SHARING SERVICES GLOBAL Corp - Quarter Report: 2023 September (Form 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: September 30, 2023
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) |
(469) 304-9400
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange in which registered | ||
| N/A | N/A | N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company. See the definitions of “large accelerated filer,” “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 November 9, 2023, there were shares of the issuer’s Class A Common Stock outstanding.
TABLE OF CONTENTS
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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.
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PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
The following unaudited financial statements: condensed consolidated balance sheets as of September 30, 2023, and condensed consolidated statements of operations and comprehensive loss, condensed consolidated statements of cash flows, and condensed consolidated statements of changes in stockholders’ deficit for the six months ended September 30, 2023 and 2022, are those of Sharing Services Global Corporation and its subsidiaries.
Index to Unaudited Condensed Consolidated Financial Statements
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SHARING SERVICES GLOBAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2023 | March 31, 2023 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 1,385,339 | $ | 2,994,885 | ||||
| Trade accounts receivable, net | 434,214 | 273,674 | ||||||
| Other receivable | 1,800,000 | |||||||
| Inventory, net | 2,201,010 | 1,636,120 | ||||||
| Other current assets, net | 222,407 | 527,827 | ||||||
| Total Current Assets | 6,042,970 | 5,432,506 | ||||||
| Property and equipment, net | 377,652 | 9,270,193 | ||||||
| Right-of-use assets, net | 426,297 | 448,240 | ||||||
| Investment in unconsolidated entities, net | 206,231 | |||||||
| Intangible assets | 473,723 | 545,372 | ||||||
| Other assets | 1,183,946 | 1,177,173 | ||||||
| TOTAL ASSETS | $ | 8,504,588 | $ | 17,079,715 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | 1,059,916 | $ | 1,028,510 | ||||
| Accrued and other current liabilities | 2,388,171 | 2,781,037 | ||||||
| Accrued sales commission payable | 1,867,283 | 2,357,643 | ||||||
| State and local taxes payable | 1,491,633 | 1,446,503 | ||||||
| Federal income taxes payable | 2,471 | |||||||
| Note payable - related party, net of unamortized debt discount and unamortized deferred loan cost | 6,922,043 | |||||||
| Loan payable | 1,200,000 | |||||||
| Convertible notes payable, related parties, net of unamortized debt discount and unamortized deferred loan cost of $2,172,914 as of March 31, 2023 | 24,827,086 | |||||||
| Total Current Liabilities | 8,009,474 | 39,362,822 | ||||||
| Lease liability – non-current | 416,277 | 440,478 | ||||||
| TOTAL LIABILITIES | 8,425,751 | 39,803,300 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ Equity (Deficit) | ||||||||
| Preferred stock, $ par value, shares authorized: | ||||||||
| Series A convertible preferred stock, $ par value, shares designated, shares issued and outstanding as of September 30, 2023 and March 31, 2023 | 310 | 310 | ||||||
| Series B convertible preferred stock, $ par value, shares issued and outstanding | ||||||||
| Series C convertible preferred stock, $ par value, shares designated, shares issued and outstanding as of September 30, 2023 and March 31, 2023 | 322 | 322 | ||||||
| Series D preferred stock, $ par value, shares authorized and issued as of September 30, 2023 | 3 | |||||||
| Class A common stock, $ par value, shares designated, shares and shares issued and outstanding as of September 30, 2023 and March 31, 2023, respectively | 37,633 | 34,745 | ||||||
| Class B common stock, $ par value, shares designated, shares issued and outstanding | ||||||||
| Treasury Stock, shares, at cost | (626,187 | ) | ||||||
| Additional paid in capital | 110,699,858 | 84,619,762 | ||||||
| Shares to be issued | 12,146 | 12,146 | ||||||
| Accumulated deficit | (110,335,526 | ) | (106,456,378 | ) | ||||
| Accumulated other comprehensive loss | (335,909 | ) | (308,305 | ) | ||||
| Total Stockholders’ Equity (Deficit) | 78,837 | (22,723,585 | ) | |||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 8,504,588 | $ | 17,079,715 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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SHARING SERVICES GLOBAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||
| September
30, 2023 | September
30, 2022 | September
30, 2023 | September
30, 2022 | |||||||||||||
| Net sales | $ | 2,408,704 | $ | 4,188,152 | $ | 5,286,825 | $ | 9,491,770 | ||||||||
| Cost of goods sold | 669,803 | 1,759,776 | 1,515,632 | 3,416,804 | ||||||||||||
| Gross profit | 1,738,901 | 2,428,376 | 3,771,193 | 6,074,966 | ||||||||||||
| Operating expenses | ||||||||||||||||
| Selling and marketing expenses | 743,057 | 2,037,596 | 2,164,545 | 4,795,396 | ||||||||||||
