Alset EHome International Inc. (Nasdaq: AEI) — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. The filing is by Alset EHome International Inc.; the proposed change to Alset Inc. and reincorporation in Texas were subject to a stockholder vote scheduled for June 6, 2022.
Business context
The company is a diversified holding company with real estate, digital transformation technology, biohealth and other activities across the U.S. and Asia. Its principal businesses are managed primarily through its approximately 77%-owned subsidiary Alset International. Real estate includes land development and a growing single-family rental portfolio; biohealth includes direct sales of consumer products.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $1.95 million | $5.61 million |
| Gross profit | $0.84 million | $1.91 million |
| Gross margin | 42.9% | 34.0% |
| Operating loss | $1.65 million | $0.40 million |
| Net loss | $7.93 million | $9.80 million |
| Net loss attributable to common stockholders | $6.47 million | $6.24 million |
| Basic and diluted loss per share | $0.07 | $0.73 |
| Net cash used in operating activities | $5.29 million | $3.30 million |
- Revenue mix: Real estate revenue was $1.27 million, biohealth $0.62 million and other revenue $0.06 million; digital transformation technology reported no revenue. Rental revenue contributed $0.23 million.
- Margins and expenses: Gross margin increased as a percentage of revenue, but gross profit fell with lower sales. Operating expenses rose 8% to $2.49 million, and the operating loss widened.
- Other items and earnings: Net loss improved year over year, largely as the net other-expense burden declined. Q1 2022 included $3.90 million of unrealized and $3.44 million of realized securities losses, partly offset by foreign-exchange gains and other income. In Q1 2021, unrealized securities losses were $9.54 million. The much higher 2022 weighted-average share count—99.2 million versus 8.6 million—also affects per-share comparisons.
- Cash flow and liquidity: Cash was $51.52 million and restricted cash $2.53 million at March 31, totaling $54.05 million, down from $60.80 million at year-end. Investing activities used $7.31 million, including $6.59 million for securities and $0.72 million for real estate; financing provided $6.04 million, principally from conversion of a $6.21 million related-party note to equity. Management said available cash and expected real estate cash generation were sufficient for at least the next 12 months.
- Assets, liabilities and investments: Total assets were $192.83 million and total liabilities $4.34 million, compared with $184.21 million and $13.92 million, respectively, at year-end. Current assets were $151.16 million and current liabilities $3.99 million. Current assets include $50.79 million of securities at fair value, $31.77 million of equity-method investments and $13.28 million of related-party notes receivable.
- Debt and leases: Current notes payable were $0.15 million, including a $0.07 million PPP loan later forgiven; related-party notes payable were $0.95 million. The M&T revolving loan balance was zero at quarter-end, and the Australian loan was repaid in February. Lease liabilities totaled $0.51 million.
Material changes versus the prior comparable period
- Revenue decreased 65% year over year. Real estate revenue fell 67% to $1.27 million, mainly as the Ballenger Run project approached completion; the last three lots were sold in Q1. Biohealth revenue fell 64% to $0.62 million, primarily because of lower annual membership sales.
- Rental operations, which began in Q2 2021, generated $0.23 million of Q1 2022 revenue. The company owned 112 rental homes at March 31, 2022, with an aggregate investment of approximately $25.7 million.
- Operating cash use increased by approximately $2.0 million. Management attributed much of the Q1 2022 operating cash outflow to payment of an accrued $4.8 million bonus.
- Accounts payable and accrued expenses declined to $2.50 million from $11.34 million at year-end. Total liabilities also fell, including after repayment of the M&T loan and Australian loan.
- Alset Capital Acquisition Corp. completed its IPO in February. AEI lost majority ownership and deconsolidated the SPAC, retaining a 23.4% interest at March 31. The balance sheet and equity reflect a $19.39 million deconsolidation-related adjustment; the SPAC offering proceeds are not AEI operating revenue.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance was provided. Management expects rental revenue to increase as it acquires and leases additional homes, but notes results may vary and interim results are not necessarily indicative of future periods.
- Management identified risks including real estate demand and project timing, construction and supply costs, permitting delays, attracting skilled staff, controlling expenses, and integrating acquisitions. Inflation-related cost increases could become significant. Foreign-exchange volatility may continue to affect results because of approximately $42 million of intercompany loans, which management did not expect to repay in the short term.
- The company reported that disclosure controls and procedures were not effective as of March 31, 2022. It reported no material change in internal control over financial reporting during the quarter.
- Related-party matters include a $476,250 interest-free loan to an entity owned by the CEO, related-party investment and financing activity, and the $4.8 million CEO bonus payment. The company reported that the $1.185 million bonus overpayment was repaid in April 2022.
- Several proposed transactions remained subject to approvals: an exchange of all 62.1 million True Partner shares for DSS shares; transfer of an $8.35 million AMRE note to DSS for DSS shares; and acquisition from the CEO of 8.4% of Alset International in exchange for AEI shares. The filing also reported an April 2022 shelf registration allowing offerings of up to $75 million in securities.
- The company disclosed that the iGalen/Gara Group lawsuits were settled on April 13, 2022. The PPP loan was confirmed forgiven in April 2022. These are subsequent events, not Q1 cash flows.
Important facts for investors to verify
- Whether the pending related-party transactions were approved and closed, their final terms, and the resulting dilution and ownership changes.
- The composition, valuation and liquidity of the securities portfolio, given substantial realized and unrealized losses and the company’s large investment exposure relative to its operating revenue.
- Whether cash generation from rentals and remaining real estate activity can support ongoing operations, given Q1 operating cash use and the decline in cash and restricted cash.
- How management plans to remediate ineffective disclosure controls and procedures, and whether subsequent filings report improved controls.
- The status of the proposed company name change and Texas reincorporation, and any securities sold under the $75 million shelf registration.