UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: JuneSeptember 30, 2022
orOR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-55997
SHARING SERVICES GLOBAL CORPORATION
(Exact name of registrant as specified in its charter)
| Nevada | 30-0869786 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
(469) 304-9400
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange in which registered | ||
| N/A | N/A | N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company. See the definitions of “large accelerated filer,acceleratedfiler,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
| Non-accelerated filer | ☐ | Smaller reporting company | ☒ | |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes☐Yes ☐ No ☒
As of August 12,November 9, 2022, there were shares of the issuer’s Class A Common Stock outstanding.
TABLE OF CONTENTS
| 2 |
In its fiscal year 2021, the Company changed its fiscal year-end from a fiscal year ending on April 30 to a fiscal year ending on March 31st in this Quarterly Report, references to “the Company,” “Sharing Services,” “our company,” “we,” “our,” “ours,” and “us” refer to Sharing Services Global Corporation and its consolidated subsidiaries unless otherwise indicated or the context otherwise requires. During the quarter ended September 30, 2022, the Company decided to change its fiscal year-end from a fiscal year ending March 31st to a fiscal year ending December 31st. Accordingly, the Company will report its 2022 year-end consolidated financial statements as of and for the year ending December 31, 2022.
cautionary notice regarding forward-looking statements
Statements in this Quarterly Report and in any documents incorporated by reference herein which are not purely historical, or which depend upon future events, may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements generally contain words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “potential,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “will likely,” “would,” or the negative of such words and/or similar expressions. However, not all forward-looking statements contain these words.
Readers should not place undue reliance upon the Company’s forward-looking statements since such statements speak only as of the date they were made. Such forward-looking statements may refer to events that ultimately do not occur, or may occur to a different extent, or occur at a different time than such forward-looking statements describe. Except to the extent required by federal securities laws, the Company undertakes no obligation to publicly update or revise any forward-looking statements contained in this Quarterly Report and in any documents incorporated by reference herein, whether as a result of new information, future events, or otherwise. The Company acknowledges that all forward-looking statements involve risks and uncertainties that could cause actual events and/or results to differ materially from the events and/or results described in the forward-looking statements.
| 3 |
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
The following unaudited financial statements: condensed consolidated balance sheets as of JuneSeptember 30, 2022, condensed consolidated statements of operations and comprehensive income (loss),loss for the three and six months ended September 30, 2022 and 2021, condensed consolidated statements of cash flows, and condensed consolidated statements of changes in stockholders’ equity for the threesix months ended JuneSeptember 30, 2022 and 2021, are those of Sharing Services Global Corporation and its subsidiaries.
Index to Unaudited Condensed Consolidated Financial Statements
| 4 |
SHARING SERVICES GLOBAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2022 | March 31, 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 6,458,865 | $ | 17,023,266 | ||||
| Trade accounts receivable, net | 1,757,494 | 1,682,958 | ||||||
| Income taxes receivable | - | 300,000 | ||||||
| Inventory, net | 3,524,236 | 4,374,236 | ||||||
| Notes receivable, net | 241,942 | - | ||||||
| Other current assets, net | 1,519,741 | 3,511,282 | ||||||
| Total Current Assets | 13,502,278 | 26,891,742 | ||||||
| Property and equipment, net | 9,554,577 | 9,585,141 | ||||||
| Right-of-use assets, net | 473,993 | 593,389 | ||||||
| Deferred income tax assets, net | 81,208 | 81,205 | ||||||
| Investment in unconsolidated entities, net | 1,370,242 | 5,063,940 | ||||||
| Investment in marketable securities | 6,506,547 | - | ||||||
| Intangible assets, net | 616,804 | 688,670 | ||||||
| Other assets | 1,171,267 | 260,637 | ||||||
| TOTAL ASSETS | $ | 33,276,916 | $ | 43,164,724 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | 940,528 | $ | 985,139 | ||||
| Accrued sales commission payable | 3,061,475 | 3,745,481 | ||||||
| Employee stock warrants liability | 299,669 | 452,050 | ||||||
| State and local taxes payable | 1,413,613 | 1,339,366 | ||||||
| Note payable - related party, net of unamortized debt discount and unamortized deferred loan cost of $699,056 as of September 30, 2022 | 10,952,513 | - | ||||||
| Accrued and other current liabilities | 3,364,308 | 3,079,782 | ||||||
| Convertible notes payable, related parties, net of unamortized debt discount and unamortized deferred loan cost of and $17,396,771 as of September 30, 2022, $20,151,230 as of March 31, 2022, respectively. | 9,603,229 | 9,898,770 | ||||||
| Total Current Liabilities | 29,635,335 | 19,500,588 | ||||||
| Settlement liability, long-term | - | 373,677 | ||||||
| Lease liability, long-term | 413,587 | 461,515 | ||||||
| TOTAL LIABILITIES | 30,048,922 | 20,335,780 | ||||||
| Commitments and contingencies | - | - | ||||||
| Stockholders’ Equity | ||||||||
| Preferred stock, $ par value, shares authorized: | ||||||||
| Series A convertible preferred stock, $ par value, shares designated, shares issued and outstanding as of September 30, 2022, and March 31, 2022, respectively | 310 | 310 | ||||||
| Series B convertible preferred stock, $par value, shares designated, shares issued and outstanding as of September 30 and March 31, 2022 | - | - | ||||||
| Series C convertible preferred stock, $par value, shares designated, shares issued and outstanding as of September 30 and March 31, 2022, respectively | 322 | 322 | ||||||
| Preferred stock value | 322 | 322 | ||||||
| Common stock, $ par value, shares authorized: | ||||||||
| Class A common stock, $ par value, shares designated, shares and shares issued and outstanding as of September 30 and March 31, 2022, respectively | 26,283 | 28,892 | ||||||
| Class B common stock, $ par value, shares designated, shares issued and outstanding as of September 30, 2022, and March 31, 2022 | - | - | ||||||
| Treasury Stock, shares, at cost | (626,187 | ) | - | |||||
| Additional paid in capital | 81,913,495 | 80,738,719 | ||||||
| Shares to be issued | 12,146 | 12,146 | ||||||
| Accumulated deficit | (77,625,249 | ) | (57,886,336 | ) | ||||
| Accumulated other comprehensive loss | (473,126 | ) | (65,109 | ) | ||||
| Total Stockholders’ Equity | 3,227,994 | 22,828,944 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 33,276,916 | $ | 43,164,724 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 5 |
SHARING SERVICES GLOBAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETSSTATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
| June 30, 2022 | March 31, 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 14,453,492 | $ | 17,023,266 | ||||
| Trade accounts receivable, net | 1,889,118 | 1,682,958 | ||||||
| Income taxes receivable | - | 300,000 | ||||||
| Inventory, net | 4,132,781 | 4,374,236 | ||||||
| Other current assets, net | 2,428,486 | 3,511,282 | ||||||
| Total Current Assets | 22,903,877 | 26,891,742 | ||||||
| Property and equipment, net | 9,586,821 | 9,585,141 | ||||||
| Right-of-use assets, net | 527,492 | 593,389 | ||||||
| Deferred income taxes, net | 81,205 | 81,205 | ||||||
| Investment in unconsolidated entities, net | 9,929,294 | 5,063,940 | ||||||
| Intangible assets | 652,761 | 688,670 | ||||||
| Other assets, net | 170,597 | 260,637 | ||||||
| TOTAL ASSETS | $ | 43,852,047 | $ | 43,164,724 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | 575,000 | $ | 985,139 | ||||
| Accrued sales commission payable | 3,247,913 | 3,745,481 | ||||||
| Employee stock warrants liability | 344,463 | 452,050 | ||||||
| State and local taxes payable | 1,381,888 | 1,339,366 | ||||||
| Note payable, related party | 5,687,500 | - | ||||||
| Accrued and other current liabilities | 2,669,096 | 3,079,782 | ||||||
| Convertible notes payable, related parties, net of unamortized debt discount and unamortized deferred loan cost of 20,033,135 and 20,151,230 as of June 30, 2022, and March 31, 2022, respectively. | 7,016,865 | 9,898,770 | ||||||
| Total Current Liabilities | 20,922,725 | 19,500,588 | ||||||
| Deferred income tax liability, net | 550,780 | - | ||||||
| Settlement liability, long term portion | - | 373,677 | ||||||
| Lease liability, long-term | 461,515 | 461,515 | ||||||
| TOTAL LIABILITIES | 21,935,020 | 20,335,780 | ||||||
| Commitments and contingencies | - | |||||||
| Stockholders’ Equity | ||||||||
| Preferred stock, $ par value, shares authorized: | ||||||||
| Series A convertible preferred stock, $ par value, shares designated, shares issued and outstanding as of June 30, 2022, and March 31, 2022, respectively | 310 | 310 | ||||||
| Series B convertible preferred stock, $ par value, shares designated, shares issued and outstanding at June 30 and March 31 | - | - | ||||||
| Series C convertible preferred stock, $ par value, shares designated, shares and shares issued and outstanding at June 30 and March 31, 2022, respectively | 322 | 322 | ||||||
| Preferred stock, value | 322 | 322 | ||||||
| Common Stock, $ par value, shares authorized: | ||||||||
| Class A common stock, $ par value, shares designated, shares and shares issued and outstanding at June 30 and March 31, 2022, respectively | 28,892 | 28,892 | ||||||
| Class B common stock, $ par value, shares designated, shares issued and outstanding | - | - | ||||||
| Common stock value | - | - | ||||||
| Treasury Stock, shares, at cost | (626,187 | ) | - | |||||
| Additional paid in capital | 81,950,266 | 80,738,719 | ||||||
| Shares to be issued | 12,146 | 12,146 | ||||||
| Accumulated deficit | (59,239,346 | ) | (57,886,336 | ) | ||||
| Accumulated other comprehensive loss | (209,376 | ) | (65,109 | ) | ||||
| Total Stockholders’ Equity | 21,917,027 | 22,828,944 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 43,852,047 | $ | 43,164,724 | ||||
| Three Months Ended | Six Months Ended | |||||||||||||||
| September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||
| Net sales | $ | 4,188,152 | $ | 9,873,300 | $ | 9,491,770 | $ | 21,084,827 | ||||||||
| Cost of goods sold | 1,759,776 | 2,924,439 | 3,416,804 | 6,278,250 | ||||||||||||
| Gross profit | 2,428,376 | 6,948,861 | 6,074,966 | 14,806,577 | ||||||||||||
| Operating expenses | ||||||||||||||||
| Selling and marketing expenses | 2,037,596 | 5,022,160 | 4,795,396 | 10,172,635 | ||||||||||||
| General and administrative expenses | 4,557,922 | 5,540,701 | 9,108,825 | 10,269,011 | ||||||||||||
| Total operating expenses | 6,595,518 | 10,562,861 | 13,904,221 | 20,441,646 | ||||||||||||
| Operating loss | (4,167,142 | ) | (3,614,000 | ) | (7,829,255 | ) | (5,635,069 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense, net | (3,321,410 | ) | (3,126,358 | ) | (6,441,464 | ) | (6,056,372 | ) | ||||||||
| Gain on employee warrants liability | 52,875 | 646,930 | 167,835 | 1,781,100 | ||||||||||||
| Gain on extinguishment of debt | - | - | - | 1,040,400 | ||||||||||||
| Unrealized gain (loss) on investments | (11,553,933 | ) | 2,114,970 | (6,669,760 | ) | 2,114,970 | ||||||||||
| Other non-operating income (expense), net | 49,632 | 9,559 | 139,799 | (14,046 | ) | |||||||||||
| Total other (expense), net | (14,772,836 | ) | (354,899 | ) | (12,803,590 | ) | (1,133,948 | ) | ||||||||
| Loss before income taxes | (18,939,978 | ) | (3,968,899 | ) | (20,632,845 | ) | (6,769,017 | ) | ||||||||
| Income tax benefit | (554,075 | ) | (1,254,134 | ) | (893,932 | ) | (506,245 | ) | ||||||||
| Net loss | $ | (18,385,903 | ) | $ | (2,714,765 | ) | $ | (19,738,913 | ) | $ | (6,262,772 | ) | ||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||
| Currency translation adjustments | (263,751 | ) | (8,230 | ) | (408,017 | ) | 23,973 | |||||||||
| Total other comprehensive (loss) income | (263,751 | ) | (8,230 | ) | (408,017 | ) | 23,973 | |||||||||
| Comprehensive loss | $ | (18,649,654 | ) | $ | (2,722,995 | ) | $ | (20,146,930 | ) | $ | (6,238,799 | ) | ||||
| Loss per share: | ||||||||||||||||
| Basic | $ | (0.07 | ) | $ | (0.01 | ) | $ | (0.07 | ) | $ | (0.03 | ) | ||||
| Diluted | $ | (0.07 | ) | $ | (0.01 | ) | $ | (0.07 | ) | $ | (0.03 | ) | ||||
| Weighted average shares: | ||||||||||||||||
| Basic and diluted | 262,832,833 | 187,567,291 | 270,531,857 | 186,009,840 | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 6 |
SHARING SERVICES GLOBAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
| Six Months Ended | ||||||||
| September 30, 2022 | September 30, 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (19,738,913 | ) | $ | (6,262,772 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 335,571 | 228,294 | ||||||
| Stock-based compensation gain | (152,381 | ) | (1,461,637 | ) | ||||
| Deferred income tax benefit | - | (1,513,672 | ) | |||||
| Amortization of debt discount and other | 6,994,167 | 4,877,643 | ||||||
| Gain on extinguishment of debt | (350,320 | ) | (1,040,400 | ) | ||||
| Impairment loss on intangible assets | 154,182 | - | ||||||
| Bad debt expense | 107,800 | - | ||||||
| Unrealized gain (loss) on investments | 6,669,760 | (1,778,789 | ) | |||||
| Provision for obsolete inventory | 433,714 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (182,343 | ) | (24,398 | ) | ||||
| Inventory | 514,591 | (3,455,082 | ) | |||||
| Other current assets | 422,894 | 1,797,008 | ||||||
| Other assets | (153,324 | ) | (1,810 | ) | ||||
| Accounts payable | 762,392 | (126,488 | ) | |||||
| Income taxes payable | (577,235 | ) | 921,641 | |||||
| Lease liability | 17,541 | (21,946 | ) | |||||
| Accrued and other liabilities | (694,905 | ) | (2,297,788 | ) | ||||
| Net Cash Used in Operating Activities | (5,436,809 | ) | (10,160,196 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Payments for property and equipment and other assets | (1,352,792 | ) | (209,997 | ) | ||||
| Issuance of notes receivable | (241,942 | ) | - | |||||
| Purchase of marketable securities | (9,510,000 | ) | - | |||||
| Collection of notes receivable | - | (41,682 | ) | |||||
| Cash paid for asset purchase | (400,000 | ) | (2,937,000 | ) | ||||
| Net Cash Used in Investing Activities | (11,504,734 | ) | (3,188,679 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Retirement of loan | (3,348,811 | ) | - | |||||
| Net proceeds from issuance of promissory notes | 10,922,329 | - | ||||||
| Common stock received on litigation settlement | (1,046,254 | ) | - | |||||
| Proceeds from issuance of common stock | - | 34,625 | ||||||
| Proceeds from convertible notes | - | 30,000,000 | ||||||
| Net Cash Provided by Financing Activities | 6,527,264 | 30,034,625 | ||||||
| IMPACT OF CURRENCY RATE CHANGES ON CASH | (150,122 | ) | 11,124 | |||||
| Increase (decrease) in cash and cash equivalents | (10,564,401 | ) | 16,696,874 | |||||
| Cash and cash equivalents, beginning of period | 17,023,266 | 12,144,409 | ||||||
| Cash and cash equivalents, end of period | $ | 6,458,865 | $ | 28,841,283 | ||||
| Supplemental cash flow information | ||||||||
| Cash paid for interest | $ | 127,790 | $ | 32,435 | ||||
| Cash paid for income taxes | $ | - | $ | 45,312 | ||||
| Supplemented disclosure of non-cash investing and financing activities: | ||||||||
| Stock issued for financing fees and prepaid interest on debt | $ | - | $ | 5,400,000 | ||||
| Investment origination fee collected in shares of investee stock | $ | - | $ | 500,000 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SHARING SERVICES GLOBAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSSCHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
| Three Months Ended | ||||||||
| June 30, 2022 | June 30, 2021 | |||||||
| Net sales | $ | 5,303,618 | $ | 11,211,526 | ||||
| Cost of goods sold | 1,657,028 | 3,353,810 | ||||||
| Gross profit | 3,646,590 | 7,857,716 | ||||||
| Operating expenses | ||||||||
| Selling and marketing expenses | 2,757,800 | 5,150,475 | ||||||
| General and administrative expenses | 4,550,903 | 4,728,310 | ||||||
| Total operating expenses | 7,308,703 | 9,878,785 | ||||||
| Operating loss | (3,662,113 | ) | (2,021,069 | ) | ||||
| Other income (expense) | ||||||||
