Alset(AEI) - 2020 Q4 - Annual Report

PART I Business A diversified holding company focused on property development, digital technology, and biohealth through its subsidiary Alset International - The company operates through three main segments: Property Development, Digital Transformation Technology, and Biohealth[11] - Operations are managed primarily through its 60.2% owned subsidiary, Alset International Limited, which is traded on the Singapore Stock Exchange[11] - The company's growth strategy focuses on acquiring majority stakes in innovative businesses where its management has expertise and can add value[12] - Effective February 5, 2021, the company changed its name from HF Enterprises Inc to Alset EHome International Inc, and its Nasdaq ticker changed from "HFEN" to "AEI"[14] Property Development Business The primary revenue driver, focusing on land development and lot sales to homebuilders in Texas and Maryland Revenue Contribution from Property Development | Year | Revenue Contribution | | :--- | :--- | | 2020 | 84% | | 2019 | 94% | - The Black Oak project in Texas is a 162-acre development planned for 550-600 residential lots; the company sold 124 lots in January 2019 for $6.175 million but incurred project impairments of approximately $5.2 million in 2019[19][23][24] - The Ballenger Run project in Maryland is a 197-acre development with 479 entitled residential lots, all of which are under a purchase agreement with NVR, Inc; 388 lots have been sold as of December 31, 2020[29][39] - The company is exploring expanding its property business to include building homes for sale or rent, incorporating eco-friendly features, and offering ancillary services[28][46][47] Digital Transformation Technology This segment provides B2B solutions like enterprise messaging and e-commerce platforms through its subsidiary GigWorld Inc - The business focuses on B2B solutions like communications, workflow, e-commerce, and payment systems through its GigWorld platform[49] - GigWorld has a revenue-sharing agreement with iGalen Inc to provide a customized secure app for communication and management, which it plans to market to other network marketing companies[52] - The company is exploring providing technology consulting for Security Token Offerings (STOs), including white paper development and technology design, but has no plans to launch its own token[53] Biohealth Business This division develops and distributes biohealth products, with its main assets transferred to DSS in a 2020 share exchange - Key assets include the 'Linebacker' universal therapeutic drug platform, 'Laetose' low-calorie natural sugar, and a mosquito-repellent fragrance[56][57] - In August 2020, the company completed a share exchange with Document Security Systems, Inc (DSS), transferring its subsidiary Impact BioMedical to DSS, which reduced direct ownership in the biohealth assets but increased the company's stake in DSS[59][60][63] - The company sold its 53% ownership stake in iGalen International Inc on December 30, 2020[71] - The company held an indirect 13.1% equity interest in Vivacitas Oncology Inc, which was subsequently sold to a subsidiary of DSS on March 18, 2021[72] Expansion into New Business Areas The company is strategically expanding into financial services through significant acquisitions in asset management, fund management, and banking - On March 12, 2021, the company agreed to purchase several assets from CEO Chan Heng Fai, financed by issuing convertible notes totaling approximately $63.9 million[99][101] - Acquisitions include 100% of LiquidValue Development Pte Ltd (LVD) for asset management, 15.5% of True Partner Capital Holding Limited for fund management, and 86.4% of American Pacific Bancorp Inc (APB) to enter the banking sector[102][103][104] Risk Factors The company faces risks from internal control weaknesses, a history of losses, customer concentration, and high ownership concentration - Management identified a material weakness in internal controls due to a small number of accounting staff, which could lead to material misstatements in financial reports[106][108] - The company has a history of annual net losses, reporting a net loss of $4.4 million in 2020 and $8.1 million in 2019[111][112] - There is a significant revenue concentration risk, with homebuilder NVR Inc being the sole purchaser of 479 residential lots at the