SHARING SERVICES GLOBAL Corp - Quarter Report: 2020 October (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: October 31, 2020

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)

(469) 304-9400

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Title of each class

Common Stock, $0.0001 par value per share

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 [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, 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 [X] 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.

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 [X]

As of December 9, 2020, there were 196,810,833 shares of the issuer’s Class A common stock outstanding.

TABLE OF CONTENTS

In this Quarterly Report, references to “the Company,” “Sharing Services,” “our company,” “we,” “our,” “ours” and “us” refer to Sharing Services Global Corporation and its consolidated subsidiaries unless otherwise indicated or the context otherwise requires.

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. Such risks and uncertainties include, but are not limited to, risks and uncertainties concerning:

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

The following condensed consolidated balance sheets as of October 31, 2020 and April 30, 2020, the condensed consolidated statements of operations for the three and six months ended October 31, 2020 and 2019, the condensed consolidated statements of cash flows and condensed consolidated statements of stockholders’ equity for the six months ended October 31, 2020 and 2019 are those of Sharing Services Global Corporation and its subsidiaries.

Index to Unaudited Condensed Consolidated Financial Statements

SHARING SERVICES GLOBAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

SHARING SERVICES GLOBAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

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

SHARING SERVICES GLOBAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

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

SHARING SERVICES GLOBAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

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

SHARING SERVICES GLOBAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 –DESCRIPTION OF OPERATIONS AND BASIS OF PRESENTATION

Sharing Services Global Corporation (“Sharing Services”, “we,” or the “Company”), formerly Sharing Services, Inc., markets and distributes its health and wellness products primarily in the United States and Canada. The Company is an emerging growth company and was incorporated in the State of Nevada in April 2015. It markets and distributes its products and services through its wholly owned subsidiaries, using a marketing strategy driven by a form of direct selling.

The Company does not operate retail stores. It markets its products and services through an independent contractor sales force, which it refers to as “Elepreneurs,” and using its proprietary websites, including: www.elevacity.com. The Company’s fiscal year ends on April 30.

In 2019, Sharing Services, Inc. changed its corporate name to Sharing Services Global Corporation to better reflect the Company’s strategic intent to grow its business globally. In connection with the name change, the Company adopted the over-the-counter trading symbol “SHRG.”

The 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 information and 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 April 30, 2020.

NOTE 2 –SIGNIFICANT ACCOUNTING POLICIES

We adhere to the same accounting policies in the preparation of our condensed consolidated interim financial statements as we do in the preparation of our full year consolidated financial statements. As permitted under GAAP, interim accounting for certain expenses, including our provision for income taxes, is based on full-year assumptions.

Reclassifications

Certain reclassifications have been made to the prior year data to conform with the current period’s presentation.

Comprehensive Income

For the fiscal periods included in this Quarterly Report, the only component of the Company’s comprehensive income is the Company’s net earnings. Accordingly, the Company does not present a consolidated statement of comprehensive income.

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 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.

However, we believe that the public’s fear of exposure to and/or the actual impact of the COVID-19 virus, as well as past actions taken to mitigate the spread of the virus, have had and continue to have a materially adverse impact on the economy of the U. S. and Canada, and has resulted in a significant number of workers becoming unemployed or underemployed in both countries. Consumer demand for discretionary products such as ours is sensitive to downturns in the economy, increases in unemployment, or decreases in perceived employment security. The full impact on our business of changes in consumer demand resulting from the current economic downturn, increased unemployment, reduced consumer confidence, and public fear of exposure to the virus cannot reasonably be determined, but the impact may be significant and protracted. Accordingly, it is possible that estimates made in the Company’s consolidated financial statements have been, or will be, materially impacted as a result of these uncertainties. These may include, among other things, estimates regarding losses on 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.

Revenue Recognition

The Company derives revenue only from the sale of its products and services and recognizes revenue net of amounts due to taxing authorities (such as local and state sales tax). Our customers place sales orders online and through our “back-office” operations, which creates a contract and establishes the transaction price. The Company recognizes revenue when (or as) it transfers control of the promised goods and services to the customer. With respect to products sold, our performance obligation is satisfied upon receipt of the products by the customer. With respect to subscription-based revenue, including Elepreneurs membership fees, our performance obligation is satisfied over time (up to one year). The timing of our revenue recognition may differ from the time when we invoice the customer and/or collect payment. The Company has elected to treat shipping and handling costs as an activity to fulfill its performance obligations, rather than a separate performance obligation.

Deferred sales revenue associated with product invoiced but not received by customers at the balance sheet date was $1.1 million and $2.7 million as of October 31, 2020 and April 30, 2020, respectively. In addition, as of October 31, 2020 and April 30, 2020, deferred sales revenue associated with our unfulfilled performance obligations for services offered on a subscription basis was $260,182 and $433,386, and deferred sales revenue associated with our performance obligations for customers’ right of return was $120,914 and $263,117, respectively. Deferred sales revenue is expected to be recognized over one year.

During the six months ended October 31, 2020, no individual customer, or related group of customers, represents 10% or more of our consolidated net sales, and approximately 45% of our consolidated net sales were to recurring customers (which we refer to as “SmartShip” sales), approximately 28% were to new customers and approximately 27% were to our independent distributors. During the six months ended October 31, 2020 and 2019, approximately 94% and 95%, respectively, of our consolidated net sales are to our customers and/or independent distributors located in the United States.

During the six months ended October 31, 2020, approximately 99% of our consolidated net sales are from our health and wellness products (including approximately 5% from the sale of coffee and coffee-related products, 48% from the sale of other Nutraceutical products, and approximately 46% from the sale of all other health and wellness products). During the six months ended October 31, 2019, approximately 98% of our consolidated net sales are from the sale of our Elevate product line (including 25% from the sales of coffee and coffee-related products, 52% from the sale of other Nutraceutical products, and approximately 21% from the sale of all other health and wellness products).

