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EMAIL:
SFELDMAN@OLSHANLAW.COM
November
12, 2019
VIA EDGAR AND ELECTRONIC MAIL
U.S.
Securities and Exchange Commission
Division
of Corporation Finance
Mail
Stop 3628
100 F
Street, N.E.
Washington,
D.C. 20549
Attn.:
Stacie Gorman, Esq.
Office
of Real Estate and Commodities
Ladies
and Gentlemen:
Re:
HF
Enterprises Inc.
Draft
Registration Statement on Form S-1
Ladies
and Gentlemen:
On
behalf of HF Enterprises Inc., a Delaware corporation (the
“Company”), we hereby confidentially submit through
EDGAR for confidential non-public review under Section 6(e) of the
Securities Act of 1933, one complete copy of the Company’s
Confidential Draft Submission No. 3 to the captioned Registration
Statement on Form S-1 (the “Registration Statement”),
for the registration of $15,000,000 in shares of the
Company’s common stock, including one complete copy of the
exhibits listed as filed therewith.
The
Registration Statement responds to the comments received from the
staff of the SEC in its comment letter dated September 9, 2019,
with respect to the Company’s Amendment No. 1 to Draft
Registration Statement on Form S-1 (CIK No. 0001750106) submitted
confidentially to the Division of Corporation Finance by the
Company on August 12, 2019, as discussed below.
Courtesy copies of
this letter and the Registration Statement (as marked to reflect
changes), together with all exhibits, are being provided directly
to the staff for its convenience (attention: Stacie Gorman, Esq.)
in the review of the foregoing documents.
To
facilitate the staff’s review, the SEC’s comments are
reproduced before each of the Company’s responses thereto.
All page numbers referred to in the responses to the staff’s
comments correspond to the page numbers of the Registration
Statement.
November
12, 2019
Page
2
Comments
and Responses
Form DRS/A filed August 12, 2019
Prospectus Summary, page 1
1.
We note your response to comments 1 and 2 of our letter dated
December 10, 2018. Please note that we have referred your response
to the Division of Investment Management for further review, and
they will contact you directly when they have completed their
review. Please feel free to contact the Division of Investment
Management staff member referenced below regarding their
review.
Response: Based on our communications
with the Division of Investment Management, it is our understanding
that this review has now been completed.
Risk Factors
Our
international operations expose us to additional legal and
regulatory risks..., page 20
2.
We note your response to comment 7 of our letter. Please address
risks associated with international regulations that specifically
impact your business. Please also revise your business section as
appropriate to address regulations that impact your business
plan.
Response: This disclosure has been
revised. Please see page 20.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations Real Estate Assets, page 33
3.
We note your response to prior comment 19. Please revise your
disclosure on page 35 to reconcile the line item Construction-Sold
Lots with the line item Cost of Sales for the Property Development
segment on page F-74. This comment also applies to the interim
financial statements.
Response: On page 35, the capitalized
construction costs show the capitalized development costs and total
property value as of June 30, 2019 and December 31, 2018. It is a
balance sheet number, showing the total capitalized costs from the
beginning of the project to those dates. These numbers agree with
the Properties under
Development on consolidated balance sheets. Construction – Sold lots is also
total allocated capitalized cost of these sold lots from the
beginning of project to these financial closing dates. The
Cost of Sales for Property
Development segment
on page F-67 is the allocated cost matching the lot sales,
including land cost, construction cost and finance cost, in the
one-year period. It is a P/L number. These two types of numbers
could not be reconciled.
Digital Transformation Technology, page 53
4.
We note your response to comment 26 of our letter and we reissue
our comment in part. Please provide more detailed disclosure
regarding the business of and services provided by HotApp
Blockchain and describe the stage of development of its blockchain
technology. Please clarify whether this entity is continuing to
create digital assets and how these assets are being used. Please
also disclose any related business risks and challenges, including
any known trends or uncertainties that are reasonably expected to
have a material impact on results of operations or financial
condition.
Response: This disclosure has been
revised. Please see page 53.
Consolidated Statements of Operations and Other Comprehensive
Income (Loss), page F-3
5.
Please provide to us additional details regarding the nature of and
the accounting for the Gain on Disposal of Subsidiary and the
guidance upon which you relied.
