HF Enterprises Inc. (HFEN) — Form 10-Q summary
Registrant note: The supplied filing is for HF Enterprises Inc., not Alset Inc. HF Enterprises reports that it held a 51.04% interest in Alset International Limited at September 30, 2020.
Business context and reporting period
This unaudited quarterly report covers the three and nine months ended September 30, 2020, with comparisons to 2019. HF Enterprises is a diversified holding company operating through property development, digital transformation technology, biohealth and other activities. Property development, especially the Ballenger Run and Black Oak projects, generated nearly all reported revenue in the first nine months.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $2.15 million | $5.31 million | $7.18 million | $22.94 million |
| Gross profit | $0.53 million | $1.18 million | $1.57 million | $3.77 million |
| Operating expenses | $2.41 million | $5.58 million | $9.81 million | $27.45 million |
| Net income (loss) | $(13.34) million | $0.80 million | $(13.44) million | $(4.53) million |
| Net income (loss) per share | $(1.54) | $0.08 | $(1.10) | $(0.31) |
| Net cash from (used in) operations | Not presented for quarter | Not presented for quarter | $(1.01) million | $8.96 million |
Gross margin was approximately 24.8% in Q3 and 21.9% for the nine months, compared with approximately 22.2% and 16.4%, respectively, in 2019. Gross profit dollars fell as property sales declined. The nine-month operating cash outflow reflected lower sales and development spending; financing provided $6.70 million, principally from exercises of Alset International warrants.
At September 30, 2020, cash was $8.75 million and restricted cash was $4.24 million. Current assets were $75.63 million, including $59.75 million of securities at fair value; current liabilities were $11.47 million. Total assets were $101.47 million and total liabilities $14.50 million. Notes payable, including related-party notes, totaled approximately $3.06 million; this excludes lease liabilities. Some cash is restricted or pledged as collateral.
Material changes and unusual items
- Nine-month revenue fell 69% year over year. Property sales declined from $21.51 million to $7.15 million, reflecting the timing and lower volume of lot sales; biohealth revenue fell from $1.41 million to $31,133, largely due to slow product sales and delayed promotion. Q3 revenue fell 60%.
- Other expense was $10.20 million for the nine months, versus other income of $0.36 million in 2019. A $42.17 million unrealized securities loss was a major driver, partly offset by foreign-exchange gains and other items. The Q3 unrealized securities loss was $43.76 million.
- HF Enterprises’ ownership of Alset International fell below 50% in July and it was deconsolidated, then rose to 51.04% after a related-party share purchase in August and was reconsolidated. The filing records a $53.20 million deconsolidation gain and a $21.91 million consolidation loss; these noncash, control-related entries make reported earnings unusually volatile.
- In August, a subsidiary transferred Impact BioMedical to DSS, a company with significant ties to HF Enterprises’ CEO, in exchange for DSS common and convertible preferred shares. The preferred stock was valued at $54.86 million using Level 3 assumptions. The filing says no gain or loss was recognized on the disposal because it was a related-party transaction. HF Enterprises also reported an aggregate $67.21 million fair value for the securities received.
- Common shares outstanding were 6.4 million at September 30, after 3.601 million shares were cancelled. A November IPO subsequently issued 2.16 million shares at $7.00 each and yielded approximately $12.7 million net proceeds. The filing reports 8.57 million shares outstanding as of December 29, 2020.
Outlook, risks and contingencies
No quantified earnings or revenue guidance is provided. Management described continued development at Ballenger Run and potential changes to Black Oak plans, subject to market interest, partners and financing. It cited suburban housing interest and low mortgage rates as supportive, while noting COVID-19-related construction and permitting delays, uncertainty in Houston-area conditions and the need for funding. Management also expects foreign-exchange effects on substantial intercompany balances to continue affecting results.
- Valuation and earnings risk: Securities values, particularly DSS convertible preferred stock, depend partly on unobservable Level 3 estimates; management cautions that changes in inputs could materially change fair value.
- Litigation: Gara Group asserted claims including $9 million in general damages and $50 million in liquidated damages in a dispute involving iGalen. The company said it could not assess loss risk, intended to contest the matter and did not believe the outcome would materially affect its financial statements. It also said collection of a separate Azure Holdings note was not probable; $169,166 was due at September 30.
- Related parties: The filing describes material dealings, investments and loans involving the CEO, family members and affiliated entities, including the DSS transaction. These relationships warrant scrutiny.
- Controls and reporting: Management concluded disclosure controls and procedures were not effective as of September 30, 2020. The filing also checked “No” for having filed all required reports during the preceding 12 months.
- Subsequent events: The SBA forgave $64,502 of the $68,502 PPP loan in November 2020. IPO proceeds were intended primarily for potential acquisitions, properties, working capital and general corporate purposes.
Most important facts for investors to verify
- Reconcile the reported loss to the large fair-value, deconsolidation and reconsolidation entries, and assess the sensitivity of the $54.86 million Level 3 DSS preferred-stock valuation.
- Review the DSS/Impact BioMedical related-party transaction terms, the subsequent preferred-stock conversion, and the implications of management’s relationships with DSS.
- Confirm liquidity available for operations after excluding restricted cash and considering the liquidity and valuation risk of securities that make up most current assets.
- Track property sales, remaining development costs, project timelines and required external financing, particularly for Ballenger Run and Black Oak.
- Assess the Gara Group dispute, the Azure receivable and other contingencies, as well as the company’s remediation of ineffective disclosure controls and reporting compliance.
- Verify post-IPO share count, any over-allotment or representative warrant issuance, and the actual use of the approximately $12.7 million net proceeds.