| General and administrative expenses | 2,116,240 | 4,557,922 | 4,403,312 | 9,108,825 | ||||||||||||
| Total operating expenses | 2,859,297 | 6,595,518 | 6,567,857 | 13,904,221 | ||||||||||||
| Operating loss | (1,120,396 | ) | (4,167,142 | ) | (2,796,664 | ) | (7,829,255 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense, net | (1,963,267 | ) | (3,321,410 | ) | (2,869,077 | ) | (6,441,464 | ) | ||||||||
| Other income | 1,800,000 | 1,800,000 | ||||||||||||||
| Gain on employee warrants liability | 52,875 | 167,835 | ||||||||||||||
| Loss on extinguishment of debt | (188,842 | ) | (38,209 | ) | ||||||||||||
| Unrealized loss on investment | (11,553,933 | ) | (78,632 | ) | (6,669,760 | ) | ||||||||||
| Other non-operating income, net | 5,613 | 49,632 | 103,434 | 139,799 | ||||||||||||
| Total other expense, net | (346,496 | ) | (14,772,836 | ) | (1,082,484 | ) | (12,803,590 | ) | ||||||||
| Loss before income taxes | (1,466,892 | ) | (18,939,978 | ) | (3,879,148 | ) | (20,632,845 | ) | ||||||||
| Income tax benefit | (12,102 | ) | (554,075 | ) | (893,932 | ) | ||||||||||
| Net loss | $ | (1,454,790 | ) | $ | (18,385,903 | ) | $ | (3,879,148 | ) | $ | (19,738,913 | ) | ||||
| Other comprehensive loss, net of tax: | ||||||||||||||||
| Currency translation adjustments | (22,435 | ) | (263,751 | ) | (27,604 | ) | (408,017 | ) | ||||||||
| Total other comprehensive loss | (22,435 | ) | (263,751 | ) | (27,604 | ) | (408,017 | ) | ||||||||
| Comprehensive loss | $ | (1,477,225 | ) | $ | (18,649,654 | ) | $ | (3,906,752 | ) | $ | (20,146,930 | ) | ||||
| Loss per share: | ||||||||||||||||
| Basic | $ | (0.004 | ) | $ | (0.07 | ) | $ | (0.01 | ) | $ | (0.07 | ) | ||||
| Diluted | $ | (0.004 | ) | $ | (0.07 | ) | $ | (0.01 | ) | $ | (0.07 | ) | ||||
| Weighted average shares: | ||||||||||||||||
| Basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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SHARING SERVICES GLOBAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
| Six Months Ended | ||||||||
| September 30, 2023 | September 30, 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (3,879,148 | ) | $ | (19,738,913 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 307,499 | 335,571 | ||||||
| Stock-based compensation | (148,267 | ) | (152,381 | ) | ||||
| Amortization of debt discount and other | 2,015,542 | 6,994,167 | ||||||
| Loss (gain) on extinguishment of debt | 38,209 | (350,320 | ) | |||||
| Intangible asset impairment | 154,182 | |||||||
| Bad debt expense | 177,115 | 107,800 | ||||||
| Realized/unrealized gain on investments | 6,669,760 | |||||||
| Provision for obsolete inventory | 2,112 | 433,714 | ||||||
| Non-cash income | (1,800,000 | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (337,659 | ) | (182,343 | ) | ||||
| Inventory | (784,928 | ) | 514,591 | |||||
| Other current assets | 742,337 | 422,894 | ||||||
| Other assets | (153,324 | ) | ||||||
| Accounts payable | 57,396 | 762,392 | ||||||
| Income taxes payable | (577,235 | ) | ||||||
| Lease liability | 768 | 17,541 | ||||||
| Accrued and other liabilities | 638,717 | (694,905 | ) | |||||
| Net Cash Used in Operating Activities | (2,970,305 | ) | (5,436,809 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Payments for property and equipment and other assets | (1,352,792 | ) | ||||||
| Issuance of notes receivable | (241,942 | ) | ||||||
| Purchase of marketable securities | (9,510,000 | ) | ||||||
| Cash paid for asset purchase | (400,000 | ) | ||||||
| Net Cash Used in Investing Activities | (11,504,734 | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Net proceeds from issuance of promissory notes | 10,922,329 | |||||||
| Proceeds from loan payable | 1,200,000 | |||||||
| Common stock received on litigation settlement | (1,046,254 | ) | ||||||
| Retirement of loans | (3,348,811 | ) | ||||||
| Net Cash Provided by Financing Activities | 1,200,000 | 6,527,264 | ||||||
| IMPACT OF CURRENCY RATE CHANGES ON CASH | 160,759 | (150,122 | ) | |||||
| Decrease in cash and cash equivalents | (1,609,546 | ) | (10,564,401 | ) | ||||
| Cash and cash equivalents, beginning of period | 2,994,885 | 17,023,266 | ||||||
| Cash and cash equivalents, end of period | $ | 1,385,339 | $ | 6,458,865 | ||||
| Supplemental cash flow information | ||||||||
| Cash paid for interest | $ | 24,279 | $ | 127,790 | ||||
| Cash paid for income taxes | $ | 550 | $ | |||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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SHARING SERVICES GLOBAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
(Unaudited)