November
12, 2019
Page
3
Response: On October 25, 2018, HotApps
International Pte. Ltd. (“HIP”), one of the
Company’s subsidiaries, 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. 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.
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Consideration
received
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$100,000
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Net liabilities
disposal of
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164,935
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Cumulative exchange
gain in respect of the net liabilities of subsidiary
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34,320
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Gain on
disposal
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$299,255
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We
followed guidance ASC 810-10-40: A parent shall account for the
deconsolidation of a subsidiary by recognizing a gain or loss in
net income attributable to the parent, measured as: a) the fair
value of any consideration received, and b) the carrying amount of
the former subsidiary’s net assets and
liabilities.
Report of Independent Registered Public Accounting Firm, page
F-42
6.
Please revise to include the date of the accountants’ report.
Refer to Rule 2-02 (a) (1) of Regulation S-X.
Response: This date has been added on
page F-35.
Consolidated Statements of Stockholder’s Equity, page
F-45
7.
Please provide to us additional details regarding the nature of and
the accounting for Unrealized Gains Reclassification and the Shares
Issued in Exchange Agreements and the guidance upon which you
relied.
Response:
Unrealized Gains Reclassification
We
adopted ASU 2016-01, Financial Instruments—Overall (Subtopic
825-10): Recognition and Measurement of Financial Assets and
Financial Liabilities (“ASU 2016-01”), as of January 1,
2018. 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. Under previous guidance, an unrealized
gain or loss should be recognized as other comprehensive income.
Upon adoption, we reclassified $1,961,835 of previously recognized
unrealized gain from accumulated other comprehensive income to
accumulated deficit.
Shares Issued in Exchange Agreements
On
October 1, 2018, Chan Heng Fai made the following transfers of
holding companies to the Company:
1.
100% of the
ownership interest in Heng Fai Enterprises Pte. Ltd. (“Heng
Fai Enterprises”) in exchange for 500,000 shares of the
Company. Heng Fai Enterprises holds 2,480,000 shares (14.23%) of
Vivacitas Oncology Inc. (“Vivacitas”), a U.S.-based
biopharmaceutical company. Heng Fai Enterprises’ cost to
purchase these Vivacitas shares was $200,128.
2.
100% of the
ownership interest in Global eHealth Limited (“Global
eHealth”) in exchange for 1,000,000 shares of the Company.
Global eHealth holds 46,226,673 shares (19.8%) of Holista CollTech
Limited (“Holista”), a public Australian company that
produces natural food ingredients.
November 12,
2019
Page 4
These
transactions were under common control and ASC 805-50 provides
guidance on preparing financial statements and related disclosure.
If the nature of the net assets transferred does not result in a
change in the reporting entity, the receiving entity presents the
net assets received in its separate financial statements
prospectively from the date of the transfer. ASC 250-10 provides
guidance on accounting for a change in the reporting entity. None
of the above two transactions resulted in a change in the reporting
entity and the Company should present the net assets received in
its separate financial statements prospectively for October 1,
2018.
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. On October 1, 2018, the fair value of Vivacitas stock was
$200,128.
For the
Holista investment, 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 this equity investment. Holista is a
publicly traded company and fair value of the equity investment is
determined by the quoted stock price. On October 1, 2018, the fair
value of Holista stock was $2,270,802.
Under
ASC 860-10-55-78, these financial assets should be measured at fair
value. On October 1, 2018, the total fair value of $2,470,930 for
Vivacitas and Holista was recognized as additional paid in capital
of the Company.
Basis of Presentation and Principles of Consolidation, page
F-50
8.
We note your disclosure that the acquisitions of Heng Fai
Enterprises and Global eHealth were accounted for prospectively as
of October 1, 2018 instead of as of January 1, 2017. Please tell us
how you considered ASC 805-50-45.
Response:
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. If the nature of the net assets
transferred does not result in a change in the reporting entity,
the receiving entity presents the net assets received in its
separate financial statements prospectively from the date of the
transfer.
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. ASC 250 generally limits a change in the
reporting entity to the following:
●
Presenting consolidated or combined financial statements in place
of financial statements of individual entities.
●
Changing specific subsidiaries that make up the group of entities
for which consolidated financial statements are
presented.
●
Changing the entities included in combined financial
statements.