During both the six months ended October 31, 2020 and 2019, product purchases from one supplier accounted for approximately 98% of our total product purchases.

Sales Commissions

The Company recognizes sales commission expense, when incurred, in accordance with GAAP. During the three months ended October 31, 2020 and 2019, sales commission expense was $8.4 million and $18.2 million, respectively. During the six months ended October 31, 2020 and 2019, sales commission expense was $17.8 million and $33.6 million, respectively.

In the six months ended October 31, 2020, the Company issued to members of its independent sales force who had been offered stock warrants under the 2019 Sales-Related Warrants program more fully discussed in Note 2 of the Notes to Consolidated Financial Statements for our fiscal year ended April 30, 2020 and met other qualifications (mainly related to remaining active distributors), fully vested warrants to purchase up to 3,747,600 shares its common stock with an estimated aggregate fair value of $1.4 million (the “2020 Sales-Related Warrants”). The 2020 Sales-Related Warrants are exercisable for a period of one year from the issuance date at the exercise price of $0.01 per share. The rights conferred by the 2020 Sales-Related Warrants are not subject to service conditions and all other conditions necessary to earn the award have been satisfied. The Company deems the fair value of the warrants granted to members of its independent contractor sales force to be an element of sales compensation expense. The Company recognized incremental sales compensation expense of $140,911 in connection with stock warrants issued under the 2020 Sales-Related Warrants program to holders of unexercised equity-based awards under the predecessor plan that are deemed modified, as defined by GAAP. In addition, the Company recognized sales compensation expense of $1,045,644 in connection with stock warrants issued under the 2020 Sales-Related Warrants program to participants of the predecessor plan who had not yet accepted the terms of the 2019 Sales-Related Warrants (but accepted the new award).

Further, in the six months ended October 31, 2020, the Company derecognized sales compensation expense of $1.1 million in connection with stock warrants previously offered under the 2019 Sales-Related Warrants program that were terminated or forfeited, including warrants no longer deemed probable of exercise. At October 31, 2020 and April 30, 2020, accrued sales compensation payable was $5,012,957 and $7,983,536, respectively, including $101,510 and $1,290,477, respectively, in estimated sales compensation contingently payable with stock warrants in connection with the 2019 Sales-Related Warrants program.

Recently Issued Accounting Standards - Recently Adopted

In November 2019, the FASB issued ASU No. 2019-08, Compensation – Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements – Share-based Consideration Payable to a Customer (“ASU 2019-08”). ASU 2019-08 requires that an entity apply the guidance in ASC 718 to measure and classify share-based payment awards granted to a customer. Under ASC 718, among other things, share-based awards to non-employees must generally be measured at the grant-date fair value of the equity instrument. For entities that have adopted the provisions of ASU 2018-07, Compensation – Stock Compensation (Topic 718) – Improvements to Nonemployee Share-based Payment Accounting, this amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. As discussed in Note 2 of the Notes to Consolidated Financial Statements for our fiscal year ended April 30, 2020, the Company has adopted the provisions of ASU 2018-07. Accordingly, the Company adopted the provisions of ASU 2019-08 effective on May 1, 2020 and such adoption did not have a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) which modifies the disclosure requirements on fair value measurements under ASC Topic No. 820, Fair Value Measurement, as amended (“ASC 820”). For public companies, ASU 2018-13 removes (a) the prior requirement to disclose the amount and reason for transfers between Level 1 and Level 2 of the fair value hierarchy (please see Note 3 – “Fair Value Measurements of Financial Instruments” below), (b) the policy for timing of transfers between levels, and (c) the valuation processes used for level 3 fair value measurements. For public companies, ASU 2018-13 also adds, among other things, a requirement to disclose the range and weighted average of significant unobservable inputs used in Level 3 fair value measurements. The Company adopted ASU 2018-13 effective on February 1, 2020 and such adoption did not have a material impact on its consolidated financial statements.

Recently Issued Accounting Standards - Pending Adoption

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 are 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 May 1, 2024. Early adoption is permitted, subject to certain limitations. The Company is evaluating the potential impact of adoption on its consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12, among other things, (a) eliminates the exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income (or a gain) from other items, (b) eliminates the exception to the general methodology for calculating income taxes in an interim period when the year-to-date loss exceeds the anticipated loss for the year, (c) requires than an entity recognize a franchise tax (or a similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax, and (d) requires than an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation for the interim period that includes the enactment date. For public companies, these amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted but must involve the adoption of all amendments contained in ASU 2019-12 concurrently. The Company is evaluating the potential impact of adoption on its consolidated financial statements.

NOTE 3 – FAIR VALUE MEASURENTS OF FINANCIAL INSTRUMENTS

Our financial instruments consist of cash equivalents, if any, accounts receivable, notes receivable, investments in unconsolidated entities, accounts payable and notes payable. The carrying amounts of cash equivalents, if any, trade accounts receivable, notes 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:

NOTE 4 – EARNINGS (LOSS) PER SHARE

We calculate basic earnings (loss) per share by dividing net earnings (loss) available to common shareholders by the weighted average number of common shares outstanding during the reporting period. Diluted earnings 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 earnings per share also reflects an adjustment to net earnings for the potential reduction to the reporting period’s interest expense, net of applicable income tax, that would result if the Company’s convertible notes payable were converted at the beginning of the period.

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

The following potentially dilutive securities and instruments were outstanding during the three and six months ended October 31, 2019 but excluded from the calculation of loss per share because their impact would be anti-dilutive:

NOTE 5 – NOTES RECEIVABLE

In the fiscal year 2020, the Company received a promissory note for $58,047 from a prior merchant payment processor in connection with amounts owed to the Company. At October 31, 2020, the note was paid in full. At April 30, 2020, the principal balance of $58,047 remained outstanding.

