| 111,305 | | |
| 263,291 | |
| Interest expense | |
| 2,185 | | |
| 29,362 | |
| Depreciation | |
| 17,114 | | |
| (17,451 | ) |
| Total operating expenses | |
$ | 398,672 | | |
$ | 638,003 | |
For the year of 2023, we
continued committing us to reduce our operating expenses, and had successfully cut our expenses across the board. Overall, we reduced
our operating expenses by approximately 38%, from approximately $638,000 to approximately $399,000. We believe that this reflects the
efficiency of our management in cost control.
In particular, our management
team reduced their management fee by approximately 32%, from approximately $188,000 in the year 2022, to approximately $128,000 in the
year 2023.
Change of Profit Per Unit
For the fiscal years of 2023
and 2022, our gross profit is approximately $594,000 million and ($607,000) respectively. The following table demonstrates our gross
profit and net income after allocated to common units.
| Period end | |
Gross Profit | | |
Gross Profit / Common
Unit
* | | |
Net Income /
Common
Unit * | | |
Dividend | |
| December 31, 2023 | |
$ | 594,364 | | |
$ | 0.11 | | |
$ | 0.03 | | |
$ | - | |
| December 31, 2022 | |
$ | (606,728 | ) | |
$ | (0.11 | ) | |
$ | (0.23 | ) | |
$ | - | |
| * | Based on the
fact that preferred units shall not be allocated any gross profit or net income for the concerned
fiscal years. |
Liquidity and Capital Resources
Cash Flows
As an investor, we do not
manage the daily operation of any of our portfolio property, except for some insignificant and non-material operative activities. We
intend to form partnerships with third party operators/managers to conduct daily operations. We usually require the third-party to bear
all operating cost, except for capital spendings which will increase the value of properties.
Meanwhile we apply a disciplined
investment strategy, under which we will usually make new investments only when we have cash available.
Under such a business model,
we don’t usually have a significant amount of cash commitments, except for 1) management fees and professional fees, which are
usually stable and predictable period-to-period; and 2) due amount of our debt financing.
The following table shows a summary of cash flows
for the periods set forth below:
| | |
Fiscal Year Ended
December 31,
2023 | | |
Fiscal Year Ended
December 31,
2022 | |
| Net cash provided by (used in) operating activities | |
$ | 599,920 | | |
$ | (637,878 | ) |
| Net cash provided by (used in) investing activities | |
$ | (310,519 | ) | |
$ | 94,935 | |
| Net cash provided by (used in) financing activities | |
$ | (350,000 | ) | |
$ | (544,473 | ) |
| Cash at beginning of period | |
$ | 168,955 | | |
$ | 1,256,372 | |
| Cash at end of period | |
$ | 108,356 | | |
$ | 168,955 | |
Net Cash (Used in) Provided
in Operating Activities
Net cash provided by (used
in) operating activities changed from $(637,878) to $599,920, mostly reflecting the improvement in our operating profitability.
Net Cash (Used in) Provided
by Investing Activities
Our net cash provided by
investing activities is primarily the result of cash received from divesting our existing portfolio assets (including properties and
loans), reduced by cash used for investing in new portfolio assets. In the year 2023, we received more cash from divesting our portfolio
assets than in the year of 2022, and we also invested more cash into portfolio assets, which resulted in a net cash flow of negative
$310,519 in the year 2023, in comparison to the net cash flow of positive $94,935 in the year of 2022.
Net Cash Provided by Financing
Activities
For the fiscal year ended
December 31, 2022, net cash provided by financing activities was primarily the result of distributing a total amount of approximately
$544,000 dividend for the previous year.
For the fiscal year ended
December 31, 2023, net cash provided by financing activities was primarily the result of paying off a construction loan of $400,000,
plus borrowing a private loan of $50,000.
Commitments and Contingencies
We pay quarterly management
fees to our general partner, UCF Asset LLC. Management fees are calculated at 2.0% of assets under management (AUM) as of the last day
of our preceding fiscal year. The value of AUM was determined using fair market value (FMV) accounting, according to the bylaw (limited
partnership agreement) of the Company. Starting from the year 2023, we have changed the method of calculating AUM to historical cost,
with the intention to reduce management fees. As a result, management fees were reduced by approximately 32%, from approximately $188,000
in the year 2022, to approximately $128,000 in the year 2023.
We used to lease space from
an unaffiliated third party at 2299 Perimeter Park Drive, Suite 120 in Atlanta, GA. We have terminated the lease and will no longer pay
any rent after April 2022.
In February 2023, we paid
off a construction loan of $400,000 and became debt free. In November 2023, we borrowed a private loan of $50,000.
In the year 2022, the Company
distributed a dividend of $0.10 per common unit for the year 2021. The total amount of dividend was approximately $548,500 based on the
number of common units currently outstanding.
Capital Resources
Since our inception, we have
funded our operations primarily through the sale of limited partner interests sold in private placements, including through three rounds
of private placement prior to our public offering. Our Initial Public Offering pursuant to the requirements of Regulation A plus was
closed on October 12, 2018. The net proceeds of capital raised in the offering was approximately $1.15 million.
Since March 2020, we have
not raised any capital. The Company bought back shares from a number of investors for a total amount of approximately $90,000, in the
year 2021. The Company also redeemed $300,000 series-A preferred shares in July 2022. We made a $544,000 distribution in the year 2022.
Altogether, our available capital has decreased by $934,000 since the year 2021.
The Company may raise more
capital through private or public offering of its partnership interests. There are no guarantees, however, that the Company will be able
to do so.