Neither
a business combination accounted for by the acquisition method nor
the consolidation of a variable interest entity (VIE) pursuant to
Topic 810 is a change in reporting entity. Because the guidance in
ASC 250-10 is limited, entities must use judgment in determining
whether the receiving entity has undergone a change in the
reporting entity. The guidance focuses on combining entities or
subsidiaries; however, we believe that entities should assess the
substance of the transfer rather than its legal form. Typically, the transfer of an asset or a group
of similar assets will not result in a change in the reporting
entity. For example, the transfer of one or several parcels
of land with no other assets or liabilities or any related
operations would not be expected to result in a change in the
reporting entity. Similarly, if an
asset or a group of similar assets constitutes the only assets in a
legal entity and the receiving entity receives the shares of that
legal entity as a result of a common-control transfer, we believe
that entities should assess the nature of the assets transferred
rather than the fact that they were transferred as part of a legal
entity. We do not believe that an entity should come to a
different conclusion solely on the basis of how the transfer is
structured (exchange of shares versus a transfer of net
assets).
November 12,
2019
Page 5
In
connection with the Company’s acquisition of Hengfai
International, Heng Fai Enterprises and Global eHealth were
reviewed with regard to the substance of the transfer, rather than
its legal form.
Unlike
Heng Fai Enterprises and Global eHealth, Hengfai International
contained a majority-owned operating subsidiary, Singapore
eDevelopment Ltd, and in substance represents a subsidiary for
which consolidated financial statements would be prepared. The
nature of the net assets transferred resulted in a change in the
reporting entity. HF Enterprises presents the net assets received
in its separate financial statements retrospectively for all
periods during which the entities or net assets were under common
control, similar to a pooling of interests under APB Opinion 16. In
this instance, the retrospective period would be the 2017 financial
statements.
For
both Heng Fai Enterprises and Global eHealth, although in form they
are legal entities, in substance the entities’ composition is
that of assets representing equity instruments. As such, their
transfer would not change the entities to be consolidated in the
financial statements prepared. Since the nature of the net assets
transferred does not result in a change in the reporting entity,
the Company presents the net assets received in its separate
financial statements prospectively from the date of the transfer or
October 1, 2018. For more detail transactions, please refer to the
response to question 7.
9.
We note your tabular disclosure of the entities that you have
consolidated. Please tell us your basis for consolidating those
entities in which your attributable interest is no more than 50%
and the guidance upon which you relied. This comment also applies
to the interim financial statements.
Response: There are some entities that
Singapore eDevelopment Ltd, one of the Company’s
subsidiaries, owns more than 50% directly. However, the Company
owns 69.11% of Singapore eDevelopment Ltd. In some situations, the
Company may own less than 50% of an entity, but still consolidate
such entity into the Company. For example, Singapore eDevelopment
Ltd owns 53% of iGalen Inc. The Company thereby owns 36.63% of
iGalen Inc. (representing 69.11% of Singapore eDevelopment
Ltd.’s 53% ownership interest) but consolidates iGalen Inc.
into the group’s financial statements.
10.
We note your response to prior comment 40 relating to the
accounting for the acquisition of Hengfai Asset Management Pte.
Ltd. and SeD Intelligent Home Inc. Please revise your disclosure on
page F-50 to disclose this information. This comment also applies
to the interim financial statements.
Response: The information was disclosed
on page F-43.
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” 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 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.
On
December 22, 2016 a related company transferred 99.9% or 74,015,730
common shares of SeD Intelligent Home Inc. to Singapore
eDevelopment Ltd, a subsidiary of the Company. Such shares are
presently owned by SeD Home International, Inc., a wholly-owned
subsidiary of Singapore eDevelopment Ltd. Since this transaction
happened in 2016, we do not disclose it in the 2018 audited
financial statements.
Note 3. Summary of Significant Accounting Policies
Real
Estate Assets, page F-55
11.
We note your response to prior comment 37 and your disclosure of
capitalized interest. Please revise to disclose the amount of other
costs capitalized described on page F-55. This comment also applies
to the interim financial statements.
Response: This Note was updated to
disclose both interest and other costs capitalized on pages F-48
and F-13.
The
Company’s capitalized construction costs were $8,262,297 and
$5,899,103 and capitalized interests from the third-party
borrowings were $415,844 and $1,178,220 for the years ended
December 31, 2018 and 2017, respectively.
