Quarterly Report (10-q)

 

 

 

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: December 31, 2022

 

OR

 

☐ 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.)

 

5200 Tennyson Parkway, Suite 400, Plano, Texas		75024
(Address of principal executive offices)		(Zip Code)

 

[phone]

(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,” “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 ☐ No ☒

 

As of February 6, 2023, there were 262,832,833 shares of the issuer’s Class A Common Stock outstanding.

 

 

 

 

TABLE OF CONTENTS

 

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements	4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3. Quantitative and Qualitative Disclosures About Market Risk	33
Item 4. Controls and Procedures	33
PART II—OTHER INFORMATION
Item 1. Legal Proceedings	34
Item 1A. Risk Factors	34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3. Defaults Upon Senior Securities	34
Item 4. Mine Safety Disclosures	34
Item 5. Other Information	34
Item 6. Exhibits	35

 

2

 

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 sheet as of December 31, 2022, condensed consolidated statements of operations and comprehensive loss for the three and nine months ended December 31, 2022 and 2021, condensed consolidated statements of cash flows, and condensed consolidated statements of changes in stockholders’ equity (deficit) for the nine months ended December 31, 2022 and 2021, are those of Sharing Services Global Corporation and its subsidiaries.

 

Index to Unaudited Condensed Consolidated Financial Statements

 

	Page
Condensed consolidated balance sheets as of December 31, 2022, and March 31, 2022	5
Condensed consolidated statements of operations and comprehensive loss for the three and nine months ended December 31, 2022, and December 31, 2021	6
Condensed consolidated statements of cash flows for the nine months ended December 31, 2022, and December 31, 2021	7
Condensed consolidated statements of changes in stockholders’ equity (deficit) for the nine months ended December 31, 2022, and December 31, 2021	8
Notes to the unaudited condensed consolidated financial statements	9

 

4

 

SHARING SERVICES GLOBAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		December 31, 2022				March 31, 2022
		(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents		$	3,112,225			$	17,023,266
Trade accounts receivable, net			1,790,522				1,682,958
Income taxes receivable			-				300,000
Inventory, net			2,728,131				4,374,236
Notes receivable, net			216,885				-
Other current assets, net			551,828				3,511,282
Total Current Assets			8,399,591				26,891,742
Property and equipment, net			9,437,544				9,585,141
Right-of-use assets, net			458,768				593,389
Deferred income taxes, net			-				81,205
Investment in unconsolidated entities, net			178,727				5,063,940
Investment in marketable securities			4,251,225				-
Intangible assets, net			581,219				688,670
Other assets			1,183,749				260,637
TOTAL ASSETS		$	24,490,823			$	43,164,724
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities
Accounts payable			868,008			$	985,139
Accrued sales commission payable			2,548,285				3,745,481
Employee stock warrants liability			148,266				452,050
State and local taxes payable			1,421,564				1,339,366
Note payable, related party, net of unamortized debt discount and unamortized deferred loan cost of $602,414 as of December 31, 2022			11,026,526				-
Accrued and other current liabilities			3,439,828				3,079,782
Convertible notes payable, related parties, net of unamortized debt discount and unamortized deferred loan cost of $14,866,710 as of December 31, 2022 and $20,151,230 as of March 31, 2022, respectively			12,133,290				9,898,770
Total Current Liabilities			31,585,767				19,500,588
Settlement liability, long term portion			-				373,677
Lease liability, long-term			413,587				461,515
TOTAL LIABILITIES			31,999,354				20,335,780
Commitments and contingencies			-				-
Stockholders’ Equity (Deficit)
Preferred stock, $0.0001 par value, 200,000,000 shares authorized:
Series A convertible preferred stock, $0.0001 par value, 100,000,000 shares designated, 3,100,000 shares issued and outstanding as of December 31, 2022, and March 31, 2022, respectively			310				310
Series B convertible preferred stock, $0.0001 par value, no shares issued and outstanding at December 31 and March 31, 2022			-				-
Series C convertible preferred stock, $0.0001 par value, 100,000,000 shares designated, 3,220,000 shares issued and outstanding at December 31 and March 31, 2022, respectively			322				322
Class A common stock, $0.0001 par value, 1,990,000,000 shares designated, 262,832,833 shares and 288,923,969 shares issued and outstanding at December 31 and March 31, 2022, respectively			26,283				28,892
Class B common stock, $0.0001 par value, 10,000,000 shares designated, no shares issued and outstanding			-				-
Treasury Stock, 26,091,136 shares, at cost			(626,187	)			-
Additional paid in capital			81,950,753				80,738,719
Shares to be issued			12,146				12,146
Accumulated deficit			(88,650,199	)			(57,886,336	)
Accumulated other comprehensive loss			(221,959	)			(65,109	)
Total Stockholders’ Equity (Deficit)			(7,508,531	)			22,828,944
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	24,490,823			$	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 STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

 

		Three Months Ended								Nine Months Ended
		December 31, 2022				December 31, 2021				December 31, 2022				December 31, 2021
Net sales		$	3,245,903			$	7,110,532			$	12,737,673			$	28,195,359
Cost of goods sold			1,643,111				2,328,583				5,059,916				8,606,833
Gross profit			1,602,792				4,781,949				7,677,757				19,588,526
Operating expenses
Selling and marketing expenses			928,246				4,219,080				5,723,642				14,391,715
General and administrative expenses			4,678,620				3,612,803				13,787,444				13,881,814
Total operating expenses			5,606,866				7,831,883				19,511,086				28,273,529
Operating loss			(4,004,074	)			(3,049,934	)			(11,833,329	)			(8,685,003	)
Other income (expense):
Interest expense, net			(3,320,159	)			(3,112,039	)			(9,761,622	)			(9,168,411	)
Gain on employee warrants liability			39,375				154,487				207,210				1,935,588
Gain on extinguishment of debt			-				-				-				1,040,400
Unrealized gain (loss) on investment			(3,614,242	)			1,201,510				(10,284,002	)			3,328,483
Other non-operating income (expense), net			(21,722	)			(309,113	)			118,077				(335,163	)
Total other income (expense), net			(6,916,748	)			(2,065,155	)			(19,720,337	)			(3,199,103	)
Loss before income taxes			(10,920,822	)			(5,115,089	)			(31,553,666	)			(11,884,106	)
Income tax provision (benefit)			104,129				1,825,073				(789,803	)			1,318,827
Net loss		$	(11,024,951	)		$	(6,940,162	)		$	(30,763,863	)		$	(13,202,933	)
Other comprehensive income (loss), net of tax:
Currency translation adjustments			251,166				(118,860	)			(156,850	)			(94,887	)
Total other comprehensive income (loss)			251,166				(118,860	)			(156,850	)			(94,887	)
Comprehensive loss			(10,773,785	)			(7,059,022	)			(30,920,713	)			(13,297,820	)
Loss per share:
Basic and diluted		$	(0.04	)		$	(0.04	)		$	(0.12	)		$	(0.07	)
Weighted average shares:
Basic and diluted			262,832,833				192,112,139				267,956,183				188,051,336

 

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)

 