| Interest expense, net | (3,120,054 | ) | (2,930,014 | ) | ||||
| Litigation settlements and other | 69,229 | (23,605 | ) | |||||
| Unrealized gain on investments | 4,884,173 | |||||||
| Gain (loss) on employee warrants liability | 114,960 | 1,134,170 | ||||||
| Gain on extinguishment of debt | - | 1,040,400 | ||||||
| Other non-operating expense | 20,938 | - | ||||||
| Total other income (expense), net | 1,969,246 | (779,049 | ) | |||||
| Loss before income taxes | (1,692,867 | ) | (2,800,118 | ) | ||||
| Income tax (benefit) provision | (339,857 | ) | 747,889 | |||||
| Net loss | $ | (1,353,010 | ) | $ | (3,548,007 | ) | ||
| Other Comprehensive Income/Loss (net of tax): | ||||||||
| Currency translation adjustments | (144,267 | ) | 32,203 | |||||
| Total other comprehensive income (loss) | (144,267 | ) | 32,203 | |||||
| Comprehensive loss | $ | (1,497,277 | ) | $ | (3,515,804 | ) | ||
| Net income (loss) per share: | ||||||||
| Basic | $ | (0.01 | ) | $ | (0.02 | ) | ||
| Diluted | $ | (0.00 | ) | $ | (0.02 | ) | ||
| Weighted average shares: | ||||||||
| Basic | 278,315,485 | 184,435,274 | ||||||
| Diluted | 278,315,485 | 184,435,274 | ||||||
| Series A Preferred Stock | Series B Preferred Stock | Series C Preferred Stock | Class A and Class B Common Stock | Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Number | Number | Number | Number | Additional | Shares | Other | ||||||||||||||||||||||||||||||||||||||||||||||||||
| of | Par | of | Par | of | Par | of | Par | Paid in | to be | Treasury | Accumulated | Comprehensive | ||||||||||||||||||||||||||||||||||||||||||||
| Shares | Value | Shares | Value | Shares | Value | Shares | Value | Capital | Issued | Stock | Deficit | Loss | Total | |||||||||||||||||||||||||||||||||||||||||||
| Balance – March 31, 2022 | 3,100,000 | $ | 310 | - | $ | - | 3,220,000 | $ | 322 | 288,923,969 | $ | 28,892 | $ | 80,738,719 | $ | 12,146 | - | $ | (57,886,336 | ) | $ | (65,109 | ) | $ | 22,828,944 | |||||||||||||||||||||||||||||||
| Refinancing of debt and detachable warrants | - | - | - | - | - | - | - | - | 1,172,167 | - | - | - | 1,172,167 | |||||||||||||||||||||||||||||||||||||||||||
| Repurchase of shares of Common Stock | - | - | - | - | (26,091,136 | ) | (2,609 | ) | $ | 2,609 | (626,187 | ) | - | (626,187 | ) | |||||||||||||||||||||||||||||||||||||||||
| Repurchase of shares of Common Stock | - | - | - | - | (26,091,136 | ) | (2,609 | ) | 2,609 | (626,187 | ) | - | (626,187 | ) | ||||||||||||||||||||||||||||||||||||||||||
| Currency translation adjustments | - | - | - | - | - | - | - | - | - | - | - | - | (408,017 | ) | (408,017 | ) | ||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | - | - | - | - | (19,738,913 | ) | - | (19,738,913 | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance – September, 30, 2022 | 3,100,000 | $ | 310 | - | $ | - | 3,220,000 | $ | 322 | 262,832,833 | $ | 26,283 | $ | 81,913,495 | $ | 12,146 | (626,187 | ) | $ | (77,625,249 | ) | $ | (473,126 | ) | $ | 3,227,994 | ||||||||||||||||||||||||||||||
| Series A Preferred Stock | Series B Preferred Stock | Series C Preferred Stock | Class A and Class B Common Stock | Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||
| Number | Number | Number | Number | Additional | Shares | Other | ||||||||||||||||||||||||||||||||||||||||||||||
| of | Par | of | Par | of | Par | of | Par | Paid in | to be | Accumulated | Comprehensive | |||||||||||||||||||||||||||||||||||||||||
| Shares | Value | Shares | Value | Shares | Value | Shares | Value | Capital | Issued | Deficit | Loss | Total | ||||||||||||||||||||||||||||||||||||||||
| Balance – March 31, 2021 | 5,100,000 | $ | 510 | - | $ | - | 3,230,000 | $ | 323 | 160,100,769 | $ | 16,010 | $ | 43,757,768 | $ | 12,146 | - | $ | (37,627,718 | ) | $ | - | $ | 6,159,039 | ||||||||||||||||||||||||||||
| Beginning balance | 5,100,000 | $ | 510 | - | $ | - | 3,230,000 | $ | 323 | 160,100,769 | $ | 16,010 | $ | 43,757,768 | $ | 12,146 | - | $ | (37,627,718 | ) | $ | - | $ | 6,159,039 | ||||||||||||||||||||||||||||
| Common stock issued for deferred financing costs and prepaid interest on debt | - | - | - | - | - | - | 27,000,000 | 2,700 | 6,477,300 | - | (1,080,000 | ) | - | 5,400,000 | ||||||||||||||||||||||||||||||||||||||
| Conversions or retirements of preferred stock | (2,000,000 | ) | (200 | ) | - | - | (10,000 | ) | (1 | ) | 10,000 | 1 | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Issuance of debt with beneficial conversion feature and in-the-money stock warrant, net of tax | - | - | - | - | - | - | - | - | 21,330,000 | - | - | - | - | 21,330,000 | ||||||||||||||||||||||||||||||||||||||
| Expiration of common stock puts | - | - | - | - | - | - | - | - | - | - | 177,879 | - | 177,879 | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | - | - | - | - | 280,000 | - | - | - | 280,000 | |||||||||||||||||||||||||||||||||||||||
| Stock warrants exercised | - | - | - | - | - | - | 500,000 | 50 | 77,450 | 77,500 | ||||||||||||||||||||||||||||||||||||||||||
| Currency translation adjustments | - | - | - | - | - | - | - | - | - | - | - | 23,973 | 23,973 | |||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | - | - | - | (6,262,772 | ) | - | (6,262,772 | ) | |||||||||||||||||||||||||||||||||||||
| Balance – September 30, 2021 | 3,100,000 | $ | 310 | - | $ | - | 3,220,000 | $ | 322 | 187,610,769 | $ | 18,761 | $ | 71,922,718 | $ | 12,146 | - | $ | (44,792,611 | ) | $ | 23,973 | $ | 27,185,619 | ||||||||||||||||||||||||||||
| Ending balance | 3,100,000 | $ | 310 | - | $ | - | 3,220,000 | $ | 322 | 187,610,769 | $ | 18,761 | $ | 71,922,718 | $ | 12,146 | - | $ | (44,792,611 | ) | $ | 23,973 | $ | 27,185,619 | ||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.statements
SHARING SERVICES GLOBAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
| Three Months Ended | ||||||||
| June 30, 2022 | June 30, 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (1,353,010 | ) | $ | (3,548,007 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 171,035 | 87,114 | ||||||
| Stock-based compensation gain | (107,588 | ) | (931,533 | ) | ||||
| Deferred income tax benefit | - | (717,960 | ) | |||||
| Amortization of debt discount and other | 3,412,427 | 2,356,507 | ||||||
| Gain on extinguishment of debt | (324,230 | ) | (1,040,400 | ) | ||||
| Unrealized gain on investments | (4,884,173 | ) | - | |||||
| Provision for obsolete inventory | 108,055 | 116,334 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (206,163 | ) | 4,755 | |||||
| Inventory | (111 | ) | (3,450,228 | ) | ||||
| Other current assets | 298,812 | 730,387 | ||||||
| Other assets | (19,950 | ) | (89,935 | ) | ||||
| Accounts payable | 374,997 | 959,990 | ||||||
| Income taxes payable | (30,259 | ) | 1,446,896 | |||||
| Lease liability | 4,162 | 1,621 | ||||||
| Accrued and other liabilities | (1,220,512 | ) | (1,942,929 | ) | ||||
| Net Cash Used in Operating Activities | (3,776,508 | ) | (6,017,388 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Payments for property and equipment | (136,807 | ) | (244,728 | ) | ||||
| Collection of notes receivable | 10,070 | |||||||
| Net Cash Used in Investing Activities | (136,807 | ) | (234,658 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Retirement of loan | (3,270,174 | ) | - | |||||
| Proceeds from issuance of promissory notes | 5,687,500 | - | ||||||
| Common stock received on litigation settlement | (1,043,645 | ) | - | |||||
| Proceeds from convertible notes | - | 30,000,000 | ||||||
| Net Cash Provided by Financing Activities | 1,373,681 | 30,000,000 | ||||||
| IMPACT OF CURRENCY RATE CHANGES ON CASH | (30,140 | ) | 26,304 | |||||
| Increase (decrease) in cash and cash equivalents | (2,569,774 | ) | 23,774,258 | |||||
| Cash and cash equivalents, beginning of period | 17,023,266 | 12,144,409 | ||||||
| Cash and cash equivalents, end of period | $ | 14,453,492 | $ | 35,918,667 | ||||
| Supplemental cash flow information | ||||||||
| Cash paid for interest | $ | 481,043 | $ | 14,442 | ||||
| Cash paid for income taxes | $ | - | $ | - | ||||
| Supplemented disclosure of non-cash investing and financing activities: | ||||||||
| Stock issued for financing fees and prepaid interest on debt | $ | - | $ | 5,400,000 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SHARING SERVICES GLOBAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
| Series A Preferred Stock | Series B Preferred Stock | Series C Preferred Stock | Class A and Class B Common Stock | Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Number | Number | Number | Number | Additional | Shares | Other | ||||||||||||||||||||||||||||||||||||||||||||||||||
| of | Par | of | Par | of | Par | of | Par | Paid in | to be | Treasury | Accumulated | Comprehensive | ||||||||||||||||||||||||||||||||||||||||||||
| Shares | Value | Shares | Value | Shares | Value | Shares | Value | Capital | Issued | Stock | Deficit | Loss | Total | |||||||||||||||||||||||||||||||||||||||||||
| Balance – March 31, 2022 | 3,100,000 | $ | 310 | - | $ | - | 3,220,000 | $ | 322 | 288,923,969 | $ | 28,892 | $ | 80,738,719 | $ | 12,146 | $ | - | (57,886,336 | ) | $ | (65,109 | ) | - | $ | 22,828,944 | ||||||||||||||||||||||||||||||
| Refinancing of debt and detachable warrants | - | - | - | - | - | - | - | - | 1,211,547 | - | - | - | 1,211,547 | |||||||||||||||||||||||||||||||||||||||||||
| Repurchase of shares of Common Stock |
|
|
| (626,187 | ) | (626,187 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Currency translation adjustments | - | - | - | - | - | - | - | - | - | - | - | (144,267 | ) | (144,267 | ) | |||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | - | - | - | (1,353,010 | ) | (1,353,010 | ) | ||||||||||||||||||||||||||||||||||||||||||
| Balance – June 30, 2022 | 3,100,000 | $ | 310 | - | $ | - | 3,220,000 | $ | 322 | 288,923,969 | $ | 28,892 | $ | 81,950,266 | $ | 12,146 | (626,187 | ) | (59,239,346 | ) | $ | (209,376 | ) | - | $ | 21,917,027 | ||||||||||||||||||||||||||||||
| Series A Preferred Stock | Series B Preferred Stock | Series C Preferred Stock | Class A and Class B Common Stock | Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||
| Number | Number | Number | Number | Additional | Shares | Other | ||||||||||||||||||||||||||||||||||||||||||||||
| of | Par | of | Par | of | Par | of | Par | Paid in | to be | Accumulated | Comprehensive | |||||||||||||||||||||||||||||||||||||||||
| Shares | Value | Shares | Value | Shares | Value | Shares | Value | Capital | Issued | Deficit | Loss | Total | ||||||||||||||||||||||||||||||||||||||||
| Balance – March 31, 2021 | 5,100,000 | $ | 510 | - | $ | - | 3,230,000 | $ | 323 | 160,100,769 | $ | 16,010 | $ | 43,757,768 | $ | 12,146 | - | $ | (37,627,718 | ) | - | $ | - | $ | 6,159,039 | |||||||||||||||||||||||||||
| Beginning balance, value | 5,100,000 | 510 | - | - | 3,230,000 | 323 | 160,100,769 | 16,010 | $ | 43,757,768 | 12,146 | - | (37,627,718 | ) | - | - | 6,159,039 | |||||||||||||||||||||||||||||||||||
| Common stock issued for deferred financing costs and prepaid interest on debt | - | - | - | - | - | - | 27,000,000 | 2,700 | 6,477,300 | - | - | (1,080,000 | ) | - | - | 5,400,000 | ||||||||||||||||||||||||||||||||||||
| Conversions of preferred stock | - | - | (10,000 | ) | (1 | ) | 10,000 | 1 | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||
| Issuance of debt with beneficial conversion feature and in-the-money stock warrant, net of tax | - | - | - | - | - | - | - | - | 21,330,000 | - | - | - | 21,330,000 | |||||||||||||||||||||||||||||||||||||||
| Expiration of common stock puts | - | - | - | - | - | - | - | - | - | - | 177,879 | - | 177,879 | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | - | - | - | - | 280,000 | - | - | - | 280,000 | |||||||||||||||||||||||||||||||||||||||
| Currency translation adjustments | - | - | - | - | - | - | - | - | - | - | - | 32,203 | 32,203 | |||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | - | - | - | (3,548,007 | ) | - | (3,548,007 | ) | |||||||||||||||||||||||||||||||||||||
| Balance – June 30, 2021 | 5,100,000 | $ | 510 | - | $ | - | 3,220,000 | $ | 322 | 187,110,769 | $ | 18,711 | $ | 71,845,068 | $ | 12,146 | - | $ | (42,077,846 | ) | - | $ | 32,203 | $ | 29,831,114 | |||||||||||||||||||||||||||
| Ending balance, value | 5,100,000 | $ | 510 | - | - | 3,220,000 | $ | 322 | 187,110,769 | $ | 18,711 | $ | 71,845,068 | $ | 12,146 | - | $ | (42,077,846 | ) | - | $ | 32,203 | $ | 29,831,114 | ||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
SHARING SERVICES GLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – ORGANIZATION AND BUSINESS
Description of Operations
Sharing Services Global Corporation and subsidiaries (“Sharing Services,” “we,”Services” or the “Company”) aim to build shareholder value by developing or acquiring businesses, products and technologies in the direct selling industry and other industries that augment the Company’s product and services portfolio, business competencies, and geographic reach.
The Company was incorporated in the State of Nevada in April 2015.
Health and Wellness Products - The Company’s subsidiaries operating in the health and wellness products industry, which accounted for substantially all the Company’s consolidated net sales during the periods included in this Quarterly Report, market their products primarily through an independent sales force, using a direct selling business model under the proprietary brand “The Happy Co.” Currently, The Happy Co.TM markets and distributes its health and wellness products primarily in the United States, Canada, the Republic of Korea, and other countries in the Asia Pacific region. In addition, certain of the Company’s domestic subsidiaries market its health and wellness products on a “not-for-resale” basis to consumers in other countries outside the U.S.
Subscription-Based Travel Services - Through its subsidiary, Hapi Travel Destinations (“Hapi Travel”), the Company is preparing to launch adelivers subscription-based travel services business under the proprietary brand “Hapi Travel.”services. The Hapi TravelTM services are designed to offer the opportunitydeepest discounts for travel relating to travel toairfare, cruises, hotels, resorts, time shares and rental cars for destinations inthroughout the U.S. and abroad toworld for people of all ages, demographics, and economic backgrounds. Hapi TravelTM will also provide entrepreneurial opportunities to its subscribers by capitalizing on both the direct selling model and the retail travel business model.
Company-Owned and Franchised Destination Cafes – Sharing Services recentlyhas entered into a Letter of Intent (the “LOI”Master Franchise Agreement (“MFA”) to acquire the exclusive franchise rights in North America to the brand “Hapi Café” from Hapi Café, Inc., a company affiliated with Heng Fai Ambrose Chan, a Director of the Company, subject to formalization of a Master Franchise Agreement.Company. Under the proposed terms,MFA, Sharing Services, directly or through its subsidiaries, will operate no less than five (5) corporate-owned stores and can offer to the public sub-franchise rights to own and operate other stores, subject to the terms and conditions contained in the LOI and the ultimate Master Franchise Agreement.stores. Each corporate-owned or franchised Hapi CaféTM store will offer toallow customers and Brand Partners seeking a healthier lifestyle:lifestyle access to: (a) a selection of functional and healthy food and beverages, (b) a pleasant workspace with free Wi-Fi service, (c) extensive physical fitness, nutrition management and personal workout print and video content, and (d) our Hapi TravelTM subsidiary’sthe Company’s proprietary travel services.
Targeted Ownership Interests – Directly or through its subsidiaries, the Company from time to time will invest in emerging businesses, using a combination of debt and equity financing, in efforts to leverage the Company’s resources and business competencies and to participate in these businesses’ growth. As part of the Company’s commitment to these emerging businesses’ success, the Company, directly or through its subsidiaries, also offers non-traditional inventory financing, equity or debt financing, order fulfillment and logistic, CRM “Back Office” solutions, and other success-critical services to these businesses.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited condensed consolidated interim financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted as permitted pursuant to the rules and regulations of the SEC, although we believe that the disclosures made are adequate to make the information not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2022. Unless so stated, the disclosures in the accompanying condensed consolidated financial statements do not repeal the disclosures in our consolidated financial statements for year ended March 31, 2022.