The
Company’s capitalized interest and finance expenses from
third-party borrowings were $471,965 and $289,744 for the six
months ended June 30, 2019 and 2018, respectively. The
Company’s capitalized construction cost were $3,558,398 and
$2,491,684 for the six months ended June 30, 2019 and 2018,
respectively.
Note 12. Related Parties Transactions
Notes
Payable, page F-79
12.
We note your response to prior comment 30 that you received the
confirmation from the debtor that the loan needs not to be paid
within one year. Please revise Note 12 to disclose this
information. This comment also applies to the interim financial
statements.
Response: Note 12 in 2018 financial
statements on page F-72 and Note 11 in the interim financial
statements on page F-24 were updated to reflect this
information.
13.
Please reconcile the amount of notes payable to related parties on
page F-79 with the balance sheet.
Response: We corrected the error of the
principle balance of loan from Chan Heng Fai on December 31, 2018
(please see page F-72). The correct principle balance should be
$8,517,490.
Please
see following reconciliation with notes payable to related parties
in the balance sheet.
Chan Heng
Fai
$8,993,553
(Principle in the amount of $8,517,490 + interest accrued of
$476,063)
Dr. Rajen
Manicka
$345,706
Total
$9,339,259
(Principle in the amount of $8,863,196 +interest accrued of
$476,063)
November 12,
2019
Page
6
Note 3. Equity, page F-81
14.
We note your response to prior comment 41 relating to the
$1,107,039 merger reserve. Please revise to clarify whether this
reserve had any impact on assets, liabilities and net income (loss)
and if so explain why.
Response: 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 100% of the issued and
paid-up share capital of LiquidValue Asset Management Pte. Ltd.
(“LVAM” f.k.a. Hengfai Asset Management Pte. Ltd,
“HFAM”). 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.
The
merger reserve of $1,107,039 is the difference of the capital stock
and the consideration paid. It is additional paid in capital after
the merger under common control and should not appear on the equity
statement or the cash flow statement after the consolidation of
HFAM into the Company retrospectively as if the transaction
happened on January 1, 2017. This merger reserve (additional paid
in capital) does not have any impact on assets, liabilities and net
income (loss). At the same time, this merger reserve (additional
paid in capital) should not appear on the 2017 equity statement.
The Company has corrected this error.
November 12,
2019
Page 7
15.
Please provide to us additional details regarding the Capital Gain
from Merger Under Common Control presented in the statement of
stockholders’ equity, how you accounted for this item and the
guidance upon which you relied. Also, clarify whether this reserve
had any impact on assets, liabilities and net income (loss) and if
so explain why.
Response: Please see the response to
question 14.
16.
Please revise to include the disclosure required by ASC
220-10-45-14A relating to accumulated other comprehensive income.
This comment also applies to the interim financial
statements.
Response: Disclosure was included in
Note 14 to the financial statements on page F-75 and in Note 13 to
the interim financial statements on page F-26.
Note 15. Investments Measured at Fair Value, page F-85
17.
We note your response to prior comment 42. We reissue our prior
comment in its entirety as it relates to each investment included
in “Investment securities- Fair Value Option” disclosed
on page F-85. This comment also applies to the interim financial
statements.
Response: Additional details of
“Investment Stocks (quoted)” regarding the number of
shares held, the quoted price and the source of this information
were disclosed in the Note 16 “Investments measured at fair
value” on page F-79 in the financial statements and in the
Note 15 on page F-29 in the interim financial
statements.
Part II. Information not Required in Prospectus
Item
16. Exhibits and Financial Statement Schedules, page
II-3
18.
We note that you have entered into various agreements with M&T
Bank as referenced on page 51. Please file these agreements in
accordance with Item 601(b)(10) of Regulation S-K or tell us why
you believe these agreements are not material.
Response: This agreement have been filed
as Exhibit 10-34.
The
Company respectfully requests the staff’s review of the
Registration Statement on an expedited basis.
Kindly
address any comments or questions that you may have concerning this
letter or the enclosed materials to Michael Gershon, the
Company’s Chief Legal Officer (tel.: (301) 971-3944), or to
me (tel.: (212) 451-2234).
Very
truly yours,
/s/
Spencer G.
Feldman
cc: Mr.
Jorge Bonilla
Mr.
Daniel Gordon
Sonia
Barros, Esq., Assistant Director
Michael
Gershon, Esq.
Thomas
Poletti, Esq.