Alset EHome International Inc. (now Alset Inc.) — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited consolidated results; the 2020 comparative figures were combined retrospectively for certain acquisitions under common control.
Business context
The company is a diversified holding company operating in real estate, biohealth and consumer products, digital transformation technology, and other activities, primarily through its subsidiary Alset International. Its real estate business includes land development and lot sales, as well as a newly launched rental-home business. It reported operations across the United States and several Asian markets and Australia.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $6.54 million | $2.07 million | $12.15 million | $5.03 million |
| Gross margin | $3.94 million | $0.46 million | $5.84 million | $1.04 million |
| Operating loss | $4.68 million | $2.12 million | $5.08 million | $2.55 million |
| Net loss | $74.89 million | $2.43 million | $84.70 million | $0.18 million |
| Net loss attributable to common stockholders | $66.65 million | $1.17 million | $72.89 million | Net income of $0.45 million |
- Six-month real estate revenue increased 70% to $8.48 million; biohealth revenue rose to $3.67 million from $29,202. The company attributed growth to Ballenger Run lot sales and HWH World direct sales. It sold 58 Ballenger Run lots in the first half, compared with 46 in 2020.
- Six-month gross margin was approximately 48% of revenue, versus approximately 21% in the prior-year period. Higher sales contributed, while cost of sales also increased 58%.
- Operating expenses increased 204% to $10.93 million for the first half. Management cited approximately $6 million in subsidiary CEO bonus payments, alongside higher property-development selling costs and biohealth distributor commissions.
- Net results were dominated by other expenses: six-month unrealized securities losses were $30.70 million, and finance costs were $50.84 million. The latter principally reflected amortization of a $50.77 million beneficial-conversion-feature debt discount associated with related-party convertible notes, which were converted to equity during the period.
- Cash was $59.53 million and restricted cash $7.40 million at June 30, compared with $24.97 million and $6.77 million at year-end. Total assets were $127.34 million; total liabilities were $12.27 million. Current assets were $103.00 million and current liabilities $11.68 million.
- Cash used in operating activities was $10.65 million for the first half; investing activities provided $2.23 million and financing activities provided $43.90 million. Financing included $39.27 million net proceeds from common-stock issuance and warrant exercises. Cash and restricted cash totaled $66.93 million at period-end.
- Reported notes payable were $236,683, plus $5.99 million of related-party notes payable, largely current. Related-party advances are repayable on demand. The M&T Bank revolving-loan balance was zero at June 30; an $8 million credit line remained available. The company also reported a $68,502 PPP loan and $168,181 of Australia loan debt.
Changes, outlook, and material risks
- Capital and dilution: The May public offering and warrant exercises generated $39.27 million net proceeds and substantially increased shares outstanding. The company reported 28.27 million shares outstanding at June 30 and 40.15 million as of August 16. A further offering closed July 30, with approximately $28.8 million net proceeds; the company also reported subsequent pre-funded warrant and Series A warrant exercises.
- Going concern: The company reported operating losses and an accumulated deficit of $117.80 million. Management said these conditions could raise substantial doubt about continued operations, but believed its cash, expected operating inflows, borrowing plans, and available M&T credit line alleviated the initial doubt. It cautioned that liquidity plans may not succeed. Management prioritized operating needs over repayment of related-party debt.
- Outlook: No quantified revenue, earnings, or cash-flow guidance was provided. Management expected rental revenue to grow as it acquired and leased more homes. It cited potential acquisition and expansion opportunities, while noting financing, integration, staffing, and expense-control challenges.
- Key risks and unusual items: Two customers represented 97% and 3% of property and development revenue in the first half. The company held $63.97 million of uninsured cash and restricted cash. Market-price volatility in securities and foreign-exchange movements on approximately $27.1 million of intercompany loans may materially affect results. COVID-19 could disrupt construction, approvals, staffing, and demand; management reported a prior clubhouse construction delay.
- Several transactions involved CEO and founder Chan Heng Fai or other related parties, including acquisitions, loans, security sales, and note conversions. The company recorded no gain on the related-party Vivacitas sale and treated the difference as additional paid-in capital.
- Management concluded disclosure controls and procedures were not effective as of June 30, 2021. No material change in internal control over financial reporting was reported during the quarter. No legal proceedings were reported for the period.
Important facts for investors to verify
- How much of the reported loss reflects recurring operating performance versus noncash debt-discount amortization and investment fair-value changes.
- The liquidity available for operations after restricted cash, operating cash burn, and demand repayment rights on related-party loans are considered.
- The terms, actual use of proceeds, and full dilution effects of the May and July offerings, including outstanding warrants and subsequent exercises.
- The valuation and concentration risks in the investment portfolio, including related-party holdings and securities measured using significant unobservable inputs.
- Progress on remediation of ineffective disclosure controls, and the company’s ability to meet its stated liquidity and operating plans.