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The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates and Assumptions
The preparation of financial statements in accordance with GAAP requires the use of judgment and requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosures about contingent assets and liabilities, if any. Matters that require the use of estimates and assumptions include: the recoverability of notes and accounts receivable, the valuation of inventory, the useful lives of fixed assets, the assessment of long-lived assets for impairment, the nature and timing of satisfaction of performance obligations resulting from contracts with customers, allocation of the transaction price to multiple performance obligations in a sales transaction, the measurement and recognition of right-of-use assets and related lease liabilities, the valuation of stock-based compensation awards, the measurement and recognition of uncertain tax positions, and the valuation of loss contingencies, if any. Actual results may differ from these estimates in amounts that may be material to our consolidated financial statements. We believe that the estimates and assumptions used in the preparation of our consolidated financial statements are reasonable.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents include recent customer remittances deposited with our merchant processors at the balance sheet date, which generally settle within 24 to 72 hours. As of JuneSeptember 30, 2022, and March 31, 2022, cash and cash equivalents included cash held by our merchant processors of approximately $1.21.1 million and $3.3 million, respectively, including approximately $1.1 million and $3.0 million, respectively held by one merchant processor. In addition, as of JuneSeptember 30, 2022, and March 31, 2022, cash and cash equivalents held in bank accounts in foreign countries in the ordinary course of business were $1.01.3 million and $1.4 million, respectively. Amounts held by our merchant processor or held in bank accounts located in foreign countries are generally not insured by any federal agency.agency
Notes Receivable net
On August 29, 2022, the Company and 1044Pro LLC (“1044”) entered in an agreement to modify the Revolving Promissory Note dated January 22, 2022. In accordance with the amendment, the Company agreed to lend $125,000 to 1044 for a 20% membership interest in 1044. The loan is secured by the assets of 1044 as well as by a personal guaranty executed by a member of 1044.
At JuneSeptember 30, 2022 and March 31, 2022, Notesnotes receivable were $539,623951,262 and $601,520, before allowance for impairment losses of $539,623709,320 and $601,520, respectively.
Investment in Marketable Securities
The Company has invested in a marketable security that can easily be bought, sold, or traded on public exchanges. The investment is carried at fair market. Unrealized gains and losses have been recorded to operating income. At September 30, 2022, the investment was valued at approximately $6.5 million on the Company’s unaudited condensed consolidated balance sheet.
Inventory
Inventory consists of finished goods and promotional materials and are stated at the lower of cost, determined using the first-in, first-out (“FIFO”) method, or net realizable value. The Company periodically assesses its inventory levels when compared to current and anticipated sales levels. As of JuneSeptember 30, 2022, and March 31, 2022,the allowance for obsolete inventory was $108,055433,714 and 108,055, respectively, in connection with health and wellness product that is damaged, expired or otherwise in excess of forecasted outputs, based on our current and anticipated sales levels. The Company reports its provisions for inventory losses in cost of goods sold in its consolidated statements of operations.
Other Assets
Other assets include a multi-user license and code of a back-office platform that was acquired for $1,000,000 in July 2022. This back-office platform is intended to facilitate the computation and processing of commission payments to distributors, and it requires customization in order for it to be operational. Costs associated with the customization and build out of the platform has been capitalized in accordance with ASC 350 - Capitalization on Internal-Use Software Costs.
Note Payable
In May 2020, the Company was granted a loan (the “PPP Loan”) by a commercial bank in the amount of $1.0million, pursuant to the Paycheck Protection Program features of the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”). At March 31, 2021, loan principal in the amount of $1.0million was outstanding. The Company’s borrowings under the PPP Loan were eligible for loan forgiveness under the provisions of the CARES Act. In June 2021, the Company was formally notified by the lender that the Company’s obligations under the loan have been forgiven effective May 25, 2021. The loan forgiveness applies to all principal and interest accrued through the loan forgiveness effective date. The Company recognized a gain on extinguishment of debt of $1.0million in connection with such loan forgiveness.
On June 15, 2022, Linden Real Estate Holdings, LLC, a wholly owned subsidiary of the Company, American Pacific Bancorp, Inc. (“APB”), and the Company entered into a Loan Agreement pursuant to which APB loaned the Company approximately $5.7 million. The loan bears interest at the annual rate of 8%, matures on June 1, 2024,, and is secured by a first mortgage interest on the Company’s Lindon, Utah office building. In connection with this loan, the Company received net proceeds of $5,522,829 from APB on June 17, 2022. APB is a subsidiary of DSS, Inc. Heng Fai Ambrose Chan, and Frank D. Heuszel, each a Director of the Company,APB, also serve on the Board of Directors of APB.the Company. Monthly payments of principal and interest in the amount of $43,897 are duehave been made beginning July 1, 2022, and are payable on the same date of each month thereafter. The Company paid $131,691 in principal and interest related to the loan for the three months ended September 30, 2022.
On August 11, 2022, the Company executed a revolving credit promissory note with APB (“the APB Revolving Note”) pursuant to which the Company has access to advances with a maximum principal balance not to exceed the principal sum of $10 million. The APB Revolving Note included origination fees of $600,000. The Note is collateralized by the assets of the Company, and it bears interest at the annual rate of 8% and such interest shall be due and payable quarterly. Interest payments on the loan are due and payable on the last day of each consecutive third calendar month until the maturity date of August 12, 2024. As of September 30, 2022, the Company had $6.0 million outstanding under the APB Revolving Note and accrued interest of $60,667 which amount was paid on October 1, 2022.
| 10 |
Foreign Currency Translation
Prior to April 1, 2021, substantially all the Company’s consolidated net sales were denominated in U.S. dollars. As part of our strategic growth plan initiatives, we are in the process of expandinghave expanded our operations outside the United States. The functional currency of each of our foreign operations is generally the respective local currency. Balance sheet accounts are translated into U.S. dollars (our reporting currency) at the rates of exchange in effect at the balance sheet date, while the results of operations and cash flows are generally translated using average exchange rates for the periods presented. Individual material transactions, if any, are translated using the actual rate of exchange on the transaction date. The resulting translation adjustments are reported in accumulated other comprehensive loss in our condensed consolidated balance sheets.
SCHEDULE OF FOREIGN EXCHANGE CURRENCY TRANSLATION
| South Korean Won per USD | ||||
| Exchange rate as of September 30, 2022 | 1,435.44 | |||
| South Korean Won per USD | ||||||||
| Three Months ended September 30, 2022 | Six Months Ended September 30, 2022 | |||||||
| Average exchange rate as of September 30, 2022 | 1,340.47 | 1,300.50 | ||||||
Comprehensive Income (Loss)Loss
For the three and six months ended JuneSeptember 30, 2022, and 2021, the Company’s comprehensive loss was comprised of currency translation adjustments and net loss. Prior to April 1, 2021, the only component of the Company’s comprehensive income (loss) was its net earnings (loss).
Revenue Recognition
As of JuneSeptember 30, 2022, and March 31, 2022, deferred sales revenue associated with product invoiced but not received by customers at the balance sheet date was $195,282159,021 and $344,071, respectively. In addition, as of JuneSeptember 30, 2022, and March 31, 2022, deferred sales revenue associated with our unfulfilled performance obligations for services offered on a subscription basis was $65,31873,748, and $70,968, and deferred sales revenue associated with our performance obligations for customers’ right of return was $63,04661,824 and $63,890, and deferred revenuessales associated with customer loyalty points was $81,98094,097 and $68,287, respectively. Deferred sales revenue isare expected to be recognized over one year.
During the three and six months ended JuneSeptember 30, 2022, no individual customer, or affiliated group of customers, represented 10% or more of ourthe Company’s consolidated net sales, and approximately 62% of net sales for the three months ended September 30, 2022, were to customers (including 39% to recurring customers, refer internally as “SmartShip” sales, and approximately 23% to new customers) and approximately 38% of the Company’s net sales were to independent distributors.
During the three and six months ended September 30, 2021, no individual customer, or affiliated group of customers, represented 10% or more of the Company’s consolidated net sales, and approximately 68% of net sales for the three months ended September 30, 2021, were to customers (including 34% to recurring customers and approximately 34% to new customers) and approximately 32% of net sales were to independent distributors.
| 11 |
During the six months ended September 30, 2022, approximately 63% of ourthe Company’s net sales were to customers (including 3738% to recurring customers, which we refer toherein as “SmartShip” sales, and approximately 2625% to new customers) and approximately 37% of ourthe Company’s net sales were to our independent distributors.
During the threesix months ended JuneSeptember 30, 2021, no individual customer, or affiliated group of customers, represents 10% or more of our consolidated net sales, and approximately 7069% of ourthe Company’s net sales were to customers (including 3132% to recurring customers, refer herein as “SmartShip” sales, and approximately 3937% to new customers) and approximately 3031% of ourthe Company’s net sales were to our independent distributors.
During the threesix months ended JuneSeptember 30, 2022, and JuneSeptember 30, 2021, approximately 93% and 8984%, respectively, of ourthe Company’s consolidated net sales were to our customers and/or independent distributors located in the United States. No other country accounted for 10% or more of our consolidated net sales.
During the three months ended JuneSeptember 30, 2022, substantially all ourof the Company’s consolidated net sales arewere from ourhealth and wellness products (including approximately 7% from the sale of coffee and other functional beverages, 20% from the sales of Nutraceutical products while the remaining sales of 9% were of weight management related products). During the three months ended September 30, 2021, substantially all of the Company’s consolidated net sales were from health and wellness products (including approximately 64% from the sale of coffee and other functional beverages, 22% from the sales of Nutraceutical products while the remaining sales of 16% were of weight management related products).
During the six months ended September 30, 2022, substantially all of consolidated net sales were from health and wellness products (including approximately 70% from the sale of Nutraceutical products, 20% from the sale of coffee and other functional beverages, 910% from the sale of weight management products and approximately 1% from the sale of all other health and wellness products). During the threesix months ended JuneSeptember 30, 2021, substantially all ourapproximately 99% of the Company’s consolidated net sales arewere from our health and wellness products (including approximately 42% from the sale of Nutraceutical products, 2728% from the sale of coffee and other functional beverages, 1214% from the sale of weight management products, and approximately 1915% from the sale of all other health and wellness products).
During the three and six months ended JuneSeptember 30, 2022, approximatelyover 9493% of ourthe Company’s consolidated product purchases were from a third-party manufacturer based in the U.S. During the three and six months ended JuneSeptember 30, 2021, approximately 4955% of ourthe Company’s consolidated product purchases were from a third-party manufacturer based in the U.S., while 5145% of our product purchases were from a related-party supplier located in the Republic of Korea.
Sales Commissions
The Company recognizes sales commission expense, when incurred, in accordance with GAAP. During the three months ended JuneSeptember 30, 2022, and 2021, sales commission expense, which is included in selling and marketing expenses in our consolidated statements of operations and comprehensive loss, was $2.41.5 million and $5.04.9 million, respectively.respectively; and during the six months ended September 30, 2022 and 2021, was $3.9 million and $9.9 million, respectively
Recently Issued Accounting Standards - Recently Adopted
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12, among other things, (a) eliminates the exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income (or a gain) from other items, (b) eliminates the exception to the general methodology for calculating income taxes in an interim period when the year-to-date loss exceeds the anticipated loss for the year, (c) requires than an entity recognize a franchise tax (or a similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax, and (d) requires than an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation for the interim period that includes the enactment date. The Company adopted ASU 2019-12 effective April 1, 2021, and adoption did not have a material impact on its consolidated financial statements.
Recently Issued Accounting Standards - Pending Adoption
In August 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (ASU 2020-06), which simplifies the accounting for certain convertible instruments. Among other things, under ASU 2020-06, the embedded conversion features no longer must be separated from the host contract for convertible instruments with conversion features not required to be accounted for as derivatives, or that do not result in substantial premiums accounted for as paid-in capital. ASU 2020-06 also eliminates the use of the treasury stock method when calculating the impact of convertible instruments on diluted Earnings per Share. For the Company, the provisions of ASU 2020-06 are effective for its fiscal quarter beginning on April 1, 2024. Early adoption is permitted, subject to certain limitations. The Company is evaluating the potential impact of adoption on its consolidated financial statements.
We calculate basic earnings (loss)loss per share by dividing net earnings (loss)loss available to common shareholders by the weighted average number of common shares outstanding during the reporting period. Diluted earningsloss per share is calculated similarly but reflects the potential impact of shares issuable upon the conversion or exercise of outstanding convertible preferred stock, convertible notes payable, stock warrants and other commitments to issue common stock, except where the impact would be anti-dilutive.
The calculation of diluted earningsloss per share also reflects an adjustment to net earningsloss for the potential reduction to a reporting period’s interest expense, net of applicable income tax, which would result if the Company’s convertible notes payable were converted at the beginning of such reporting period.
SCHEDULE OF COMPUTATIONS OF BASIC AND DILUTED LOSS PER SHARE
| June 30, 2022 | June 30, 2021 | |||||||||||||||||||||||
| Three Months Ended | Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, 2022 | June 30, 2021 | September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||||||||
| Net loss | $ | (1,353,010 | ) | $ | (3,548,007 | ) | ||||||||||||||||||
| Net loss, as reported | $ | (18,385,903 | ) | $ | (2,714,765 | ) | $(19,738,913 | ) | $ | (6,262,772 | ||||||||||||||
| After tax interest adjustment | - | - | - | - | ||||||||||||||||||||
| Net loss, if-converted basis | $ | (18,385,903 | ) | $ | (2,714,765 | ) | $ | (19,738,913 | ) | $ | (6,262,772 | ) | ||||||||||||
| Weighted average basic shares | 278,315,485 | 184,435,274 | 262,832,833 | 187,567,291 | 270,531,857 | 186,009,840 | ||||||||||||||||||
| Dilutive securities and instruments: | ||||||||||||||||||||||||
| Convertible preferred stock | - | - | - | - | ||||||||||||||||||||
| Convertible notes | - | - | - | - | ||||||||||||||||||||
| Stock options and warrants | - | - | - | - | ||||||||||||||||||||
| Weighted average diluted shares | 278,315,485 | 184,435,274 | 262,832,833 | 187,567,291 | 270,531,857 | 186,009,840 | ||||||||||||||||||
| Loss per share: | ||||||||||||||||||||||||
| Basic | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.07 | ) | $ | (0.01 | ) | $ | (0.07 | ) | $ | (0.03 | ) | ||||||
| Diluted | $ | (0.00 | ) | $ | (0.02 | ) | $ | (0.07 | ) | $ | (0.01 | ) | $ | (0.07 | ) | $ | (0.03 | ) | ||||||
SCHEDULE OF POTENTIALLY DILUTIVE INSTRUMENTS OUTSTANDING
| June 30, 2022 | June 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||
| Convertible preferred stock | 6,320,000 | 8,325,165 | 6,320,000 | 8,289,781 | ||||||||||||
| Convertible notes payable | 135,377,975 | 152,231,082 | 246,123,029 | 156,381,169 | ||||||||||||
| Stock warrants | - | 168,295,815 | 23,246,817 | 128,743,903 | ||||||||||||
| Total potential incremental shares | 141,697,975 | 328,852,062 | 275,689,846 | 293,414,853 | ||||||||||||
The preceding table does not include and 8,750,000for both stock warrants held by employees which are not vested (or exercisable) at JuneSeptember 30, 2022 and Juneat September 30, 2021, respectively.
NOTE 4 – INVENTORY, NET
Inventory consists primarily of finished goods. The Company provides an allowance for any slow-moving or obsolete inventory. As of JuneSeptember 30, 2022, and March 31, 2022, inventory consists of the following:
SCHEDULE OF INVENTORY
| June 30, 2022 | March 31, 2022 | |||||||||||||||
| June 30, 2022 | March 31, 2022 | September 30, 2022 | March 31, 2022 | |||||||||||||
| Finished Goods | $ | 4,240,836 | $ | 4,482,291 | $ | 3,957,950 | $ | 4,482,291 | ||||||||
| Allowance for inventory obsolescence | (108,055 | ) | (108,055 | ) | (433,714 | ) | (108,055 | ) | ||||||||
| Inventory, net | $ | 4,132,781 | $ | 4,374,236 | $ | 3,524,236 | $ | 4,374,236 | ||||||||
The Company allowance for inventory obsolescence for the six months ended September 30, 2022, and September 30, 2021, was $433,714 and $284,780, respectively. The change in the allowance has primarily been driven by expired/expiring products.
On July 5, 2022, the Company entered into an asset purchase agreement with Hulsa LLC. The Company purchased assets, inclusive of inventory and intangible assets. The Company paid $400,000 in exchange for the assets and received approximately $177,000 of inventory related to the purchase. The inventory is included within the Inventory, net, line on the condensed consolidated balance sheet as of September 30, 2022.