Debt financing
As of and by December 31,
2023, our outstanding debt includes a private loan facility of $50,000 from a non-affiliated individual. It carries a gross interest
of 4.5%.
Trend information
The following discussion
covers some significant trends or uncertainties affecting our business during the reporting period, in our industry, or to the macro
economy, which had impacts on our continuing operations, particularly on our portfolio investments.
Interest Rate May Remain
at Relatively High Level
The Federal Reserve has raised
interest rate multiple times since the year 2021. High interest rate has slowed down the real estate market. For most part of the year
2023, the whole real estate industry slowed down due to higher interest rate. According to a report published in January 2024, by the
National Association of Realtors, existing U.S. home sales totaled $4.09 million in 2023, an 18.7% decline from 2022. That is the weakest
year for home sales since 1995 and the biggest annual decline since 2007, which was the start of the housing slump of the late 2000s.
As of and by April 2024, it was widely believed that the Federal Reserve may only cut the interest rate one time in the year 2024. In
other words, interest rate will likely remain at relatively high level in the foreseeable future.
Unit Pricing for Regulated
Cannabis Products
Many states continue to experience
significant declines in unit pricing for regulated cannabis products, with that decline more pronounced in certain states than in others,
which compresses operating margins for operators. As a result, certain regulated cannabis operators have recently announced that they
are consolidating operations or shuttering certain operations to reduce costs, which if prolonged, could have a material negative impact
on operators’ demand for cannabis properties.
Inflation and Supply Chain
Constraints
The U.S. economy is experiencing
a sustained increase in inflation rates, which we believe is negatively impacting tenants of cannabis facilities. This inflation has
impacted costs for labor and production inputs for regulated cannabis operators, in addition to increasing costs of construction for
development and redevelopment projects. Ongoing labor shortages and global supply chain issues also continue to adversely impact costs
and timing for completion of these development and redevelopment projects, which in turn may result in cost overruns and delays in collecting
rent from cannabis properties.
Critical accounting estimates
We have no critical accounting
estimates for the foreseeable future.
Item 3. Directors and Officers
The operation of our partnership
is managed by our general partner. As of and by December 31, 2023, we do not have any directors, officers, or significant employees.
The following are key managers of our general partner and their respective ages and positions as of December 31, 2023. As the member
of majority interest of our general partner, Dr. Wu contributes his time and services to our general partner as an owner rather than
an employee.
| Name |
|
Position |
|
Age |
|
Since |
| Jason Armstrong |
|
Managing Member |
|
50 |
|
December 2023 |
| “Larry” Xianghong Wu |
|
Member of Majority Interest |
|
54 |
|
formation in January 2016 |
Jason Armstrong had
worked as a contracted project director for UC Asset since the year 2021. He is the founder and manager of EES Contracting, which he
started in 2004 as a site development company, and expanded into a licensed new construction and high-end remodeling business in the
year 2008. Mr. Armstrong also worked as a project management consultant to multiple real estate investment groups between 2012 and 2018,
assisting in creating budgets, schedules, and handling accounting on construction projects both in the metro Atlanta area and across
the country.
Dr. “Larry”
Xianghong Wu has been the member of majority interest of UCF Asset LLC since its formation in January 2016. Between 2012
and 2016, he was the founder and chief executive officer of Shanghai Heqing Asset Management LP, a limited partnership based in Shanghai,
China, focused on Chinese investments in the U.S., particularly real estate. Between 2011 and 2012, he was chief executive officer of
EHE Capital, a Chinese PE fund managing a portfolio of approximately $1 billion from 2011, mostly in real estate. Between 2009 and 2011,
he worked at Cisco Systems, Inc. as a vice president in charge of Cisco’s strategic business transformation in China. Dr. Wu has
served as policy advisor and counselor to the Chinese government and officials. He also served as a Board Member of Finance and Investment
of the Capital Club in China from 2009 to 2013.
Prior to April 2023, Mr.
Greg Bankston was our managing member in the position currently held by Mr. Jason Bankston.
Gregory Bankston has
served as managing member of UCF Asset LLC since its formation in January 2016. Between 2013 and 2016, he founded and operated Real Estate
Butlers. Since 2010, he was a co-owner of Bankston Brokers, formerly known as Bankston Realty. Mr. Bankston is a member of Atlanta Board
of Realtors, the Georgia Association of Realtors, and the National Association of Realtors.
In April 2023, Mr. Bankston
quit his position as a managing member for personal reasons, but he remains a member of UCF Asset LLC. In April 2023, Mr. Armstrong was
hired as manager of UCF Asset LLC. In December 2023, Mr. Bankston transfer his membership interest in UCF Asset LLC to Mr. Armstrong,
making Mr. Armstrong the managing member, while Mr. Bankston is no longer a member of UCF Asset LLC.
Audit Committee
Our Company is a limited
partnership and is not required to establish a board of directors. However, we were still required by the rules of OTCQX, on which we
used to be quoted, to set up an Audit Committee. In February 2019, the Company resolved to establish an Audit Committee. Starting from
July 01, 2019, we have admitted two Audit Committee members who both are independent.
Starting from the beginning
of 2022, the Company changed its quoting platform from OTCQX to OTCQB. As a result, the Company was no longer required to have an Audit
Committee. However, the Company decided to keep the Audit Committee with the expectation that we might up-list to a major exchange soon.
In September 2022, one of
the two members of our Audit Committee, Mr. Harris Miller, passed away. This unfortunate event left us with inadequate members to serve
on the Audit Committee. Consequently, we have dissolved and terminated our Audit Committee.