In the fiscal year 2019, the Company received a promissory note for $106,404 from a prior merchant payment processor in connection with amounts owed to the Company. In the fiscal year 2020, the Company and the issuer of the promissory notes engaged in negotiations aimed at settling this balance. In January 2020, the Company recognized an impairment loss of $46,404 in connection therewith. At October 31, 2020 and April 30, 2020, the principal balance of $30,000 and $60,000, respectively, remains outstanding.

NOTE 6 – OTHER CURRENT ASSETS

Other current assets consist of the following:

NOTE 7 – PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

Depreciation and amortization expense were $42,384 and $16,961 for the three months ended October 31, 2020 and 2019, respectively, and, for the six months ended October 31, 2020 and 2019, $84,601 and $47,242, respectively.

NOTE 8 - NOTE PAYABLE

In May 2020, the Company was granted a loan (the “PPP Loan”) by a commercial bank in the amount of $1,040,400, pursuant to the Paycheck Protection Program features of the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”). The PPP Loan is evidenced by a promissory note, matures on May 13, 2022 and bears interest at an annual rate of 1.0%. The PPP Loan may be prepaid without penalty, at the option of the Company, at any time prior to maturity. Proceeds from loans granted under the CARES Act are intended to be used for payroll, costs to continue employee group health care benefits, rent, utilities, and certain other qualified costs (“qualifying expenses”). The Company used the loan proceeds for qualifying expenses.

The Company’s borrowings under the PPP Loan may be eligible for loan forgiveness if used for qualifying expenses incurred during the “covered period,” as defined in the CARES Act, except that the amount of loan forgiveness is limited to the qualifying expenses incurred during the 8-week period commencing on the loan effective date. In addition, the amount of any loan forgiveness may be reduced if there is a decrease in the average number of full-time equivalent employees of the Company during the covered period as compared to the comparable period in the prior calendar year. The Company anticipates that some or all of its obligation under the PPP Loan will qualify for loan forgiveness. The Company’s indebtedness, after any such loan forgiveness, is payable in 18 equal monthly installments commencing on December 13, 2020, with all amounts due and payable by the maturity date.

At October 31, 2020, note principal in the amount of $1,040,400, excluding accrued but unpaid interest of $4,760, remains outstanding.

NOTE 9 - ACCRUED AND OTHER CURRENT LIABILITIES

Accrued and other current liabilities consist of the following:

Lease liability, current portion, represent obligations due withing one year under operating leases for office space, automobiles, and office equipment.

NOTE 10 - CONVERTIBLE NOTES PAYABLE

Convertible notes payable consists of the following:

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. Borrowings on the Company’s convertible notes bear interest at the annual rate of 12%, except as otherwise indicated below.

Pursuant to the terms of the Company’s convertible note dated October 6, 2017, the Company is currently reviewing the conversion terms of the note. Accordingly, the conversion price shown on the table above is subject to change as a result of such review. This is a related party note. Please see Note 13 for more details.

In December 2019, the Company and the holder of the Company’s convertible note dated April 13, 2018 (the “April 2018 Note”) entered into an amendment to the underlying promissory note. Pursuant to the amendment, the parties extended the maturity date of the note to April 2021. In addition, after giving effect to the amendment, the April 2018 Note is non-interest bearing. All other terms of the April 2018 Note remain unchanged.

During the three months ended October 31, 2020 and 2019, interest expense in connection with the Company’s convertible notes was $1,512 and $16,802, respectively, excluding amortization of debt discount of $5,120 and $2,519, respectively. During the six months ended October 31, 2020 and 2019, interest expense in connection with the Company’s convertible notes was $3,025 and $43,711, respectively, excluding amortization of debt discount of $10,242 and $5,040, respectively. These amounts are included in interest expense in our consolidated statements of operations.

NOTE 11 – LEASES

The Company leases space for its corporate headquarters, and additional office and warehouse space, under lease agreements classified as “operating leases’” as defined in ASC Topic 842. The Company’s real estate lease agreements have remaining terms varying from one to two years, offer the Company customary renewal options, and contain provisions for customary common area maintenance (CAM) assessments by the lessor.

The following information pertains to the Company’s leases as of the balance sheet dates indicated:

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

The Company’s lease liability is payable as follows:

NOTE 12 – INCOME TAXES

The Company is an emerging growth company and, prior to its fiscal quarter ended October 31, 2018, had not generated earnings from its operations or pre-tax earnings. During its fiscal year ended April 30, 2020, the Company’s consolidated operating earnings were $9.7 million and, during its fiscal year ended April 30, 2019, the Company had a consolidated operating loss of $1.0 million. The Company believes that it is probable it will utilize its available net operating losses entirely in the foreseeable future.

During the three months ended October 31, 2020, the Company recognized a current benefit for federal income taxes of $200,000, a provision for state and local income taxes of $196,327 and a deferred income tax provision of $501,156. During the six months ended October 31, 2020, the Company recognized a current provision for federal income taxes of $108,300, a provision for state and local income taxes of $314,312 and a deferred income tax benefit of $66,621. In addition, during the fiscal year ended April 30, 2020, the Company recognized a current provision for income taxes of $2.1 million and deferred income tax benefits of $1.6 million.

For the six months ended October 31, 2020, our income tax rate reconciliation is as follows:

Our consolidated provision for (benefit from) income taxes is as follows:

As of October 31, 2020, our deferred tax asset (liability) is as follows:

NOTE 13 - RELATED PARTY TRANSACTIONS

Decentralized Sharing Systems, Inc.