| Series A | Series B | Series C | Series D | Class A and Class B | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Preferred Stock | Preferred Stock | Common Stock | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Number | Number | Number | Number | Number | Additional | Shares | Other | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| of | Par | of | Par | of | Par | of | Par | of | Par | Paid in | to be | Treasury | Accumulated | Comprehensive | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Value | Shares | Value | Shares | Value | Shares | Value | Shares | Value | Capital | Issued | Stock | Deficit | Loss | Total | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance - March 31, 2023 | 3,100,000 | $ | 310 | $ | 3,220,000 | $ | 322 | $ | 347,451,880 | $ | 34,745 | $ | 84,619,762 | $ | 12,146 | (626,187 | ) | $ | (106,456,378 | ) | $ | (308,305 | ) | $ | (22,723,585 | ) | ||||||||||||||||||||||||||||||||||||||
| Cancellation of treasury stock | - | - | - | - | - | (626,187 | ) | 626,187 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock issued for debt modification | - | - | - | 26,000 | 3 | - | 26,169,365 | 26,169,368 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued to settle accrued interest payable | - | - | - | - | 28,877,005 | 2,888 | 536,918 | 539,806 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Currency translation adjustments | - | - | - | - | - | (27,604 | ) | (27,604 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (3,879,148 | ) | (3,879,148 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance - Sep 30, 2023 | 3,100,000 | $ | 310 | # | 3,220,000 | # | $ | 322 | 26,000 | # | $ | 3 | 376,328,885 | $ | 37,633 | $ | 110,699,858 | $ | 12,146 | $ | (110,335,526 | ) | $ | (335,909 | ) | $ | 78,837 | |||||||||||||||||||||||||||||||||||||
| Series A | Series B | Series C | Series D | Class A and Class B | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Preferred Stock | Preferred Stock | Common Stock | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Number | Number | Number | Number | Number | Additional | Shares | Other | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| of | Par | of | Par | of | Par | of | Par | of | Par | Paid in | to be | Treasury | Accumulated | Comprehensive | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Value | Shares | Value | Shares | Value | Shares | Value | Shares | Value | Capital | Issued | Stock | Deficit | Loss | Total | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance - March 31, 2022 | 3,100,000 | $ | 310 | $ | 3,220,000 | $ | 322 | $ | 288,923,969 | $ | 28,892 | $ | 80,738,719 | $ | 12,146 | $ | (57,886,336 | ) | $ | (65,109 | ) | $ | 22,828,944 | |||||||||||||||||||||||||||||||||||||||||
| Refinancing of debt and detachable warrants | - | - | - | - | - | 1,172,167 | 1,172,167 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of shares of Common Stock | - | - | - | - | (26,091,136 | ) | (2,609 | ) | 2,609 | (626,187 | ) | (626,187 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Currency translation adjustments | - | - | - | - | - | (408,017 | ) | (408,017 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (19,738,913 | ) | (19,738,913 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance - Sep 30, 2022 | 3,100,000 | $ | 310 | # | 3,220,000 | # | $ | 322 | # | $ | 262,832,833 | $ | 26,283 | $ | 81,913,495 | $ | 12,146 | (626,187 | ) | $ | (77,625,249 | ) | $ | (473,126 | ) | $ | 3,227,994 | |||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
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SHARING SERVICES GLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – ORGANIZATION AND BUSINESS
Description of Operations
Sharing Services Global Corporation (“Sharing Services,” “SHRG”) and its subsidiaries (collectively, the “Company”) aim to build shareholder value by developing or investing in innovative emerging businesses and technologies that augment the Company’s products and services portfolio, business competencies, and geographic reach. The Company was incorporated in the State of Nevada in April 2015. The Company’s main business activities include:
Sale of Health and Wellness Products - The Company markets its health and wellness 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 (the “U.S.”) and Canada.
Sale of Member-Based Travel Services - Through its subsidiary, Hapi Travel Destinations, the Company established a subscription-based travel services business under the proprietary brand MyTravelVentures (“MTV”) in May 2022. MTV provides entrepreneurial opportunities to its subscribers by capitalizing on both the direct selling model and the retail travel business model. The MTV services are designed to offer discount 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.
In August 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 (the “MFA”) pursuant to which Sharing Services acquired the exclusive franchise rights in North America to the brand “Hapi Café.” Under the terms of the MFA, Sharing Services, directly or through its subsidiaries, has the right to operate no less than five 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 MFA. In light of the challenges and business opportunities presented by the COVID pandemic, the Company is refining its operating and related business plan to open up Hapi Café in Plano, Dallas and the New York City.