Management Compensation
The operation of our partnership
is managed by our general partner, UCF Asset LLC. Our partnership does not have any directors or officers who receive compensation other
than the Audit Committee members. Our Audit Committee members, either before or after the dissolution of Audit Committee, did not receive
any compensation for the year 2022.
We pay management fees quarterly
to our general partner. Management fees are calculated at 2.0% of the fair market value of assets under management as of the last day
of our preceding fiscal year. The fee is paid quarterly. Management fees for the fiscal year 2023 and 2022 were approximately $128,000
and $188,000, respectively. In addition, the General Partner will receive 20% of all distributions the Company makes above a “hurdle
rate”. See “Distributions”.
In addition to the management
fee, we reimburse the general partner for standard expenses it may incur in managing the Company in accordance with our limited partnership
agreement. These reimbursable expenses include: organizational expenses; fees for accountants, attorneys, auditors, and other professionals;
expenses associated with partnership taxation reporting; operational expenses including insurance, valuation reports, and real estate
brokerage commissions; and government filing fees and costs.
Item 4. Security Ownership of Management and
Certain Security holders
As of and by the date of
December 31, 2022, there were no unit holders to our knowledge that beneficially owns more than 5% of our common units except for one
investor who owned approximately 5.37%. The managing member of UCF Asset, LLC, Gregory Bankston, beneficially owns 11,113 of our common
units (0.20%), and the member of majority interest of our general partner (“Larry” Xianghong Wu,) beneficially owns 167,953
of our common units (3.06%). The general partner is entitled to 20% of all distribution to be made by the Company after the common unit
holders receive a return equal to the Company audited book value See “Distribution”.
As of the by the date of
December 31,2023, the security ownership of certain beneficial owners and management of our company is listed as below:
| Beneficial Owner | |
Title | |
Security | |
Amount | | |
Percentage
of Same
Type of
Securities | |
| Ying Huang | |
None | |
Common Units | |
| 302,667 | | |
| 5.52 | % |
| Officers and Directors: | |
| |
| |
| | | |
| | |
| “Larry” Xianghong Wu | |
Majority Owner of General Partner | |
Common Units | |
| 172,953 | | |
| 3.06 | % |
| Jason Armstrong | |
Managing Member of General Partner | |
- | |
| - | | |
| - | |
Item 5. Interest of Management and Others in
Certain Transactions
None for the reporting period.
Item 6. Other information
Issuance of 500,000 Series B Preferred Units
In connection with the acquisition
of our fifty percent ownership in an Oklahoma City cannabis property, we issued 500,000 shares of our series B preferred units (“Series
B”) to the seller as part of the purchase price. Each Series B share carries a face value of $1.20, and therefore the Series B
shares issued to the seller have a total face value of $600,000. Each share of Series B may be converted into one share of common units,
subject to certain terms and conditions. The certificate of series B preferred units, which contains the terms and conditions of conversion
among other matters, is filed along with our Form 1-SA dated August 21, 2023, as Exhibit 3.4 to that report, of which the link is provided
as Exhibit 3.4 to this report.
Settlement of Regulatory Action against the
Company by the State of Washington
On February 27, 2023, the
Department of Financial Institutions (“DFI”), State of Washington issued a Statement of Charges and Notice of Intent to Enter
Order of Cease and Desist, to Impose Fines and to Charge Costs (the “Statement of Charges”) against the Company and Mr. Xianghong
Wu. In the Statement of Charges, DFI stated that, during our Initial Public Offering (“IPO) , which was conducted under Regulation
A plus (“Reg A+”) and was qualified at the federal government level by the Security and Exchange Commission (“SEC”)
, and which occurred in the year 2018, our Company failed to register the IPO with the State of Washington and made one sale in the State
of Washington, and hence violated the statue RCW.21.20.140 of the State of Washington.
On November 03, 2023, DFI
of State of Washington, the Company and Mr. Xianghong Wu reached a Consent Order, which settled all the matters in the Statement of Charges,
on a “neither admit nor deny” basis, in exchange for the Company and Mr. Xianghong Wu to pay a fine of $5,000 each. Further,
the Consent Order states that, except in any action by the Securities Division of the Washington State DFI, the Consent Order is not
intended to be used as an admission of or evidence of any fault, omission or liability of either UC Asset LP, Xianghong Wu, or any of
their agents and employees, in any civil, criminal, arbitration, or administrative proceeding.
Item 7. Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting
Firm
To the shareholders and the board of directors
of UC Asset, LP.
Opinion on the Financial Statements
We have audited the accompanying balance sheet
of UC Asset, LP (the “Company”) as of December 31, 2022 and the related statement of operations, stockholders’ equity,
and cash flow, for the period ended December 31, 2022 and the related notes and schedules (collectively referred to as the “financial
statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company
as of December 31, 2022, and the results of its operations and its cash flows for year ended December 31, 2022 in conformity with generally
accepted accounting principles in the United States of America.
Basis for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s 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 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 audit, 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 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 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 financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Bolko & Company
We have served as the Company’s auditor
since 2023.