Ballenger project[149] - The company's success is highly dependent on its founder, Chairman, and CEO, Chan Heng Fai[128][129] - As of April 14, 2021, CEO Chan Heng Fai beneficially owns approximately 74.8% of the company's common stock, making it a 'controlled company' under Nasdaq rules[198][199] Properties The company's principal assets are its two real estate development projects in Texas and Maryland - The Black Oak property in Texas totals approximately 168 acres and is planned for about 648 lots (excluding the 124 already sold)[206][207] - The Ballenger Run property in Maryland is approximately 197 acres and is entitled for 689 residential units (479 lots and 210 multi-family units)[209] Legal Proceedings The company is involved in ongoing litigation through a former subsidiary concerning a breach of contract dispute - iGalen International Inc (a subsidiary sold on Dec 30, 2020) and Gara Group, Inc are involved in mutual lawsuits regarding a services agreement[210][211] - Gara Group's complaint seeks $9 million in general damages and $50 million in liquidated damages against iGalen, Alset International, and certain executives[212] PART II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities The company's stock trades on Nasdaq, with an IPO completed in November 2020, and no dividends are anticipated - The company's common stock began trading on the Nasdaq Capital Market on November 24, 2020; the ticker symbol was changed from "HFEN" to "AEI" following a name change[217] - The company completed its IPO on November 27, 2020, raising gross proceeds of $15.12 million by selling 2,160,000 shares at $7.00 per share, with net proceeds of approximately $13.2 million[221][222] - The company has not paid any dividends since inception and does not plan to in the foreseeable future[218] Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue decreased in 2020 due to lower property sales, but net loss narrowed, and the cash position improved significantly post-IPO Financial Performance Summary (2020 vs 2019) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Total Revenue | $16,238,200 | $24,257,953 | | Net Loss | ($4,398,435) | ($8,053,428) | Revenue by Segment (2020 vs 2019) | Segment | 2020 Revenue | 2019 Revenue | Change (%) | | :--- | :--- | :--- | :--- | | Property Development | $13,643,689 | $22,855,446 | -40% | | Biohealth | $2,594,511 | $1,371,298 | +89% | | Other | $0 | $31,209 | -100% | | Total | $16,238,200 | $24,257,953 | -33% | - The decrease in 2020 revenue was mainly driven by a $9.2 million (40%) decline in the property development segment, as 2019 included a large one-time sale of 124 lots from the Black Oak project for $6.175 million[268] - The net loss improved in 2020 primarily because operating expenses decreased significantly, which was mainly due to a $5.2 million impairment of real estate recognized in 2019 that was not repeated in 2020[276][278] - The company's cash position increased from $2.8 million at year-end 2019 to $22.1 million at year-end 2020, driven by $13.2 million in net proceeds from its IPO and $11.4 million from the exercise of subsidiary warrants[289][305] Financial Statements and Supplementary Data The 2020 balance sheet shows substantial growth in assets and equity, driven by IPO proceeds and investment activities Consolidated Balance Sheet Highlights (As of Dec 31) | Account | 2020 | 2019 | | :--- | :--- | :--- | | Assets | | | | Cash | $22,124,491 | $2,774,587 | | Investment in Securities at Fair Value | $48,857,483 | $3,015,698 | | Real Estate Properties under Development | $20,505,591 | $23,884,704 | | Total Assets | $103,316,578 | $35,872,780 | | Liabilities & Equity | | | | Total Liabilities | $8,592,724 | $13,649,449 | | Total Stockholders' Equity | $94,723,854 | $22,223,331 | Consolidated Statement of Operations Highlights (Year Ended Dec 31) | Account | 2020 | 2019 | | :--- | :--- | :--- | | Total Revenue | $16,238,200 | $24,257,953 | | Total Operating Expenses | $17,928,641 | $31,200,994 | | Impairment of Real Estate | $0 | $5,230,828 | | Net Loss | ($4,398,435) | ($8,053,428) | | Net Loss Per Share | ($0.30) | ($0.52) | - The company deconsolidated and then reconsolidated its subsidiary Alset International during 2020 due to ownership percentage changes, resulting in a recorded gain of approximately $53 million upon deconsolidation and a loss of approximately $22 million