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 the growth of these businesses. As part of the Company’s commitment to the success of these emerging businesses, the Company, directly or through its subsidiaries, also plans to offer 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- GOING CONCERN
The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which assumes the Company will be able to realize its assets and settle its liabilities in the ordinary course of business for the foreseeable future. The Company has experienced a significant decline in consolidated sales and earnings during the most recent years. For the three months ended September 30, 2023, and 2022, net loss was approximately $1.5 million and $18.4 million, respectively. For the six months ended September 30, 2023, and 2022, net loss was approximately $3.9 million and $19.7 million. In addition, as of September 30, 2023, and March 31, 2023, accumulated deficit was approximately $ million and $106.5 million, respectively.
Historically, the Company has funded its working capital needs primarily with capital transactions and with secured and unsecured debt, including the issuance of convertible notes and borrowings under short-term financing arrangements. The Company intends to continue to raise capital and use secured and unsecured debt, including the issuance of convertible notes and borrowings under short-term financing arrangements, from time to time in the future as needed to fund its working capital needs and strategic acquisitions.
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During the past twelve months, the Company has initiated business initiatives intended to stabilize its sales levels, to drive long-term sales growth, and to create positive cash flows from operations, including by implementing stricter fiscal controls over operating costs and expenditures. The Company believes it will be able to fund its working capital needs for the next 12 months with: (a) secured and unsecured borrowings, including the issuance of convertible notes and borrowings under short-term financing arrangements, (b) capital transactions, and (c) cash from operations. However, there can be no assurance about the future success of the Company’s growth and cost control initiatives or about the Company’s ability to raise sufficient capital and to issue sufficient secured and unsecured debt, including the issuance of convertible notes and borrowings under short-term financing arrangements, in the future to fund its working capital needs.
These matters raise reasonable doubt as to the Company’s ability to continue as a going concern. These condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded assets and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 3 – 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, 2023. 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, 2023.
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates and Assumptions
The preparation of financial statements in accordance with GAAP requires the use of judgment and requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosures about contingent assets and liabilities, if any. Matters that require the use of estimates and assumptions include, among others: the recoverability of accounts and notes 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 multiple performance obligations resulting from contracts with customers, the 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 share-based compensation awards, the provision for income taxes, the measurement and recognition of uncertain tax positions, the valuation of long-term debt covenants, 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 September 30, 2023, and March 31, 2023, cash and cash equivalents included cash held by our merchant processors of approximately $0.05 million and $0.5 million, respectively. In addition, as of September 30, 2023, and March 31, 2023, cash and cash equivalents held in bank accounts in foreign countries in the ordinary course of business were approximately $0.4 million and $1.3 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.
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 September 30, 2023, and March 31, 2023, the allowance for obsolete inventory was $881,868 and $880,926, respectively, in connection with health and wellness product that is damaged, expired or otherwise in excess of forecasted outputs, based on our current and anticipated sales levels. The Company reports its provisions for inventory losses in cost of goods sold in its condensed consolidated statements of operations.
| 10 |
Other Receivable and Loan Payable
In July 2023, the Company, through its out-sourced payroll services provider (“Paychex”), submitted a claim to the Internal Revenue Services (“IRS”) for the Employee Retention Tax Credit (“ERTC credit”) based on its payroll records and other pertinent information. Refunds will be distributed based on IRS processing times and the total ERTC credit will be approximately $1.88 million. Such the likelihood of receiving the ERTC credit is probable and the amount is estimable, the Company has recorded its ERTC credit in the Other Receivable.
Through the introduction of Paychex, the Company successfully applied for an ERTC loan (“bridge loan”) in August 2023. The bridge loan that was approved came to $1.2 million, and it was recoded as a Loan Payable. The loan is for a 12-month period and carries a 2% monthly interest rate. The loan proceeds must be used solely and exclusively for working capital and other business purposes and it had an origination fee of $24,000. The Company received net proceeds of approximately $1.18 million on September 9, 2023.
Other Assets
Other assets include a multi-user license and code of a back-office platform that was acquired for $1,000,000 in 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.
Loans Payable
On September 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 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 September 17, 2022. APB is a subsidiary of DSS, Inc, a major stockholder of the Company. Heng Fai Ambrose Chan, and Frank D. Heuszel, each a Director of the Company, also serve on the Board of Directors of APB. 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.
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.
Effective June 30, 2023, the Company, and Decentralized Sharing Systems, Inc. (“DSSI”), entered into an Assignment of Limited Liability Company Interests agreement pursuant to which: (a) DSSI assumed approximately $7.24 million in SHRG liabilities secured by certain Commercial Real Estate, (b) DSSI credited SHRG $239,790 towards accrued interest payable under the 2022 Note (the “$27.0 million loan”), and (c) DSSI acquired ownership of Linden Real Estate Holdings LLC, with its sole asset being a commercial lot and commercial building located in Lindon, Utah, subject to the assumed indebtedness.