Boca Raton,
Bolko & Company
Certified Public Accountant
UC ASSET, LP
Consolidated Balance Sheets
December 31,
| | |
2023 | | |
2022 | |
| ASSETS | |
| | |
| |
| CURRENT ASSETS | |
| | |
| |
| Cash and cash equivalents | |
$ | 108,356 | | |
$ | 168,955 | |
| Insurance claim receivable | |
| - | | |
| 560,000 | |
| Marketable equity securities held for sale | |
| - | | |
| 100,000 | |
| Investment in General Partner | |
| 120,000 | | |
| - | |
| Real estate held for sale | |
| 1,302,765 | | |
| 1,645,465 | |
| Loans to third parties | |
| 218,000 | | |
| 779,148 | |
| Convertible loans to third parties | |
| 463,666 | | |
| | |
| Loans to related parties | |
| 100,000 | | |
| 10,544 | |
| Prepaid expenses and other assets | |
| 18,294 | | |
| 22,148 | |
| Total current assets | |
| 2,331,081 | | |
| 3,286,260 | |
| | |
| | | |
| | |
| PROPERTY AND EQUIPMENT | |
| | | |
| | |
| Land | |
| 2,200,000 | | |
| - | |
| Property and equipment, net | |
| 863,425 | | |
| 833 | |
| Real estate held for rental, net of accumulated depreciation | |
| - | | |
| 472,711 | |
| Total property and equipment | |
| 3,063,425 | | |
| 473,544 | |
| | |
| | | |
| | |
| LONG-TERM ASSETS | |
| | | |
| | |
| Real estate held for renovation/remodel | |
| 2,041,690 | | |
| 1,838,719 | |
| Total long-term assets | |
| 2,041,690 | | |
| 1,838,719 | |
| | |
| | | |
| | |
| Total Assets | |
$ | 7,436,196 | | |
$ | 5,598,523 | |
| | |
| | | |
| | |
| LIABILITIES AND PARTNERS’ CAPITAL | |
| | | |
| | |
| Accounts payable and accrued expenses | |
$ | 1,213 | | |
$ | 1,213 | |
| Short-term note payable | |
| 50,000 | | |
| 208,120 | |
| Mortgage loan | |
| - | | |
| 400,000 | |
| Total Liabilities | |
| 51,213 | | |
| 609,333 | |
| Partners’ Capital: | |
| | | |
| | |
| Series B preferred units, 500,000 and 0 issued and
outstanding at December 31,2023 and 2022 | |
| 600,000 | | |
| - | |
| Common units 5,485,025 and 5,485,025 issued and outstanding at December 31,2021
and 2020 | |
| 5,270,252 | | |
| 5,079,357 | |
| Units held in treasury | |
| (90,167 | ) | |
| (90,167 | ) |
| Minority interest in consolidated subsidiary | |
| 1,604,898 | | |
| - | |
| | |
| | | |
| | |
| Total Partner’s Capital | |
| 7,384,983 | | |
| 4,989,190 | |
| | |
| | | |
| | |
| Total Liabilities and Partners’ Capital | |
$ | 7,436,196 | | |
$ | 5,598,523 | |
The accompanying notes are an integral part of
the consolidated financial statements
UC ASSET, LP
Consolidated Statements of Operations
Year ended December 31,
| | |
2023 | | |
2022 | |
| INCOME | |
| | |
| |
| Sales of real estate | |
$ | 1,813,600 | | |
$ | 679,791 | |
| Rental income | |
| 11,800 | | |
| 13,500 | |
| Unrealized loss on investment in marketable equity securities | |
| - | | |
| (750,000 | ) |
| Realized loss on sale of marketable equity securities | |
| (67,749 | ) | |
| - | |
| Gain (loss) on settlement of loan | |
| 108,120 | | |
| (39,100 | ) |
| Interest income | |
| 78,843 | | |
| 179,383 | |
| | |
| | | |
| | |
| Total income | |
| 1,944,614 | | |
| 83,574 | |
| COST OF SALES | |
| | | |
| | |
| Cost of sales | |
| 1,350,250 | | |
| 690,302 | |
| | |
| | | |
| | |
| Total cost of sales | |
| 1,350,250 | | |
| 690,302 | |
| | |
| | | |
| | |
| Gross Margin | |
| 594,364 | | |
| (606,728 | ) |
| OPERATING EXPENSES | |
| | | |
| | |
| Management fees | |
| 127,784 | | |
| 188,316 | |
| Professional fees | |
| 140,284 | | |
| 174,485 | |
| Other operating expenses | |
| 111,305 | | |
| 263,291 | |
| Interest expense | |
| 2,185 | | |
| 29,362 | |
| Depreciation | |
| 17,114 | | |
| (17,451 | ) |
| | |
| | | |
| | |
| Total operating expenses | |
| 398,672 | | |
| 638,003 | |
| | |
| | | |
| | |
| Net income before minority interest in consolidated subsidiary | |
| 195,692 | | |
| (1,244,731 | ) |
| | |
| | | |
| | |
| Minority interest in consolidated subsidiary | |
| (4,898 | ) | |
| - | |
| | |
| | | |
| | |
| Net income | |
$ | 190,794 | | |
$ | (1,244,731 | ) |
| | |
| | | |
| | |
| Net income per unit | |
$ | 0.03 | | |
$ | (0.23 | ) |
| Weighted average units outstanding | |
| 5,485,025 | | |
| 5,485,025 | |
The accompanying notes are an integral part of
the consolidated financial statements
UC ASSET, LP
Consolidated Statement of Partners’ Capital
| | |
Limited
Partners
Common
Units | | |
Limited
Partners
Preferred
A Units | | |
Limited
Partners
Preferred
B Units | | |
Limited
Partners
Common
Units
Amount | | |
Limited
Partners
Common
Units Held
in Treasury | | |
Limited
Partners
Preferred A
Units
Amount | | |
Limited
Partners
Preferred
B Units
Amount | | |
Minority
Interest in
Consolidated
Subsidiary | | |
Total
Partners’
Equity | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| BALANCE,
January 1, 2022 | |
| 5,635,303 | | |
| 166,667 | | |
| - | | |
$ | 6,868,562 | | |
$ | (90,167 | ) | |
$ | 300,000 | | |
$ | - | | |
$ | - | | |
$ | 7,078,395 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Retirement
of Preferred A units | |
| - | | |
| (166,667 | ) | |
| - | | |
| - | | |
