Alset EHome International Inc. (now identified in the request as Alset Inc.) — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Comparative Q1 2020 figures are presented as combined following certain common-control transactions. The company is a diversified holding company with property development, digital transformation technology, biohealth and other activities.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $5.61 million | $2.97 million |
| Gross profit / gross margin | $1.91 million / 34.1% | $0.58 million / 19.6% |
| Operating loss | $0.40 million | $0.42 million |
| Net income (loss) | $(9.80) million | $2.26 million |
| Net income (loss) attributable to common stockholders | $(6.24) million | $1.62 million |
| Net cash used in operating activities | $(3.30) million | $(0.18) million |
- Property revenue rose 32% to $3.89 million. Biohealth revenue was $1.71 million, primarily from HWH World, versus $10,782 in the prior-year quarter. No digital-transformation revenue was reported.
- Operating expenses increased 130% to $2.31 million, including higher biohealth distributor commissions and corporate expenses. The filing reports no consolidated operating margin; gross margin improved as biohealth sales expanded.
- Other expense was $8.95 million, versus other income of $2.68 million. The main swing was a $9.54 million unrealized loss on securities investments, compared with a $0.46 million unrealized gain in Q1 2020. A $1.46 million foreign-exchange transaction gain partly offset the loss.
- Cash was $20.37 million and restricted cash $8.64 million at March 31; together, $29.01 million, down from $31.24 million at year-end. Operating cash use reflected higher prepayments and trading-security purchases. Investing activities provided $2.35 million, including proceeds from a related-party sale of Vivacitas investment; financing activities used $0.96 million.
- Total assets were $108.80 million and total liabilities $23.25 million. Current assets were $86.62 million and current liabilities $21.92 million. Current liabilities included $14.84 million of related-party notes payable. Separately, reported notes payable were $0.89 million, including a $0.07 million PPP loan.
Material changes and unusual transactions
- Revenue increased 89% year over year, reflecting more property sales and the launch of HWH World sales in the comparative period. Property cost of sales rose 52% as lot sales increased.
- On March 12, the company agreed to acquire assets from CEO and Chairman Chan Heng Fai for stated consideration of approximately $63.92 million, payable through convertible promissory notes. The transactions included Alset International warrants, LiquidValue Development, True Partner shares and American Pacific Bancorp shares. The notes had a stated $5.59 conversion price, subject to terms and shareholder approval. A $50.77 million beneficial conversion feature was recorded as a debt discount; the filing reports approximately $13.70 million of notes net of discount at quarter-end, plus accrued interest.
- These related-party transactions involve common-control accounting for certain acquisitions, including retrospective combination of APB and LVD in comparative statements. The filing also reports other related-party relationships and transactions, including the Vivacitas sale to DSS, for which the $2.28 million difference between sale price and original cost was recorded in additional paid-in capital rather than earnings.
- At quarter-end, the company had purchased 10 homes for its rental business for $2.16 million. It reported no impairment of real estate projects in the quarter.
Outlook, risks and controls
- No quantified financial guidance is provided. Management said it expected foreign-exchange movements to continue materially affecting results in 2021 because of approximately $25 million of intercompany loans, which it did not expect to repay in the short term. Management also expects property cost of sales to rise as sales increase.
- Management described COVID-19 risks to real-estate demand, construction schedules, government approvals, staffing and cross-border travel. It reported that Ballenger Run lot sales to NVR were 27 in both Q1 2021 and Q1 2020; clubhouse construction had been delayed.
- Property development revenue was highly concentrated: two customers accounted for approximately 97% and 3% of the segment’s Q1 2021 revenue. The filing also identifies risks involving acquisitions and financing, integration, staffing and expense control.
- Management concluded that disclosure controls and procedures were not effective as of March 31, 2021. It reported no material change in internal control over financial reporting during the quarter.
- Subsequent events included a May public offering with approximately $29.2 million net proceeds; the company then used approximately $28.48 million to exercise Alset International warrants. Later warrant exercises increased reported ownership of Alset International to 71.4%. The company also disclosed a $5.56 million interest-free loan from the CEO in May. These occurred after quarter-end and are not Q1 operating results.
- The filing reports no legal proceedings for the period and no off-balance-sheet arrangements it considered reasonably likely to have a material effect.
Important facts for investors to verify
- Review the terms, shareholder-approval conditions, conversion mechanics, dilution potential and related-party governance of the $63.92 million acquisition-note arrangements, including subsequent exchanges into preferred stock.
- Assess the valuation sensitivity and concentration of the securities portfolio, especially the Level 3 investments and the quarter’s $9.54 million unrealized loss.
- Confirm the current unrestricted liquidity, restrictions on cash, related-party obligations and use of public-offering proceeds, including the warrant exercise funding.
- Evaluate dependence on major property customers and the sustainability, margins and costs of the rapidly expanded biohealth business.
- Review remediation of ineffective disclosure controls. Also reconcile share counts: the filing reports 8.58 million common shares outstanding at March 31 but 8,511,637 as of May 24, 2021.