On August 31, 2023, the Company and DSSI executed a debt exchange agreement whereby DSSI cancelled the $27 million loan and accepted shares of the Company’s Series D Preferred Stock, $ par value per share (“Preferred D Stock”) in exchange for the cancellation of the $27.0 million loan . Pursuant to the debt exchange agreement, the principal amount together with all unpaid interest, totaling $26,169,367.33 was deemed to be repaid. The holder of Preferred D Stock is entitled to receive dividends in cash valued at a rate of 25% per annum of the operating income of the Company. Any accrued and unpaid dividends shall be payable in cash commencing on August 31, 2024 and continuing each annual anniversary of such date on a perpetual basis.
Foreign Currency Translation
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. In September 2021, the Company, through its wholly owned subsidiary, commenced operations in the Republic of Korea (South Korea).
| South Korean | ||||
| Won per USD | ||||
| Exchange rate as of September 30, 2023 | 1,352.92 | |||
| South Korean Won per USD | ||||||||
| Three Months ended | Six Months ended | |||||||
| September 30, 2023 | September 30, 2023 | |||||||
| Average exchange rate as of September 30, 2023 | 1,313.71 | 1,314.49 | ||||||
| 11 |
Comprehensive Loss
For the three and six months ended September 30, 2023 and 2022, the Company’s comprehensive loss was comprised of currency translation adjustments and net loss.
Revenue Recognition
As of September 30, 2023, and March 31, 2023, deferred sales revenue associated with products invoiced but not received by customers at the balance sheet date was $158,463 and $113,896, respectively. In addition, as of September 30, 2023, and March 31, 2023, deferred sales revenue associated with our unfulfilled performance obligations for services offered on a subscription basis was $52,052 and $80,528, and deferred sales revenue associated with our performance obligations for customers’ right of return was $26,427 and $26,894, and deferred revenues associated with customer loyalty points was $25,493 and $25,493, respectively. Deferred sales revenue is expected to be recognized over one year.
During the three and six months ended September 30, 2023 and 2022, substantially all our consolidated net sales are from our health and wellness products. During the three months ended September 30, 2022, substantially all our consolidated net sales are from our health and wellness products.
Sales Commissions
The Company recognizes sales commission expenses, when incurred, in accordance with GAAP. During the three months ended September 30, 2023 and 2022, sales commission expense, which is included in selling and marketing expenses in our condensed consolidated statements of operations and comprehensive loss, was approximately $0.7 million and $1.5 million, respectively. During the six months ended September 30, 2023 and 2022, sales commission expense was approximately $1.8 million and $3.9 million, respectively
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.
| 12 |
We calculate basic loss per share by dividing net loss attributable 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, if any, stock warrants and other commitments to issue common stock, except where the impact would be anti-dilutive.
| Three Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Net loss | $ | (1,454,790 | ) | $ | (18,385,903 | ) | ||
| Weighted average basic shares | 376,328,885 | 262,832,833 | ||||||
| Weighted average diluted shares | 376,328,885 | 262,832,833 | ||||||
| Loss per share: | ||||||||
| Basic | $ | (0.004 | ) | $ | (0.07 | ) | ||
| Diluted | $ | (0.004 | ) | $ | (0.07 | ) | ||
| Six Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Net loss | $ | (3,879,148 | ) | $ | (19,738,913 | ) | ||
| Weighted average basic shares | 373,961,126 | 270,531,857 | ||||||
| Weighted average diluted shares | 373,961,126 | 270,531,857 | ||||||
| Loss per share: | ||||||||
| Basic | $ | (0.01 | ) | $ | (0.07 | ) | ||
| Diluted | $ | (0.01 | ) | $ | (0.07 | ) | ||
| As of September 30, | ||||||||
| 2023 | 2022 | |||||||
| Convertible preferred stock | 6,320,000 | 6,320,000 | ||||||
| Convertible notes payable | 246,123,029 | |||||||
| Stock warrants | 23,246,817 | |||||||
| Total potential incremental shares | 6,320,000 | 275,689,846 | ||||||
As of September 30, 2023, all employee warrants outstanding were fully vested.
NOTE 5 – NOTES RECEIVABLE, NET
In January 2021, the Company, through a wholly owned subsidiary, and 1044Pro, LLC (“1044Pro”) entered into a Funding Agreement pursuant to which the Company agreed to provide 1044Pro loans under a $250,000 revolving credit line. In December 2021, the parties to the Funding Agreement entered into a modification to the Funding Agreement pursuant to which the parties agreed to increase the amount of the revolving credit line to $310,000. Borrowings under the credit line, as amended, are payable in monthly installments in amounts determined in relation to the amount of each cash advance. In connection with the Funding Agreement, the Company acquired a 10% equity interest in 1044Pro and a security interest in 1044Pro’s cash receipts and in substantially all 104Pro’s assets.
On January 26, 2022, the parties to the Funding Agreement discussed in the preceding paragraph entered into a new Loan Agreement (“Revolving Promissory Note”) pursuant to which the Company agreed to loan to 1044Pro up to an additional $250,000, of which $125,000 was funded immediately. Borrowings under the Revolving Credit Note bear interest at 10%, are payable in full on or before July 26, 2023, and are secured by a security interest in substantially all 1044Pro’s assets and a security interest in 50% of 1044Pro’s members’ interest. Borrowings under the Loan Agreement are further secured by a personal guaranty executed by a member of 1044Pro.