On July 22, 2020, the Company and Chan Heng Fai Ambrose, a Director of the Company, entered into a Stock Purchase and Share Subscription Agreement (the “SPA Agreement”) pursuant to which Mr. Chan agreed to invest $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. On the issuance date, the closing price for the Company’s common stock was $0.177 per share and the Company recognized a deemed dividend of $2.4 million. Simultaneously with the SPA Agreement, Mr. Chan and Decentralized Sharing Systems, Inc. (“DSS”), a subsidiary of Document Security Systems, Inc., and, together with Document Security Systems, Inc., 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. On July 23, 2020, the Company issued 30.0 million shares of its Class A Common Stock to DSS, an “accredited investor” as defined in the Securities Act, pursuant to the SPA Agreement. Under the terms of the SPA Agreement, the shares of Class A Common Stock issued to DSS are subject to a one (1) year restriction. The Stock Warrant issued pursuant to the SPA Agreement expires on the third anniversary from the issuance date, unless exercised earlier.

As of October 31, 2020, DSS and its affiliates owned 74.1 million shares of the Company’s Class A Common Stock, excluding 10.0 million shares issuable upon the exercise of warrants held by DSS. Mr. Chan, a Director of the Company, also serves on the Board of Directors of DSS and its parent, Document Security Systems, Inc. In addition, John (“JT”) Thatch, the President, CEO and Interim Chairman of the Board of Directors of the Company, also serves on the Board of Directors of Document Security Systems, Inc. Further, Frank D. Heuszel, a Director of the Company, also serves on the Board of Directors of DSS and its parent, Document Security Systems, Inc.

In October 2017, the Company issued a convertible note in the principal amount of $50,000 to HWH International, Inc (“HWH”). HWH is affiliated with Chan Heng Fai Ambrose, who in April 2020 became a Director of the Company. The note matures in October 2022. Please see Note 10 above for more details.

Bear Bull Market Dividends, Inc.

On July 22, 2020, the Company, Bear Bull Market Dividends, Inc. (“BBMD”), a purported shareholder of the Company, Kenyatto Montez Jones (“Jones”), and MLM Mafia, Inc. (“MLM”) entered into a Settlement Accommodation Agreement [Including Stock Disposition And Release Provisions] (the “SAA”) pursuant to which the relevant parties agreed to settle all prior disputes between the Company, on the one part, and BBMD and Jones, on the other, concerning the status of BBMD as a valid shareholder of the Company, and the ownership, operation, management and control of the Company, all of which has been the subject of various pending lawsuits. In addition, the parties agreed to dismiss such pending lawsuits and exchanged customary mutual releases.

In August 2020, as provided under the SAA, the Disputed Stock, as defined in the SAA, was converted into 25.0 million shares of the Company’s Class A Common Stock (the “Converted Stock”). In addition, under the terms of the SAA and the related Securities Escrow And Disposition Agreement, in August 2020, MLM purchased from BBMD 20.0 million shares of the Converted Stock at the purchase price of $0.0525 per share (or $1,050,000). Further, as provided under the SAA and the related Securities Escrow And Disposition Agreement, the Company repurchased from MLM 17.5 million shares of the Converted Stock at the repurchase price of $0.0514 per share (or $899,500) in cash and the Company has retired the 17.5 million shares repurchased. After these transactions, BBMD remained the holder of 5.0 million shares of the Company’s Class A Common Stock and MLM remained the holder of 2.5 million shares of the Company’s Class A Common Stock. The Company recognized the repurchased shares as treasury stock in accordance with GAAP. In October 2020, the Company retired the 17.5 million repurchased shares, pursuant to Nevada Revised Statutes, Section 78.283.

NOTE 14 - STOCKHOLDERS’ EQUITY

Preferred Stock

Series A Convertible Preferred Stock – As more fully discussed in Note 13 above, in August, BBMD, then the purported holder of 20,000,000 shares of the Company’s Series A preferred stock, converted such holdings into 20,000,000 shares of the Company’s Class A common stock. In addition, during the six months ended October 31, 2020, the holder of 750,000 shares of the Company’s Series A preferred stock converted such holdings into 750,000 shares of the Company’s Class A common stock. As of October 31, 2020, 6,100,000 shares of the Company’s Series A preferred stock remain outstanding.

Series B Convertible Preferred Stock – In August 2020, as more fully discussed in Note 13 above, BBMD, then the purported holder of 2,500,000 shares of the Company’s Series B preferred stock, converted such holdings into 2,500,000 shares of the Company’s Class A common stock. In addition, in September 2020, the Company and Alchemist Holding, LLC (“Alchemist”), another major shareholder of the Company, agreed to convert 7,500,000 shares of the Company’s Series B preferred stock then held by Alchemist into 7,500,000 shares of the Company’s Class A common stock. As of October 31, 2020, no shares of the Company’s Series B preferred stock remain outstanding.

Series C Convertible Preferred Stock – During the six months ended October 31, 2020, holders of 110,000 shares of the Company’s Series C preferred stock converted such holdings into 110,000 shares of the Company’s Class A common stock. As of October 31, 2020, 3,380,000 shares of the Company’s Series C preferred stock remain outstanding.

Common Stock

During the six months ended October 31, 2020, the Company issued 30,000,000 shares of its 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 the exercise price of $0.20 per share, to DSS in exchange for $3.0 million in cash (please see Note 13 above). In addition, the Company issued 10,000,000 shares of its Class A common stock to Robert Oblon, a co-founder of the Company, pursuant to the Multi-Party Settlement Agreement discussed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2020. Further, during the six months ended October 31, 2020, the Company issued 5,488,247 shares of its Class A common stock in connection with the exercise of warrants by Company employees and 1,780,200 shares of its Class A common stock in connection with the exercise of warrants by Company distributors.