		Nine Months Ended
		December 31, 2022				December 31, 2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(30,763,863	)			(13,202,933	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			539,411				341,775
Stock-based compensation gain			(303,784	)			(1,502,195	)
Deferred income tax benefit			-				(3,977,918	)
Amortization of debt discount and other			10,447,435				9,173,753
Gain on extinguishment of debt			(350,320	)			(1,040,400	)
Intangible asset impairment			154,182				-
Bad debt expense			(85,155	)			-
Unrealized loss (gain) on investments			10,284,002				(2,114,970	)
Provision for obsolete inventory			1,012,433				448,484
Changes in operating assets and liabilities:							-
Accounts receivable			(22,413	)			(101,829	)
Inventory			892,136				(2,847,188	)
Other current assets			321,291				(477,706	)
Other assets			(137,112	)			(1,941	)
Accounts payable			669,048				(631,412	)
Income taxes payable			(496,026	)			5,181,561
Lease liability			35,008				(7,523	)
Accrued and other liabilities			(1,042,211	)			(2,418,406	)
Net Cash Used in Operating Activities		$	(8,845,938	)		$	(13,178,848	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property and equipment and other assets			(1,404,013	)			(9,162,617	)
Issuance of notes receivable			(216,885	)			(118,689	)
Purchase of marketable securities			(9,510,000	)			-
Collection of notes receivable			-				5,000
Cash paid for asset purchase			(400,000	)			(2,937,000	)
Net Cash Used in Investing Activities			(11,530,898	)			(12,213,306	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Retirement of loan			(3,374,416	)			-
Net proceeds from issuance of promissory notes			10,922,329				30,000,000
Common stock received on litigation settlement			(1,046,254	)			-
Proceeds from issuance of common stock							3,073,607
Proceeds from convertible notes							-
Net Cash Provided by Financing Activities			6,501,659				33,073,607
IMPACT OF CURRENCY RATE CHANGES ON CASH			(35,864	)			(45,331	)
Increase (decrease) in cash and cash equivalents			(13,911,041	)			7,636,122
Cash and cash equivalents, beginning of period			17,023,266				12,144,409
Cash and cash equivalents, end of period		$	3,112,225			$	19,780,531
Supplemental cash flow information
Cash paid for interest		$	127,790			$	52,331
Cash paid for income taxes		$	-			$	47,412
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.

 

7

 

SHARING SERVICES GLOBAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

 

		Shares				Value				Shares				Value				Shares				Value				Shares				Value				Capital				Issued				Stock				Deficit				Loss				Total
		Series A Preferred Stock								Series B Preferred Stock								Series C Preferred Stock								Class A and Class B Common Stock								Additional																Accumulated
		Number								Number								Number								Number								Paid				Shares												Other
		of				Par				of				Par				of				Par				of				Par				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			-				-				-				-				-				-				-				-				1,235,516				-								-				-				1,235,516
Repurchase of 26,091,136 shares of Common Stock							-								-				-				-				(26,091,136	)			(2,609	)		$	(23,482	)							(626,187	)							-				(652,278	)
Currency translation adjustments			-				-				-				-				-				-				-				-				-				-				-				-				(156,850	)			(156,850	)
Net loss			-				-				-				-				-				-				-				-				-				-				-				(30,763,863	)			-				(30,763,863	)
Balance – December 31, 2022			3,100,000			$	310				-			$	-				3,220,000			$	322				262,832,833			$	26,283			$	81,950,753			$	12,146				(626,187	)		$	(88,650,199	)		$	(221,959	)		$	(7,508,531	)

 

		Series A Preferred Stock								Series B Preferred Stock								Series C Preferred Stock								Class A and Class B Common Stock								Additional												Cumulative
		Number of Shares				Par Value				Number of Shares				Par Value				Number of Shares				Par Value				Number of Shares				Par Value				Paid in Capital				Shares to be Issued				Accumulated Deficit				Translation Adjustments				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
Common stock issued for cash			-				-				-				-				-				-				50,000,000				5,000				5,245,000				-				(2,250,000	)			-				3,000,000
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				200				-				-				-				-
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			-				-				-				-				-				-				1,813,200				181				148,451				-				-				-				148,632
Currency translation adjustments			-				-				-				-				-				-				-				-				-				-				-				(94,887	)			(94,887	)
Net loss			-				-				-				-				-				-				-				-				-				-				(13,202,933	)			-				(13,202,933	)
Balance – December 31, 2021			3,100,000			$	310				-			$	-				3,220,000			$	322				238,923,969			$	23,892			$	77,238,719			$	12,146			$	(53,982,772	)		$	(94,887	)		$	23,197,730

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

8

 

SHARING SERVICES GLOBAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – ORGANIZATION AND BUSINESS

 

Description of Operations

 

Sharing Services Global Corporation and subsidiaries (“Sharing 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.

 

Subscription-Based Travel Services - Through its subsidiary, Hapi Travel Destinations (“MyTravelVentures” or “MTV”), the Company delivers subscription-based travel services. MyTravelVentures’ services are designed to offer the deepest discounts for travel relating to airfare, cruises, hotels, resorts, time shares and rental cars for destinations throughout the world for people of all ages, demographics, and economic backgrounds. MTV 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 Cafes – Sharing Services has entered into a 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. Under the MFA, Sharing Services, directly or through its subsidiaries, will operate no less than five corporate-owned stores and can offer to the public sub-franchise rights to own and operate other stores. Each corporate-owned or franchised Hapi Café^TM store will allow customers and Brand Partners seeking a healthier lifestyle access to: (a) functional and healthy food and beverages, (b) a pleasant workspace with free Wi-Fi service, (c) physical fitness, nutrition management and personal workout print and video content, and (d) the Company’s proprietary travel services. In August 2022, the Company executed a non-binding letter of intent with American Wealth Mining Corporation (“AWM”, known previously as American Premium Water Corporation), a related party, allowing AWM to be the exclusive franchisee of Hapi Café in the State of New York.

 

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.

 

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.

 

9

 

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 December 31, 2022, and March 31, 2022, cash and cash equivalents included cash held by our merchant processors of approximately $1.0 million and $3.3 million, respectively, including approximately $0.9 million and $3.0 million, respectively held by one merchant processor. In addition, as of December 31, 2022, and March 31, 2022, cash and cash equivalents held in bank accounts in foreign countries in the ordinary course of business were $1.4 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.

 

Notes Receivable

 

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 December 31, 2022, the amount due from 1044 is $230,355.

 

At December 31, 2022 and March 31, 2022, notes receivable were $926,205 and $601,520, before allowance for impairment losses of $709,320 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 in the Company’s consolidated statements of operations. At December 31, 2022, the investment was valued at approximately $4.3 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 December 31, 2022, and March 31, 2022, the allowance for obsolete inventory was $742,311 and 108,055, respectively, in connection with the health and wellness products that are either damaged, expired or otherwise considered slowing moving based of historical or projected 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 designed 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.

 

10

 

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”). At March 31, 2021, loan principal in the amount of $1.0 million 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 $1.0 million 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 APB, also serve on the Board of Directors of the Company. Monthly payments of principal and interest in the amount of $43,897 have been made beginning July 1, 2022, and are payable on the same date of each month thereafter. The Company paid $307,279 in principal and interest related to the loan for the nine months ended December 31, 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. On December 9, 2022, APB and the Company mutually agreed to limit and/or end any further commitment by APB to fund or to readvance under the terms of the APB Revolving Note. As of December 31, 2022, the Company had $6.0 million outstanding under the APB Revolving Note and no accrued interest as of the date.   