NOTE 5 – OTHER CURRENT ASSETS, NET
Other current assets consist of the following:
SCHEDULE OF OTHER CURRENT ASSETS
| June 30, 2022 | March 31, 2022 | |||||||||||||||
| June 30, 2022 | March 31, 2022 | September 30, 2022 | March 31, 2022 | |||||||||||||
| Prepaid consulting fees, related party | $ | 2,013,706 | $ | 2,867,123 | $ | 1,139,999 | $ | 2,867,123 | ||||||||
| Inventory-related deposits | 312,090 | 384,477 | 253,884 | 384,477 | ||||||||||||
| Prepaid insurance and other operational expenses | 261,823 | 201,275 | 287,553 | 201,275 | ||||||||||||
| Deposits for sales events | 5,000 | 222,540 | - | 222,540 | ||||||||||||
| Right to recover asset | 15,632 | 15,632 | 13,946 | 15,632 | ||||||||||||
| Subtotal | 2,608,251 | 3,691,047 | 1,695,382 | 3,691,047 | ||||||||||||
| Less: allowance for losses | (179,765 | ) | (179,765 | ) | (175,641 | ) | (179,765 | ) | ||||||||
| Other current assets | $ | 2,428,486 | $ | 3,511,282 | $ | 1,519,741 | $ | 3,511,282 | ||||||||
Prepaid consulting fees represent the fair value on the grant date of stock warrants issued to DSS in January 2022 for consulting services to be rendered over a year from the issue date (see Note 12 – Related Party Transactions for more information)Transactions). Prepaid insurance and other operational expenses primarily consist of payments for goods and services (such as freight, trade show expenses and insurance premiums) which are expected to be realized in the next operating cycle. Right to recover asset is associated with our customers’ right of return and is expected to be realized in one year or less. As of both JuneSeptember 30, 2022, and March 31, 2022, the provision for losses in connection with certain inventory-related deposits for which recoverability is less than certain was $175,641 and $179,765.
NOTE 6 – INVESTMENT IN UNCONSOLIDATED ENTITIES, NET
In September 2021, the Company, Stemtech Corporation (“Stemtech”) and Globe Net Wireless Corp. (“GNTW”) entered into a Securities Purchase Agreement (the “SPA”) pursuant to which the Company invested $1.4 million in Stemtech in exchange for: (a) a Convertible Promissory Note in the amount of $1.4 million in favor of the Company (the “Convertible Note”) and (b) a detachable Warrant to purchase shares GNTW common stock (the “GNTW Warrant”). Stemtech is a subsidiary of GNTW. As an inducement to enter into the SPA, GNTW agreed to pay to the Company an origination fee of $500,000, payable in shares of GNTW’s common stock. The Convertible Note matures on September 9, 2024, bears interest at the annual rate of 10%, and is convertible, at the option of the holder, into shares of GNTW’s common stock at a conversion rate calculated based on the closing price per share of GNTW’s common stock during the 30-day period ended September 19, 2021. The GNTW Warrant expires on September 13, 2024 and conveys the right to purchase up to 1.4 million shares of GNTW’s common stock at a purchase price calculated based on the closing price per share of GTNW’s common stock during the 10-day period ended September 13, 2021. In September 2021, GNTW issued to the Company shares of its common stock, or less than 1% of the shares of GNTW then issued and outstanding, in payment of the origination fee. In November 2021, Globe Net Wireless Corp. changed its corporate name to Stemtech Corporation. In connection therewith, the investee’s common stock is now traded under the symbol “STEK”.
The Company carries its investment in the Convertible Note, the GNTW Warrant and the shares of GNTW common stock at fair value in accordance with GAAP. During the three and six months ended JuneSeptember 30, 2022, the Company recognized unrealized gains,losses, before income tax, of $4,865,3548.6 million and $3.7 million in connection with its investment in the Convertible Note, the GNTW Warrant and the shares of GNTW common stock.
In September 2021, the Company entered into a Membership Unit Purchase Agreement pursuant to which the Company acquired a 30.75% equity interest in MojiLife, LLC, a limited liability company organized in the State of Utah, in exchange for $1,537,000. MojiLife is an emerging growth distributor of technology-based consumer products for the home and car. MojiLife’s products include esthetically attractive, cordless scent diffusers for the home or for the car, as well as proprietary home cleaning products and accessories.
On a quarterly basis, the Company evaluates the recoverability of its investments and reviews current economic trends to determine the adequacy of its allowance for impairment losses based on each investee financial performance data and other relevant information. An estimate for impairment losses is recognized when recovery in full of the Company’s investment is no longer probable. Investment balances are written off against the allowance after the potential for recovery is considered remote.
Investment in unconsolidated entities and securities consists of the following:
SUMMARY OF INVESTMENT IN UNCONSOLIDATED ENTITIES
| June 30, 2022 | March 31, 2022 | September 30, 2022 | March 31, 2022 | |||||||||||||
| Investment in detachable GNTW stock warrant | $ | 7,000,000 | $ | 3,570,000 | $ | 966,000 | $ | 3,570,000 | ||||||||
| Investment in GNTW common stock | 770,865 | 393,141 | 106,379 | 393,141 | ||||||||||||
| Investment in Stemtech convertible note | 2,158,429 | 1,100,799 | 297,863 | 1,100,799 | ||||||||||||
| Investment in MojiLife, LLC | 1,537,000 | 1,537,000 | 1,537,000 | 1,537,000 | ||||||||||||
| Subtotal | 11,466,294 | 6,600,940 | 2,907,242 | 6,600,940 | ||||||||||||
| Less, allowance for impairment losses | (1,537,000 | ) | (1,537,000 | (1,537,000 | ) | (1,537,000 | ||||||||||
| Investments | $ | 9,929,294 | $ | 5,063,940 | $ | 1,370,242 | $ | 5,063,940 | ||||||||
The following table reflects the activity in the allowance for impairment losses for the periods presented:
SCHEDULE OF ALLOWANCE FOR IMPAIRMENT LOSSES
| June 30, 2022 | March 31, 2022 | |||||||
| Balance at beginning of fiscal year | $ | 1,537,000 | $ | - | ||||
| Provision for estimated impairment losses | - | 1,537,000 | ||||||
| Balance at end of fiscal year | $ | 1,537,000 | $ | 1,537,000 |
| September 30, 2022 | March 31, 2022 | |||||||
| Balance at beginning of period | $ | 1,537,000 | $ | - | ||||
| Provision for estimated impairment losses | - | 1,537,000 | ||||||
| Balance at end of period | $ | 1,537,000 | $ | 1,537,000 | ||||
NOTE 7 – PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
SUMMARY OF PROPERTY AND EQUIPMENT
| June 30, 2022 | March 31, 2022 | September 30, 2022 | March 31, 2022 | |||||||||||||
| Building and building improvements | $ | 8,975,805 | $ | 8,976,878 | $ | 8,976,878 | $ | 8,976,878 | ||||||||
| Computer software | 1,015,742 | 875,925 | 1,020,396 | 875,925 | ||||||||||||
| Furniture and fixtures | 237,042 | 237,045 | 237,046 | 237,045 | ||||||||||||
| Computer equipment | 223,393 | 223,424 | 223,424 | 223,424 | ||||||||||||
| Leasehold improvements and other | 261,304 | 263,208 | 351,878 | 263,208 | ||||||||||||
| Total property and equipment | 10,713,286 | 10,576,480 | 10,809,622 | 10,576,480 | ||||||||||||
| Impairment of property and equipment | (100,165 | ) | (100,165 | - | (100,165 | |||||||||||
| Accumulated depreciation and amortization | (1,026,300 | ) | (891,174 | ) | (1,255,045 | ) | (891,174 | ) | ||||||||
| Property and equipment, net | $ | 9,586,821 | $ | 9,585,141 | $ | 9,554,577 | $ | 9,585,141 | ||||||||
NOTE 8 - OTHER ASSETS
In July 2022, the Company acquired a multi-user license of a back-office platform for $1,000,000. This back-end platform is intended to facilitate the computation and processing of commission payments to distributors, and it requires customization in order for it to be operational. The license has no resell rights and the Company has the option to buy the full license within six months of the launch of the platform. At of the date of this report, this platform is in development for inclusion of relevant user requirements.
NOTE 89 – ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities consist of the following:
SUMMARY OF ACCRUED AND OTHER CURRENT LIABILITIES
| June 30, 2022 | March 31, 2022 | September 30, 2022 | March 31, 2022 | |||||||||||||
| Deferred sales revenues | $ | 405,626 | $ | 547,217 | ||||||||||||
| Deferred sales | $ | 388,691 | $ | 547,217 | ||||||||||||
| Liability associated with uncertain tax positions | 921,987 | 921,987 | 925,794 | 921,987 | ||||||||||||
| Payroll and employee benefits | 309,736 | 478,360 | 427,473 | 478,360 | ||||||||||||
| Settlement liability, current portion | - | 341,919 | - | 341,919 | ||||||||||||
| Lease liability, current portion | 68,477 | 134,578 | 70,789 | 134,578 | ||||||||||||
| Due to related parties | 288,731 | 125,532 | 699 | 125,532 | ||||||||||||
| Other operational accruals | 674,539 | 530,189 | 1,550,862 | 530,189 | ||||||||||||
| Accrued and other current liabilities | $ | 2,669,096 | $ | 3,079,782 | $ | 3,364,308 | $ | 3,079,782 | ||||||||
Lease liability, current portion, represent obligations due within one year under operating leases for office space, automobiles, and office equipment. See Note14 - LEASES below for more information. Other operational accruals as of JuneSeptember 30, 2022, as presented above, include accrued expense of $379,556 902,862and accrued interest of $118,405648,000. on the related party convertible notes and notes payable included in the condensed consolidated balance sheet.
NOTE 910 - CONVERTIBLE NOTES PAYABLE, RELATED PARTIES
Convertible notes payable consists of the following:
SCHEDULE OF CONVERTIBLE NOTES PAYABLE
| Issuance Date | Maturity Date | Interest Rate | Conversion Price (per share) | June 30, 2022 | March 31, 2022 | Maturity Date | Interest Rate | Conversion Price (per share) | September 30, 2022 | March 31, 2022 | ||||||||||||||||||||||||||
| April 2021 | April 2024 | 8 | % | $ | 0.20 | $ | - | $ | 30,000,000 | April 2024 | 8 | % | $ | 0.20 | $ | - | $ | 30,000,000 | ||||||||||||||||||
| October 2017 | October 2022 | 12 | % | $ | 0.15 | 50,000 | 50,000 | October 2022 | 12 | % | $ | 0.15 | - | 50,000 | ||||||||||||||||||||||
| June 2022 | June 2024 | 8 | % | $ | 0.03 | 27,000,000 | - | |||||||||||||||||||||||||||||
| September 2022 | September 2024 | 8 | % | $ | 0.03 | 27,000,000 | - | |||||||||||||||||||||||||||||
| Total convertible notes payable | Total convertible notes payable | 27,050,000 | 30,050,000 | 27,000,000 | 30,050,000 | |||||||||||||||||||||||||||||||
| Less: unamortized debt discount and deferred financing costs | Less: unamortized debt discount and deferred financing costs | 20,033,135 | 20,151,230 | 17,396,771 | 20,151,230 | |||||||||||||||||||||||||||||||
| 7,016,865 | 9,898,770 | 9,603,229 | 9,898,770 | |||||||||||||||||||||||||||||||||
| Less: current portion of convertible notes payable | Less: current portion of convertible notes payable | 7,016,865 | 9,898,770 | 9,603,229 | 9,898,770 | |||||||||||||||||||||||||||||||
| Long-term convertible notes payable | Long-term convertible notes payable | $ | - | $ | - | $ | - | $ | - | |||||||||||||||||||||||||||
The Company’s convertible notes are convertible, at the option of the holder, into shares of the Company’s Common Stock at the conversion prices shown above.
In October 2017, the Company issued a Convertible Promissory Note in the principal amount of $50,000 (the “Note”) to HWH International, Inc. (“HWH” or the “Holder”). HWH is affiliated with Heng Fai Ambrose Chan, who in April 2020 became a Director of the Company. The Note is convertible into shares of the Company’s Common Stock. Concurrent with issuance of the Note, the Company issued to HWH a detachable warrant to purchase up to an additional 333,333 shares of the Company’s Common Stock, at an exercise price of $0.15 per share. Under the terms of the Note and the detachable stock warrant, the Holder is entitled to certain financing rights. If the Company enters into more favorable transactions with a third-party investor, it must notify the Holder and may have to amend and restate the Note and the detachable stock warrant to be identical. On August 9, 2022, HWH and the Company executed an agreement to settle the Note and cancel the related stock warrant for $78,636, which amount represents the principal plus accrued interest. The Company made the payment to HWH on August 9, 2022.
On April 5, 2021, the Company and Decentralized Sharing Systems, Inc. (“DSSI”) entered into a Securities Purchase Agreement, pursuant to which the Company issued: (a) a Convertible Promissory Note in the principal amount of $30.0 million (the “Note”) in favor of DSSI, and (b) a detachable Warrant to purchase up to 150,000,000 shares of the Company’s Class A Common Stock, at $ per share, and DSSI loaned to the Company $30.0 million. DSSI, is a subsidiary of DSS, Inc. (formerly Document Security Systems, Inc., “DSS”), and, together with DSS, is a major shareholder of the Company. Under the terms of the loan, the Company agreed to pay to DSSI a loan Origination Fee of $3.0 million, payable in shares of the Company’s Class A Common Stock, at the rate of $0.20 per share. The Note bore interest at the annual rate of 8%, with a maturity date of April 5, 2024, subject to certain accelerated provisions upon the occurrence of an Event of Default, as was defined in the Note. At any time during the term of the Note, all or part of the Note, including the principal amount less unamortized prepaid interest, if any, plus any accrued interest could have been converted into shares of the Company’s Class A Common Stock at the rate of $0.20 per share, at the option of the holder. Interest on the Note was pre-payable annually in cash or in shares of the Company’s Class A Common Stock, at the option of the Company, except that interest for the first year was pre-payable in shares of the Company’s Class A Common Stock, at the rate of $0.20 per share. As further discussed below, the Note and the detachable Warrant were redeemed in June 2022.
In connection with the issuance of the Note and the detachable Warrant, the Company allocated $15.0 million of the net proceeds from the loan to the detachable Warrant, allocated $12.0 million of the net proceeds to the beneficial conversion feature embedded in the Note and recognized deferred financing costs of $3.0 million. The resulting debt discount and the deferred financing costs were being amortized into interest expense over the term of the note (three years). During the threesix months ended JuneSeptember 30, 2021, the Company issued to DSSI shares of its Class A Common Stock, including shares in payment of the loan Origination Fee and shares in prepayment of interest for the first year and recognized a deemed dividend of $1,080,000 for the excess of the fair value of the shares issued over the amounts settled.
On June 15, 2022, the Company and DSSI which, together with DSS, is a majority shareholder of the Company, entered into an agreement pursuant to which the Company issued, to DSSI: (a) a two-year Convertible, Advancing Promissory Note in the principal amount of $27.0million (the “2022 Note”) in favor of DSSI and (b) a detachable Warrant to purchase up to 818,181,819shares of the Company’s Class A Common Stock at the exercise price of $per share. The 2022 Note bears interest at the annual rate of 8% and is due and payable on demand or, if no demand, on May 1, 2024. At any time during the term of the 2022 Note, all or part of the Note may be converted into up to shares of the Company’s Class A Common Stock, at the option of the holder. Under the terms of the agreement, the Company agreed to pay to DSSI a loan origination fee of $270,000. In addition, DSSI agreed to surrender to the Company all DSSI’s rights pursuant to: (a) a certain Convertible Promissory Note in the principal amount of $30.0million issued by the Company in April 2021 in favor of DSSI, and (b) a certain detachable Warrant to purchase up to 150,000,000shares of the Company’s Class A Common Stock, at $per share, issued concurrently with such $30.0million note. The Company recognized the transaction with DSSI as a debt extinguishment in accordance with GAAP. Since DSSI is a related party, the difference between the fair value of the new equity instruments and the carrying value of the retired equity instruments, was recognized in additional paid in capital on the Company’s condensed consolidated balance sheet.
During the three months ended JuneSeptember 30, 2022, and JuneSeptember 30, 2021, interest expense in connection with the Company’s convertible notes was $143,086558,000 and $2.9606,444 million,, respectively, excluding amortization of debt discount and deferred financing costs of $2.52.6 million and $2.3 million, respectively. During the six months ended September 30, 2022, and September 30, 2021, interest expense in connection with the convertible notes were $648,000 and 1.7 million, respectively, excluding amortization of debt discount and deferred financing cost of $3.1 and $4.4 million respectively. These amounts are included in interest expense in our consolidated statements of operations.