During the six months ended October 31, 2020, the holders of 10,000,000 shares of the Company’s Series B preferred stock and 10,000,000 shares of the Company’s Class B common stock converted their holdings into 20,000,000 shares of the Company’s Class A common stock. In addition, during the six months ended October 31, 2020, as discussed above, BBMD, then the purported holder of 20,000,000 shares of the Company’s Series A preferred stock, converted such holdings into 20,000,000 shares of the Company’s Class A common stock. Further, during the six months ended October 31, 2020, the holder of 750,000 shares of the Company’s Series A preferred stock converted such holdings into 750,000 shares of the Company’s Class A common stock and holders of 110,000 shares of the Company’s Series C preferred stock converted such holdings into 110,000 shares of the Company’s Class A common stock. As discussed above, during the six months ended October 31, 2020, the Company repurchased 17.5 million shares of the Converted Stock for cash and retired such repurchased shares.

As of October 31, 2020, 196,700,833 shares of our Class A common stock remained issued and outstanding.

In August 2020, as more fully discussed in Note 13 above, BBMD, then the purported holder of 2,500,000 shares of the Company’s Class B common stock, converted such holdings into 2,500,000 shares of the Company’s Class A common stock. In addition, in September 2020, the Company and Alchemist agreed to convert 7,500,000 shares of the Company’s Class B common stock then held by Alchemist into 7,500,000 shares of the Company’s Class A common stock. As of October 31, 2020, no shares of the Company’s Class B common stock remain outstanding.

Stock Warrants

The following table summarizes the activity relating to the Company’s warrants during the six months ended October 31, 2020:

The following table summarizes certain information relating to outstanding and exercisable warrants:

During the six months ended October 31, 2020, as more fully discussed in Note 13 above, the Company issued 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 to DSS. In addition, during the six months ended October 31, 2020, the Company issued 5,488,247 shares of its Class A common stock in connection with warrants to purchase 9,000,000 shares exercised by Company employees and 1,780,200 shares of its Class A common stock in connection with the exercise of warrants by Company distributors. The 5,488,247 shares issued to employees are net of shares retained to satisfy the related exercise price and employee payroll tax obligations.

NOTE 15 - COMMITMENTS AND CONTINGENCIES

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.

Acquisition-Related Contingencies

In October 2017, the Company entered into a Share Exchange Agreement pursuant to which it acquired a 25% equity interest in 561 LLC. Pursuant to the terms of the Share Exchange Agreement, in May 2018, the Company increased its cumulative equity interest in 561 LLC to 40% in exchange for 2,500,000 shares of its Series A Preferred Stock. Under the terms of the Share Exchange Agreement, the sellers would be entitled to an additional 2,500,000 shares of our Series A Preferred Stock if/when both of the following conditions have been met: (a) one year has passed from the Closing Date and (b) the closing bid price of the Company’s common stock equals or exceeds $5.00 per share, as reported by the OTC Markets. In accordance with GAAP, the Company has not recorded a liability in connection with this contingency.

In October 2017, the Company entered into a Share Exchange Agreement pursuant to which it acquired a 25% equity interest in America Approved Commercial LLC (“AAC”). Pursuant to the terms of the Share Exchange Agreement, in May 2018, the Company increased its cumulative equity interest in AAC to 40% in exchange for 2,500,000 shares of its Series A Preferred Stock. Under the terms of the Share Exchange Agreement, the sellers would be entitled to an additional 2,500,000 shares of the Company’s Series A Preferred Stock in/when both of the following conditions have been met: (a) one year has passed from the Closing Date and (b) the closing bid price of the Company’s common stock equals or exceeds $5.00 per share, as reported by the OTC Markets. In accordance with GAAP, the Company has not recorded a liability in connection with this contingency.

Legal Proceedings – Other Matters

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) Cause No. 416-02428-2019; Sharing Services Global Corporation, f/k/a Sharing Services, Inc. v. XIP Technologies, LLC, filed in the 416^th Judicial District of Collin County, Texas. On May 6, 2019, the Company filed a lawsuit against XIP Technologies, LLC to recover money held by XIP Technologies, LLC that was owed to the Company. The Company obtained a writ of garnishment against a third-party holding funds for XIP Technologies, LLC. This matter has been resolved and the lawsuit was dismissed during the six months ended October 31, 2020.

(b) Cause No. 296-03589-2019; Pruvit Ventures, Inc. v. Elevacity, LLC, filed in the 296^th Judicial District of Collin County, Texas. On July 3, 2019, Pruvit Ventures, Inc. filed a lawsuit against Elevacity, alleging a breach of contract claim. Elevacity has denied the claim of breach contract. This matter has been resolved and the lawsuit was dismissed during the six months ended October 31, 2020.

(c) Case No. A-19-802861-B; Sharing Services Global Corporation v. Bear Bull Market Dividends, Inc., Alchemist Holdings, LLC and Kenyatto M. Jones, filed in the District Court of Clark County, Nevada and subsequently transferred to the Business Court of Clark County, Nevada. On October 1, 2019, the Company filed suit against two shareholders, Bear Bull Market Dividends, Inc. and Alchemist Holdings, LLC, and the key principal of Bear Bull Market Dividends, Inc., Kenyatto M. Jones, concerning an amended certificate of designation filed by the Company, and for allegations of self-dealing by the two shareholders. A request for entry of default was filed against two of the defendant shareholders as well as Mr. Jones, as a key principal. As part of the resolution of this matter as described in Note 13, this case was dismissed pursuant to court order (and stipulation) during the six months ended October 31, 2020.

(d) Case No. A-20-811265-C; Sharing Services Global Corporation v. Bear Bull Market Dividends, Inc., Research & Referral, BZ and Kenyatto M. Jones, filed in the District Court of Clark County, Nevada. On February 27, 2020, the Company filed suit against two shareholders, Bear Bull Market Dividends, Inc. and Research & Referral BZ, as well as a key principal of Bear Bull Market Dividends, Inc., Kenyatto M. Jones, concerning breach of contract, fraud, violations of state securities laws and alter ego relating to a stock exchange/transfer transaction, involving the Company’s stock. A request for entry of default was filed against the two shareholders and key principal Jones. As part of the resolution of this matter as described in Note 13, dismissal documents were submitted to the court. This matter is pending final action by the court for dismissal with prejudice.