 

Foreign Currency Translation

 

As part of our strategic growth plan initiatives, we have 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.

		South Korean Won per USD
Exchange rate as of December 31, 2022			1,261.92

 

		South Korean Won per USD
		Three Months Ended December 31, 2022				Nine Months Ended December 31, 2022
Average exchange rate as of December 31, 2022			1,359.18				1,320.11

 

Comprehensive Loss

 

For the three and nine months ended December 31, 2022, and 2021, the Company’s comprehensive loss was comprised of currency translation adjustments and net loss.

 

Revenue Recognition

 

As of December 31, 2022, and March 31, 2022, deferred sales associated with product invoiced but not received by customers was $142,221 and $344,071, respectively. In addition, as of December 31, 2022 and March 31, 2022, deferred sales associated with our unfulfilled performance obligations for services offered on a subscription basis was $89,679, and $70,968; deferred sales associated with our performance obligations for customers’ right of return was $63,382 and $63,890, and deferred sales associated with customer loyalty points was $106,380 and $68,287, respectively. Deferred sales are expected to be recognized into income when the related performance obligations have been met.

 

11

 

During the three and nine months ended December 31, 2022, no individual customer, or affiliated group of customers, represented 10% or more of the Company’s consolidated net sales, and approximately 64% of net sales for the three months ended December 31, 2022, were to customers (including 42% to recurring customers, refer internally as “SmartShip” sales, and approximately 22% to new customers) and approximately 36% of the Company’s net sales were to independent distributors.

 

During the nine months ended December 31, 2022, approximately 63% of the Company’s net sales were to customers (including 39% to recurring customers, refer herein as “SmartShip” sales, and approximately 24% to new customers) and approximately 37% of the Company’s net sales were to independent distributors.

 

During the nine months ended December 31, 2021, approximately 67% of the Company’s net sales were to customers (including 32% to recurring customers, refer herein as “SmartShip” sales, and approximately 35% to new customers) and approximately 33% of the Company’s net sales were to independent distributors.

 

During the nine months ended December 31, 2022, and December 31, 2021, approximately 93% and 86%, respectively, of the Company’s consolidated net sales were to customers and/or independent distributors located in the United States. No other country accounted for 10% or more of consolidated net sales.

 

During the three months ended December 31, 2022, substantially all of the Company’s consolidated net sales were from health and wellness products (including approximately 70% from the sale of coffee and other functional beverages, 20% from the sales of Nutraceutical products while the remaining sales of 10% were of weight management and other related products).

 

During the nine months ended December 31, 2022, substantially all of consolidated net sales were from health and wellness products (including approximately 70% from the sale of coffee and other functional beverages, 20% from the sale of Nutraceutical products and 10% from the sale of weight management products and all other health and wellness products). During the nine months ended December 31, 2021, substantially all net sales are from health and wellness products (including approximately 39% from the sale of Nutraceutical products, 29% from the sale of coffee and other functional beverages, 12% from the sale of weight management products, and approximately 20% from the sale of all other health and wellness products).

 

During the nine months ended December 31, 2022, over 93% of the Company’s consolidated product purchases were from a third-party manufacturer based in the U.S. During the nine months ended December 31, 2021, approximately 58% of product purchases were from a third-party manufacturer based in the U.S., and approximately 41% of product purchases were from various suppliers located in Asia.

 

Sales Commissions

 

The Company recognizes sales commission expense, when incurred, in accordance with GAAP. During the three months ended December 31, 2022, and 2021, sales commission expense, which is included in selling and marketing expenses in our consolidated statements of operations and comprehensive loss, was $1.2 million and $3.7 million, respectively; and during the nine months ended December 31, 2022, and 2021, was $5.1 million and $13.6 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 that 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 that 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.

 

12

 

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.

 

NOTE 3 – LOSS PER SHARE

 

We calculate basic loss per share by dividing net loss available to common shareholders by the weighted average number of common shares outstanding during the reporting period. Diluted loss 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 loss per share also reflects an adjustment to net loss 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.

 

The following table sets forth the computations of basic and diluted loss per share:

 

		Three Months Ended								Nine Months Ended
		December 31, 2022				December 31, 2021				December 31, 2022				December 31, 2021
Net loss, as reported		$	(11,024,951	)		$	(6,940,162	)			(30,763,863	)		$	(13,202,933	)
After tax interest adjustment			-				-								-
Net loss, if-converted basis		$	(11,024,951	)		$	(6,940,162	)		$	(30,763,863	)		$	(13,202,933	)
Weighted average basic shares			262,832,833				192,112,139				267,956,183				188,051,336
Dilutive securities and instruments:
Convertible preferred stock							-								-
Convertible notes							-								-
Stock options and warrants							-								-
Weighted average diluted shares			262,832,833				192,112,139				267,956,183				188,051,336
Loss per share:
Basic and Diluted		$	(0.04	)		$	(0.04	)		$	(0.12	)		$	(0.07	)

 

The following potentially dilutive securities and instruments were outstanding as of December 31, 2022, and December 31, 2021, but excluded from the table above:

		December 31, 2022				December 31, 2021
Convertible preferred stock			6,320,000				7,630,800
Convertible notes payable			163,612,120				157,756,728
Stock warrants			-				94,829,948
Total potential incremental shares			169,932,120				260,217,476

 

The preceding table does not include 3,750,000 for both stock warrants held by employees which are not vested (or exercisable) at December 31, 2022 and 3,750,000 at December 31, 2021, respectively.

 

13

 

NOTE 4 – INVENTORY, NET

 

Inventory consists primarily of finished goods. The Company provides an allowance for slow-moving, damaged, expired or expiring inventory. As of December 31, 2022, and March 31, 2022, inventory consists of the following:

 

		December 31, 2022				March 31, 2022
Finished Goods		$	3,470,442			$	4,482,291
Allowance for inventory obsolescence			(742,311	)			(108,055	)
		$	2,728,131			$	4,374,236

 

The Company allowance for inventory obsolescence for the nine months ended December 31, 2022, and December 31, 2021, was $742,311 and $388,431, respectively. The increase in the allowance was primarily 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.

 

NOTE 5 – OTHER CURRENT ASSETS, NET

 

Other current assets consist of the following:

		December 31, 2022				March 31, 2022
Prepaid consulting fees, related party		$	230,136			$	2,867,123
Inventory-related deposits			222,982				384,477
Prepaid insurance and other operational expenses			258,257				201,275
Deposits for sales events			-				222,540
Right to recover asset			16,094				15,632
Subtotal			727,469				3,691,047
Less: allowance for losses			(175,641	)			(179,765	)
		$	551,828			$	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). 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 December 31, 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 154,173 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”.

 

14

 

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 nine months ended December 31, 2022, the Company recognized losses, before income tax, of $1.2 million and $4.9 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. In March of 2022, the company impaired the MojiLife investment as the evaluation at such time determined the investment was not fully recoverable.