NOTE 1011 – INCOME TAXES
The statutory rates for our domestic and our material foreign operations are as follows for the periods shown:
SCHEDULE OF STATUTORY RATES FOR OUR DOMESTIC AND FOREIGN OPERATION
| Country | 2022 | 2021 | ||||||
| United States | 21 | % | 21 | % | ||||
| Republic of Korea | 21 | % | 22 | % | ||||
| Effective Income Tax Rate | 21 | % | 22 | % | ||||
Our consolidated effective income tax rate reconciliation is as follows:
SCHEDULE OF INCOME TAX RATE RECONCILIATION RATE
| Three Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Federal statutory rate | 21.0 | % | 21.0 | % | ||||
| State and local income taxes | 0.6 | (0.7 | ) | |||||
| Change in valuation allowance for NOL carry-forwards | 1.3 | (51.1 | ) | |||||
| Stock warrant transactions and other items | (2.8 | ) | 4.1 | |||||
| Effective income tax rate | 20.1 | % | (26.7 | )% | ||||
| Six Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Federal statutory rate | 21.0 | % | 21.0 | % | ||||
| State and local income taxes | (0.2 | ) | (0.7 | ) | ||||
| Valuation allowance for NOL carry-forwards | (15.6 | ) | (51.1 | ) | ||||
| Stock warrant transactions and other items | (0.2 | ) | 4.1 | |||||
| Effective income tax rate | 5.2 | % | (26.7 | )% | ||||
Income taxes applicable to our foreign operations are not material in the periods presented.
NOTE 1112 - STOCKHOLDERS’ EQUITY
Common Stock
During the threesix months ended JuneSeptember 30, 2022, the Company issued to DSSI: (a) a two-year Convertible, Advancing Promissory Note in the principal amount of $27.0 million (the “2022 Note”) in favor of DSSI and (b) a detachable Warrant to purchase up to 818,181,819 shares of the Company’s Class A Common Stock at the exercise price of $ per share. The transaction is discussed more fully in Note 9 – Convertible Notes Payable, Related Parties.
In May 2022, the Company and certain of its subsidiaries, on the one hand, and Alchemist, the former officer and certain entities affiliated with the former officer, on the other hand, entered into a Confidential Settlement Agreement with Mutual Releases (the “May 2022 Settlement Agreement”) pursuant to which the parties amicably settled all claims and disputes among them; (b) the former officer sold to the Company shares of the Company’s common stock then under the voting and dispositive control of the former officer; (c) the Company made a one-time payment of $1,043,645; and (d) the Company and its relevant subsidiaries, on the one hand, and the former officer and relevant entities affiliated with the former officer, on the other hand, exchanged customary mutual releases of any prior obligations among them. On May 19, 2022, the closing price for the Company’s common stock was $per share. In the fiscal quarter ending Junesix months ended September 30, 2022, the Company measured and recognized the repurchase of its common stock at its fair value of $626,187, derecognized its remaining liability under the Co-Founder’s Agreement, and recognized a recovery of $324,230in connection with the previously recognized loss related to the Co-Founder’s Agreement.
At the Annual Meeting, the Company’s Shareholders ratified the Third Amended and Restated Articles of Incorporation of the Company and approved the maximum number of shares which the Corporation shall have the authority to issue of Two Billion Two Hundred Million (2,200,000,000) shares, $ par value per share, of which: (a) Two Billion () Shares of Common Stock having a par value of $ per share (“Common Stock”) and (b) Two Hundred Million () Shares of Preferred Stock comprised of Series A and Series C having a par value of $ per share or as authorized (“Preferred Stock”).
The Company’s Board of Directors has designated shares of Class B Common Stock, par value per share. As of both: JuneSeptember 30, 2022, and March 31, 2022, there were and shares of the Company’s Class A Common Stock issued. As of JuneSeptember 30, 2022, and March 31, 2022, there were shares and shares, respectively, net of shares held in Treasury Stock at JuneSeptember 30, 2022, of the Company’s Class A Common Stock outstanding. As of JuneSeptember 30, 2022, and March 31, 2022, there were shares of the Company’s Class B Common Stock issued and outstanding.
NOTE 1213 - RELATED PARTY TRANSACTIONS
Decentralized Sharing Systems, Inc.
In July 2020, the Company and Heng Fai Ambrose Chan, a Director of the Company, entered into a Stock Purchase and Share Subscription Agreement (the “SPA Agreement”) pursuant to which Mr. Chan invested $ million in the Company and the Company agreed to issue million shares of the Company’s Class A Common Stock and a fully vested Stock Warrant to purchase up to million shares of the Company’s Class A Common Stock at an exercise price of $ per share. Concurrently with the SPA Agreement, Mr. Chan and DSS, then a major shareholder of the Company, entered into an Assignment and Assumption Agreement pursuant to which Mr. Chan assigned to DSS all interests in the SPA Agreement. In July 2020, the Company issued million of its Class A Common Stock pursuant to the SPA Agreement. The Stock Warrant issued pursuant to the SPA Agreement expires on the third anniversary from the issuance date, unless exercised earlier.
In April 2021, the Company and DSSI entered into a Securities Purchase Agreement, pursuant to which DSSI granted a $30.0 million loan to the Company in exchange for: (a) a Convertible Promissory Note in the principal amount of $30.0 million (the “Note”) in favor of DSSI, and (b) a detachable Stock Warrant to purchase up to shares of the Company’s Class A Common Stock, at $0.22 per share. At any time during the term of the Note, all or part of the Note, including the principal amount less unamortized prepaid interest, if any, plus any accrued interest can be converted into shares of the Company’s Class A Common Stock at the rate of $0.20 per share, at the option of the holder. Under the terms of the loan agreement, the Company agreed to pay to DSSI a loan origination fee of $3.0 million, payable in shares of the Company’s Class A Common Stock, with the number of shares to be calculated at the rate of $0.20 per share. In April 2021, Sharing Services issued million shares of its Class A Common Stock to DSSI, including 15.0 million shares in payment of the loan origination fee and million shares in prepayment of interest on a loan for the first year.
In December 2021, the Company and DSSI entered into a Stock Purchase and Share Subscription Agreement pursuant to which DSSI invested $ in the Company in exchange for million shares of Class A Common Stock (the “Shares”) and stock warrants (the “Stock Warrants”) to purchase up to million shares of the Company’s Class A Common Stock. The Stock Warrants are fully vested, have a term of five () years and are exercisable at any time prior to expiration, at the option of DSSI, at a per share price equal to $. On the effective date of the Stock Purchase and Share Subscription Agreement, the closing price for the Company’s common stock was $ per share and the Company recognized a deemed dividend of $ million in connection with the transaction.
In January 2022, the Company and DSS who, together with its subsidiaries, is currently a majority shareholder of the Company, entered into a one-year Business Consulting Agreement (the “Consulting Agreement”) pursuant to which DSS will provide to the Company certain consulting services, as defined in the Consulting Agreement. The Consulting Agreement may be terminated by either party on a 60-day’s written notice. In connection with the Consulting Agreement, the Company agreed to pay DSS a flat monthly fee of sixty thousand dollars ($60,000) and DSS received a fully vested detachable Stock Warrant to purchase up to 50.0 million shares of the Company’s Class A Common Stock, at the exercise price of $0.0001 per share. On the effective date of the Consulting Agreement, the closing price of the Company’s common stock was $ per share and the fair value of the Stock Warrant was $3.5 million. The fair value of the Stock Warrant is being recognized as consulting expense over the term of one year. During the three and six months ended JuneSeptember 30, 2022, the Company recognized consulting expense of $872,6031.1, million and $2.1 million, in connection with the Consulting Agreement. In February 2022, the Company issued million shares of its Common Stock Class A to DSS in connection with exercise of the Stock Warrant.
On June 15, 2022, the Company and Decentralized Sharing Systems, Inc. (“DSSI”) entered into a Securities Purchase Agreement (the “SPA”), pursuant to which the Company issued: (a) a Convertible Promissory Note in the principal amount of $27.0 million (the “2022 Note”) in favor of DSSI and (b) a detachable Warrant to purchase up to 818,181,819 shares of the Company’s Class A Common Stock (the “Warrant”), at $ per share, in exchange for the $27.0 million. The 2022 Note bears interest at the annual rate of 8% and is due and payable on demand or, if no demand, on May 1, 2024. At any time during the term of the 2022 Note, all or part of the Note may be converted into up to shares of the Company’s Class A Common Stock, at the option of the holder.
In connection with the loan, the Company agreed to pay to DSSI a loan Origination Fee of $270,000. In addition, DSSI agreed to surrender to the Company all DSSI’s rights pursuant to: (a) a certain Convertible Promissory Note in the principal amount of $30.0 million issued by the Company in April 2021 in favor of DSSI, and (b) a certain detachable Warrant to purchase up to 150,000,000 shares of the Company’s Class A Common Stock, at $ per share, issued concurrently with such $30.0 million note.
As of JuneSeptember 30, 2022, DSS and its affiliates owned, in the aggregate, 191.9 million shares of the Company’s Class A Common Stock, excluding million shares issuable upon the exercise of warrants held by DSS and million shares issuable upon conversion of the Note discussed in the third preceding paragraph. Heng Fai Ambrose Chan, Frank D. Heuszel, and John (“JT”) Thatch, each a Director of the Company, also serve on the Board of Directors of DSS. Mr. Chan serves as Chairman of the Board of Directors of the Company. Mr. Thatch also serves as President, CEO and Vice Chairman of the Board of Directors of the Company.
HWH International, Inc.
In October 2017, Sharing Services issued a Convertible Promissory Note in the principal amount of $50,000 (the “Note”) to HWH International, Inc. (“HWH” or the “Holder”). HWH is affiliated with Heng Fai Ambrose Chan, who became a Director of the Company in April 2020. The Note is convertible into shares of the Company’s Common Stock. Concurrent with issuance of the Note, the Company issued to HWH a detachable stock warrant to purchase up to an additional 333,333 shares of the Company’s Common Stock, at an exercise price of $0.15 per share. Under the terms of the Note and the detachable stock warrant, the Holder is entitled to certain financing rights. If the Company enters into more favorable transactions with a third-party investor, it must notify the Holder and may have to amend and restate the Note and the detachable stock warrant to be identical. On August 9, 2022, HWH and the Company executed an agreement to settle the Note and cancel the related stock warrant for $78,635.6278,636, which amount represents the principal plus accrued interest. The detachable stock warrant to purchase the additional shares of the Company’s Common Stock was forfeited by the Holder upon payment. The Company made the payment to HWH on August 9, 2022.
HWH World, Inc.
A subsidiary of the Company operating in the Republic of Korea subleases office space from HWH World, Inc. (“HWH World”), a subsidiary of DSS and a company affiliated with Heng Fai Ambrose Chan, a Director of the Company. Pursuant to the terms of the sublease agreement, the Company recognized a right-of-use asset and an operating lease liability of $261,835 in connection therewith. In fiscal year ended March 31, 2022, the Company recognized expense of $222,092 in connection this lease. As of March 31, 2022, accounts payable included payments due to HWH World under the lease of $213,742. In May 2022, the Company and HWH World amended the related sublease agreement to significantly reduce the space subleased by the Company and the related rent obligation. On June 30, 2022, the right-of-use asset and liability were written off and a new month-to-month rental agreement was entered into for the reduced space subleased by the Company. The company recognized $9362,808 in rent expense for the six months ended September 30, 2022, in connection with the new lease.
In September 2021, the Company and HWH World entered into an Advisory Agreement pursuant to which the Company provides strategic advisory services to HWH World in connection with its North America expansion plans in exchange for a monthly fee of $10,000. During the fiscal year ended March 31, 2022, the Company recognized consulting income of $76,700 in connection therewith. The Advisory Agreement was terminated during the threesix months ended JuneSeptember 30, 2022. No consulting income has been recognized for the three and six months ended September 30, 2022.
Impact Biomedical, Inc.
In the fiscal year ended March 31, 2022, a wholly owned subsidiary of the Company purchased health and wellness products from Impact Biomedical, Inc., a subsidiary of DSS, in the aggregate amount of $111,414. During the three and six months ended JuneSeptember 30, 2022, the Company’s purchases of health and wellness products from Impact Biomedical, Inc., totaled $19,247. and $36,808, respectively.
K Beauty Research Lab. Co., Ltd
In the fiscal year ended March 31, 2022, a wholly owned subsidiary of the Company purchased skin care products manufactured by K Beauty Research Lab. Co., Ltd (“K Beauty”), a South Korean-based supplier of skin care products that is affiliated with Heng Fai Ambrose Chan, a Director of the Company, in the aggregate amount of $2.3million. The Company’s affiliates operating in Asia intend to distribute skin care and other products in South Korea and other countries, including skin care products procured from K Beauty, as part of the Company’s previously announced strategic growth plans. During the three and six months ended JuneSeptember 30, 2022, the Company purchased skin care products manufactured by K Beauty Research Lab and other items in the amount of $643929 and $1,572.
Premier Packaging Corporation
During the three months ended June 30, 2021,Premier Packaging Corporation is a wholly owned subsidiary of the Company issued purchaseCompany. Purchase orders to Premier Packaging Corporation, a subsidiary of DSS, to acquire printed packaging materials in the aggregate amount ofwas $28,090 and $151,509. No purchase orders were issued duringfor the threesix months ended JuneSeptember 30, 2022.2022, and 2021, respectively
Alchemist Holdings, LLC
In February 2020, the Company, Alchemist Holdings, LLC (“Alchemist”), and a former Company officer entered into a Settlement Accommodation Agreement (the “Accommodation Agreement”) pursuant to which Alchemist and the former Company officer agreed to transfer to the Company million shares of the Company’s Common Stock held by Alchemist, in settlement of certain obligations to the Company. Under the terms of the Accommodation Agreement, Alchemist and the former Company officer also agreed to transfer to the Company million shares of the Company’s Common Stock held by Alchemist, to offset certain legal and other expenses incurred by the Company in connection with various related-party legal claims. Accordingly, in the fiscal year ended March 31, 2021, the Company and Alchemist caused the transfer to the Company, in the aggregate, of million shares of the Company’s Common Stock then held by Alchemist, and the Company retired such redeemed shares.
In May 2022, the Company and certain of its subsidiaries, on the one hand, and Alchemist, the former officer and certain entities affiliated with the former officer, on the other hand, entered into a Confidential Settlement Agreement with Mutual Releases (the “May 2022 Settlement Agreement”) pursuant to which the parties amicably settled all claims and disputes among them; (b) the former officer sold to the Company shares of the Company’s common stock then under the voting and dispositive control of the former officer; (c) the Company made a one-time payment of $1,043,645; and (d) the Company and its relevant subsidiaries, on the one hand, and the former officer and relevant entities affiliated with the former officer, on the other hand, exchanged customary mutual releases of any prior obligations among them. On May 19, 2022, the closing price for the Company’s common stock was $per share. InDuring the fiscal quarter ending Junesix months ended September 30, 2022, the Company measured and recognized the repurchase of its common stock at its fair value of $626,187, derecognized its remaining liability under the Co-Founder’s Agreement, and recognized a recovery of $324,230in connection with the previously recognized loss related to the Co-Founder’s Agreement.
The Company subleases warehouse and office space from Alchemist, until May 2022, a 10% shareholder of the Company. During the three and six months ended JuneSeptember 30, 2022, rent expense associated with such sublease agreement was $25,081. and $50,179, respectively.
American Premium Water Corporation
In July 2021, the Company, and American Premium Water Corporation (“American Premium”) entered into a business consulting agreement pursuant to which the Company provides consulting services to American Premium in exchange for a monthly fee of $4,166. Mr. John “JT” Thatch, a director of the Company, also serves on the Board of Directors of American Premium. During the three and six months ended JuneSeptember 30, 2022, the Company recognized consulting fee income of $12,498. and 24,996, respectively.
Alset Title Company, Inc.
In December 2021, Sharing Services, through one of its subsidiaries, purchased an office building in Lindon, Utah for $8,942,640. In connection therewith, Alset Title Company, Inc. (“Alset Title”), a subsidiary of DSS, acted as escrow and closing agent for the transaction, at no cost. DSS, together with its subsidiaries, is a majority shareholder of the Company.
Hapi Café, Inc.
In November 2021, Sharing Services and Hapi Café, Inc., a company affiliated with Heng Fai Ambrose Chan, a Director of the Company, entered into a Master Franchise Agreement pursuant to which Sharing Services acquired the exclusive franchise rights in North America to the brand “Hapi Café.” Under the terms, Sharing Services, directly or through its subsidiaries, has the right to operate no less than five (5) corporate-owned stores and can offer to the public sub-franchise rights to own and operate other stores, subject to the terms and conditions contained in the Master Franchise Agreement.
American Pacific Bancorp
On June 15, 2022, Sharing Services, through one of its subsidiaries, entered into a secured real estate promissory note with American Pacific Bancorp, Inc. (“APB”), and the Company entered into a Loan Agreement pursuant to which APB loaned the Company approximately $5.7 million. The loan bears interest at the annual rate of 8% matures on June 1, 2024,, is payable in equal monthly instalments of $43,897 commencing on July 1, 2022 (with the remainder due on JuneSeptember 1, 2024), and is secured by a first mortgage interest on the Company’s Lindon, Utah office building. In connection with this loan, the Company received net proceeds of $5,522,829 from APB on June 17, 2022. APB is a subsidiary of DSS. Heng Fai Ambrose Chan, and Frank D. Heuszel, each a Director of the Company, also serve on the Board of Directors of APB.
