Alset Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements This Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For this purpose, any statements contained in this Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as “may”, “will”, “expect”, “believe”, “anticipate”, “estimate” or “continue” or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially depending on a variety of factors, many of which are not within our control. These factors include by are not limited to economic conditions generally and in the industries in which we may participate, competition within our chosen industry, including competition from much larger competitors, technological advances and failure to successfully develop business relationships. Business Overview We are a diversified holding company principally engaged through our subsidiaries in the development of EHome communities and other real estate, financial services, digital transformation technologies, biohealth activities and consumer products with operations in the United States, Singapore, Hong Kong, Australia and South Korea. We manage our principal businesses primarily through our 77% owned subsidiary, Alset International Limited, a public company traded on the Singapore Stock Exchange. Through this subsidiary (and indirectly, through other public and private U.S. and Asian subsidiaries), we are actively developing real estate projects near Houston, Texas and in Frederick, Maryland in our real estate segment. Recently, the Company expanded its real estate portfolio to single family rental homes, and we currently own 112 homes that are rented or are available for rent. We have designed applications for enterprise messaging and e-commerce software platforms in the United States and Asia in our digital transformation technology business unit. Our biohealth segment includes the sale of consumer products. As of March 31, 2022, additional interests we held included a 41.3% equity interest in American Pacific Bancorp Inc., an indirect 15.8% equity interest in Holista CollTech Limited, a 15.5% equity interest in True Partner Capital Holding Limited, a 28.2% equity interest in DSS Inc. (“DSS”), an 18% equity interest in Value Exchange International, Inc., a 7.7% equity interest in American Premium Water Corp., and an interest in Alset Capital Acquisition Corp. (“Alset Capital”). American Pacific Bancorp Inc. is a financial network holding company. Holista CollTech Limited is a public Australian company that produces natural food ingredients (ASX: HCT). True Partner Capital Holding Limited is a public Hong Kong company which operates as a fund management company in the U.S. and Hong Kong. DSS is a multinational company operating businesses within nine divisions: product packaging, biotechnology, direct marketing, commercial lending, securities and investment management, alternative trading, digital transformation, secure living, and alternative energy. DSS Inc. is listed on the NYSE American (NYSE: DSS). Value Exchange International, Inc. is a provider of information technology services for businesses, and is traded on the OTCQB (OTCQB: VEII). American Premium Water Corp. is a publicly traded company that was engaged in the sale of consumer products (OTCPK: HIPH). Subsequent to the period covered by this report, American Premium Water Corp. changed its name to American Premium Mining Corporation to reflect its new line of business, crypto-mining. Our equity interest in American Premium Mining Corporation has been reduced to 0.8% following stock issuances by that company. Alset Capital is a newly organized blank check company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses and is listed on the Nasdaq (Nasdaq: ACAXU, ACAX, ACAXW and ACAXR). Recent Developments Sale of Securities of True Partner Limited On January 18, 2022, the Company entered into a stock purchase agreement with DSS, Inc., pursuant to which the Company has agreed to sell, through the transfer of subsidiary and otherwise, 62,122,908 shares of stock of True Partner Capital Holding Limited in exchange for 11,397,080 shares of the common stock of DSS. On February 28, 2022 the Company entered into a revised Stock Purchase Agreement with DSS, Inc., pursuant to which the Company has agreed to replace the January 18, 2022 agreement with a new agreement to sell a subsidiary holding 44,808,908 shares of stock of True Partner Capital Holding Limited, together with an additional 17,314,000 shares of True Partner Capital Holding Limited (for a total of 62,122,908 shares, representing all of our shares in such entity) in exchange for 17,570,948 shares of common stock of DSS (the “DSS Shares”). The issuance of the DSS Shares will be subject to the approval of the NYSE American (on which the common stock of DSS is listed) and DSS’s shareholders. 