 

Investment in unconsolidated entities and securities consists of the following:

 

		December 31, 2022				March 31, 2022
Investment in detachable GNTW stock warrant		$	126,000			$	3,570,000
Investment in GNTW common stock			13,876				393,141
Investment in Stemtech convertible note			38,851				1,100,799
Investment in MojiLife, LLC			1,537,000				1,537,000
Subtotal			1,715,727				6,600,940
Less, allowance for impairment losses			(1,537,000	)			(1,537,000	)
		$	178,727			$	5,063,940

 

The following table reflects the activity in the allowance for impairment losses for the periods presented:

		December 31, 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:

		December 31, 2022				March 31, 2022
Building and building improvements		$	8,975,813			$	8,976,878
Computer software			1,025,586				875,925
Furniture and fixtures			237,045				237,045
Computer equipment			223,424				223,424
Vehicles			27,851				-
Leasehold improvements and other			371,124				263,208
Total property and equipment			10,860,843				10,576,480
Impairment of property and equipment			-				(100,165	)
Accumulated depreciation and amortization			(1,423,299	)			(891,174	)
		$	9,437,544			$	9,585,141

 

15

 

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 designed 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 9 – ACCRUED AND OTHER CURRENT LIABILITIES

 

Accrued and other current liabilities consist of the following:

		December 31, 2022				March 31, 2022
Deferred sales		$	401,663			$	547,217
Liability associated with uncertain tax positions			925,795				921,987
Payroll and employee benefits			388,193				478,360
Settlement liability, current portion			224,000				341,919
Lease liability, current portion			78,266				134,578
Due to related parties			53,797				125,532
Other operational accruals			1,368,114				530,189
		$	3,439,828			$	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 December 31, 2022, include accrued expense of $816,115 and accrued interest of $552,000 on the related party convertible notes and notes payable included in the condensed consolidated balance sheet.

 

NOTE 10 - CONVERTIBLE NOTES PAYABLE, RELATED PARTIES

 

Convertible notes payable consists of the following:

Issuance Date		Maturity Date		Interest Rate				Conversion Price (per share)				December 31, 2022				March 31, 2022
April 2021		April 2024			8	%		$	0.20			$	-			$	30,000,000
October 2017		October 2022			12	%		$	0.15				-				50,000
June 2022		June 2024			8	%		$	0.03				27,000,000				-
Total convertible notes payable													27,000,000				30,050,000
Less: unamortized debt discount and deferred financing costs													14,866,710				20,151,230
													12,133,290				9,898,770
Less: current portion of convertible notes payable													12,133,290				9,898,770
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, 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 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.

 

16

 

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 $0.22 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 nine months ended December 31, 2021, the Company issued to DSSI 27,000,000 shares of its Class A Common Stock, including 15,000,000 shares in payment of the loan Origination Fee and 12,000,000 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 $27.0 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 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 $0.22 per share, issued concurrently with such $30.0 million 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 December 31, 2022, and December 31, 2021, interest expense in connection with the Company’s convertible notes was $552,000 and $605,934, respectively, excluding amortization of debt discount and deferred financing costs of $2.5 million and $2.3 million, respectively. During the nine months ended December 31, 2022, and December 31, 2021, interest expense in connection with the convertible notes were $1.2 million and $1.8 million, respectively, excluding amortization of debt discount and deferred financing cost of $5.6 million and $6.7 million respectively. These amounts are included in interest expense in our consolidated statements of operations.

 

NOTE 11 – INCOME TAXES

 

The statutory rates for our domestic and our material foreign operations are as follows for the periods shown:

 

Country		2022				2021
United States			21	%			21	%
Republic of Korea			21	%			22	%

 

17

 

Our consolidated effective income tax rate reconciliation is as follows:

 

		Nine Months Ended December 31,
		2022				2021
Federal statutory rate			21.0	%			21.0	%
State and local income taxes			(0.0	)			(0.7	)
Valuation allowance for NOL carry-forwards			(21.0	)			(51.1	)
Stock warrant transactions and other items			(2.5	)			4.1
Effective income tax rate			(2.5	)%			(26.7	)%

 

Income taxes applicable to our foreign operations are not material in the periods presented.

 

NOTE 12 - STOCKHOLDERS’ EQUITY

 

Common Stock

 

During the nine months ended December 31, 2022, the Company issued to DSSI: (a) a two-year 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 at the exercise price of $0.033 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 26,091,136 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 $0.25 per share. In the nine months ended December 31, 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 $324,230 in 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, $0.0001 par value per share, of which: (a) Two Billion (2,000,000,000) Shares of Common Stock having a par value of $0.0001 per share (“Common Stock”) and (b) Two Hundred Million (200,000,000) Shares of Preferred Stock comprised of Series A and Series C having a par value of $0.0001 per share or as authorized (“Preferred Stock”).

 

The Company’s Board of Directors has designated 10,000,000 shares of Class B Common Stock, par value 0.0001 per share. As of December 31, 2022, and March 31, 2022, there were 262,832,833 and 288,923,969 shares of the Company’s Class A Common Stock issued. As of December 31, 2022, and March 31, 2022, there were 262,832,833 shares and 288,923,969 shares, respectively, net of 26,091,136 shares held in Treasury Stock at December 31, 2022, of the Company’s Class A Common Stock outstanding. As of December 31, 2022, and March 31, 2022, there were no shares of the Company’s Class B Common Stock issued and outstanding.

 

NOTE 13 - 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 $3.0 million in the Company and the Company agreed to issue 30.0 million shares of the Company’s Class A Common Stock and a fully vested Stock Warrant to purchase up to 10.0 million shares of the Company’s Class A Common Stock at an exercise price of $0.20 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 30.0 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.

 

18

 

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 150,000,000 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 27.0 million shares of its Class A Common Stock to DSSI, including 15.0 million shares in payment of the loan origination fee and 12.0 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 $3,000,000 in the Company in exchange for 50.0 million shares of Class A Common Stock (the “Shares”) and stock warrants (the “Stock Warrants”) to purchase up to 50.0 million shares of the Company’s Class A Common Stock. The Stock Warrants are fully vested, have a term of five (5) years and are exercisable at any time prior to expiration, at the option of DSSI, at a per share price equal to $0.063. On the effective date of the Stock Purchase and Share Subscription Agreement, the closing price for the Company’s common stock was $0.075 per share and the Company recognized a deemed dividend of $2.3 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 $0.07 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. As of December 31, 2022, the Company had accrued approximately $700,000, related to the Consulting Agreement, within the condensed consolidated financial statements. During the three and nine months ended December 31, 2022, the Company recognized consulting expense of $1.0 million and $3.1 million, in connection with the Consulting Agreement. In February 2022, the Company issued 50.0 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 $0.033 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 818,181,819 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 $0.22 per share, issued concurrently with such $30.0 million note.

 

As of December 31, 2022, DSS and its affiliates owned, in the aggregate, 191.9 million shares of the Company’s Class A Common Stock, excluding 878.2 million shares issuable upon the exercise of warrants held by DSS and 818.2 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 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 detachable stock warrant to purchase the additional 333,333 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.

 

19

 

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 $2,808 in rent expense for the nine months ended December 31, 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 nine months ended December 31, 2022. No consulting income has been recognized for the three and nine months ended December 31, 2022.