On August 29, 2022, the Company and 1044Pro entered into an agreement to modify the Revolving Promissory Note dated January 26, 2022. In accordance with the amendment, the Company agreed to lend $125,000 to 1044 for a 20% membership interest in 1044Pro. The loan is secured by the assets of 1044Pro as well as by a personal guaranty executed by a member of 1044Pro.
| 13 |
Effective June 30, 2023, the Company and DSSI, entered into a Loan Purchase Contract, Assignment of Note and liens and Other Loan Documents, pursuant to which DSSI purchased from SHRG promissory notes in the amount of $666,875 and related equity interests of 1044Pro LLC, for a purchase price of $400,000, with the financial terms generally summarized as follows: (a) DSSI pays the purchases price by crediting $400,000 to the outstanding principal and interest owing under the terms of the $27.0 million loan, and (b) DSSI acquired ownership of the $666,875 promissory note payable by 1044Pro, free and clear of any liens, and any equity interest in 1044Pro LLC that SHRG held.
NOTE 6 – INVENTORY, NET
Inventory consists primarily of finished goods. The Company provides an allowance for any slow-moving or obsolete inventory. As of September 30, 2023, and March 31, 2023, inventory consists of the following:
| September
30, 2023 | March
31, 2023 | |||||||
| Finished Goods | $ | 3,082,878 | $ | 2,517,046 | ||||
| Allowance for inventory obsolescence | (881,868 | ) | (880,926 | ) | ||||
| $ | 2,201,010 | $ | 1,636,120 | |||||
The following table reflects the activity in the allowance for inventory obsolescence for the periods presented:
NOTE 7 – OTHER CURRENT ASSETS, NET
Other current assets consist of the following:
| September
30, 2023 | March
31, 2023 | |||||||
| Inventory-related deposits | $ | 324,781 | $ | 288,649 | ||||
| Accounts receivable, related parties | 250 | 167,578 | ||||||
| Prepaid insurance and other operational expenses | 52,686 | 105,652 | ||||||
| Deposits for sales events | 120,614 | |||||||
| Prepaid interest, related party | ||||||||
| Right to recover asset | 20,331 | 20,975 | ||||||
| Subtotal | 398,048 | 703,468 | ||||||
| Less: allowance for losses | (175,641 | ) | (175,641 | ) | ||||
| $ | 222,407 | $ | 527,827 | |||||
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. Prepaid interest represents interest on the 2022 Note due to DSSI (see NOTE 14 below) for the period from July 1, 2023 inclusive to September 30, 2023. Right to recover assets is associated with our customers’ right of return and is expected to be realized in one year or less. As of September 30, 2023, and March 31, 2023, the provision for losses in connection with certain inventory-related deposits for which recoverability is less than certain was approximately $176,000.
| 14 |
NOTE 8 – INVESTMENT IN UNCONSOLIDATED ENTITIES, NET
In September 2021, the Company, Stemtech Corporation (“Stemtech”) and Globe Net Wireless Corp. (“GNTW”) entered into a Securities Purchase Agreement (the “SPA”) pursuant to which the Company invested $1.4 million in Stemtech in exchange for: (a) a Convertible Promissory Note in the amount of $1.4 million in favor of the Company (the “Convertible Note”) and (b) a detachable Warrant to purchase shares GNTW common stock (the “GNTW Warrant”). Stemtech is a subsidiary of GNTW. As an inducement to enter into the SPA, GNTW agreed to pay to the Company an origination fee of $500,000, payable in shares of GNTW’s common stock. The Convertible Note matures on September 9, 2024, bears interest at the annual rate of 10%, and is convertible, at the option of the holder, into shares of GNTW’s common stock at a conversion rate calculated based on the closing price per share of GNTW’s common stock during the 30-day period ended September 19, 2021. The GNTW Warrant expires on September 13, 2024 and conveys the right to purchase up to 1.4 million shares of GNTW’s common stock at a purchase price calculated based on the closing price per share of GTNW’s common stock during the 10-day period ended September 13, 2021. In September 2021, GNTW issued to the Company shares of its common stock, or less than 1% of the shares of GNTW then issued and outstanding, in payment of the origination fee. In November 2021, Globe Net Wireless Corp. changed its corporate name to Stemtech Corporation. In connection therewith, the investee’s common stock is now traded under the symbol “STEK”.
The Company carries its investment in the Convertible Note, the GNTW Warrant and the shares of GNTW common stock at fair value in accordance with GAAP. During the three months ended September 30, 2022, the Company recognized unrealized gains, before income tax, of $4,865,354 in connection with its investment in the Convertible Note, the GNTW Warrant and the shares of GNTW common stock.