3 Purchase of Shares of DSS On January 25, 2022, the Company agreed to purchase 44,619,423 shares of DSS’s common stock for a purchase price of $0.3810 per share, for an aggregate purchase price of $17,000,000. On February 28, 2022, the Company and DSS agreed to amend this stock purchase agreement. The number of shares of the common stock of DSS that the Company agreed to purchase was reduced to 3,986,877 shares for an aggregate purchase price of $1,519,000. Such acquisition of shares of DSS closed on March 9, 2022. Sale of Note to DSS On February 25, 2022, Alset International entered into an assignment and assumption agreement with DSS pursuant to which DSS has agreed to purchase a convertible promissory note from Alset International. The note has a principal amount of $8,350,000 and accrued but unpaid interest of $367,400 through May 15, 2022. The note was issued by American Medical REIT, Inc. The consideration to be paid for the note will be 21,366,177 shares of DSS’s common stock. The number of DSS shares to be issued as consideration was calculated by dividing $8,717,400, the aggregate of the principal amount and the accrued but unpaid interest under the Note, by $0.408 per share. The number of shares of DSS common stock to be issued as consideration may be adjusted based on the accrued interest if the parties should agree to close this transaction on a date other than the originally anticipated date of May 15, 2022. The closing of the assumption agreement and the issuance of the DSS shares described above will be subject to the approval of the NYSE American and DSS’s shareholders. Purchase of Alset International shares On January 17, 2022 the Company entered into securities purchase agreement with Chan Heng Fai, pursuant to which the Company agreed to purchase from Chan Heng Fai 293,428,200 ordinary shares of Alset International for a purchase price 29,468,977 newly issued shares of the Company’s common stock. On February 28, 2022, the Company and Mr. Chan entered into an amendment to this securities purchase agreement pursuant to which the Company shall purchase these 293,428,200 ordinary shares of Alset International for a purchase price of 35,319,290 newly issued shares of the Company’s common stock. The closing of this transaction with Mr. Chan is subject to approval of the Nasdaq and the Company’s stockholders. These 293,428,200 ordinary shares of Alset International represent approximately 8.4% of the 3,492,713,362 total issued and outstanding shares of Alset International. The Company has scheduled a Special Meeting of Stockholders to vote on the approval of this transaction for June 6, 2022. Initial Public Offering of Alset Capital Acquisition Corp. On February 3, 2022 Alset Capital Acquisition Corp. (“Alset Capital”), a special purpose acquisition company sponsored by the Company and certain affiliates, closed its initial public offering of 7,500,000 units at $10 per unit. Each unit consisted of one of Alset Capital’s shares of Class A common stock, one-half of one redeemable warrant and one right to receive one-tenth of one share of Class A common stock upon the consummation of an initial business combination. Each whole warrant entitles the holder thereof to purchase one share of Class A common stock at a price of $11.50 per share. Only whole warrants are exercisable. The underwriters exercised their over-allotment option in full for an additional 1,125,000 units on February 1, 2022, which closed at the time of the closing of the Offering. As a result, the aggregate gross proceeds of this offering, including the over-allotment, were $86,250,000, prior to deducting underwriting discounts, commissions, and other offering expenses. On February 3, 2022, simultaneously with the consummation of Alset Capital’s initial public offering, Alset Capital consummated the private placement of 473,750 units (the “Private Placement Units”) to the Sponsor, which amount includes 33,750 Private Placement Units purchased by the Sponsor in connection with the underwriters’ exercise of the over-allotment option in full, at a price of $10.00 per Private Placement Unit, generating gross proceeds of approximately $4.7 million (the “Private Placement”) the proceeds of which were placed in the trust account. No underwriting discounts or commissions were paid with respect to the Private Placement. The Private Placement Units are identical to the units sold in the initial public offering, except that (a) the Private Placement Units and their component securities will not be transferable, assignable or saleable until 30 days after the consummation of Alset Capital’s initial business combination except to permitted transferees and (b) the warrants and rights included as a component of the Private Placement Units, so long as they are held by the Sponsor or its permitted transferees, will be entitled to registration rights, respectively. The Company and its majority-owned subsidiary Alset International each own 45% of the sole member of Alset Acquisition Sponsor, LLC, the sponsor of Alset Capital, with the remaining 10% of the sole member of the sponsor owned by Alset Investment Pte. Ltd., a company owned by the Company’s Chairman, Chief Executive Officer and largest stockholder, Chan Heng Fai. 4 Potential Name Change The Company has scheduled a Special Meeting of Stockholders on June 6, 2022, to approve the reincorporation of the Company in Texas and the change of the Company’s name to “Alset Inc.” Should stockholders approve the new name, we believe that such new name will more fully reflect its current business model. Financial Impact of the COVID-19 Pandemic Real Estate Projects The extent to which the COVID-19 pandemic may impact our business will depend on future developments, which are highly uncertain and cannot be predicted. The COVID-19 pandemic’s far-reaching impact on the global economy could negatively affect various aspects of our business, including demand for real estate. From March 2020 through the first quarter of 2022, we continued to sell lots at our Ballenger Run project (in Maryland) to NVR for the construction of single-family homes. At this time, all of the lots at Ballenger Run have been sold to NVR, however we continue to complete our development requirements under our agreements with NVR. We do not anticipate that the COVID-19 pandemic will have a material impact on the timing of the completion of our remaining tasks at Ballenger Run. We have received strong indications that buyers and renters across the country are expressing interest in moving from more densely populated urban areas to the suburbs. We believe this trend, should it continue, will encourage interest in our Lakes at Black Oak project, an Alset EHome community. The COVID-19 pandemic could impact the ability of our staff and contractors to continue to work, and our ability to conduct our operations in a prompt and efficient manner. In 2020, we experienced a slowdown in the construction of a clubhouse at the Ballenger Run project, which was completed behind schedule. We believe this delay was caused in part by policies requiring lower numbers of contractors working in indoor space. The infrastructure design, engineering and construction for the Black Oak project, and other planned projects, could be impacted by the COVID-19 pandemic in the future. In addition, we believe the COVID-19 pandemic could continue to have an impact on supply chains and commodities in the future, which may impact our real estate business by causing increased costs and longer project durations. The COVID-19 pandemic may adversely impact the timeliness of local government in granting required approvals. Accordingly, the COVID-19 pandemic may cause the completion of important stages in our real estate projects to be delayed. Other Business Activities The COVID-19 pandemic may adversely impact our potential to expand our business activities in ways that are difficult to assess or predict. The COVID-19 pandemic continues to evolve. The COVID-19 pandemic has impacted, and may continue to impact, the global supply of certain goods and services in ways that may impact the sale of products to consumers that we, or companies we may invest in or partner with, will attempt to make. The COVID-19 pandemic may prevent us from pursuing otherwise attractive opportunities. COVID-19 pandemic has impacted our operations in South Korea; since the start of the pandemic, the South Korean government has at various times placed certain restrictions on business meetings to reduce the spread of COVID-19. Such restrictions have impacted our ability to recruit potential affiliate sales personnel, and to introduce products to a larger audience. 5 Impact on Staff Most of our U.S. staff works out of our Bethesda, Maryland office. Our U.S. staff has shifted to mostly working from home since March 2020, but this has had a minimal impact on our operations to date. Our staff in Singapore and Hong Kong has been able to work from home when needed with minimal impact on our operations, however our staff’s ability to travel between our Hong Kong and Singapore offices has been significantly limited, and our staff’s travel between the U.S. and non-U.S. offices has been suspended since March 2020. The COVID-19 pandemic has also impacted the frequency with which our management would otherwise travel to the Black Oaks project; however, we have a contractor in Texas providing supervision of the project. Management continues to regularly supervise the Ballenger Run project. Limitations on the mobility of our management and staff may slow down our ability to enter into new transactions and expand existing projects. We have not reduced our staff in connection with the COVID-19 pandemic. To date, we did not have to expend significant resources related to employee health and safety matters related to the COVID-19 pandemic. We have a small staff, however, and the inability of any significant number of our staff to work due to illness or the illness of a family member could adversely impact our operations. Matters that May or Are Currently Affecting Our Business In addition to the matters described above, the primary challenges and trends that could affect or are affecting our financial results include: ● Our ability to improve our revenue through cross-selling and revenue-sharing arrangements among our diverse group of companies; ● Our ability to identify complementary businesses for acquisition, obtain additional financing for these acquisitions, if and when needed, and profitably integrate them into our existing operation; ● Our ability to attract competent, skilled technical and sales personnel for each of our businesses at acceptable compensation levels to manage our overhead; and ● Our ability to control our operating expenses as we expand each of our businesses and product and service offerings. Results of Operations Summary of Statements of Operations for the Three Months Ended March 31, 2022 and 2021 Three- Months Ended March 31, 2022 March 31, 2021 Revenue $ 1,952,237 $ 5,606,914 Operating Expenses $ (3,605,778 ) $ (6,010,359 ) Other Expense $ (6,054,798 ) $ (8,949,966 ) Income Tax Expense $ (222,114 ) $ (451,337 ) Net Loss $ (7,930,453 ) $ (9,804,748 ) Revenue The following tables set forth period-over-period changes in revenue for each of our reporting segments: Three Months Ended March 31, Change 2022 2021 Dollars Percentage Real Estate $ 1,274,106 $ 3,894,131 $ (2,620,025 ) -67 % Biohealth 617,471 1,712,783 (1,095,312 ) -64 % Other 60,660 - 60,660 100 % Total revenue $ 1,952,237 $ 5,606,914 $ (3,654,677 ) -65 % 6 Revenue was $1,952,237 and $5,606,914 for the three months ended March 31, 2022 and 2021, respectively. The decrease in property sales from the Ballenger Project and direct sales from our indirect subsidiary HWH World in the first quarter of 2022 contributed to lower revenue in those periods. In the first three months of 2022 the last three homes in Ballenger Project were sold. In this project, builders are required to purchase a minimum number of lots based on their applicable sale agreements. We collect revenue from the sale of lots to builders. We are not involved in the construction of homes at the present time. Income from the sale of Front Foot Benefits (“FFBs”), assessed on Ballenger project lots, decreased from $107,071 in the three months ended March 31, 2021 to $77,012 in the three months ended March 31, 2022. The decrease is a result of the decreased sale of properties to homebuyers in 2022. In the second quarter of 2021, the Company started renting homes to tenants. Revenue from this rental business was $232,582 in the three months ended March 31, 2022. The Company expects that the revenue from this business will continue to increase as we acquire more rental houses and successfully rent them. In recent years, the Company expanded its biohealth segment to the Korean market through one of the subsidiaries of Health Wealth Happiness Pte. Ltd., HWH World Inc (“HWH World”). HWH World operates based on a direct sale model of health supplements. HWH World recognized $617,471 and $1,712,783 in revenue in three months ended March 31, 2022 and 2021, respectively. The decrease in revenue from HWH World is caused mainly by decreased sales of annual memberships. The category described as “Other” includes corporate and financial services and new venture businesses. “Other” includes certain costs that are not allocated to the reportable segments, primarily consisting of unallocated corporate overhead costs, including administrative functions not allocated to the reportable segments from global functional expenses. The financial services and new venture businesses are small and diversified, and accordingly they are not separately addressed as one independent category. In the three months ended March 31, 2022 and 2021, the revenue from other businesses was $60,660 and $0, respectively, generated by Singaporean café shop. Operating Expenses The following tables sets forth period-over-period changes in cost of revenues for each of our reporting segments: Three Months Ended March 31, Change 2022 2021 Dollars Percentage Real Estate $ 1,093,709 $ 3,614,832 $ (2,521,123 ) -70 % Biohealth 12,038 83,022 (70,984 ) -86 % Other 8,803 - 8,803 100 % Total Cost of Revenues $ 1,114,550 $ 3,697,854 $ (2,583,304 ) -70 % Cost of revenues decreased from 3,697,854 in the three months ended March 31, 2021 to $1,114,550 in the three months ended March 31, 2022, as a result of the decrease in sales in the Ballenger Run project and HWH World sales. Capitalized construction expenses, finance costs and land costs are allocated to sales. We anticipate the total cost of revenues to increase as revenue increases. 7 The gross margin decreased from $1,909,060 to $837,687 in the three months ended March 31, 2021 and 2022, respectively. The decrease of gross margin was caused by the decrease in sales in the Ballenger Run project and HWH World sales. The following tables sets forth period-over-period changes in operating expenses for each of our reporting segments. Three Months Ended March 31, Change 2022 2021 Dollars Percentage Real Estate $ 536,765 $ 359,489 $ 177,276 49 % Biohealth 620,342 846,480 (226,138 ) -27 % Digital transformation technology 114,263 30,128 84,135 279 % Other 1,219,858 1,076,408 143,450 13 % Total operating expenses $ 2,491,228 $ 2,312,505 $ 178,723 8 % The increase of operating expenses of real estate in 2022 compared with 2021 was mostly caused by the increase in sales and rental related expenses. Decrease in expenses in our biohealth business is caused by the decreased commission payments to our distributors, which is connected to decreased sales. Additionally, the increase in professional fees and employee salaries and bonuses in our other businesses contributed to increased operating expenses in three months ended March 31, 2022, as compared to the same period in 2021. Other Income (Expense) In the three months ended March 31, 2022, the Company had other expense of $6,054,798 compared to other expenses of $8,949,966 in the three months ended March 31, 2021. The change in realized and unrealized loss on securities investments are the primary reasons for the volatility in these two periods. Unrealized loss on securities investment was $3,899,015 in the three months ended March 31, 2022, compared to $9,535,009 loss in the three months ended March 31, 2021. Realized loss on security investment was $3,436,783 the three months ended March 31, 2022, compared to a loss of $258,245 in the three months ended March 31, 2021. Net Loss In the three months ended March 31, 2022 the Company had net loss of $7,930,453 compared to net loss of $9,804,748 in the three months ended March 31, 2021. Liquidity and Capital Resources Our real estate assets have increased to $40,851,806 as of March 31, 2022 from $40,515,380 as of December 31, 2021. This increase primarily reflects the additional