 

Impact Biomedical, Inc. and DSS BioHealth Holdings 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 months ended December 31, 2022, the Company made no purchases of health and wellness products from DSS BioHealth Holdings Inc. For the nine months ended December 31, 2022, the Company’s purchases totaled $36,808.

 

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 $2.3 million. 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 months ended December 31, 2022, the Company made no purchases of skin care products manufactured by K Beauty Research Lab and other items. For the nine months ended December 31, 2022, the Company made purchases in the amount of $1,572 of skin care products manufactured by K Beauty Research Lab.

 

Premier Packaging Corporation

 

Premier Packaging Corporation is a wholly owned subsidiary of the Company. Purchase orders to Premier Packaging Corporation, a subsidiary of DSS, to acquire printed packaging materials in the aggregate amount was $28,090 and $152,813 for the nine months ended December 31, 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 22.7 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 15.6 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 38.3 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 26,091,136 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 $0.25 per share. During the nine months ended December 31, 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 $324,230 in connection with the previously recognized loss related to the Co-Founder’s Agreement.

 

20

 

The Company subleases warehouse and office space from Alchemist, until May 2022, a 10% shareholder of the Company. During the three and nine months ended December 31, 2022, rent expense associated with such sublease agreement was $26,007 and $77,787, respectively.

 

American Wealth Mining Corporation (formerly, 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 nine months ended December 31, 2022, the Company recognized consulting fee income of $12,498 and 37,494, respectively.

 

In August 2022, the Company executed a non-binding letter of intent with American Wealth Mining Corporation (“AWM”), a related party, allowing AWM to be the exclusive franchisee of Hapi Café in the State of New York.

 

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 September 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. On December 9, 2022, APB and the Company mutually agreed to limit and/or end any further commitment by APB to fund or to readvance under the terms of the APB Revolving Note. As of December 31, 2022, the Company had $6.0 million outstanding under the APB Revolving Note.

 

NOTE 14 – STOCK-BASED COMPENSATION

 

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 $3.0 million in the Company in exchange for 30.0 million shares of the Company’s Class A Common Stock and a fully vested Stock Warrant to purchase up to 10.0 million shares of the Company’s Class A Common Stock at an exercise price of $0.20 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 333,333 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 333,333 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.

 

21

 

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 December 31, 2022, and 2021, the Company recognized a compensatory gain of $39,375 and $154,488, respectively, in connection with grants with a variable exercise price after service is completed. During the nine months ended December 31, 2022, and 2021, the Company recognized a gain of $207,210 and 1,935,588, respectively, in connection with grants with a variable exercise price after service is completed.

 

NOTE 15 – 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:

 

Assets		Classification		December 31, 2022				March 31, 2022
Operating leases		Right-of-use assets, net		$	458,768			$	593,389
Total lease assets				$	458,768			$	593,389
Liabilities
Operating leases		Accrued and other current liabilities		$	78,266			$	134,578
Operating leases		Lease liability, long-term			413,587				461,515
Total lease liabilities				$	491,853			$	596,093

 

The following information pertains to the Company’s leases for the periods indicated:

 

				Three Months Ended December 31,
Lease cost		Classification		2022				2021
Operating lease cost		General and administrative expenses		$	36,920			$	54,463
Operating lease cost		Depreciation and amortization			-				-
Operating lease cost		Interest expense, net			-				-
Total lease cost				$	36,920			$	54,463

 

				Nine Months Ended December 31,
Lease cost		Classification		2022				2021
Operating lease cost		General and administrative expenses		$	81,212			$	349,165
Operating lease cost		Depreciation and amortization			-				-
Operating lease cost		Interest expense, net			-				-
Total lease cost				$	81,212			$	349,165

 

22

 

The Company’s lease liabilities are payable as follows:

 

Twelve months ending September 30,		Amount
2023		$	80,439
2024			99,367
2025			102,147
2026			104,926
2027			107,706
Thereafter			252,241
Total remaining payments			746,826
Less imputed interest			254,973
Total lease liability		$	491,853

 

NOTE 16 – 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 December 31, 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 Plaintiffs in 2015. The Company and its affiliated entities filed an answer denying the three investors’ claims. Plaintiffs filed a First Amended Complaint on October 14, 2021. The Company and its affiliated entities responded in November 2021 by filing a Motion to Dismiss the claims contained in the Amended Complaint. The Motion was granted on July 20, 2022, by Court Order dismissing with prejudice the Company and all affiliated entities from the lawsuit. In early August 2022, Plaintiffs on their own motion moved to dismiss all claims against the remaining parties in the case to enable the Order of Dismissal to become an appealable, final Order. On September 7, 2022, Plaintiffs filed a Notice of Appeal to the United States Court of Appeals for the Fifth Circuit. As of December 31, 2022, the Fifth Circuit had not yet issued a briefing schedule.
(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. The parties settled their disputes, and a Joint Motion for Final Dismissal was filed with the Court on December 31, 2022, requesting the Court to enter a Final Order of Dismissal with Prejudice and close the case.

 

23

 

(c)	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 December 31, 2022.
(d)	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. The Defendant filed two motions to dismiss. The Court entered an Order recently denying Defendant’s motion to dismiss for lack of jurisdiction over the Defendant in Texas. As of December 31, 2022, Defendant’s motion to dismiss Plaintiff’s claim of tortious interference remains pending. Regardless of the outcome of that pending motion, the case will move forward with breach of contract claims against the Defendant. The case is pending as of December 31, 2022.
(e)	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. This case was resolved on December 29, 2022, and the Court entered a Dismissal with Prejudice on February 6, 2023.
(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 December 31, 2022.

 

NOTE 17 - 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:

 

		December 31, 2022
		Total				Level 1				Level 2				Level 3
Assets
Investment in unconsolidated entities, net		$	178,727			$	-				-				178,727
Investment in marketable securities			4,251,225				4,251,225
Total assets		$	4,429,952			$	4,251,225			$	-			$	178,727
Liabilities
Convertible notes payable		$	12,109,091			$	-			$	12,109,091			$	-
Total liabilities		$	12,109,091			$	-			$	12,109,091			$	-

 

		March 31, 2022
		Total				Level 1				Level 2				Level 3
Assets
Investment in unconsolidated entities, net		$	5,063,940			$	-			$	-			$	5,063,940
Total assets		$	5,063,940			$	-			$	-			$	5,063,940
Liabilities
Convertible notes payable		$	5,840,000			$	-			$	5,790,000			$	50,000
Total liabilities		$	5,840,000			$	-			$	5,790,000			$	50,000

 

NOTE 18 - SUBSEQUENT EVENTS

 

In preparing these unaudited condensed consolidated financial statements, the Company has evaluated events and transactions subsequent to the balance sheet date of December 31, 2022, for potential recognition or disclosure through the date of this report. Except as disclosed below, no other events require adjustment to or disclosure in the Company’s unaudited condensed consolidated financial statements.