upon reconsolidation[559][561] - Subsequent to year-end, on March 12, 2021, the company entered into a securities purchase agreement with its CEO to acquire assets valued at $63.9 million, financed through convertible promissory notes[630] Controls and Procedures Management identified a material weakness in internal controls due to limited accounting staff and plans remediation - Management concluded that disclosure controls and procedures were ineffective as of December 31, 2020[635] - A material weakness exists in internal control over financial reporting due to limited staff with US GAAP and SEC experience[638] - The company plans to remediate the weakness by hiring additional qualified personnel with relevant financial accounting and SEC experience[640] PART III Directors, Executive Officers and Corporate Governance The company is led by its founder and CEO, Chan Heng Fai, and operates as a 'controlled company' under Nasdaq rules - The key executive is Chan Heng Fai, age 76, who serves as Founder, Chairman of the Board, and Chief Executive Officer[642][644] - The company is a 'controlled company' because CEO Chan Heng Fai controls a majority of the voting stock, exempting it from certain Nasdaq corporate governance requirements[665] - The Board has an Audit Committee and a Compensation Committee, both composed of directors determined to be independent[666] Executive Compensation CEO compensation is primarily performance-based, tied to market cap and net asset value growth, with no stock awards in 2020 2020 Named Executive Officer Compensation | Name | Position | 2020 Total Compensation | | :--- | :--- | :--- | | Chan Heng Fai | Chairman & CEO | $473,468 | | Lui Wai Leung Alan | Co-CFO | $122,534 | | Rongguo Wei | Co-CFO | $116,184 | | Charles MacKenzie | Chief Development Officer | $240,000 | - A new employment agreement for CEO Chan Heng Fai, effective February 2021, includes a nominal salary and a bonus equal to 5% of the growth in market cap and 5% of the growth in net asset value each year[677] - The company has a 2018 Incentive Compensation Plan reserving 500,000 shares, but no options or awards were granted to named executive officers in 2020[680][681] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters CEO Chan Heng Fai holds a controlling interest of 74.4% of the company's outstanding common stock Beneficial Ownership (as of April 14, 2021) | Name | Shares Beneficially Owned | Percentage of Outstanding Shares | | :--- | :--- | :--- | | Chan Heng Fai | 6,380,000 | 74.4% | | All Directors and Officers (as a group) | 6,380,000 | 74.4% | - Beneficial ownership is based on 8,580,000 shares of common stock outstanding as of April 14, 2021[687] Certain Relationships and Related Transactions, and Director Independence The company has engaged in numerous related-party transactions, primarily with its CEO and his affiliated entities - In April 2020, the company agreed to sell its subsidiary Impact BioMedical to DSS, a company where Chan Heng Fai is Chairman, in a share exchange transaction[702] - Chan Heng Fai provided significant loans to the company; an outstanding loan balance of $4.2 million existed at year-end 2019, which was paid off in 2020[705] - On June 24, 2020, Chan Heng Fai and his holding company surrendered a total of 3,601,000 shares of common stock for no consideration, which were subsequently cancelled[697] - On August 20, 2020, the company acquired 30,000,000 shares of Alset International from Chan Heng Fai in exchange for a $1.33 million note, which was later repaid[698] Principal Accountant Fees and Services Total fees paid to the principal accountant were $196,500 in 2020, a decrease from $224,591 in 2019 Accountant Fees (2020 vs 2019) | Fee Category | 2020 | 2019 | | :--- | :--- | :--- | | Audit Fees | $158,500 | $166,600 | | Audit-Related Fees | $0 | $37,991 | | Tax Fees | $0 | $0 | | All Other Fees | $38,000 | $20,000 | | Total | $196,500 | $224,591 | PART IV Exhibits, Financial Statement Schedules This section lists all financial statements and exhibits filed with the report, including key contracts and certifications - This section provides a list of all financial statements and exhibits filed as part of the annual report[724] - Key exhibits filed include corporate governance documents, material contracts such as the IPO underwriting agreement, and executive certifications[725][730]