| - | | |
| (300,000 | ) | |
| - | | |
| - | | |
| (300,000 | ) |
| LP
Unit Distributions | |
| - | | |
| - | | |
| - | | |
| (544,474 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| (544,474 | ) |
| Net
loss | |
| - | | |
| - | | |
| - | | |
| (1,244,731 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,244,731 | ) |
| BALANCE,
December 31, 2022 | |
| 5,635,303 | | |
| - | | |
| - | | |
| 5,079,357 | | |
| (90,167 | ) | |
| - | | |
| - | | |
| - | | |
| 4,989,190 | |
| Dissolution
of wholly owned subsidiary | |
| - | | |
| - | | |
| - | | |
| 100 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 100 | |
| Issuance
of Preferred B units to acquire land | |
| - | | |
| - | | |
| 500,000 | | |
| - | | |
| - | | |
| - | | |
| 600,000 | | |
| - | | |
| 600,000 | |
| Minority
interest in consolidates subsidiary | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 1,600,000 | | |
| 1,600,000 | |
| Net
income | |
| - | | |
| - | | |
| - | | |
| 190,795 | | |
| - | | |
| - | | |
| - | | |
| 4,898 | | |
| 195,693 | |
| BALANCE,
December 31, 2023 | |
| 5,635,303 | | |
| - | | |
| 500,000 | | |
$ | 5,270,252 | | |
$ | (90,167 | ) | |
$ | - | | |
$ | 600,000 | | |
$ | 1,604,898 | | |
$ | 7,384,983 | |
The accompanying notes are an integral part of
the consolidated financial statements
UC ASSET, LP
Consolidated Statements of Cash Flows
Year ended December 31,
| | |
2023 | | |
2022 | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | |
| | |
| |
| Net income (loss) | |
$ | 190,794 | | |
$ | (1,244,731 | ) |
| Adjustments to reconcile net increase (decrease) in income to net cash used in operating activities: | |
| | | |
| | |
| Minority interest in consolidated subsidiary | |
| 4,898 | | |
| - | |
| Net unrealized loss (gain) on marketable equity securities | |
| - | | |
| 750,000 | |
| Loss on settlement of investment | |
| (108,120 | ) | |
| 39,100 | |
| Amortization of prepaid expense and deferred rent | |
| - | | |
| 23,331 | |
| Depreciation and amortization | |
| 17,114 | | |
| (17,451 | ) |
| Changes in working capital items | |
| | | |
| | |
| Accrued interest receivable | |
| (49,166 | ) | |
| (167,383 | ) |
| Insurance claim receivable | |
| 560,000 | | |
| - | |
| Deposits | |
| - | | |
| (1,010 | ) |
| Accounts receivable | |
| - | | |
| (2,675 | ) |
| Prepaid expense | |
| (15,600 | ) | |
| (17,059 | ) |
| Accrued expenses | |
| - | | |
| - | |
| | |
| | | |
| | |
| Net cash used in operating activities | |
| 599,920 | | |
| (637,878 | ) |
| | |
| | | |
| | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
| | |
| Investments in portfolio loans | |
| (216,000 | ) | |
| (200,000 | ) |
| Investments in portfolio properties | |
| (1,788,119 | ) | |
| (395,896 | ) |
| Investment in related party | |
| (120,000 | ) | |
| - | |
| Proceeds from sale of portfolio properties | |
| 1,813,600 | | |
| 679,791 | |
| Repayments of portfolio loans | |
| - | | |
| 11,040 | |
| | |
| | | |
| | |
| Net cash provided by (used in) investing activities | |
| (310,519 | ) | |
| 94,935 | |
| | |
| | | |
| | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | | |
| | |
| Proceeds from short term loan | |
| 50,000 | | |
| 150,000 | |
| Repayment of mortgage | |
| (400,000 | ) | |
| - | |
| LP Unit distributions | |
| - | | |
| (544,473 | ) |
| Repayment of short term loam | |
| - | | |
| (150,000 | ) |
| | |
| | | |
| | |
| Net cash provided in financing activities | |
| (350,000 | ) | |
| (544,473 | ) |
| | |
| | | |
| | |
| Net decrease in cash and cash equivalents | |
| (60,599 | ) | |
| (1,087,416 | ) |
| | |
| | | |
| | |
| CASH
and cash equivalents, beginning of period | |
| 168,955 | | |
| 1,256,371 | |
| | |
| | | |
| | |
| CASH
and cash equivalents, end of period | |
$ | 108,356 | | |
$ | 168,955 | |
| | |
| | | |
| | |
| Non-Cash Financing Activities: | |
| | | |
| | |
| Purchase of portfolio property for cancellation of note receivable and issuance of note payable | |
$ | - | | |
$ | 1,350,000 | |
| Exchange of Preferred A units for note receivable | |
$ | - | | |
$ | 300,000 | |
| Exchange of Preferred B units for land | |
$ | 600,000 | | |
$ | - | |
The accompanying notes are an integral part of
the consolidated financial statements
UC ASSET, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
UC Asset, LP (the “Partnership”) is
a Delaware Limited Partnership formed for the purpose of making capital investments in limited liability companies with a focus on growth-equity
investments and real estate. The Partnership was formed on February 1, 2016. The Partnership is managed by its General Partner, UCF Asset
LLC.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of accounting The Partnership
prepares its financial statements on the accrual basis in accordance with Generally Accepted Accounting Principles (“GAAP”)
in the United States of America (“U.S.”) as promulgated by the Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) and with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”).