On August 11, 2022, the Company executed a revolving credit promissory note with APB (“the APB Revolving Note”) pursuant to which the Company has access to advances with a maximum principal balance not to exceed the principal sum of $10 million. The APB Revolving Note is collateralized by the assets of the Company, and it bears interest at the annual rate of 8% and such interest shall be due and payable quarterly as it accrues on the outstanding balance. Interest payments on the loan are due and payable on the last day of each consecutive third calendar month until the maturity date of August 12, 2024. As of September 30, 2022, the Company had $6.0 million outstanding under the APB Revolving Note and accrued interest of $60,667 which amount was paid on October 1, 2022.
Stock Warrants
Stock Warrants Issued to Directors, Officers and Employees
In July 2020, the Company and Heng Fai Ambrose Chan, a Director of the Company, entered into a Stock Purchase and Share Subscription Agreement (the “SPA Agreement”) pursuant to which Mr. Chan invested $ million in the Company in exchange for million shares of the Company’s Class A Common Stock and a fully vested Stock Warrant to purchase up to million shares of the Company’s Class A Common Stock at an exercise price of $ per share. In July 2020, Mr. Chan assigned to DSS all interests in the SPA Agreement and the transactions contemplated in the SPA Agreement were completed. Mr. Chan is also a Director of DSS.
In October 2017, the Company issued a convertible note in the principal amount of $50,000 to HWH International, Inc. (“HWH”) and a detachable stock warrant to purchase up to shares of the Company’s Common Stock, at an exercise price of $0.15 per share. The Note is convertible into 333,333 shares of the Company’s Common Stock and expires in October 2022. HWH is affiliated with Heng Fai Ambrose Chan, who in April 2020 became a Director of the Company. On August 9, 2022, HWH and the Company executed an agreement to settle the Note and cancel the related stock warrant for $78,636, which amount represents the principal plus accrued interest. The detachable stock warrant to purchase the additional shares of the Company’s Common Stock was forfeited by the Holder upon payment. The Company made the payment to HWH on August 9, 2022.
During fiscal year 2020, subsidiaries of the Company entered multi-year employment agreements with its key employees. In general, each employment contract contained a fully vested initial grant of warrants exercisable at a fixed exercise price and, provided for subsequent grants that were exercisable at a discounted price based on the 10-day average stock price determined at the time of exercise. The subsequent grants would vest at each anniversary date of the employment agreement effective date. The Company begins recognizing the compensatory nature of the warrants at the service inception date and ceases recognition at the vesting date. Due to the variable nature of the exercise price for some grants, the Company will continue to recognize expense (or benefit) after the end of the service period until the warrants are exercised or expire. As such, the Company disclosures below are based on either (i) the fixed exercise price of the warrant; or (ii) the variable exercise price of the warrant as determined on the last day of the period.
During the three months ended JuneSeptember 30, 2022, and 2021, the Company recognized a compensatory gain of $114,960167,855 and $1,134,170, respectively, in connection with grants with a variable exercise price after service is completed.
NOTE 1415 – LEASES
The Company leases space for its offices and warehouse space, under lease agreements classified as “operating leases’” as defined in ASC Topic 842.
The Company leases space for its corporate headquarters, warehouse space, automobiles, and office and other equipment, under lease agreements classified as operating leases. The Company has remaining lease terms of approximately 1 to 10 years on the remaining Leases. Leases with an initial term in excess of 12 months are recognized on the consolidated balance sheet based on the present value of future lease payments over the defined lease term at the lease commencement date. Future lease payments were discounted using an implicit rate of 10% to 12% in connection with most leases.
The following information pertains to the Company’s leases as of the balance sheet dates indicated:
SCHEDULE OF OPERATING LEASE ASSETS AND LIABILITIES
| Assets | Classification | June 30, 2022 | March 31, 2022 | |||||||
| Operating leases | Right-of-use assets, net | $ | 527,492 | $ | 593,389 | |||||
| Total lease assets | $ | 527,492 | $ | 593,389 | ||||||
| Liabilities | ||||||||||
| Operating leases | Accrued and other current liabilities | $ | 68,477 | $ | 134,578 | |||||
| Operating leases | Lease liability, long-term | 461,515 | 461,515 | |||||||
| Total lease liabilities | $ | 529,992 | $ | 596,093 | ||||||
| Assets | Classification | September 30, 2022 | March 31, 2022 | |||||||
| Operating leases | Right-of-use assets, net | $ | 473,993 | $ | 593,389 | |||||
| Total lease assets | $ | 473,993 | $ | 593,389 | ||||||
| Liabilities | ||||||||||
| Operating leases | Accrued and other current liabilities | $ | 70,789 | $ | 134,578 | |||||
| Operating leases | Lease liability, long-term | 413,587 | 461,515 | |||||||
| Total lease liabilities | $ | 484,376 | $ | 596,093 | ||||||
The following information pertains to the Company’s leases for the periods indicated:
SCHEDULE OF OPERATING LEASE COSTS
| Three Months Ended June 30, | Three Months Ended September 30, | |||||||||||||||||||
| Lease cost | Classification | 2022 | 2021 | Classification | 2022 | 2021 | ||||||||||||||
| Operating lease cost | General and administrative expenses | $ | 23,178 | $ | 159,820 | General and administrative expenses | $ | 21,831 | $ | 305,680 | ||||||||||
| Operating lease cost | Depreciation and amortization | - | - | Depreciation and amortization | - | - | ||||||||||||||
| Operating lease cost | Interest expense, net | - | - | Interest expense, net | - | - | ||||||||||||||
| Total lease cost | $ | 23,178 | $ | 159,820 | $ | 21,831 | $ | 305,680 | ||||||||||||
| Six Months Ended September 30, | ||||||||||
| Lease cost | Classification | 2022 | 2021 | |||||||
| Operating lease cost | General and administrative expenses | $ | 45,009 | $ | 465,500 | |||||
| Operating lease cost | Depreciation and amortization | - | - | |||||||
| Operating lease cost | Interest expense, net | - | - | |||||||
| Total lease cost | $ | 45,009 | $ | 465,500 | ||||||
The Company’s lease liabilities are payable as follows:
SCHEDULE OF OPERATING LEASE LIABILITY PAYABLE
| Twelve months ending June 30, | Amount | |||||||
| Twelve months ending September 30, | Amount | |||||||
| 2023 | $ | 102,897 | $ | 72,962 | ||||
| 2024 | 52,128 | 99,367 | ||||||
| 2025 | 60,500 | 102,147 | ||||||
| 2026 | 69,746 | 104,926 | ||||||
| 2027 | 79,713 | 107,706 | ||||||
| Thereafter | 231,108 | 252,241 | ||||||
| Total remaining payments | 596,092 | 739,349 | ||||||
| Less imputed interest | (66,100 | ) | 254,973 | |||||
| Total lease liability | $ | 529,992 | $ | 484,376 | ||||
NOTE 1516 – COMMITMENTS AND CONTINGENCIES
Legal Matters in General
The Company has incurred several claims in the normal course of business. The Company believes such claims can be resolved without any material adverse effect on our consolidated financial position, results of operations, or cash flows.
The Company maintains certain liability insurance. However, certain costs of defending lawsuits are not covered by or only partially covered by its insurance policies, including claims that are below insurance deductibles. Additionally, insurance carriers could refuse to cover certain claims, in whole or in part. The Company accrues costs to defend itself from litigation as they are incurred.
The outcome of litigation is uncertain, and despite management’s view of the merits of any litigation, or the reasonableness of the Company’s estimates and reserves, the Company’s financial statements could nonetheless be materially affected by an adverse judgment. The Company believes it has adequately reserved for the contingencies arising from current legal matters where an outcome was deemed to be probable, and the loss amount could be reasonably estimated. No provision for legal matters was deemed necessary at JuneSeptember 30, 2022.
Legal Proceedings
The Company from time to time is involved in various claims and lawsuits incidental to the conduct of its business in the ordinary course. We do not believe that the ultimate resolution of these matters will have a material adverse impact on our consolidated financial position, results of operations or cash flows.
| (a) | Case No. 4:20-cv-00946; Dennis Burback, Ken Eddy and Mark Andersen v. Robert Oblon, Jordan Brock, Jeff Bollinger, Four Oceans Global, LLC, Four Oceans Holdings, Inc., Alchemist Holdings, LLC, Elepreneurs U.S., LLC, Elevacity U.S., LLC, Sharing Services Global Corporation, Custom Travel Holdings, Inc., and Does 1-5, pending in the United States District Court for the Eastern District of Texas. On December 11, 2020, three investors in Four Oceans Global, LLC filed a lawsuit against the Company, its affiliated entities, and other persons and entities related to an investment made by the three |
| (b) | |
| Case No. 4:21-cv-00026; Elepreneurs Holdings, LLC d/b/a Elepreneur, LLC, Elepreneurs U.S., LLC d/b/a Elepreneurs, LLC, and SHRG IP Holdings, LLC v. Lori Ann Benson, Andrea Althaus and Lindsey Buboltz, pending in the United States District Court for the Eastern District of Texas. On December 31, 2020, the Company filed suit against three former distributors and obtained injunctive relief from the 429th Judicial District of Collin County, Texas. The lawsuit was removed by the three former distributors to federal court. The Company subsequently obtained injunctive relief from the federal court. | |
| Case No. 429-01137-2022; Elevacity U.S., LLC d/b/a The Happy Co. and Elepreneurs U.S., LLC d/b/a Elepreneurs, LLC v. Mark Willodson, Judy Willodson and Valentus, Inc., pending in the 429th Judicial District Court of Collin County, Texas. On March 9, 2022, the Company filed suit against a competitor and former distributors. On March 9, 2022, the Company filed suit against a competitor and former distributors. An Agreed Temporary Injunction was entered by the Court against the Willodsons in April 2022. This matter remains pending as of | |
| Case No. 4:22-cv-00042; Elevacity U.S., LLC d/b/a The Happy Co. and Elepreneurs U.S., LLC d/b/a Elepreneurs, LLC v. Brian Christopher Schweda, Jr., pending in the United States District Court for the Eastern District of Texas. On January 20, 2022, the Company filed suit against a former distributor. | |
| Case No. 9:22-cv-00146; Travel Gig, LLC and Happitravel, LLC v. Sharing Services Global Corporation, SHRG IP Holdings, LLC; Global Travel Destinations, LLC., and Does 1-25, pending in the United States District Court for the District of Montana. On September 7, 2022, Plaintiffs filed a lawsuit against the Company and two affiliated entities alleging trademark infringement concerning the Company’s affiliated travel entity. Plaintiffs filed a motion seeking a Preliminary Injunction and the Court set a hearing on the motion for November 1, 2022. | |
| (f) | Case No. 4:22-cv-00047; Elevacity U.S., LLC d/b/a The Happy Co. and Elepreneurs U.S., LLC d/b/a Elepreneurs, LLC v. Kimberley McLean, pending in the United States District Court for the Eastern District of Texas. On January 20, 2022, the Company filed suit against a former distributor. This matter remains pending as of |
NOTE 1617 - FAIR VALUE MEASUREMENTS OF FINANCIAL INSTRUMENTS
Our financial instruments consist of cash equivalents, if any, accounts receivable, notes receivable, investments in unconsolidated entities, accounts payable and convertible notes payable. The carrying amounts of cash equivalents, if any, trade accounts receivable and accounts payable approximate their respective fair values due to the short-term nature of these financial instruments.
Consistent with the valuation hierarchy contained in ASC Topic 820, we categorized certain of our financial assets and liabilities as follows:
SCHEDULE OF VALUATION HIERARCHY FINANCIAL ASSETS AND LIABILITIES
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||
| June 30, 2022 | September 30, 2022 | |||||||||||||||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||
| Investment in unconsolidated entities | $ | 9,929,294 | $ | - | $ | - | 9,929,294 | |||||||||||||||||||||||||
| Investment in unconsolidated entities, net | $ | 1,370,242 | $ | - | - | 1,370,242 | ||||||||||||||||||||||||||
| Investment in marketable securities | 6,506,547 | 6,506,547 | - | - | ||||||||||||||||||||||||||||
| Total assets | $ | 9,929,294 | $ | - | $ | - | $ | 9,929,294 | $ | 7,876,789 | $ | 6,506,547 | $ | - | $ | 1,370,242 | ||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||
| Convertible notes payable | $ | 25,577,273 | $ | - | $ | 25,527,273 | $ | 50,000 | $ | 17,918,182 | $ | - | $ | 17,918,182 | $ | - | ||||||||||||||||
| Total liabilities | $ | 25,577,273 | $ | - | $ | 25,527,273 | $ | 50,000 | $ | 17,918,182 | $ | - | $ | 17,918,182 | $ | - | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||
| March 31, 2022 | March 31, 2022 | |||||||||||||||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||
| Investment in unconsolidated entities | $ | 5,063,940 | $ | - | $ | - | $ | 5,063,940 | ||||||||||||||||||||||||
| Investment in unconsolidated entities, net | $ | 5,063,940 | $ | - | $ | - | $ | 5,063,940 | ||||||||||||||||||||||||
| Total assets | $ | 5,063,940 | $ | - | $ | - | $ | 5,063,940 | $ | 5,063,940 | $ | - | $ | - | $ | 5,063,940 | ||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||
| Convertible notes payable | $ | 5,840,000 | $ | - | $ | 5,790,000 | $ | 50,000 | $ | 5,840,000 | $ | - | $ | 5,790,000 | $ | 50,000 | ||||||||||||||||
| Total liabilities | $ | 5,840,000 | $ | - | $ | 5,790,000 | $ | 50,000 | $ | 5,840,000 | $ | - | $ | 5,790,000 | $ | 50,000 | ||||||||||||||||
NOTE 1718 - SUBSEQUENT EVENTS
On July 28, 2022, at the Company’s Annual Meeting of Stockholders, the Company’s Stockholders: (i) elected each John (“JT”) Thatch and Robert H Trapp to serve as Class I directors for a four-year term or until their respective successors are elected and qualified, (ii) ratified the Third Amended and Restated Articles of Incorporation ofIn preparing these unaudited condensed consolidated financial statements, the Company which was previously approved byhas evaluated events and transactions subsequent to the Boardbalance sheet date of Directors, and (iii) ratifiedSeptember 30, 2022, for potential recognition or disclosure through the appointment by the Boarddate of Directors of Ankit Consulting Services, Inc., Certified Public Accountants as the Company’s independent registered public accounting firm for the fiscal year that commenced on April 1, 2022.
In July and August 2022, the Company made investments in marketable securities, in the aggregate, of approximately $5.1 millionthis report. No other events require adjustment to be carried at fair valueor disclosure in the Company’s unaudited condensed consolidated financial statements.
In October 2017, Sharing Services issued a Convertible Promissory Note in the principal amount of $50,000 (the “Note”) to HWH International, Inc. (“HWH”). Concurrent with issuance of the Note, the Company issued to HWH a detachable stock warrant to purchase up to an additional shares of the Company’s Common Stock, at an exercise price of $0.15 per share. On August 9, 2022, HWH and the Company executed an agreement to settle the Note and cancel the related stock warrant for $78,636, which amount represents the principal plus accrued interest. The Company made the payment to HWH on August 9, 2022.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following section discusses management’s views of the financial condition and the results of operations and cash flows of Sharing Services Global Corporation and consolidated subsidiaries. This section should be read in conjunction with: (a) our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2022, and (b) our condensed consolidated financial statements included elsewhere in this Quarterly Report. This section may contain forward-looking statements. See “Cautionary Notice Regarding Forward-Looking Statements” above for a discussion of forward-looking statements.
