Alset EHome International Inc. (AEI) — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022; filed August 15, 2022. The company is a diversified holding company with real estate, financial services, digital technology, biohealth and consumer businesses in the U.S. and Asia. It reported managing its principal businesses through an 85.4%-owned subsidiary, Alset International Limited. Stockholders had approved a Texas reincorporation and name change to Alset Inc.; this filing is in the prior corporate name.
Financial results and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $0.93 million | $6.54 million | $2.88 million | $12.15 million |
| Gross margin | $0.38 million | $3.94 million | $1.21 million | $5.84 million |
| Operating loss | $(1.65) million | $(4.68) million | $(3.31) million | $(5.08) million |
| Consolidated net loss | $(9.98) million | $(74.89) million | $(17.91) million | $(84.70) million |
| Net loss attributable to common stockholders | $(8.99) million | $(66.65) million | $(15.45) million | $(72.89) million |
| Basic and diluted loss per share | $(0.07) | $(6.03) | $(0.14) | $(7.42) |
- Revenue and margins: Revenue fell 86% in Q2 and 76% for the first half. Gross margin was about 41% in Q2 and 42% for the first half, versus about 60% and 48%, respectively, in 2021.
- Cash flow: First-half operating cash use was $16.13 million, investing cash use $8.31 million, and financing cash provided $6.04 million. Cash and restricted cash ended the period at $42.00 million, down from $60.80 million at year-end 2021.
- Balance sheet and debt: June 30 cash was $41.33 million; total assets $176.07 million; total liabilities $3.91 million; and stockholders’ equity $172.17 million. Notes payable were $77,308, related-party notes payable $412,848, and operating lease liabilities $484,682. The M&T Bank revolving loan balance was zero.
- Asset mix: Real estate assets were $43.14 million, including $25.83 million of rental properties. The company owned 112 single-family rental homes with an aggregate investment of $25.66 million. Investments in securities at fair value were $21.22 million and equity-method investments $52.51 million.
Changes and notable items
- Management attributed lower revenue primarily to reduced Ballenger Run lot sales and lower HWH World direct-sales revenue. The final three Ballenger homes were sold in the first half; rental revenue rose to $636,482 from $21,947 a year earlier as the rental business expanded.
- Biohealth revenue declined 80% in the first half, which management linked mainly to fewer annual memberships while it reorganized its South Korean business model. New digital-technology revenue was $7,701; other-business revenue included a newly operating Singapore café.
- Net losses improved substantially year over year, but comparisons were affected by large 2021 investment losses and $50.84 million of 2021 finance costs, including amortization of a beneficial conversion feature. In the first half of 2022, the company recorded $10.77 million of unrealized and $6.36 million of realized securities losses.
- Foreign-exchange transaction gains were $2.49 million for the first half, while foreign-currency translation reduced comprehensive results. Management said approximately $43 million of intercompany loans remain outstanding and expected currency movements to continue materially affecting results.
- Common shares outstanding increased from 87.37 million at year-end to 148.51 million at June 30. The company reported $6.21 million of first-half common-stock proceeds and a 10-million-share conversion of a related-party note. A separate agreement to issue 35.32 million shares to CEO Chan Heng Fai for Alset International shares was reported as completed July 18; the filing’s share issuance timing and reported share counts warrant reconciliation.
Outlook, risks and controls
- Management said available cash and expected real-estate cash revenue were sufficient for operations for at least the next 12 months; no quantified revenue or earnings guidance was provided.
- Management expected rental revenue to grow as homes are acquired and leased. It also noted potential cost increases from inflation, supply-chain disruption, construction delays, government approvals and seasonal real-estate activity.
- Risks include dependence on a small number of property-development customers, volatile securities valuations, foreign-exchange exposure, execution of a diverse set of businesses, and the ability to finance and integrate acquisitions. Uninsured cash and restricted-cash balances were $38.86 million.
- Management concluded disclosure controls and procedures were not effective as of June 30, 2022. It reported no material change in internal control over financial reporting during the quarter.
- The company reported that litigation involving iGalen and Gara Group was settled on April 13, 2022. Related-party activity includes loans, investment transactions, and consulting arrangements; the filing describes a June 2022 payment of $1.75 million to a director for a proposed stock purchase that was later terminated, with a refund or replacement transaction expected.
- After quarter-end, on July 12, Alset International transferred an $8.35 million AMRE note to DSS in exchange for 21,366,177 DSS shares. The filing also states the Alset International share purchase for 35.32 million AEI shares closed July 18.
Investor verification priorities
- Reconcile the reported 148.51 million shares outstanding with the 35.32 million-share related-party issuance, its stated July 18 closing date, and the cover-page share count as of August 15.
- Review the valuation methods, realized and unrealized losses, and related-party exposure within the company’s securities and equity-method investments, particularly DSS, AMRE and Alset Capital.
- Assess the cash runway against continuing operating cash use, restricted and uninsured cash, and the collectability and terms of related-party receivables and advances.
- Track rental-home occupancy, rent collections and operating costs, and any replacement revenue following the final Ballenger Run lot sales and the HWH World business-model changes.
- Monitor remediation of ineffective disclosure controls and the completion and accounting for the post-quarter transactions.