Effective June 30, 2023, subject to the terms of a certain Loan Purchase Contract, Assignment of Note and Liens and Other Loan Documents, and Note Allonge document, DSSI purchased from SHRG the Stemtech promissory note in the amount of $1.4 million, along with all SHRG’s rights in any Stemtech warrants, for a purchase price of $1.1 million, with the financial terms generally summarized as follows: (a) DSSI paid the $1.1 million purchase price by crediting the $27.0 million loan, first to interest and then to principal, and (b) DSSI acquired ownership of the $1.4 million promissory note payable by Stemtech, free and clear of any liens, and any equity or warrant interest in the Stemtech that SHRG may have held. As of September 30, 2023, as a result of the transaction, the Company no longer has an investment in Stemtech.
In September 2021, the Company entered into a Membership Unit Purchase Agreement pursuant to which the Company acquired a 30.75% equity interest in MojiLife, LLC, a limited liability company organized in the State of Utah, in exchange for $1,537,000. MojiLife is an emerging growth distributor of technology-based consumer products for the home and car. MojiLife’s products include esthetically attractive, cordless scent diffusers for the home or for the car, as well as proprietary home cleaning products and accessories.
On a quarterly basis, the Company evaluates the recoverability of its investments and reviews current economic trends to determine the adequacy of its allowance for impairment losses based on each investee financial performance data and other relevant information. An estimate for impairment losses is recognized when recovery in full of the Company’s investment is no longer probable. Investment balances are written off against the allowance after the potential for recovery is considered remote.
Investment in unconsolidated entities consists of the following:
September 30, 2023 | March
31, 2023 | |||||||
| Investment in detachable GNTW stock warrant | $ | $ | 143,641 | |||||
| Investment in GNTW common stock | 18,300 | |||||||
| Investment in Stemtech convertible note | 44,290 | |||||||
| Investment in MojiLife, LLC | 1,537,000 | 1,537,000 | ||||||
| Subtotal | 1,537,000 | 1,743,231 | ||||||
| Less, allowance for impairment losses | (1,537,000 | ) | (1,537,000 | ) | ||||
| $ | $ | 206,231 | ||||||
| 15 |
NOTE 9 – PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
| September
30, 2023 | March
31, 2023 | |||||||
| Building and building improvements | $ | $ | 8,952,555 | |||||
| Computer software | 1,024,274 | 1,024,274 | ||||||
| Furniture and fixtures | 237,042 | 237,042 | ||||||
| Computer equipment | 220,264 | 220,264 | ||||||
| Leasehold improvements and other | 394,306 | 394,306 | ||||||
| Total property and equipment | 1,875,886 | 10,828,441 | ||||||
| Accumulated depreciation and amortization | (1,498,234 | ) | (1,558,248 | ) | ||||
| $ | 377,652 | $ | 9,270,193 | |||||
Effective June 30, 2023, the Company and DSSI entered into an Assignment of Limited Liability Company Interests agreement pursuant to which: (a) DSSI assumed approximately $7.24 million in SHRG liabilities secured by certain Commercial Real Estate, (b) DSSI credited SHRG $239,790 towards accrued interest payable under the 2022 Note (the “$27.0 million loan”), and (c) DSSI acquired ownership of Linden Real Estate Holdings LLC, with its sole asset being a commercial lot and commercial building located in Lindon, Utah, subject to the assumed indebtedness.
NOTE 10 – ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities consist of the following:
| September
30, 2023 | March
31, 2023 | |||||||
| Deferred sales revenues | $ | 262,434 | $ | 246,811 | ||||
| Liability associated with uncertain tax positions | 925,795 | 925,795 | ||||||
| Accrued interest payable | 536,123 | |||||||
| Payroll and employee benefits | 207,565 | 329,762 | ||||||
| Lease liability, current portion | 44,650 | 41,385 | ||||||
| Other accruals | 947,728 | 701,161 | ||||||
| $ | 2,388,171 | $ | 2,781,037 | |||||
Lease liability, current portion, represents obligations due within one year under operating leases for office space, automobiles, and office equipment. See Note14 - LEASES below for more information. As of September 30, 2023, and March 31, 2023, other accruals include amounts due to related parties of $0 and $167,578, respectively, and several operational accruals of $947,728 and $533,583, respectively.