 

●

On February 3, 2023, the Company and DSS entered into a mutual release and termination of the business consulting agreement dated January 24, 2022 (the “Consulting Agreement”) effective December 31, 2022. The Parties agree and acknowledge that the Company’s accrued and unpaid service fees of $700,000 owed to DSS under the Consulting Agreement and, in lieu of a cash payment thereof, the Company shall issue to DSS 33,333,333 shares of the Company’s common stock (calculated on a pre-reverse split basis), reflecting a price per share of $0.021 (which price is the average of last five days’ closing price as per OTC Markets), in full satisfaction of any and all amounts due by the Company to DSS pursuant to the Consulting Agreement.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following section discusses management’s views of the consolidated financial condition and the results of operations and cash flows of Sharing Services Global Corporation and 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 unaudited 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																Nine Months Ended
		December 31, 2022				December 31, 2021				Increase (Decrease)				% Change				December 31, 2022				December 30, 2021				Increase (Decrease)				% Change
Net sales		$	3,245,903			$	7,110,532				(3,864,629	)			-54.4	%		$	12,737,673			$	28,195,359			$	(15,457,686	)			-54.8	%
Gross profit			1,602,792				4,781,949				(3,179,157	)			-66.5	%			7,677,757				19,588,526				(11,910,769	)			-60.8	%
Operating expenses			(5,606,866	)			(7,831,883	)			2,225,017				-28.4	%			(19,511,086	)			(28,273,529	)			8,762,443				-31.0	%
Operating loss			(4,004,074	)			(3,049,934	)			(954,140	)			31.3	%			(11,833,329	)			(8,685,003	)			(3,148,326	)			36.3	%
Non-Operating (expense), net			(6,916,748	)			(2,065,155	)			(4,851,593	)			234.9	%			(19,720,337	)			(3,199,103	)			(16,521,234	)			516.4	%
Loss before income taxes			(10,920,822	)			(5,115,089	)			(5,805,733	)			113.5	%			(31,553,666	)			(11,884,106	)			(19,669,560	)			165.5	%
Income tax (benefit) expense			104,129				1,825,073				(1,720,944	)			-94.3	%			(789,803	)			1,318,827				(2,108,630	)			-159.9	%
Net loss		$	(11,024,951	)		$	(6,940,162	)		$	(4,084,789	)			58.9	%		$	(30,763,863	)		$	(13,202,933	)		$	(17,560,930	)			133.0	%

 

Highlights for the Three Months Ended December 31, 2022:

 

	●	For the three months ended December 31, 2022, our consolidated net sales decreased $3.9 million, or 54.4%, to $3.2 million, compared to the three months ended December 31, 2021.
	●	For the three months ended December 31, 2022, our consolidated gross profit decreased $3.2 million, or 66.5%, to $1.6 million, compared to the three months ended December 31, 2021. Our consolidated gross margin was 49.4% for the three months ended December 31, 2022, compared to 67.3% for the three months ended December 31, 2021.
	●	For the three months ended December 31, 2022, our consolidated operating expenses decreased $2.2 million, or 28.4%, to $5.6 million, compared to the three months ended December 31, 2021.
	●	For the three months ended December 31, 2022, our consolidated operating loss was $4.0 million, compared to $3.0 million for the three months ended December 31, 2021.
	●	For the three months ended December 31, 2022, our consolidated net non-operating expense was $6.9 million, compared to net non-operating expenses of $2.1 million for the three months ended December 31, 2021.
	●	For the three months ended December 31, 2022, our consolidated net loss was $11.0 million compared to net loss of $6.9 million for the three months ended December 31, 2021. For the three months ended December 31, 2022, and December 31, 2021, our diluted losses per share were $0.04 and $0.04, respectively.
	●	For the nine months ended December 31, 2022, our consolidated net cash used by operating activities was $8.9 million compared to $13.2 million for the nine months ended December 31, 2021.
	●	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. In December 2022, APB and the Company mutually agreed to limit and/or end any further commitment by APB to fund or to readvance under the terms of the Note.

 

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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 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 (such as equity and inventory financing, advisory services, mobile application tools, merchant processing services, commercial insurance, and event planning) to smaller direct sales companies initially in the U.S.

 

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. 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 September 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) expanding its membership-based consumer travel products line in the U.S. and 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-19 Pandemic

 

In 2020, in response to the COVID-19 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.

 

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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-19 pandemic 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

 

Three months ended December 31, 2022, Compared to Three months ended December 31, 2021

 

Net Sales

 

For the three months ended December 31, 2022, our consolidated net sales decreased by $3.9 million, or 54.4%, to $3.2 million, compared to the three months ended December 31, 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 Co^TM,” 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 $3.9 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 December 31, 2021, of approximately $1.2 million.

 

During the three months ended December 31, 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 nine months ended December 31, 2022, approximately 63% of the Company’s net sales were to customers (including 39% to recurring customers, refer herein as “SmartShip” sales, and approximately 24% to new customers) and approximately 37% of the Company’s net sales were to independent distributors.

 

Gross Profit

 

For the three months ended December 31, 2022, our consolidated gross profit decreased by $3.2 million, or 66.5%, to $1.6 million, compared to the three months ended December 31, 2021, and our consolidated gross margins were 49.4% and 67.3%, respectively. For the three months ended December 31, 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 December 31, 2022, our consolidated selling and marketing expenses decreased by $3.3 million, to $0.9 million, or 28.6% of net sales compared to $4.2 million, or 59.3% of net sales for the three months ended December 31, 2021. The decrease in consolidated selling and marketing expenses is due primarily to lower sales commissions of $2.6 million (which reflects decrease in our consolidated net sales discussed above).

 

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General and Administrative Expenses

 

For the three months ended December 31, 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) increased by approximately $1.1 to $4.7 million, or 144.1% of consolidated net sales compared to $3.6 million, or 50.8% of consolidated net sales, for the three months ended December 31 , 2021. The increase in consolidated general and administrative expenses was primarily driven by higher consulting expenses offset by a decrease in employee compensation and benefits and legal expenses.

 

Interest Expense, net

 

For the three months ended December 31, 2022, our consolidated interest expense, net was 3.3 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 three months ended December 31, 2021, our consolidated interest expense was $3.1 including amortization of debt discount and deferred financing costs, interest income, and other expenses associated with borrowings from “DSSI” and related parties.

 

Net Other Non-Operating Expenses

 

For the three months ended December 31, 2022, we had net consolidated non-operating expenses of approximately $6.9 million. For the three months ended December 31, 2021, our consolidated non-operating income was approximately $2.1 million.

 

Unrealized Gain (Loss) on Investments in Unconsolidated Entities and Marketable Securities

 

For the three months ended December 31, 2022, net unrealized losses, before income tax, in connection with our investments in unconsolidated entities and marketable securities were $3.6 million.

 

For the three months ended December 31, 2021, net unrealized gains, before income tax, in connection with our investment in unconsolidated entities were $1.2 million.

 

Gain on Employee Warrants Liability

 

For the three months ended December 31, 2022, we recognized a compensatory gain of $39,375, compared to $154,488 for the three months ended December 31, 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 December 31, 2022, the Company had a state and local tax benefit of $22,849 and a provision for deferred federal income taxes of $348,236 and a benefit for current federal income taxes of $429,516.

