Alset EHome International Inc. (Nasdaq: AEI) — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; comparisons are with FY2019. The company was then a diversified holding company focused on property development, digital transformation technology and biohealth. Its common stock began trading on Nasdaq in November 2020; the company changed its name from HF Enterprises Inc. to Alset EHome International Inc. in February 2021.
Financial performance and position
| Metric | FY2020 / Dec. 31, 2020 | FY2019 / Dec. 31, 2019 |
|---|---|---|
| Revenue | $16.24 million | $24.26 million |
| Gross profit | $4.15 million; 25.6% margin | $4.29 million; 17.7% margin |
| Operating loss | $1.69 million | $6.94 million |
| Net loss | $4.40 million; $0.30 per share | $8.05 million; $0.52 per share |
| Operating cash flow | $1.64 million | $5.96 million |
| Cash / restricted cash | $22.12 million / $6.77 million | $2.77 million / $4.45 million |
| Total assets / liabilities | $103.32 million / $8.59 million | $35.87 million / $13.65 million |
- Property development generated $13.64 million of revenue, down 40%. Biohealth generated $2.59 million, up 89%; digital technology reported no revenue. Property remained about 84% of total revenue. The 2019 comparison benefited from a $6.18 million Black Oak lot sale.
- Cost of sales fell 39% to $12.09 million. Gross profit was slightly lower despite the higher gross margin, as sales volume declined. FY2019 included $5.23 million of real estate impairment; no real estate impairment was recorded in 2020.
- Investing cash outflow was $0.12 million; financing cash inflow was $20.10 million, principally reflecting the IPO, Alset International warrant exercises and subsidiary share sales. The IPO yielded approximately $13.2 million net proceeds. Cash and restricted cash together were $28.89 million at year-end.
- Year-end notes payable were approximately $0.81 million, including a net $0.64 million M&T Bank note and $0.17 million Australian loan. Related-party notes payable were $1.53 million current; total liabilities were $8.59 million. Restricted cash includes lender collateral and escrow and is not wholly available for general use.
Material changes, transactions and management commentary
- Revenue declined 33% overall. Ballenger Run lot sales continued, with 121 lots sold to NVR in 2020 versus 123 in 2019; 388 of 479 contracted lots had been sold by year-end. The company reported approximately $13.6 million of 2020 Ballenger lot revenue and expects about $69 million of Ballenger revenue before costs over the project, subject to contract conditions and market prices.
- Biohealth revenue shifted toward HWH World in South Korea, which reported $2.50 million in 2020 revenue. The company sold its 53% interest in iGalen International to an officer on December 30, 2020 for $100; the related-party disposal was recorded in equity without a gain or loss.
- In August 2020, the company transferred Impact BioMedical to DSS, a company chaired by its CEO, for DSS common and convertible preferred shares. The preferred shares had a stated value of $46.87 million; the company reported a $46.28 million fair value for the securities received at closing and recorded the related-party transaction in equity rather than earnings. At year-end, DSS preferred stock was valued at $37.68 million using Level 3 valuation inputs.
- Alset International ownership briefly fell below 50% in July 2020, prompting deconsolidation, then rose above 50% after an August share purchase from CEO Chan Heng Fai, prompting reconsolidation. The filing reports a roughly $53 million gain on deconsolidation, a roughly $22 million loss on reconsolidation and approximately $31 million unrealized loss during the unconsolidated period. These accounting effects and volatile investment marks are important to interpreting the reported results.
- Management cited lower property sales, investment valuation fluctuations, COVID-19-related construction delays and foreign exchange movements as factors affecting results. The company expects foreign-exchange effects to remain significant because of roughly $25 million of intercompany loans between Singapore and the U.S.; it did not expect to repay them in the near term.
Outlook, risks and contingencies
- No formal earnings or revenue guidance is provided. Management anticipated completing Ballenger Run’s remaining phases by June 2022, with approximately $3 million of estimated final-phase construction costs, and described Black Oak construction plans totaling about $11.27 million, with timing subject to financing, market interest and project changes. The Black Oak project’s ultimate costs and schedule may differ.
- The company’s property business depends heavily on NVR as purchaser of Ballenger lots. It also disclosed significant customer concentration in property revenue. Any change in NVR’s purchasing or the housing market could materially affect results.
- Management identified a material weakness in internal controls: limited accounting staff and inability to adequately segregate duties. Disclosure controls were ineffective at year-end, and the weakness remained unremediated. The 2018 financial statements had previously required restatement. The auditor did not attest to internal control effectiveness.
- A California lawsuit involving iGalen and Gara Group includes Gara Group claims for $9 million in general damages and $50 million in liquidated damages. The company said it intended to contest the matter; no trial date had been set. Management did not believe the discussed matters would have a material adverse effect, but litigation outcomes are uncertain.
- COVID-19 risks include project delays, disruption to contractors and local approvals, and uncertain real estate demand. The filing also notes real estate impairment risk, reliance on key executive Chan Heng Fai, foreign exchange exposure, competition, regulatory and product-development risks, and possible limits on subsidiary distributions.
- After year-end, the company completed acquisitions from its CEO under a March 2021 agreement for a total of approximately $63.92 million, funded with four 2% convertible notes, subject to shareholder approval for conversion at $5.59 per share. Also subsequent to year-end, the company reported a $68,502 PPP loan, a $2.48 million related-party sale of its Vivacitas interest, and an increase in Alset International ownership to approximately 60.2%.
Key facts investors should verify
- Reconcile the Alset International deconsolidation/reconsolidation accounting, related unrealized investment losses and year-end investment valuations, especially DSS preferred stock.
- Assess available liquidity after excluding restricted cash and considering the maturity, collateral and guarantees of outstanding debt and related-party notes.
- Confirm NVR lot takedown progress, remaining Ballenger revenue and costs, project completion dates, and the funding and sales assumptions for Black Oak.
- Review remediation plans and subsequent progress on the material weakness, including staffing, segregation of duties and financial-reporting controls.
- Evaluate the Gara Group litigation, the related-party nature and terms of major transactions, and shareholder approval and potential dilution associated with the $63.92 million convertible notes.