Purchases and sales of investments are recorded upon the closing of the transaction. Investments are recorded at historical cost.
(b) Principles of Consolidation The Partnership’s
consolidated financial statements include the financial statements of UC Asset, LP and its wholly owned subsidiaries: Atlanta Landsight,
LLC, SHOC Holdings LLC and 50% owned consolidated subsidiary, AZO Properties, LLC. All inter-company balances and transactions have been
eliminated.
(c) Use of estimates The preparation of
financial statements in conformity with accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities, disclose contingent assets and liabilities
at the date of the financial statements and report amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
(d) Fair value measurements ASC 825-10
“Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair
value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new
election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be
reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.
ASC 825 also requires disclosures of the fair
value of financial instruments. The carrying value of the Company’s current financial instruments, which include cash and cash equivalents,
accounts payable and accrued liabilities approximates their fair values because of the short-term maturities of these instruments.
FASB ASC 820 “Fair Value Measurement”
clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants. It also requires disclosure about how fair value is determined for assets and liabilities
and establishes a hierarchy for these assets and liabilities must be grouped, based on significant levels of inputs as follows:
Level 1: Quoted prices in active markets
for identical assets or liabilities.
Level 2: Quoted prices for similar instruments
in active markets, quoted prices for identical or similar instruments in markets that are not active, and model derived valuations whose
inputs are observable or whose significant value drivers are observable.
Level 3: Significant inputs to the valuation model are unobservable.
UC ASSET, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
continued
(d) Fair value measurements, continued The
determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to
the fair value measurement.
(e) Cash and equivalents The Partnership
considers all highly liquid debt instruments with original maturities of three (3) months or less to be cash equivalents.
(f) Investments The Partnership’s
core activity is to make investments in real estate limited liability companies. Excess funds are held in financial institutions.
Investments in short term loans are recorded at
fair value, which are their stated amount due to their short-term maturity and modest interest rates. Portfolio investments are recorded
at their historical cost, except for investments in marketable equity securities held for sale, which are marked to market value at each
period end.
(g) Federal Income taxes As a limited partnership,
the Partnership is not a taxpaying entity for federal or state income tax purposes; accordingly, a provision for income taxes has not
been recorded in the accompanying financial statements. Partnership income or losses are reflected in the partners’ individual or
corporate tax returns in accordance with their ownership percentages.
As defined by Financial Accounting Standards Board
Accounting Standards Codification (ASC) Topic 740, Income Taxes, no provision or liability for materially uncertain tax positions was
deemed necessary by management. Therefore, no provision or liability for uncertain tax positions has been included in these financial
statements. Generally, the Partnerships tax returns remain open for three years for federal income tax examination.
(h) Income Interest income from portfolio
investments is recorded as interest is accrued.
(i) Reclassification Certain prior period items have been reclassified
to conform with the current period presentation.
(j) Recent Accounting Pronouncements Partnership management
does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on
the accompanying financial statements.
NOTE 3 - LIQUIDITY AND GOING CONCERN CONSIDERATIONS
The Partnership’s consolidated financial
statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities
and commitments in the normal course of business. The Partnership earned net operating income of approximately $195,693 and cash provision
of $599,920 from operations for the year ended December 31, 2023. The historical conditions raise substantial doubt about our ability
to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might be necessary
if we are unable to continue as a going concern.
UC ASSET, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - FAIR VALUE OF FINANCIAL INSTRUMENTS
(a) Cash and Cash Equivalents The fair
value of financial instruments that are short-term and that have little or no risk are considered to have a fair value equal to book value.
(b) Unsecured Loan Investments The fair
value of short-term unsecured loans are considered to have a fair value equal to book value due to the short-term nature and market rate
of interest commensurate with the level of credit risk. At December 31, 2023 and 2022, there were $630,000 and $700,000 short-term loans,
respectively.
(c) Portfolio Investments The portfolio
investments consist of member equity interests which are not publicly traded. The General Partner (“GP”) uses the investee
entity’s real estate valuation reports as a basis for valuation when there is limited, or no, relevant market activity for a specific
instrument or for other instruments that share similar characteristics. Portfolio investments priced by reference to valuation reports
are included in Level 3. The GP conducts internal reviews of pricing to ensure reasonableness of valuations used. Based on the information
available, management believes that the fair values provided are representative of prices that would be received to sell the individual
assets at the measurement date (exit prices).
The fair values of the investee entity’s
assets are determined in part by placing reliance on third-party valuations of the properties and/or third party approved internally prepared
analyses of recent offers or prices on comparable properties in the proximate vicinity. The third-party valuations and internally developed
analyses are significantly impacted by the local market economy, market supply and demand, competitive conditions and prices on comparable
properties, adjusted for anticipated date of sale, location, property size, and other factors. Each property is unique and is analyzed
in the context of the particular market where the property is located. In order to establish the significant assumptions for a particular
property, the GP analyzes historical trends, including trends achieved by the GP’s operations, if applicable, and current trends in the
market and economy impacting the property. These methods use unobservable inputs to develop fair value for the GP’s properties.
Due to the volume and variance of unobservable inputs, resulting from the uniqueness of each of the GP’s properties, the GP does not use
a standard range of unobservable inputs with respect to its evaluation of properties.
Changes in economic factors, consumer demand and
market conditions, among other things, could materially impact estimates used in the third-party valuations and/or internally prepared
analyses of recent offers or prices on comparable properties. Thus, estimates can differ significantly from the amounts ultimately realized
by the investee segment from disposition of these assets.