 

Net Loss and Loss per Share

 

As a result of the foregoing, for the three months ended December 31, 2022, our consolidated net loss was $11.0 million, compared to $6.9 million for the three months ended December 31, 2021. For the three months ended December 31, 2022, and December 31, 2021, our diluted loss per share was $0.04 and $0.04, respectively.

 

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Nine months ended December 31, 2022, Compared to the Nine months ended December 31, 2021

 

Net Sales

 

For the nine months ended December 31, 2022, our consolidated net sales decreased by $15.5 million, or 54.8%, to $12.7 million, compared to the nine months ended December 31, 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 Co^TM,” 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 $15.5 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 December 31, 2021, of approximately $800,000.

 

During the nine months ended December 31, 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 nine months ended December 31, 2022, approximately 63% of the Company’s net sales were to customers (including 39% to recurring customers, refer herein as “SmartShip” sales, and approximately 24% to new customers) and approximately 37% of the Company’s net sales were to independent distributors.

 

Gross Profit

 

For the nine months ended December 31, 2022, our consolidated gross profit decreased by $11.9 million, or 60.8%, to $7.7 million, compared to the nine months ended December 31, 2021, and our consolidated gross margins were 60.3% and 69.5%, respectively. For the nine months ended December 31, 2022, gross margin was affected by shipping expenses and promotional pricing, as a percentage of sales.

 

Selling and Marketing Expenses

 

For the nine months ended December 31, 2022, our consolidated selling and marketing expenses decreased by $8.7 million, to $5.7 million, or 44.9% of net sales compared to $14.4 million, or 51.0% of net sales for the nine months ended December 31, 2021. The decrease in consolidated selling and marketing expenses is due primarily to lower sales commissions of $8.6 million (which reflects decrease in our consolidated net sales discussed above) partially offset by higher sales convention expenses of approximately $454,465 (as we resumed holding some in-person conventions).

 

General and Administrative Expenses

 

For the nine months ended December 31, 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 $94,370 to $13.8 million, or 108.2% of consolidated net sales compared to $13.9 million, or 49.2% of consolidated net sales, for the nine months ended December 31 , 2021. The decrease in consolidated general and administrative expenses was primarily driven by lower professional fees, employee compensation and benefits and legal expenses.

 

Interest Expense, net

 

For the nine months ended December 31, 2022, our consolidated interest expense was $9.8 million, including amortization of debt discount and deferred financing costs, interest income, and other expenses associated with borrowings from “DSSI” and related parties.

 

29

 

For the nine months ended December 31, 2021, consolidated interest expense was $9.2 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 nine months ended December 31, 2022, our net consolidated non-operating income, includes litigation settlements and other non-operating income of $133,199. For the nine months ended December 31, 2021, consolidated other non-operating expenses (including litigation settlements) were $59,516.

 

Gain on employee warrants liability

 

For the nine months ended December 31, 2022, we recognized a compensatory gain of $207,210, compared to $1.9 million for the nine months ended December 31, 2021, in connection with employee warrants with a variable exercise price after service was completed.

 

Gain on Extinguishment of Debt

 

For the nine-month ended December 31, 2022, no amounts were incurred related to extinguishment of debt. In June of 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

 

During the nine months ended December 31, 2022, the Company recognized a provision for deferred taxes and federal taxes of $799,748 and a state and local tax benefit of $9,945.

 

During the nine months ended December 31, 2021, the Company recognized a consolidated provision for current federal income taxes of $5.2 million, net of a valuation allowance recognized of $4.5 million, and a consolidated provision for state and local taxes of $109,241 and a consolidated deferred income tax benefit of $4.0 million.

 

Net Loss and Loss per Share

 

As a result of the foregoing, for the nine months ended December 31, 2022, our consolidated net loss was $30.8 million, compared to $13.2 million for the nine months ended December 31, 2021. For the nine months ended December 31, 2022, and December 31, 2021, our diluted loss per share was $0.12 and $0.07, 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

 

We had a deficiency in our working capital of approximately $23.2 million as of December 31, 2022, and a working capital of approximately $7.4 million as of March 31, 2022. As of December 31, 2022, our cash and cash equivalents were $3.1 million.

 

We have implemented measures to restructure our business operations and reduce our monthly cash burns and operating loss. Such measures include, and are not limited to, headcount reduction and elimination of certain overhead and consulting fees. Based upon the current level of operations and anticipated investments necessary to sustain/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.

 

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The following table summarizes our cash flow activities for the nine months ended December 31, 2022, compared to the nine months ended December 31, 2021:

 

		Year Ended December 31,
		2022				2021				Change
Net cash used in operating activities		$	(8,845,938	)		$	(13,178,848	)		$	4,332,910
Net cash used in investing activities			(11,530,898	)			(12,213,306	)			682,408
Net cash provided by financing activities			6,501,659				33,073,607				(26,571,948	)
Impact of currency rate changes in cash			(35,864	)			(45,331	)			9,467
Net (decrease) increase in cash and cash equivalents		$	(13,911,041	)		$	7,636,122			$	(21,547,163	)

 

Net Cash Used in Operating Activities

 

For the nine months ended December 31, 2022, net cash used in operating activities was $8.8 million, compared to net cash used in operating activities of $13.7 million for the nine months ended December 31, 2021. The $4.3 million change was due primarily to decline in gross profit, excluding non-cash items, such as depreciation and amortization, stock-based compensation gain, provision for obsolete inventory losses, amortization of debt discount, losses on impairment of investments in unconsolidated entities, a note receivable, and 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 approximately $6.3 million driven by the normal recurring operations of the business.

 

Net Cash Used in Investing Activities

 

For the nine months ended December 31, 2022, net cash used in investing activities was $11.5 million, compared to $12.2 million for the nine months ended December 31, 2021. Included in the $11.5 million of net cash outflow was cash paid for marketable securities of approximately $9.5 million during the nine months ended December 31, 2022.

 

Net Cash Provided by Financing Activities

 

For the nine months ended December 31, 2022, net cash provided by financing activities decreased by $26.6 million, to $6.5 million, compared to $33.1 million for the nine months ended December 31, 2021, primarily due to refinancing of the June 2022 DSSI loan.

 

Impact of currency rate changes in cash

 

For the nine months ended December 31, 2022, the impact of currency rate changes in cash was negative $35,864 compared to negative $45,331 for the nine months ended December 31, 2021.

 

Legal Proceedings

 

The information contained in Note 16, COMMITMENTS AND CONTINGENCIES - Legal Proceedings, of the Notes to the Unaudited 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 June of 2021, the Company was formally notified by the lender that the Company’s obligations under the loan had been forgiven effective May 25, 2021. The loan forgiveness applies to all principal and interest accrued through the loan forgiveness effective date.

 

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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 June 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 June 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 December 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. On December 9, 2022, APB and the Company mutually agreed to limit and/or end any further commitment by APB to fund or to readvance under the terms of the APB Revolving Note. As of December 31, 2022, the Company had $6.0 million outstanding under the APB Revolving Note.

 

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, 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 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 nine months ended December 31, 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 $1.4 million which primarily relates to the purchase of the multi-user license and code for development of a new sales commissions’ platform.