(e) Cause No. 219-04726-2019; Sharing Services Global Corporation v. Research & Referral, BZ, filed in the 219^th Judicial District of Collin County, Texas. On August 22, 2019, the Company filed a lawsuit against Research & Referral, BZ, another entity and an individual for breach of contract, fraud in the inducement, statutory fraud in a stock transaction and violations of the Texas Securities Act. The claims against the other entity and individual were voluntarily dismissed and a judgment was entered against Research & Referral, BZ by the Court on May 1, 2020 which rescinded the subject stock transaction.

(f) Cause No. 366-04941-2019; Sharing Services Global Corporation, Elepreneurs U.S., LLC and Elevacity, LLC v. Robert Oblon, filed in the 366^th Judicial District of Collin County, Texas. On August 30, 2019, the Company and its affiliated entities filed a lawsuit against Robert Oblon for breach of contract, tortious interference with business relationships, and misappropriation of trade secrets, and sought injunctive relief. This matter has been resolved and the lawsuit was dismissed during the six months ended October 31, 2020. 

(g) Cause No. DC-19-20587; Sharing Services Global Corporation f/k/a Sharing Services, Inc. v. Amber-Lynn Beers-Hutchinson, n/k/a Amber-Lynn Cantrell, filed in the 192^nd Judicial District of Dallas County, Texas. On December 30, 2019, the Company filed a lawsuit against a former contractor for breach of contract. The former contractor filed a counterclaim, asserting defamatory conduct engaged in by the Company. This matter has been resolved and the lawsuit was dismissed during the six months ended October 31, 2020.

(h) Cause No. 380-01007-2020; Elepreneurs Holdings, LLC v. Carissa Rogers and Barbie Williams, filed in the 380^th Judicial District of Collin County, Texas. On February 20, 2020, the Company’s affiliated entity filed a lawsuit against two former distributors for breach of contract and tortious interference. The Company’s affiliated entity obtained injunctive relief and a final judgment with injunctive relief was entered against the two former distributors.

(i) Cause No. 429-04618-2020; Kevin Young v. Elepreneurs Holdings, LLC, Elepreneurs U.S., LLC, Elevacity Holdings, LLC, Elevacity U.S., LLC, and Sharing Services Global Corporation f/k/a Sharing Services, Inc., pending in the 429^th Judicial District of Collin County, Texas. On September 18, 2020, a former employee filed a lawsuit against the Company and its affiliated entities for breach a contract. The Company and its affiliated entities have filed an answer denying the former employee’s claims. This matter remains pending.

(j) On December 4, 2019, Entrepreneur Media, Inc. filed a Notice of Opposition in response to the “Elepreneurs” trademark application filed by SHRG IP Holdings, LLC, a wholly owned subsidiary of the Company. This opposition proceeding is now pending before the Trademark Trial and Appeal Board of the United States Patent and Trademark Office. On April 13, 2020, SHRG IP Holdings, LLC filed an answer to the Notice of Opposition. A scheduling order has been entered and the parties have exchanged initial disclosures. This matter remains pending.

(k) In March 2019, the Company engaged in preliminary discussions with various independent contractor distributors of its subsidiaries regarding a previously reported dispute concerning the issuance of stock warrants based on the satisfaction of certain individual sales production metrics. Please see Note 2 - SIGNIFICANT ACCOUNTING POLICIES - Sales Commissions for more information about the stock warrants liability associated with this matter.

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

The following section discusses management’s views of the financial condition and the results of operations and cash flows of Sharing Services Global Corporation (formerly Sharing Services, Inc.) and consolidated subsidiaries. This section should be read in conjunction with: (a) our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2020, and (b) our condensed consolidated financial statements included elsewhere in this Quarterly Report. This section may contain forward-looking statements. See “Cautionary Notice Regarding Forward-Looking Statements” above for a discussion of forward-looking statements and the inherent uncertainties, risks and assumptions associated therewith, which could cause actual results to differ materially from the projections contained in such forward-looking statements.

Highlights for the Three Months Ended October 31, 2020:

Overview

Summary Description of Business

The Company, through its subsidiaries, markets and distributes health and wellness products under the “Elevate” brand, primarily in the United States and Canada. The Company is an emerging growth company and was incorporated in the State of Nevada in April 2015. It markets and distributes its products and services primarily through an independent contractor sales force, which it refers to as “Elepreneurs,” using a marketing strategy which is a form of direct selling. The Company does not operate retail stores. The Company markets its products and services through its independent contractor distribution system and using its proprietary website: www.elevacity.com. The Company’s fiscal year ends on April 30.

The Company had no significant sales history prior to December 2017, when the Company launched its current Elevate health and wellness product line. The launch of this product line accelerated the Company’s growth and enabled the Company to expand its consolidated sales volume and operations at a rapid pace.

In January 2019, Sharing Services, Inc. changed its corporate name to Sharing Services Global Corporation to better reflect the Company’s strategic intent to grow its business globally. In connection with the name change, the Company adopted the OTC trading symbol SHRG effective April 4, 2019. Prior to this the Company’s common stock traded under the symbol SHRV.

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 April 30, 2020 is incorporated herein by reference.

Significant Uncertainty Regarding the Potential Impact of Ongoing COVID-19 Virus Outbreak

In early 2020, in response to the COVID-19 public health emergency, the U.S. and several Canadian provinces declared states of emergency. In an effort to help control the spread of COVID-19, state or provincial, and local governments in the U.S. and Canada mandated or recommended various containment measures, including social distancing, quarantine and stay-at-home or shelter-in-place directives, limitations on the size of gatherings, and the cancellation of larger meetings and public events, including sporting events, concerts, conferences and meetings. At the time of this Quarterly Report, many of these mandated or recommended safety measures remain in place.