UC ASSET, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - FAIR VALUE OF FINANCIAL INSTRUMENTS,
continued
(c) Portfolio Investments, continued
The
following tables present the fair values of assets and liabilities measured on a recurring basis:
| | |
| | |
Fair Value Measurement at Reporting Date Using | |
| At December 31, 2023 | |
Fair
Value | | |
Quoted Prices in
Active Markets
for Identical
Assets/Liabilities
(Level 1) | | |
Significant
Other
Observable
Inputs
(Level 2) | | |
Significant
Unobservable
Inputs
(Level 3) | |
| Atlanta Landsight, LLC | |
$ | 3,104,449 | | |
$ | - | | |
$ | - | | |
$ | 3,104,449 | |
| SHOC Holdings LLC | |
| 340,006 | | |
| - | | |
| - | | |
| 340,006 | |
| AZO Properties, LLC | |
| 3,063,425 | | |
| - | | |
| - | | |
| 3,063,425 | |
| Short term loans | |
| 681,666 | | |
| - | | |
| - | | |
| 681,666 | |
| Total Assets | |
$ | 7,189,546 | | |
$ | - | | |
$ | - | | |
$ | 4,126,121 | |
| | |
| | |
Fair Value Measurement at Reporting Date Using | |
| At December 31, 2022 | |
Fair
Value | | |
Quoted Prices in
Active Markets
for Identical
Assets/Liabilities
(Level 1) | | |
Significant
Other
Observable
Inputs
(Level 2) | | |
Significant
Unobservable
Inputs
(Level 3) | |
| Atlanta Landsight, LLC | |
$ | 3,861,430 | | |
$ | - | | |
$ | - | | |
$ | 3,861,430 | |
| SHOC Holdings LLC | |
| 855,465 | | |
| - | | |
| - | | |
| 855,465 | |
| Short term loans | |
| 689,692 | | |
| - | | |
| - | | |
| 689,692 | |
| Total Assets | |
$ | 5,406,587 | | |
$ | - | | |
$ | - | | |
$ | 5,406,587 | |
The fair value measurements are subjective in nature, involve uncertainties
and matters of significant judgment; therefore, the results cannot be determined with precision, substantiated by comparison to independent
markets and may not be realized in an actual sale or immediate settlement of the instruments.
UC ASSET, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - FAIR VALUE OF FINANCIAL INSTRUMENTS,
continued
(c) Portfolio Investments,
continued
There may be inherent weaknesses in
any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows,
could significantly affect the results. For all of these reasons, the aggregation of the fair value calculations presented herein do not
represent, and should not be construed to represent, the underlying value of the Partnership.
Generally, the fair value of the Atlanta
investee’s properties is not sensitive to changes in unobservable inputs since generally the properties are held for less than six
months. Generally such changes in unobservable inputs take longer than six months to have an appreciable effect of more than 1 to 2% on
these properties fair value. The Dallas investee’s property is more sensitive to changes in unobservable inputs because this property
was acquired with a longer time horizon due to the nature of its size and undeveloped status. However, the Dallas investee is very cognizant
of changes in the unobservable inputs that affect the fair value of this property and intends to consider any and all such changes as
it develops it plan for the development of this property.
NOTE 5 - CONCENTRATIONS OF CREDIT RISK
a) Cash Funds held by the Partnership are
guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. The Partnership’s cash balance was
in excess of FDIC insured limits by $0 and $0 at December 31, 2023 and 2022.
NOTE 6 - CAPITAL
The Partnerships capital structure consists of
one General Partner and approximately 80 limited partners. The Partnerships total contributed capital was $7,687,373 and $7,687,373 at
December 31, 2023 and 2022, respectively. The limited partner common units issued and outstanding are 5,485,025 and 5,485,025 at December
31, 2023 and 2022. The limited partner preferred Series A units are 0 and 166,667 at December 31, 2023 and 2022, respectively. The limited
partner preferred Series B units are 500,000 and 0 at December 31, 2023 and 2022, respectively.
The Series A Preferred Units carry the following
rights and privileges:
- annual dividend of $0.09
per unit, not to exceed the audited annual net increase to net assets from operations
- carry no voting rights
- preference for dividends
and in liquidation
- 12 months post issuance,
redeemable at $0.50 per unit, if the market price of the common units falls
below $0.50 per unit for 20
consecutive trading days
- 12 months post issuance, convertible
into common units on a variable conversion ratio 1.0:1.0 (if the lowest closing price of the common units is $1.80 or more for the 5 trading
days prior to conversion), up to 1.125:1.0 (if the lowest closing price of the common units is $1.60 or less for the 5 trading days prior
to conversion)
- conversion and redemption
price shall not be lower than the book value per common unit based on the last audited book value per unit
UC ASSET, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - CAPITAL, continued
The Series B Preferred Units carry the following
rights and privileges:
- carry no automatic dividend
rights, the LP can elect to declare a dividend for the Series B
- carry no voting rights
- preference for dividends
and in liquidation over common units and any other preferred units
- carry no redemption rights
- 12 months post issuance, convertible
into common units on a variable conversion ratio 1.0:1.0 initially (Conversion ratio=Face Value/Conversion Price, or 1=$1.20/$1.20) The
LP can opt to designate a different Conversion Price. The LP may reset a Maximum Conversion Amount
In May 2023, the Partnership exchanged 500,000
Series B Preferred Units, with a face value of $1.20 per unit for 50% ownership of a parcel of land valued at $1.2 million contributed
to its subsidiary AZO Properties LLC.
In May 2023, the LP exchanged the second 50% of
the land acquired by the issuance of the Series B Preferred Units in exchange for 50% ownership of AZO Properties LLC, a previously wholly
owned subsidiary.