 

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Contractual Obligations

 

There were no material changes to our contractual cash obligations during the nine months ended December 31, 2022, except for (a) the June 2022 refinancing of our loan from DSSI (b) the June 2022 financing of our Lindon, Utah office building, and (c) the August 2022 revolving line of credit with APB, as all described above.

 

Off-Balance Sheet Financing Arrangements

 

As of December 31, 2022, we had no off-balance sheet financing arrangements.

 

Inflation

 

Prior to the COVID-19 pandemic, inflation was 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 the Unaudited 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 December 31, 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.

 

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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 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.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mining Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

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Item 6. Exhibits.

 

The following exhibits are filed as part of this Quarterly Report unless otherwise indicated:

 

3.1		Third Amended and Restated Articles of Incorporation of Sharing Services Global Corporation, which is incorporated herein by reference from Exhibit A to the Company’s 2022 Proxy Statement on Schedule 14A filed on July 14, 2022
3.2		Bylaws of Sharing Services Global Corporation, which is incorporated herein by reference from Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on January 24, 2019
4.1		Certificate of Designation of Series A Preferred Stock, which is incorporated herein by reference from Exhibit 3.1.2 to the Company’s Current Report on Form 8-K filed on May 8, 2017
4.2		Certificate of Designation of Series C Preferred Stock, which is incorporated herein by reference from Exhibit 3.1.4 to the Company’s Current Report on Form 8-K filed on May 8, 2017
4.3		Convertible Promissory Note dated April 13, 2018, issued by Sharing Service, Inc. in favor of RB Capital Partners, Inc., which is incorporated herein by reference from Exhibit 1.1 to the Company’s Current Report on Form 8-K filed on April 19, 2018
4.4		Convertible Promissory Note dated April 5, 2021, issued by Sharing Service Global Corporation in favor of Decentralized Sharing Systems, Inc., which is incorporated herein by reference from Exhibit 1.2 to the Company’s Current Report on Form 8-K filed on April 9, 2021
4.5		Warrant to Purchase Shares of Sharing Services Global Corporation’s Class A Common Stock issued to Decentralized Sharing Systems, Inc., which is incorporated herein by reference from Exhibit 1.3 to the Company’s Current Report on Form 8-K filed on April 9, 2021
4.6		Warrant to Purchase Shares of Sharing Services Global Corporation’s Class A Common Stock, which is incorporated herein by reference from Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on December 29, 2021
4.7		Warrant to Purchase Shares of Sharing Services Global Corporation’s Class A Common Stock, which is incorporated herein by reference from Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on January 27, 2022
4.8		Form of Convertible Promissory Note issued, in June 2022, by Sharing Service Global Corporation in favor of Decentralized Sharing Systems, Inc., which is incorporated herein by reference from Exhibit 4.8 to the Company’s Annual Report on Form 10-K filed on December 21, 2022
4.9		Form of Warrant to Purchase Shares of Sharing Services Global Corporation’s Class A Common Stock issued, in June 2022, by Sharing Service Global Corporation to Decentralized Sharing Systems, Inc., which is incorporated herein by reference from Exhibit 4.9 to the Company’s Annual Report on Form 10-K filed on December 21, 2022
10.1		U. S. Small Business Administration Note dated May 13, 2020, issued by Sharing Services Global Corporation in favor of Prosperity Bank, which is incorporated herein by reference from Exhibit 1.1 to the Company’s Current Report on Form 8-K filed on May 18, 2020
10.2		Stock Purchase and Share Subscription Agreement dated as of July 22, 2020, by and between Sharing Services Global Corporation and Heng Fai Ambrose Chan, which is incorporated herein by reference from Exhibit 1.1 to the Company’s Current Report on Form 8-K filed on July 24, 2020

 

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10.3		Settlement Accommodation Agreement [Including Stock Disposition and Release Provisions] dated July 22, 2020, by and between Sharing Services Global Corporation, Bear Bull Market Dividends, Inc., Kenyatto Montez Jones, and MLM Mafia, Inc., which is incorporated herein by reference from Exhibit 1.1 to the Company’s Current Report on Form 8-K filed on July 30, 2020
10.4		Securities Purchase Agreement dates as of April 5, 2021, by and among Sharing Service Global Corporation and Decentralized Sharing Systems, Inc., which is incorporated herein by reference from Exhibit 1.1 to the Company’s Current Report on Form 8-K filed on April 9, 2021
10.5		Stock Purchase and Share Subscription Agreement dated as of December 23, 2021 by and among Sharing Service Global Corporation and Decentralized Sharing Systems, Inc., which is incorporated herein by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 29, 2021
10.6		Business Consulting Agreement dated January 24, 2022 by and between Sharing Service Global Corporation and DSS, Inc., which is incorporated herein by reference from Exhibit 1.1 to the Company’s Current Report on Form 8-K filed on January 27, 2022
10.7		Form of Distributor Agreement of The Happy Co., which is incorporated herein by reference from Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2021, filed on December 10, 2021
10.8		2021 The Happy Co. Brand Partner Compensation Plan, which is incorporated herein by reference from Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2021, filed on December 10, 2021
10.9		Form of Securities Purchase Agreement entered into, in June 2022, by and among Sharing Services Global Corporation, and the Decentralized Sharing Systems, Inc., which is incorporated herein by reference from Exhibit 10.9 to the Company’s Annual Report on Form 10-K filed on December 21, 2022
10.10		Form of Security Agreement made, in June 2022, by Sharing Service Global Corporation in favor of Decentralized Sharing Systems, Inc., which is incorporated herein by reference from Exhibit 10.10 to the Company’s Annual Report on Form 10-K filed on June 21, 2022
10.11		Form of Loan Agreement entered into, in June 2022, by and between LINDEN REAL ESTATE HOLDINGS, LLC and AMERICAN PACIFIC BANCORP, INC., which is incorporated herein by reference from Exhibit 10.11 to the Company’s Annual Report on Form 10-K filed on June 21, 2022
10.12		Form of DEED OF TRUST, ASSIGNMENT OF LEASES AND RENTS, SECURITY AGREEMENT AND FINANCING STATEMENT made, in June 2022, by LINDEN REAL ESTATE HOLDINGS, LLC in favor of Cottonwood Title Insurance Agency, Inc., for the benefit of American Pacific Bancorp, Inc., which is incorporated herein by reference from Exhibit 10.12 to the Company’s Annual Report on Form 10-K filed on June 21, 2022
10.13		Form of Demand Promissory Note issued, in December 2022, by LINDEN REAL ESTATE HOLDINGS, LLC in favor of AMERICAN PACIFIC BANCORP, INC., which is incorporated herein by reference from Exhibit 10.13 to the Company’s Annual Report on Form 10-K filed on June 21, 2022
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
101		The following financial information from our Quarterly Report on Form 10-Q for the three months ended December 31, 2022 and 2021, formatted in Inline XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss); (iii) the Condensed Consolidated Statements of Cash Flows and (iv) Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) *

 

*Included herewith

 

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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: February 7, 2023
	By:	/s/ John Thatch
		John Thatch
		President, Chief Executive Officer, and Vice Chairman of the Board of Directors
		(Principal Executive Officer)
Date: February 7, 2023
	By:	/s/ Anthony S. Chan
		Anthony S Chan
		Chief Financial Officer
		(Principal Accounting and Financial Officer)

 

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