We believe that the public’s fear of exposure to and/or the actual impact of the COVID-19 virus, as well as actions taken to mitigate the spread of the virus, have had and continue to have a material adverse impact on the economy of the U. S. and Canada, and resulted in a significant number of workers becoming unemployed or underemployed in both countries. 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. The full impact on our business of changes in customer demand resulting from the current economic downturn, increased unemployment, reduced consumer confidence, and consumer fear of exposure to the virus cannot reasonably be determined at this point, but the impact may be significant and protracted.

In response to these conditions, we have instituted a number of preventive measures, including temporarily transitioning a significant number of our corporate headquarter employees to working remotely, increased cleaning and sanitizing of all business facilities, increased employee safety communication efforts, and transitioning our sales conventions to a virtual convention platform. Some of these temporary measures have increased our already significant reliance on telephone and computer systems and on the availability of continued and impeded access to the Internet to operate these systems. At the time of this Quarterly Report, we are unable to determine with certainty when these temporary measures can be eased or reversed altogether.

As a result of the foregoing, we cannot predict the ultimate scope, duration and impact of the COVID-19 public health emergency, but we believe it may continue to have a material adverse impact on our business, financial condition, cash flows and liquidity, and results of operations (including revenues and profitability), and those of our key suppliers. The impact of the COVID-19 public health emergency may also have the effect of exacerbating some of the other risk factors described in our Annual Report on Form 10-K for the fiscal year ended April 30, 2020.

Results of Operations

The Three Months Ended October 31, 2020 Compared to the Three Months Ended October 31, 2019

Net Sales

For the three months ended October 31, 2020, our consolidated net sales decreased by $19.4 million, or 49.9%, to $19.5 million, compared to the three months ended October 31, 2019. The decrease in net sales mainly reflects (a) continuation of the decline in consumer orders that we have experienced since the fourth quarter of the fiscal year 2020, (b) a decline in independent distributor orders and in the number of new independent contractor distributors, (c) a decline in the number of continuing active distributors, resulting, in part, from recent product reformulations and increased competition for independent distributors, and (d) the generally adverse impact on consumer buying trends resulting from the COVID-19 virus and actions taken to help mitigate the spread of the outbreak in the U.S. and Canada. In efforts to restore strong sales growth, in the fiscal year 2021, we have launched an initiative to develop and implement a soon-to-be announced new business brand at our Elevacity division, have accelerated our previously announced initiative to expand our operations into additional international geographies, and have further intensified our efforts to recruit, develop and reward our domestic distributors and our efforts 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-19 Virus Outbreak above.

The $19.4 million decrease in consolidated net sales reflects a decrease in number of comparable product units sold ($29.2 million) and the impact of products discontinued since October 31, 2019 ($1.7 million), partially offset by sales of products introduced since October 31, 2019 of $11.5 million.

During the three months ended October 31, 2020 and 2019, the Company derived approximately 99% and 98%, respectively, of its consolidated net sales from the sale of its Elevate health and wellness product line, launched in December 2017.

During the three months ended October 31, 2020, approximately 45% of our consolidated net sales were to recurring customers (which we refer to as “SmartShip” sales), approximately 26% were to new customers and approximately 29% were to our independent distributors.

Gross Profit

For the three months ended October 31, 2020, our consolidated gross profit decreased by $13.0 million, or 47.4%, to $14.4 million, compared to the three months ended October 31, 2019, and our consolidated gross margins were 74.0% and 70.6%, respectively. During the three months ended October 31, 2020, our consolidated gross margin benefited from selective price increases implemented in second half of the fiscal year ended April 30, 2020 and a favorable shift in product mix (towards the sale of products with a relatively higher average gross margin) resulting from changes in customer preferences in the ordinary course of business.

Selling and Marketing Expenses

For the three months ended October 31, 2020, our consolidated selling and marketing expenses decreased by $10.2 million, to $8.8 million, or 45.1% of consolidated net sales, compared to $19.0 million, or 48.9% of consolidated net sales, for the three months ended October 31, 2019. The decrease in consolidated selling and marketing expenses is due primarily to lower sales commissions of $9.6 million (which reflects decrease in our consolidated net sales discussed above) and lower promotional trade show and sales convention expenses of $0.7 million, mainly as a result of the adoption of a virtual convention platform in response to the COVID-19 health emergency. The decrease in consolidated selling and marketing expenses was partially offset by an increase in stock-based sales compensation expense (please see Note 2 of Notes to Condensed Consolidated Financial Statements above).

General and Administrative Expenses

For the three months ended October 31, 2020, 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 to $3.2 million, or 16.5% of consolidated net sales compared to $4.5 million, or 11.5% of consolidated net sales, for the three months ended October 31, 2019. The $1.3 million decrease in consolidated general and administrative expenses was due primarily to lower stock-based compensation expense of $0.6 million, lower consulting and professional fees of $0.1 million and a net decrease in other corporate administrative expenses.

Interest Expense, Net

For the three months ended October 31, 2020, our consolidated interest expense was $5,950, excluding amortization of debt discount of $5,120 and interest income of $2,799. Consolidated interest expense of $5,950 includes $2,537 associated with borrowings under short-term financing arrangements (including borrowing under the PPP Loan discussed under Short-term Borrowings and Convertible Notes below) and $1,512 associated with our convertible notes.

For the three months ended October 31, 2019, our consolidated interest expense was $140,959, excluding amortization of debt discount of $12,168 and interest income of $7,340. Consolidated interest expense of $140,959 consisted of interest of $124,157 associated with short-term borrowings under financing arrangements with third-party lenders and interest of $16,802 associated with our convertible notes. In the fiscal year ended April 30, 2020, the Company paid in full all borrowings under prior financing arrangements with third-party lenders.