Summary Results of Operations:
| Three Months Ended June 30, | Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Increase (Decrease) | % Change | September 30, 2022 | September 30, 2021 | Increase (Decrease) | % Change | September 30 ,2022 | September 30, 2021 | Increase (Decrease) | % Change | |||||||||||||||||||||||||||||||||||||
| Net sales | $ | 5,303,618 | $ | 11,211,526 | $ | (5,907,908 | ) | -52.7 | % | $ | 4,188,152 | $ | 9,873,300 | $ | (5,685,148 | ) | -57.6 | % | $ | 9,491,770 | $ | 21,084,827 | $ | (11,593,057 | ) | -55.0 | % | |||||||||||||||||||||
| Gross profit | 3,646,590 | 7,857,716 | (4,211,126 | ) | -53.6 | % | 2,428,376 | 6,948,861 | (4,520,485 | ) | -65.1 | % | 6,074,966 | 14,806,577 | (8,731,611 | ) | -59.0 | % | ||||||||||||||||||||||||||||||
| Operating expenses | (7,308,703 | ) | (9,878,785 | ) | (2,570,081 | ) | -26.0 | % | (6,595,518 | ) | (10,562,861 | ) | (3,967,343 | ) | -37.6 | % | (13,904,221 | ) | (20,441,646 | ) | (6,537,425 | ) | -32.0 | % | ||||||||||||||||||||||||
| Operating loss | (3,662,113 | ) | (2,021,069 | ) | (1,641,044 | ) | 81.2 | % | (4,167,142 | ) | (3,614,000 | ) | 553,142 | 15.3 | % | (7,829,255 | ) | (5,635,069 | ) | 2,194,186 | 38.9 | % | ||||||||||||||||||||||||||
| Non-operating income (expense), net | 1,969,246 | (779,049 | ) | 2,748,295 | -352.8 | % | ||||||||||||||||||||||||||||||||||||||||||
| Net non-operating expenses | (14,772,836 | ) | (354,899 | ) | 14,417,937 | 406.3 | % | (12,803,590 | ) | (1,133,948 | ) | 11,669,642 | 102.9 | % | ||||||||||||||||||||||||||||||||||
| Loss before income taxes | (1,692,867 | ) | (2,800,118 | ) | (1,107,251 | ) | -39.5 | % | (18,939,978 | ) | (3,968,899 | ) | 14,971,079 | 377.2 | % | (20,632,845 | ) | (6,769,017 | ) | 13,863,828 | 204.8 | % | ||||||||||||||||||||||||||
| Income tax (benefit) expense | (339,857 | ) | 747,889 | (1,087,746 | ) | -145.4 | % | |||||||||||||||||||||||||||||||||||||||||
| Income tax benefit | (554,075 | ) | (1,254,134 | ) | (700,059 | ) | -55.8 | % | (893,932 | ) | (506,245 | ) | 387,687 | 76.6 | % | |||||||||||||||||||||||||||||||||
| Net loss | $ | (1,353,010 | ) | $ | (3,548,007 | ) | $ | 2,194,997 | -61.9 | % | $ | (18,385,903 | ) | $ | (2,714,765 | ) | $ | 15,671,138 | 577.3 | % | $ | (19,738,913 | ) | $ | (6,262,772 | ) | $ | 13,476,141 | 215.2 | % | ||||||||||||||||||
Highlights for the Three months ended JuneSeptember 30, 2022:
| ● | For the three months ended | |
| ● | For the three months ended | |
| ● | For the three months ended | |
| ● | For the three months ended | |
| ● | For the three months ended | |
| ● | For the three months ended | |
| ● | For the | |
| ● | In June 2022, the Company and Decentralized Sharing Systems, Inc. (“DSSI”), a subsidiary of DSS, Inc. (“DSS”), and, together with DSS, a major shareholder of the Company entered into an agreement pursuant to which the parties to the agreement replaced the $30.0 million loan from April 2021 with a $27.0 million loan. | |
| ● | In June 2022, the Company, through a subsidiary, and American Pacific Bancorp, Inc. (“APB”), a subsidiary of DSS, entered into a Loan Agreement pursuant to which APB loaned the Company approximately $5.7 million. | |
| ● | In August 2022, the Company entered into a revolving credit promissory note (“the Note”) with APB, pursuant to which the Company has access to advances with a maximum principal balance, not to exceed the principal sum of $10.0 million. |
Overview
Summary Description of Business
Sharing Services Global Corporation and subsidiaries (“Sharing Services”, “we,” or the “Company”) aim to build shareholder value by developing or acquiring businesses and technologies that increase the Company’s product and services portfolio, business competencies, and geographic reach. Sharing Services’ combined platform currently leverages the capabilities and expertise of various companies that market and sell products direct to the consumer through independent contractors. The Company’s new shared service platform will service this direct selling “gig economy” sector by providing needed services that companies will require to operate, such as equity and inventory financing, advisory services, mobile application tools, merchant processing services, commercial insurance, and event planning.
Currently, the Company, through its subsidiaries, markets and distributes its health and wellness and other products primarily in the U.S. and Canada using a direct selling business model. In addition, the Company distributes its products from the U.S. to customers located in Australia, New Zealand and other countries. The Company’s U.S. subsidiaries market our products and services through an independent sales force, using their proprietary websites, including: www.elevacity.com and www.thehappyco.com. In JuneSeptember 2021, the Company, through a subsidiary, commenced operations in the Republic of Korea (South Korea).
The Company was incorporated in the State of Nevada on April 24, 2015.
As further discussed below, the Company intends to continue to grow its business both organically and by making strategic acquisitions from time to time of businesses and technologies that augment its product portfolio, complement its business competencies, and fit its growth strategy.
Convertible Notes and Borrowing Under Short-term Financing Arrangements
Historically, the Company has funded a substantial portion of its liquidity and cash needs through the intermittent issuance of convertible notes and borrowings under short-term financing arrangements, and through the intermittent issuance of equity securities. See “Liquidity and Capital Resources” below for additional information about the Company’s convertible notes and borrowings under short-term financing arrangements.
Industry and Business Trends
The information in “Industry and Business Trends” included in ITEM 1 — “Business” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2022, is incorporated herein by reference.
Strategic Profitable Growth Initiatives
The Company intends to continue to grow its business by pursuing a multipronged growth strategy, that includes: (a) expanding its product offerings, both within the health and wellness category and in new product categories, (b) expanding its direct-to-consumer geographic footprint (primarily in Asia), and (c) launching its previously announced membership-based consumer travel products line worldwide. This growth strategy may also include the use of strategic acquisitions of businesses that augment the Company’s product and services portfolio, business competencies and geographic reach.
Continuing Uncertainty Regarding the Recent COVID Pandemic
In 2020, in response to the COVID pandemic, governments in the countries where our products are sold mandated or recommended various containment measures, including selective business closures, social distancing, quarantine, stay-at-home or shelter-in-place directives, and limitations on, or cancellations of, larger meetings and other public events. We believe that the actual impact of the health crisis, and/or actions taken to contain the spread of the virus, have had and continue to have an adverse impact on the economies in the geographies we serve. Consumer demand for discretionary products such as ours is sensitive to significant downturns in the economy, increases in unemployment or decreases in perceived employment security, and decreases in consumer sentiment in general.
In efforts to protect our customers, distributors, employees, and other business partners, in 2020, we instituted several preventive measures, including temporarily transitioning a significant number of our corporate employees to working remotely, increasing efforts to clean and sanitize our business facilities, increasing employee safety communication, and transitioning our sales conventions to a virtual convention platform. While these temporary measures are increasingly being eased or fully reversed at the time of this Quarterly Report, we believe these necessary, temporary measurements are likely to have had an adverse impact on our business.
As a result of the foregoing, we cannot predict with certainty the scope, duration, and ultimate impact of this public health emergency in the countries where we operate, including its impact on the economy, but we believe these conditions are likely to have had and continue to have a material adverse impact on our business, financial condition, cash flows, and results of operations (including revenues and profitability), and those of our key suppliers.
The COVID emergency also may have the effect of exacerbating some of the other risk factors described elsewhere in our Annual Report on Form 10-K for the fiscal year ended March 31, 2022, including the success of our growth initiatives, our ability to anticipate and effectively respond to changes in consumer preferences and buying trends in a timely manner, our dependence on one supplier for a substantial portion of the products we sell, potential fluctuations in our quarterly financial performance, our ability to generate sustained, positive cash flows from operations with which to fund our working capital needs, the potential impact on our financial performance from economic slowdowns, our ability to effectively and cost-efficiently respond to any epidemics and other health emergencies, and the potential impact on our business of any disruption in our information technology systems.
Results of Operations
The Three months ended JuneSeptember 30, 2022 Compared to the Three months ended JuneSeptember 30, 2021
Net Sales
For the three months ended JuneSeptember 30, 2022, our consolidated net sales decreased by $5.9$5.7 million, or 52.7%57.6%, to $5.3$4.2 million, compared to the three months ended JuneSeptember 30, 2021. The decrease in net sales mainly reflects: (a) continuation of the decline in consumer orders that we experienced since the fourth quarter of the fiscal year 2020, (b) a decline in independent distributor orders, in the number of new independent distributors and in the number of continuing active distributors, resulting, in part, from recent product reformulations and increased competition for independent distributors, and (c) the generally adverse impact on consumer buying trends resulting from the recent increase in consumer good prices and in energy costs in the U.S. and from lingering effects of the COVID global health emergency and actions taken to help mitigate the spread of the virus in the geographies in which we operate. In efforts to restore strong sales growth, in the past several months, we have developed and launched our new business brand, “The Happy CoTM,” at our Elevacity division, have accelerated our previously announced initiatives to expand our operations into additional international geographies, and have further intensified our efforts to recruit, develop and reward our distributors and our efforts to reach new consumers, including through the continued introduction of new products.
We believe there continues to be significant uncertainty about the potentially adverse impact of the current health crisis on the economies and employment markets of several countries, including the U.S. and Canada. Please see Overview - Significant Uncertainty Regarding the Potential Impact of Ongoing COVID Health Crisis above.
The $5.9$5.7 million decrease in consolidated net sales primarily reflects a decrease in number of comparable product units sold, partially offset by sales of products introduced since JuneSeptember 30, 2021, of approximately $795,000.$1.2 million.
During the three months ended JuneSeptember 30, 2022, and 2021, the Company derived substantially all its consolidated net sales from the sale of its Elevate health and wellness product line.
During the three months ended JuneSeptember 30, 2022, approximately 63%62% of our net sales were to customers (including approximately 37%39% to recurring customers, which we refer to as “SmartShip” sales, and approximately 26%23% were to new customers) and approximately 37%38% of our net sales were to our independent distributors.
Gross Profit
For the three months ended JuneSeptember 30, 2022, our consolidated gross profit decreased by $4.2$4.5 million, or 53.6%65.1%, to $3.6$2.4 million, compared to the three months ended JuneSeptember 30, 2021, and our consolidated gross margins were 68.8%58.0% and 70.1%70.0%, respectively. For the three months ended JuneSeptember 30, 2022, gross margin was affected by an increase in shipping expenses and promotional pricing, as a percentage of sales.
Selling and Marketing Expenses
For the three months ended JuneSeptember 30, 2022, our consolidated selling and marketing expenses decreased by $2.4$3.0 million, to $2.8$2.0 million, or 46.5%49% of consolidated net sales compared to $5.2$5.0 million, or 45.9%51% of consolidated net sales for the three months ended JuneSeptember 30, 2021. The decrease in consolidated selling and marketing expenses is due primarily to lower sales commissions of $2.7$6.0 million (which reflects decrease in our consolidated net sales discussed above) partially offset by higher sales convention expenses of approximately $309,800$742,814 (as we resumed holding some in-person conventions).
General and Administrative Expenses
For the three months ended JuneSeptember 30, 2022, our consolidated general and administrative expenses (which include corporate employee compensation and benefits, stock-based compensation, professional fees, rent and other occupancy costs, certain consulting fees, telephone and information technology expenses, insurance premiums, and other administrative expenses) decreased by approximately $177,407$982,780 to $4.5$4.6 million, or 85.8%109% of consolidated net sales compared to $4.7$5.5 million, or 42.2%56.1% of consolidated net sales, for the three months ended JuneSeptember 30, 2021. The approximately $177,407 decreaseincrease in consolidated general and administrative expenses was primarily due to lower stock-based compensation expense of approximately $108,000, and lower employee compensation and compensation-related benefits of approximately $760,000, partially offsetdriven by higher professional, consulting and professional fees of approximately $867,000.legal expenses.
Interest Expense Net
For the three months ended JuneSeptember 30, 2022, our consolidated interest expense was $143,086, excluding3.3 million, including amortization of debt discount of $2.1 million and amortization of deferred financing costs, of $400,000, and interest income of $42,033. Consolidated interest expense of $3.1 million reflects $3.0 million, and other expenses associated with borrowings from “DSSI”. and related parties.
For the three months ended JuneSeptember 30, 2021, our consolidated interest expense was $579,182, excluding$3.1 including amortization of debt discount of $2,356,507, amortization ofand deferred financing costs, of $235,401, and interest income, of $5,674. Consolidated interest expense of $579,183 reflects $565,479and other expenses associated with borrowings under the $30.0 million from “DSSI”. and related parties.
Litigation Settlements andNet Other Non-operating Income/Expenses
For the three months ended JuneSeptember 30, 2022, we had net consolidated non-operating expenses of approximately $14.8 million. For the three months ended September 30, 2021, our consolidated non-operating income was approximately $0.4 million.
Unrealized Gain (Loss) on Investments in Unconsolidated Entities and Marketable Securities
For the three months ended September 30, 2022, net unrealized losses, before income tax, in connection with our investments in unconsolidated entities and marketable securities was $11.6 million.
For the three months ended September 30, 2021, net unrealized gains, before income tax, in connection with our investment in unconsolidated entities were $2.1 million.
Gain (Loss) on Employee Warrants Liability
For the three months ended September 30, 2022, we recognized a compensatory gain of $52,875, compared to $646,930 for the three months ended September 30, 2021, in connection with employee warrants with a variable exercise price after service was completed.
Income Tax Benefit
Income tax benefit includes current and deferred income taxes for both our domestic and foreign operations. Income from our international operations is subject to taxation in the countries in which we operate.
During the three months ended September 30, 2022, the Company had a state and local tax benefit of $3,294 and a provision for deferred federal income taxes of $550,781.
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Net Loss and Loss per Share
As a result of the foregoing, for the three months ended September 30, 2022, our consolidated net loss was $18.4 million, compared to $2.7 million for the three months ended September 30, 2021. For the three months ended September 30, 2022, and September 30, 2021, our diluted loss per share was $0.07 and $0.01, respectively.
Six months ended September 30, 2022 Compared to the Six months ended September 30, 2021
Net Sales
For the six months ended September 30, 2022, our consolidated net sales decreased by $11.6 million, or 55.0%, to $9.5 million, compared to the six months ended September 30, 2021. The decrease in net sales mainly reflects: (a) continuation of the decline in consumer orders that we experienced since the fourth quarter of the fiscal year 2020, (b) a decline in independent distributor orders, in the number of new independent distributors and in the number of continuing active distributors, resulting, in part, from recent product reformulations and increased competition for independent distributors, and (c) the generally adverse impact on consumer buying trends resulting from the recent increase in consumer good prices and in energy costs in the U.S. and from lingering effects of the COVID global health emergency and actions taken to help mitigate the spread of the virus in the geographies in which we operate. In efforts to restore strong sales growth, in the past several months, we have developed and launched our new business brand, “The Happy CoTM,” at our Elevacity division, have accelerated our previously announced initiatives to expand our operations into additional international geographies, and have further intensified our efforts to recruit, develop and reward our distributors and our efforts to reach new consumers, including through the continued introduction of new products.
We believe there continues to be significant uncertainty about the potentially adverse impact of the current health crisis on the economies and employment markets of several countries, including the U.S. and Canada. Please see Overview - Significant Uncertainty Regarding the Potential Impact of Ongoing COVID Health Crisis above.
The $11.6 million decrease in consolidated net sales primarily reflects a decrease in the number of comparable product units sold, partially offset by sales of products introduced since September 30, 2021, of approximately $190,000.
During the six months ended September 30, 2022, and 2021, the Company derived substantially all its consolidated net sales from the sale of its Elevate health and wellness product line.
During the six months ended September 30, 2022, approximately 63% of our net sales were to customers (including approximately 38% to recurring customers, which we refer to as “SmartShip” sales, and approximately 25% were to new customers) and approximately 37% of our net sales were to our independent distributors.
Gross Profit
For the six months ended September 30, 2022, our consolidated gross profit decreased by $8.7 million, or 59%, to $6.1 million, compared to the three months ended September 30, 2021, and our consolidated gross margins were 64% and 70%, respectively. For the six months ended September 30, 2022, gross margin was affected by an increase in shipping expenses and promotional pricing, as a percentage of sales.
Selling and Marketing Expenses
For the six months ended September 30, 2022, our consolidated selling and marketing expenses decreased by $5.4 million, to $4.8 million, or 50.5% of net sales compared to $10.2 million, or 48.2% of net sales for the six months ended September 30, 2021. The decrease in consolidated selling and marketing expenses is due primarily to lower sales commissions of $3.9 million (which reflects decrease in our consolidated net sales discussed above) partially offset by higher sales convention expenses of approximately $742,814 (as we resumed holding some in-person conventions).
General and Administrative Expenses
For the six months ended September 30, 2022, our consolidated general and administrative expenses (which include corporate employee compensation and benefits, stock-based compensation, professional fees, rent and other occupancy costs, certain consulting fees, telephone and information technology expenses, insurance premiums, and other administrative expenses) decreased by approximately $1.2 million to $9.1 million, or 96% of consolidated net sales compared to $10.3 million, or 48.7% of consolidated net sales, for the six months ended September 30, 2021. The decrease in consolidated general and administrative expenses was primarily driven by higher professional and legal expenses increasing.
Interest Expense
For the six months ended September 30, 2022, our consolidated interest expense was $6.4 million, including amortization of debt discount and deferred financing costs, interest income, and other expenses associated with borrowings from “DSSI” and related parties.
For the six months ended September 30, 2021, consolidated interest expense was $6.1 million, including amortization of debt discount and deferred financing cost, interest income, and other expenses associated with borrowings from “DSSI” and related parties.
Other Non-operating Income/Expenses
For the six months ended September 30, 2022, our net consolidated non-operating income, includeincludes litigation settlements and other non-operating income of approximately $1.97 million. $139,798. For the threesix months ended JuneSeptember 30, 2021, our consolidated non-operating expenses include litigation settlements and other non-operating expenses of approximately $779,600.(including litigation settlements) were $14,046.
