Alset EHome International Inc. — FY2021 Form 10-K
Reporting period: Year ended December 31, 2021; this is an annual filing, not a standalone Q4 report. The company is a diversified holding company with real estate, biohealth, digital technology and other activities, operating principally through its 76.8%-owned subsidiary Alset International. The 2020 comparative figures were restated for certain common-control transactions.
Financial results and liquidity
| Metric | 2021 | 2020 |
|---|---|---|
| Revenue | $19.8 million | $16.2 million |
| Gross profit | $8.5 million | $4.2 million |
| Gross margin | 42.9% | 25.6% |
| Operating loss | $15.0 million | $2.2 million |
| Net loss | $119.0 million | $5.1 million |
| Net cash from operating activities | $(16.7) million | $0.3 million |
| Cash and restricted cash, year-end | $60.8 million | $31.7 million |
| Total assets / total liabilities, year-end | $184.2 million / $13.9 million | $107.7 million / $9.7 million |
Revenue was 70% real estate, 28% biohealth and 2% rental in 2021. Real estate revenue increased 4% to $14.2 million; biohealth revenue rose 114% to $5.5 million, primarily from South Korean direct sales. Rental revenue began in the second quarter and was $327,296. Gross margin improved mainly on higher HWH World sales and rental income, while general and administrative expense increased substantially.
The steep increase in net loss chiefly reflected $49.2 million of unrealized securities losses and $50.9 million of finance costs, including amortization of a large beneficial-conversion-feature debt discount. Operating cash use was $16.7 million; investing cash use was $56.0 million, including purchases of real estate, securities and related-party notes. Financing provided $103.4 million, largely from stock issuance. Year-end cash was $56.1 million, plus $4.7 million restricted cash.
Year-end notes payable were $317,671, including a $68,502 PPP loan; related-party notes payable were a further $833,658. Lease liabilities totaled approximately $667,000. The Ballenger Run revolving loan had no principal outstanding at year-end. The company reported $12.8 million in current related-party note receivables, including substantial loans to American Medical REIT (AMRE). Management said available cash and financing were sufficient for at least 12 months.
Material changes and significant transactions
- Completed the purchase of 109 Texas rental homes for $24.9 million; year-end rental properties were recorded at $24.8 million.
- Raised approximately $104.6 million in gross proceeds from 2021 common-stock offerings and warrant exercises, substantially increasing the share count. Year-end shares outstanding were 87.4 million versus 8.6 million in 2020; 113.2 million were reported outstanding as of March 31, 2022.
- Increased ownership of Alset International from 57.1% to 76.8% by year-end. Acquired assets from CEO Chan Heng Fai in transactions valued at approximately $63.9 million, funded with convertible notes that were subsequently converted into company shares.
- APB sold shares to DSS for $40.0 million, reducing Alset’s APB ownership to 41.3%; Alset then deconsolidated APB and accounted for its retained interest under the equity method.
- Held approximately 24.9% of DSS at year-end. Fair-value changes in securities materially affected reported earnings; the company recorded a $49.2 million unrealized securities loss.
Outlook, risks and unusual items
No numerical company-wide earnings or revenue guidance is provided. Management expects rental revenue to grow as homes are acquired and leased; it was considering building homes for sale or rent at Black Oak and Alset Villas. The final Ballenger Run phases were expected to be completed in June 2022, with estimated construction costs of about $1.7 million, excluding land and financing. GigWorld planned to begin sales of its network-marketing technology in 2022.
- Controls: Management concluded disclosure controls were ineffective and identified an unremediated material weakness caused by limited staffing and inadequate segregation of duties. The auditor did not attest to internal controls.
- Valuation and earnings volatility: Equity securities are subject to market-price swings; significant Level 3 valuations depend on management assumptions. Foreign exchange effects on approximately $43 million of intercompany loans were expected to continue affecting results.
- Concentration: Two customers accounted for approximately 97% and 3% of 2021 property-development revenue. Real estate remained the largest revenue source, and operating cash flow was negative.
- Related parties and dilution: The CEO is the largest shareholder and has extensive business and board relationships with investees and counterparties. The filing describes material related-party acquisitions, loans, securities transactions and compensation arrangements. The CEO received $5.98 million in 2021 bonuses from Alset International; additional bonuses and a $4.8 million company NAV bonus were paid in 2022.
- Contingency: A dispute involving the former iGalen service provider includes a claim seeking $9 million in general damages and $50 million in liquidated damages. The filing reports a trial date of April 7, 2023 and says the company intends to contest the matter; management did not expect a material adverse outcome.
- Other: The filing cites COVID-19-related project and operating delays, competitive and regulatory risks, and the risk that the company could be deemed an investment company. Alset Capital’s $86.25 million SPAC IPO closed in February 2022; it was seeking a business combination, with sponsor-related conflicts disclosed.
Investor verification points
- Review the composition and valuation basis of securities, including the $49.2 million unrealized loss, and the assumptions behind any Level 3 valuations.
- Assess whether the $12.8 million of current related-party receivables, particularly AMRE loans, are collectible and whether subsequent disclosed DSS transactions closed as planned.
- Track remediation of the material weakness and whether future filings show improved controls and reliable reporting.
- Verify rental-home occupancy, realized rental economics and development spending against management’s growth expectations.
- Check the status and potential exposure of the Gara Group litigation, and evaluate the terms, approvals and dilution effects of related-party transactions and share issuances.