Interest income, related party

For the three months ended October 31, 2020 and 2019, interest income on accounts receivable, related party, was $0 and $138,546, respectively.

Litigation Settlements and Other Non-operating Expenses

For the three months ended October 31, 2020, our consolidated non-operating expenses include litigation settlements and other non-operating expenses of $55,000.

For the three months ended October 31, 2019, our consolidated non-operating expenses include litigation settlements and other non-operating expenses of $4.0 million, including an estimated loss of $2.9 million from the settlement of certain legal claims and counterclaims between the Company and certain of its affiliated entities, and Company co-founder and former consultant, Robert Oblon, a loss of $425,000 in connection with the Release and Settlement Agreement between the Company and 212 Technologies and a loss of $317,105 on impairment of a promissory note receivable.

Provision for (Benefit from) Income Taxes

During the three months ended October 31, 2020, the Company recognized a current federal income tax benefit of $200,000, a provision for state and local taxes of $196,327 and a deferred income tax benefit of $501,156. See Note 2 of the Notes to Consolidated Financial Statements in ITEM 8 — “Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the fiscal year ended April 30, 2020 for information about the Company’s accounting policies regarding accounting for income taxes.

Net Loss and Loss per Share

As a result of the foregoing, for the three months ended October 31, 2020, our consolidated net earnings were $1.9 million compared to a net loss of $1.2 million for the three months ended October 31, 2019. For the three months ended October 31, 2020, our diluted earnings per share were $0.01, compared to a diluted loss per share of $0.01 for the three months ended October 31, 2019.

The Six Months Ended October 31, 2020 Compared to the Six Months Ended October 31, 2019

Net Sales

For the six months ended October 31, 2020, our consolidated net sales decreased by $33.0 million, or 44.4%, to $41.3 million, compared to the six months ended October 31, 2019. The decrease in net sales mainly reflects: (a) continuation of the decline in consumer orders that we experienced in the fourth quarter of the fiscal year 2020, (b) a decline in independent distributor orders and in the number of new independent distributors, (c) a decline in the number of continuing active distributors, resulting, in part, from recent product reformulations and increased competition for independent distributors, and (d) the generally adverse impact on consumer buying trends resulting from the COVID-19 virus and actions taken to help mitigate the spread of the outbreak in the U.S. and Canada. In efforts to restore strong sales growth, in the fiscal year 2021, we have launched an initiative to develop and implement a soon-to-be announced new business brand at our Elevacity division, have accelerated our previously announced initiative to expand our operations into additional international geographies, and have further intensified our efforts to recruit, develop and reward our domestic distributors and 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-19 Virus Outbreak above.

The $33.0 million decrease in consolidated net sales reflects a decrease in number of comparable product units sold ($51.2 million) and the impact of products discontinued since October 31, 2019 ($2.4 million), partially offset by sales of products introduced since October 31, 2019 of $20.7 million.

During the six months ended October 31, 2020 and 2019, the Company derived approximately 99% and 98%, respectively, of its consolidated net sales from the sale of its Elevate health and wellness product line, launched in December 2017.

During the six months ended October 31, 2020, approximately 46% of our consolidated net sales were to recurring customers (which we refer to as “SmartShip” sales), approximately 26% were to new customers and approximately 28% were to our independent distributors.

Gross Profit

For the six months ended October 31, 2020, our consolidated gross profit decreased by $22.5 million, or 42.5%, to $30.4 million, compared to the six months ended October 31, 2019, and our consolidated gross margins were 73.5% and 70.9%, respectively. During the six months ended October 31, 2020, our consolidated gross margin benefited from selective price increases implemented in second half of the fiscal year ended April 30, 2020 and a favorable shift in product mix (towards the sale of products with a relatively higher average gross margin) resulting from changes in customer preferences in the ordinary course of business.

Selling and Marketing Expenses

For the six months ended October 31, 2020, our consolidated selling and marketing expenses decreased by $16.5 million, to $18.4 million, or 44.4% of consolidated net sales, compared to $34.8 million, or 46.9% of consolidated net sales, for the six months ended October 31, 2019. The decrease in consolidated selling and marketing expenses is due primarily to lower sales commissions of $15.5 million (which reflects decrease in our consolidated net sales discussed above) and lower promotional trade show and sales convention expenses of $1.0 million, mainly as a result of the adoption of a virtual convention platform in response to the COVID-19 health emergency.

General and Administrative Expenses

For the six months ended October 31, 2020, 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 to $10.8 million, or 26.0% of consolidated net sales compared to $14.1 million, or 19.0% of consolidated net sales, for the six months ended October 31, 2019. The $3.4 million decrease in consolidated general and administrative expenses was due primarily to lower stock-based compensation expense of $3.5 million and lower consulting and professional fees of $0.4 million, partially offset by an increase in estimated severance and severance-related expenses of $0.4 million.

Interest Expense, Net

For the six months ended October 31, 2020, our consolidated interest expense was $11,390, excluding amortization of debt discount of $10,242 and interest income of $4,234. Consolidated interest expense of $11,390 includes $4,760 associated with borrowings under short-term financing arrangements (including borrowing under the PPP Loan discussed under Short-term Borrowings and Convertible Notes below) and $3,025 associated with our convertible notes.

For the six months ended October 31, 2019, our consolidated interest expense was $441,929, excluding amortization of debt discount of $45,166 and interest income of $15,358. Consolidated interest expense of $441,929 consisted of interest of $398,218 associated with short-term borrowings under financing arrangements with third-party lenders and interest of $43,711 associated with our convertible notes. In the fiscal year ended April 30, 2020, the Company paid in full all borrowings under prior financing arrangements with third-party lenders.

Interest income, related party