Gain (loss) on employee warrants liability
For the threesix months ended JuneSeptember 30, 2022, we recognized a compensatory gain of $114,960,$167,835, compared to $1,134,170$1.8 million for the threesix months ended JuneSeptember 30, 2021, in connection with employee warrants with a variable exercise price after service was completed.
Gain on Extinguishment of Debt
For the six-month ended September 31, 2022, no amounts were incurred related to extinguishment of debt. In JuneSeptember 2021, the Company’s borrowings under the Paycheck Protection Program features of the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”) were forgiven pursuant to the CARES Act. The Company recognized a gain on extinguishment of debt of $1.0 million, before income tax, in connection therewith.
Income Tax (Benefit) ProvisionBenefit
Income tax (benefit) provision include current and deferred income taxes for both our domestic and foreign operations. Income from our international operations is subject to taxation in the countries in which we operate.
During the threesix months ended JuneSeptember 30, 2022, the Company recognized a current federal incomedeferred tax benefit of $882,692, a provision for deferred federal income taxes of $552,445,approximately $880,000 and a state and local tax benefit of $9,610. $12,904.
During the threesix months ended JuneSeptember 30, 2021, the Company recognized a consolidated provision for current federal income taxes of $1,445,951,$940,117, net of a valuation allowance recognized of $1,428,620,$1,866,779, a consolidated provision for state and local taxes of $19,898,$67,310, and a consolidated deferred income tax benefit of $717,960.$1,513,672.
Net Loss and Loss per Share
As a result of the foregoing, for the threesix months ended JuneSeptember 30, 2022, our consolidated net loss was $1.4$19.7 million, compared to $3.5$6.3 million for the threesix months ended JuneSeptember 30, 2021. For the threesix months ended JuneSeptember 30, 2022, and JuneSeptember 30, 2021, our diluted loss per share was $0.00$0.07 and $0.02,$0.03, respectively.
Liquidity and Capital Resources
We broadly define liquidity as our ability to generate sufficient cash, from internal and external sources, to meet our obligations and commitments. We believe that, for this purpose, liquidity cannot be considered separately from capital resources.
Working Capital
Working capital (total current assets minus total current liabilities) was $2.0a negative $16.1 million and $7.4 million as of JuneSeptember 30, 2022, and March 31, 2022, respectively,
As of JuneSeptember 30, 2022, our cash and cash equivalents were $14.5$6.5 million. Based upon the current level of operations and anticipated investments necessary to grow our business, we believe that existing cash balances and anticipated funds from operations will likely be sufficient to meet our working capital requirements over the next 12 months.
Historical Cash Flows
Historically, our primary sources of cash have been capital transactions involving the issuance of equity securities and secured and unsecured debt (See “Recent Issuances of Equity Securities” and “Short-term Borrowings and Convertible Notes” below) and cash flows from operating activities; and our primary uses of cash have been for operating activities, capital expenditures, acquisitions, net cash advances to related parties, and debt repayments in the ordinary course of our business.
The following table summarizes our cash flow activities for the threesix months ended JuneSeptember 30, 2022, compared to the threesix months ended JuneSeptember 30, 2021:
| Six Months Ended September 30, | ||||||||||||
| 2022 | 2021 | Change | ||||||||||
| Net cash used in operating activities | $ | (5,436,809 | ) | $ | (10,160,196 | ) | 4,723,387 | |||||
| Net cash used in investing activities | (11,504,734 | ) | (3,188,679 | ) | (8,316,055 | ) | ||||||
| Net cash provided by financing activities | 6,527,264 | 30,034,625 | (23,507,361 | ) | ||||||||
| Impact of currency rate changes in cash | (150,122 | ) | 11,124 | (161,246 | ) | |||||||
| Net (decrease) increase in cash and cash equivalents | $ | (10,564,401 | ) | $ | 16,696,874 | $ | (27,261,275 | ) | ||||
| Three Months Ended June 30, | ||||||||||||
| 2022 | 2021 | Increase (Decrease) | ||||||||||
| Net cash used in operating activities | $ | (3,776,508 | ) | $ | (6,017,388 | ) | $ | 2,240,880 | ||||
| Net cash used in investing activities | (136,807 | ) | (234,658 | ) | 97,851 | |||||||
| Net cash provided by financing activities | 1,373,681 | 30,000,000 | (28,626,319 | ) | ||||||||
| Impact of currency rate changes in cash | (30,140 | ) | 26,304 | (56,444 | ) | |||||||
| Net (decrease) increase in cash and cash equivalents | $ | (2,569,774 | ) | $ | 23,774,258 | $ | (26,344,032 | ) | ||||
Net Cash Used in Operating Activities
For the threesix months ended JuneSeptember 30, 2022, net cash used in operating activities was $3.8$5.4 million, compared to net cash used in operating activities of $6.0$10.2 million for the threesix months ended JuneSeptember 30, 2021. The $2.2$4.7 million change was due to a decline in profitability, excluding non-cash items, such as depreciation and amortization, stock-based compensation expense,gain, provision for obsolete inventory losses, amortization of debt discount, losses on impairment of investments in unconsolidated entities, and a note receivable, and estimated settlement liability.the gain on extinguishment of debt. In addition, the change in net cash used in operating activities reflects a change in operating assets and liabilities of $1.3 million.$109,611.
Net Cash Used in Investing Activities
For the threesix months ended JuneSeptember 30, 2022, net cash used in investing activities was $136,807,$11.5 million, compared to $234,658$3.2 million for the threesix months ended JuneSeptember 30, 2021. The $97,851$8.3 million change was due primarily to lower capital expenditurescash paid for marketable securities of $9.5 million and capitalizable costs related to ongoing upgrades to our information technologyoperating systems.
Net Cash Provided by Financing Activities
For the threesix months ended JuneSeptember 30, 2022, net cash used inprovided by financing activities decreased by $28.6$23.5 million, to $1.4$6.5 million, compared to $30.0 million for the threesix months ended JuneSeptember 30, 2021, primarily due to refinancing of the April 2021June 2022 DSSI loan.
Impact of currency rate changes in cash
For the threesix months ended JuneSeptember 30, 2022, the impact of currency rate changes in cash was $30,140,negative $150,122 compared to $26,304$11,124 for the threesix months ended JuneSeptember 30, 2021. Prior to April 1, 2021, substantially all our consolidated net sales were denominated in U.S. dollars. Effective April 1, 2021, the Company’s consolidated financial statements reflect the operation of our wholly owned subsidiaries operating in the Asia Pacific region. See Note 2 of the Notes to Consolidated Financial Statements contained in our Annual Report on Form 10-K for the fiscal year ended March 31, 2022, for information about our translation of foreign currency financial statements.
Legal Proceedings
The information contained in Note 15,16, COMMITMENTS AND CONTINGENCIES - Legal Proceedings, of the Notes to Condensed Consolidated Financial Statements located elsewhere in this Quarterly Report is incorporated herein by reference.
Potential Future Acquisitions
The Company, directly and through its subsidiaries, may make strategic acquisitions and purchases of equity interests in businesses that complement its business competencies and growth strategy. Such acquisitions and purchases of equity interests are expected to be funded with cash and cash equivalents, cash provided by operations, if any, and issuance of equity securities and debt.
Short-term Borrowings and Convertible Notes
Borrowing Under Financing Arrangements (Note Payable)
In May 2020, the Company was granted a loan (the “PPP Loan”) by a commercial bank in the amount of $1.0 million, pursuant to the Paycheck Protection Program features of the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”). The Company’s borrowings under the PPP Loan were eligible for loan forgiveness under the provisions of the CARES Act. In JuneSeptember 2021, the Company was formally notified by the lender that the Company’s obligations under the loan have been forgiven effective May 25, 2021. The loan forgiveness applies to all principal and interest accrued through the loan forgiveness effective date.
Convertible Notes from Related Parties
Decentralized Sharing Systems, Inc.
On April 5, 2021, the Company and Decentralized Sharing Systems, Inc. (“DSSI”) which, together with DSS, Inc., is a majority shareholder of the Company, entered into a Securities Purchase Agreement, pursuant to which the Company issued: (a) a Convertible Promissory Note in the principal amount of $30.0 million (the “Note”) in favor of DSSI, and (b) a detachable Warrant to purchase up to 150,000,000 shares of the Company’s Class A Common Stock, at $0.22 per share, and DSSI loaned to the Company $30.0 million. Under the terms of the loan, the Company agreed to pay to DSSI a loan Origination Fee of $3.0 million, payable in shares of the Company’s Class A Common Stock, at the rate of $0.20 per share. The Note bears interest at the annual rate of 8% and matures on April 5, 2024, subject to certain acceleration provisions upon the occurrence of an Event of Default, as defined in the Note. At any time during the term of the Note, all or part of the Note, including principal, less unamortized prepaid interest, if any, plus any accrued interest and other fees was convertible into shares of the Company’s Class A Common Stock at the rate of $0.20 per share, at the option of the holder.
On JuneSeptember 15, 2022, the Company and DSSI entered into an agreement pursuant to which the Company issued to DSSI: (a) a two-year Convertible, Advancing Promissory Note in the principal amount of $27.0 million (the “2022 Note”) in favor of DSSI and (b) a detachable Warrant to purchase up to 818,181,819 shares of the Company’s Class A Common Stock at the exercise price of $0.033 per share. The 2022 Note bears interest at the annual rate of 8% and is due and payable on demand or, if no demand, on May 1, 2024. At any time during the term of the 2022 Note, all or part of the Note may be converted into up to 818,181,819 shares of the Company’s Class A Common Stock, at the option of the holder. Under the terms of the agreement, the Company paid to DSSI a loan origination fee of $270,000, and DSSI surrendered to the Company all DSSI’s rights pursuant to the Convertible Promissory Note in the principal amount of $30.0 million issued by the Company in April 2021 and the detachable Warrant to purchase up to 150,000,000 shares of the Company’s Class A Common Stock, at $0.22 per share, issued concurrently with such $30.0 million note, as discussed in the preceding paragraph.
American Pacific Bancorp, Inc.
On JuneSeptember 15, 2022, Linden Real Estate Holdings, LLC, a wholly owned subsidiary of the Company, American Pacific Bancorp, Inc. (“APB”), a subsidiary of DSS, and the Company entered a Loan Agreement pursuant to which APB loaned the Company approximately $5.7 million. The loan bears interest at the annual rate of 8%, matures on JuneSeptember 1, 2024, and is secured by a first mortgage interest on the Company’s Lindon, Utah office building. In connection with this loan, the Company received net proceeds of $5,522,829 from APB. Heng Fai Ambrose Chan and Frank D. Heuszel, each a Director of the Company, also serve on the Board of Directors of APB.
On August 11, 2022, the Company executed a revolving credit promissory note with APB (“the APB Revolving Note”) pursuant to which the Company has access to advances with a maximum principal balance not to exceed the principal sum of $10 million. The APB Revolving Note is collateralized by the assets of the Company, and it bears interest at the annual rate of 8% and such interest shall be due and payable quarterly as it accrues on the outstanding balance. Interest payments on the loan are due and payable on the last day of each consecutive third calendar month until the maturity date of August 12, 2024. As of September 30, 2022, the Company had $6.0 million outstanding under the APB Revolving Note and accrued interest of $60,667 which amount was paid on October 1, 2022.
HWH International, Inc.
In October 2017, the Company issued a Convertible Promissory Note in the principal amount of $50,000 (the “Note”) to HWH International, IncInc. (“HWH” or the “Holder”). HWH is affiliated with Heng Fai Ambrose Chan, who in April 2020 became a Director of the Company. The Note is convertible into 333,333 shares of the Company’s Common Stock. Concurrent with issuance of the Note, the Company issued to HWH a detachable stock warrant to purchase up to an additional 333,333 shares of the Company’s Common Stock, at an exercise price of $0.15 per share. Under the terms of the Note and the detachable stock warrant, the Holder is entitled to certain financing rights. If the Company enters into more favorable transactions with a third-party investor, it must notify the Holder and may have to amend and restate the Note and the detachable stock warrant to be identical. On August 9, 2022, HWH and the Company executed an agreement to settle the Note and cancel the related stock warrant for $78,636, which amount represents the principal plus accrued interest. The Company made the payment to HWH on August 9, 2022.
Capital Requirements
During the threesix months ended JuneSeptember 30, 2022, capital expenditures for property and equipment (consisting of furniture and fixtures, computer equipment and software, other office equipment and leasehold improvements) in the ordinary course of our business were $136,807.$1.4 million which primarily relates to the purchase of the multi-user license for use of a new commissions’ platform.
Contractual Obligations
There were no material changes to our contractual cash obligations during the threesix months ended JuneSeptember 30, 2022, except for (a) the June 2022 refinancing of our loan from DSSI and (b) the June 2022 financing or our Lindon, Utah office building, (c) the August 2022 revolving line of credit with APB, as all described above.
Off-Balance Sheet Financing Arrangements
As of JuneSeptember 30, 2022, we had no off-balance sheet financing arrangements.
Inflation
In recent history, inflation has generally been low in the geographies where we operate. However, at the time of this Quarterly Report, the increase in price of consumer goods in the United States has reached a 40-year high, primarily as a result of higher energy costs, higher housing costs, and the impact global supply chain disruptions. Please see “Our business and financial performance could be adversely affected by inflation” contained in ITEM 1A, — “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2022.
Critical Accounting Estimates
While the Company is not aware of material changes to its critical accounting estimates or assumptions since March 31, 2022, it is reasonably possible that estimates made in the Company’s unaudited condensed consolidated financial statements have been, or will be, materially impacted as a result of the ultimate resolution of the uncertainties associated with the COVID health crisis. This may include estimates regarding allowance for slow-moving or obsolete inventory, impairment losses related to long-lived assets, the nature and timing of satisfaction of performance obligations resulting from contracts with customers, and the valuation of loss contingencies. Please see Overview - Continuing Uncertainty Regarding the Recent COVID Pandemic above.
Accounting Changes and Recent Accounting Pronouncements
For discussion of accounting changes and recent accounting pronouncements, see Note 2 of the Notes to Condensed Consolidated Financial Statements contained elsewhere in this Quarterly Report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The Company is a Smaller Reporting Company, as defined in Rule 12b-2 of the Exchange Act, and, accordingly, is not required to provide the information called for by this Item.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, as of the end of the fiscal period covered by this Annual Report, and concluded that, as of JuneSeptember 30, 2022, the Company’s disclosure controls and procedures were effective in providing reasonable assurance that information required to be disclosed in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management and its Board of Directors, as appropriate to allow timely decisions regarding required disclosure.
Limitations on the Company’s Controls and Procedures. We do not expect that our disclosure controls and procedures will prevent all errors and all fraud. Any system of controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system will be met. Because of the limitations in all such systems, no evaluation can provide absolute assurance that all control issues and instances of fraud (if any) within the Company have been detected. Furthermore, the design of any system of disclosure controls and procedures is based in part upon assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how unlikely. Because of these inherent limitations in a cost-effective system of controls and procedures, misstatements and/or omissions due to error or fraud may occur undetected.
In light of the Form 10-K/A filed by the Company with the Securities Exchange Commission (SEC) on July 7, 2022, for the purpose of correcting a typographical error included in its Consolidated Statements of Changes in Stockholders’ Equity for fiscal years ended March 31, 2022 and 2021, management determined that the Company had a significant deficiency in its internal control over financial reporting. The significant deficiency was attributable mainly to our failure to effectively review and proofread the registration statement, detect and correct any errors before it was filed with the SEC. To address this significant deficiency, procedures have been developed and implemented by the accounting department in August 2022, to ensure the timely review, proof reading and sign-off of all registration statements prior to their submission to the SEC.
Changes in Internal Control over Financial Reporting. Except for the remedial actions described above, during our most recent fiscal quarter, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
The information contained in Note 15,16, COMMITMENTS AND CONTINGENCIES - Legal Proceedings, of the Notes to Unaudited Condensed Consolidated Financial Statements located elsewhere in this Quarterly Report is incorporated herein by reference.
Item 1A. Risk Factors.
The factors contained in ITEM 1A, — “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2022, are incorporated herein by reference.
Item 2. Unregistered Sales of Securities and Use of Proceeds.
(a) Unregistered Sales of Securities
None
(b) Not applicable
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None
Item 3. Defaults Upon Senior Securities.
(a) Not applicable
(b) Not applicable
Item 4. Mining Safety Disclosures.
Not applicable
Item 5. Other Information.
None
Item 6. Exhibits.
The following exhibits are filed as part of this Quarterly Report unless otherwise indicated:
*Included herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SHARING SERVICES GLOBAL CORPORATION | ||
| (Registrant) | ||
| Date: | ||
| By: | /s/ John Thatch | |
| John Thatch | ||
| President, Chief Executive Officer and Vice Chairman of the Board of Directors | ||
| (Principal Executive Officer) | ||
| Date: | ||
| By: | /s/ Anthony S. Chan | |
| Anthony S Chan | ||
| Chief Financial Officer | ||
| (Principal Financial Officer) | ||