In June 2022, the Partnership exchanged a Note
receivable of $300,000 principal with $39,100 of accrued interest for the 166,667shares of preferred Series A units, which were subsequently
cancelled.
a) Distributions Distributions from the
Partnership are made to partners in accordance with the Partnerships limited partnership agreement. During 2022, the partnership distributed
$544,474 to the limited partners.
b) Allocations of Profits and Losses The
net profit of the Partnership is allocated to the Limited Partners in proportion to each partner’s respective capital contribution
on all liquidated portfolio investments made by the Partnership. Losses are allocated to all partners in proportion to each partner’s
respective capital contribution, provided that, to the extent profits had been previously allocated in a manner other than in proportion
to capital contributions, losses are allocated in the reverse order as such profits were previously allocated.
The GP participates in the profits of the Partnership
at a rate of 20% above a 10% annualized return to the Limited Partners. Beginning January 1, 2020, the GP participates in the profits
of the Partnership at a rate of 20% above an 8% annualized return to the Limited Partners.
NOTE 7 - MANAGEMENT FEES - RELATED PARTY
The Partnership pays annual management fees to
UCF Asset LLC. Management fees are calculated at 2.0% of assets under management on the first day of the fiscal year, payable quarterly.
Management fees were $127,783 and $188,315 for the years ended December 31, 2023 and 2022, respectively.
NOTE 8 - INVESTMENT IN RELATED PARTY
The LP purchased a 10% LLC interest in the LP’s
general partner. The LP will only pay 90% of the management fee to the general partner while the LP holds this ownership interest.
UC ASSET, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - PORTFOLIO INVESTMENTS
(a) Texas Land In September 2022, the partnership,
through its wholly owned subsidiary Atlanta Landsight LLC, repurchased the land in Texas in exchange for the promissory note held by ALS
in the amount of $950,000 with accrued interest of $147,250 and a $252,750 note payable. This note payable was reduced to $208,120 by
ALS’ payment of the property tax in full. At December 31, 2022, ALS had received and accepted an offer to sell the land to a third
party for $1.9 million in cash. In January 2023, ALS closed on the sale of the Texas property and received approximately $1.9 million
in cash.
(b) SHOC Holdings LLC - In November 2022,
SHOC received an offer to sell the property that it was renovating for $1.05 million. In December 2022, before the closing of the sale
was to occur the property was totally destroyed by fire. SHOC and the property insurance company agreed to a payment of $560,000 in cash
for the insurance coverage. As a result, SHOC transferred the remaining investment balance of $295,465 to a category of land held for
sale. No impairment on this value as SHOC believes that it can sell this land for at least this value. In 2023 SHOC paid approximately
$45,000 to clear the debris left by the fire, this amount has been capitalized in the book value of the land. In April 2023, SHOC received
the $560,000 insurance settlement in cash.
NOTE 10 - NOTES RECEIVABLE
In April 2023, the LP extended $16,000 in cash
to a third party for a note receivable carrying an 8% interest rate and maturity of December 11, 2023, which has been extended to June
30, 2024. At December 31, 2023, $806 of interest has been accrued.
In January 2023 the LP agreed with two 3rd
parties to a tri-party transaction to the assumption of a $479,148 note (including accrued interest) receivable from one party to $414,000
note receivable from a third party, with a write-off of the $65,148 difference of accrued interest. This new note carries an 8% interest
rate and is due January 31, 2024, which has been extended to June 30, 2024. At December 31, 2023, $30,360 of interest has been accrued.
In May 2022, the Company extended $200,000 in
cash to a third party for a note receivable carrying an 8% interest rate and maturity of November 27, 2022, which was extended to May
27, 2023, and then to December 16, 2023, with a change of the interest rate to 18%, and again to January 31, 2024. At December 31, 2023,
$18,000 of interest has been accrued. In January 2024, the maturity was extended to May 31, 2024, with a $6,000 late fee.
NOTE 11 - COVID-19 PANDEMIC AND VARIANTS
The full extent to which the COVID-19
pandemic may directly or indirectly impact our business, results of operations and financial condition, will depend on future
developments that are uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken
to contain it or treat COVID-19, as well as the economic impact on local, regional, national and international customers and
markets. We have made estimates of the impact of COVID-19 within our financial statements, and although there is currently no major
impact, there may be changes to those estimates in future periods.
Item 8. Exhibits
| 3.1 |
|
Certificate of Limited Partnership of UC Asset Filed previously with our Form 1A on February 12, 2018. |
| |
|
|
| 3.2 |
|
Limited Partnership Agreement, as amended and reinstated on March 31, 2023, filed previously with our Form 1-K on May 17, 2023 |
| |
|
|
| 3.3a |
|
SERIES A PREFERRED UNIT CANCELLATION AGREEMENT filed previously with our Form 1-SA on October 11, 2022 |
| |
|
|
| 3.4 |
|
Certificate of Designation of Series B Preferred, filed previously with our Form 1-SA on August 21, 2023 |
| |
|
|
| 10.1 |
|
Omitted |
| |
|
|
| 10.2 |
|
Employment Agreement of Jason Armstrong as the Manager of General Partner, previously filed with our Form 1-K on May 17, 2023 |
SIGNATURES
Pursuant to the requirements
of Regulation A, the issuer has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized
in the City of Atlanta, State of Georgia, on May 14, 2024.
| |
By: |
UCF ASSET LLC |
| |
|
|
| |
|
/s/
Jason Armstrong |
| |
|
Name: |
Jason Armstrong |
| |
|
Title: |
Managing Member |
16
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