rental properties we purchased in first quarter of 2022. In the three months ended March 31, 2022, we purchased 3 homes, which will be used in the Company’s rental business. Our rental properties assets were $25,402,436 as of March 31, 2022. In February of 2022, one of the Company’s subsidiaries sold one of the two plots of land it owns in Australia (which had been planned to be part of the SeD Perth project). Our cash has decreased from $56,061,309 as of December 31, 2021 to $51,520,971 as of March 31, 2022. Our liabilities decreased from $13,920,357 at December 31, 2021 to $4,336,506 at March 31, 2022. Our total assets have increased to $192,830,587 as of March 31, 2022 from $184,210,143 as of December 31, 2021 mainly due to the increase in investments in securities. The management believes that the available cash in bank accounts and favorable cash revenue from real estate projects are sufficient to fund our operations for at least the next 12 months. 8 Summary of Cash Flows for the Three Months Ended March 31, 2022 and 2021 Three Months Ended March 31 2022 2021 Net cash used in operating activities $ (5,293,582 ) $ (3,304,857 ) Net cash (used in) provided by investing activities $ (7,311,776 ) $ 2,352,536 Net cash provided by (used in) financing activities $ 6,044,640 $ (956,264 ) Cash Flows from Operating Activities Net cash used in operating activities was $5,293,582 in the first three months of 2022, as compared to net cash used in operating activities of $3,304,857 in the same period of 2021. The payment of accrued $4,800,000 contributed to the decrease of cash in operating activities in the first three months of 2022. Cash Flows from Investing Activities Net cash used in investing activities was $7,311,776 in the first three months of 2022, as compared to net cash provided by investing activities of $2,352,536 in the same period of 2021. In the three months ended March 31, 2022 we invested $6,585,294 in marketable securities, $722,817 to purchase real estate properties and $3,665 in office equipment. In the three months ended March 31, 2021 we invested $108,208 in marketable securities and we received approximately $2.5 million from the sale of Vivacitas Oncology to a related party. Cash Flows from Financing Activities Net cash provided by financing activities was $6,044,640 in the three months ended March 31, 2022, compared to net cash used of $956,264 the three months ended March 31, 2021. The increase in cash provided by financing activities in the first three months of 2022 is primarily caused by the proceeds from stock issuance of $6,213,000. Additionally, the Company repaid $168,360 to loan payable. During the three months ended March 31, 2021, we received cash proceeds of $7,484 from exercise of subsidiary warrants, $250,000 from the sale of our GigWorld shares to individual investors and $68,502 from a loan. The Company also distributed $82,250 to one minority interest investor and repaid $1,200,000 of promissory note held by related parties. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures. Impact of Inflation We believe that inflation has not had a material impact on our results of operations for the three months ended March 31, 2022 or the year ended December 31, 2021. Our current and anticipated costs in our real estate and other business lines have increased due to recent inflation, including projected costs of materials and salaries, and such increases may be significant as we engage in additional operations. We cannot assure you that future inflation will not have an adverse impact on our operating results and financial condition. Impact of Foreign Exchange Rates The effect of foreign exchange rate changes on the intercompany loans (under ASC 830), which mostly consist of loans from Singapore to the United States and which were approximately $42 million and $43 million on March 31, 2022 and December 31, 2021, respectively, are the reason for the significant fluctuation of foreign currency transaction Gain or Loss on the Condensed Consolidated Statements of Operations and Other Comprehensive Loss. Because the intercompany loan balances between Singapore and United States will remain at approximately $42 million over the next year, we expect this fluctuation of foreign exchange rates to still significantly impact the results of operations in 2022, especially given that the foreign exchange rate may and is expected to be volatile. If the amount of intercompany loan is lowered in the future, the effect will also be reduced. However, at this moment, we do not expect to repay the intercompany loans in the short term. 9 Emerging Growth Company Status We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of these exemptions until we are no longer an emerging growth company or until we affirmatively and irrevocably opt out of this exemption. Seasonality The real estate business is subject to seasonal shifts in costs as certain work is more likely to be performed at certain times of year. This may impact the expenses of Alset EHome Inc. from time to time. In addition, should we commence building homes, we are likely to experience periodic spikes in sales as we commence the sales process at a particular location. Item 3. Quantitative and Qualitative Disclosures about Market Risk As a “smaller reporting company” as defined by Item 10(f)(1) of Regulation S-K, the Company is not required to provide the information required by this Item.