Included in other accurals are amount due to DSS/DSSI for $603,876 as of September 30, 2023
NOTE 11 - NOTE PAYABLE, RELATED PARTY
Note payable, related party, consists of the following:
| Issuance Date | Maturity Date | Interest Rate | Conversion Price (per share) | September 30, 2023 | March 31, 2023 | |||||||||||||
| September 2022 | September 2024 | 8 | % | $ | N/A | $ | $ | 27,000,000 | ||||||||||
| Unamortized debt discount and deferred financing costs | (2,172,914 | ) | ||||||||||||||||
| 24,827,086 | ||||||||||||||||||
| Less: current portion of note payable | 24,827,086 | |||||||||||||||||
| Long-term note payable | $ | $ | ||||||||||||||||
| 16 |
In October 2017, the Company issued a Convertible Promissory Note in the principal amount of $50,000 (the “Note”) to HWH International, Inc. (“HWH” or the “Holder”). HWH is affiliated with Heng Fai Ambrose Chan, who in April 2020 became a Director of the Company. The Note is convertible into shares of the Company’s Common Stock. Concurrent with issuance of the Note, the Company issued to HWH a detachable warrant to purchase up to an additional 333,333 shares of the Company’s Common Stock, at an exercise price of $0.15 per share. Under the terms of the Note and the detachable stock warrant, the Holder is entitled to certain financing rights. If the Company enters into more favorable transactions with a third-party investor, it must notify the Holder and may have to amend and restate the Note and the detachable stock warrant to be identical. On August 9, 2022, HWH and the Company executed an agreement to settle the Note and cancel the related stock warrant for $78,636, which amount represents the principal plus accrued interest. The Company made the payment to HWH on August 9, 2022.
On April 5, 2021, the Company and Decentralized Sharing Systems, Inc. (“DSSI”) entered into a Securities Purchase Agreement, pursuant to which the Company issued: (a) a Convertible Promissory Note in the principal amount of $30.0 million (the “Note”) in favor of DSSI, and (b) a detachable Warrant to purchase up to 150,000,000 shares of the Company’s Class A Common Stock, at $ per share, and DSSI loaned to the Company $30.0 million. DSSI, is a subsidiary of DSS, Inc. (formerly Document Security Systems, Inc., “DSS”), and, together with DSS, is a major shareholder of the Company. Under the terms of the loan, the Company agreed to pay to DSSI a loan Origination Fee of $3.0 million, payable in shares of the Company’s Class A Common Stock, at the rate of $0.20 per share. The Note bore interest at the annual rate of 8%, with a maturity date of April 5, 2024, subject to certain accelerated provisions upon the occurrence of an Event of Default, as was defined in the Note. At any time during the term of the Note, all or part of the Note, including the principal amount less unamortized prepaid interest, if any, plus any accrued interest could have been converted into shares of the Company’s Class A Common Stock at the rate of $0.20 per share, at the option of the holder. Interest on the Note was pre-payable annually in cash or in shares of the Company’s Class A Common Stock, at the option of the Company, except that interest for the first year was pre-payable in shares of the Company’s Class A Common Stock, at the rate of $0.20 per share. As further discussed below, the Note and the detachable Warrant were redeemed in September 2022.
On September 15, 2022, the Company and DSSI which, together with DSS, is a major 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 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 consolidated balance sheet.
In March 2023, the Company and DSSI entered into a Securities Exchange and Amendment Agreement pursuant to which the parties agreed to amend the 2022 Note by removing the conversion rights granted by the 2022 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 as a deemed dividend of approximately $10.7 million on the Company’s consolidated financial statements.
| 17 |
As more fully discussed in Notes 5 and 8, effective June 30, 2023, the Company and DSSI entered into two transactions, involving the sale of certain assets to DSSI, pursuant to which DSSI credited, in the aggregate, $641,790 to principal outstanding on the 2022 Note. In addition, as more fully discussed in Notes 8 and 9, effective June 30, 2023, DSSI also credited, in the aggregate, $546,000 in accrued interest due on the 2022 Note in connection with transactions involving the sale of certain assets to DSSI.
On August 31, 2023, the Company and DSSI executed a debt exchange agreement whereby DSSI cancelled the $27 million loan and accepted shares of the Company’s Series D Preferred Stock, $ par value per share (“Preferred D Stock”) in exchange for the cancellation of the $27.0 million loan. Pursuant to the debt exchange agreement, the principal amount together with all unpaid interest, totaling $26,169,367.33 was deemed to be repaid. The holder of Preferred D Stock is entitled to receive dividends in cash valued at a rate of 25% per annum of the operating income of the Company. Any accrued and unpaid dividends shall be payable in cash commencing on August 31, 2024 and continuing each annual anniversary of such date on a perpetual basis.
NOTE 12 – INCOME TAXES
The statutory rates for our domestic and our material foreign operations are as follows for the periods shown:
| Country | 2023 | 2022 | ||||||
| United States | 21 | % | 21 | % | ||||
| Republic of Korea | 21 | % | 21 | % | ||||
Our consolidated effective income tax rate reconciliation is as follows:
| Six Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Federal statutory rate | 21.0 | % | 21.0 | % | ||||
| State and local income taxes | (0.2 | ) | (0.2 | ) | ||||
| Permanent differences | 0.8 | |||||||
| Change in valuation allowance for NOL carry-forwards | (21.0 | ) | (15.6 | ) | ||||
| Stock warrant transactions and other items | (0.2 | ) | ||||||
| Effective income tax rate | 0.6 | % | 5.2. | % | ||||
Income taxes applicable to our foreign operations are not material in the periods presented.
NOTE 13 - STOCKHOLDERS’ EQUITY
Common Stock
On September 15, 2022, the Company and DSSI which, together with DSS, is a major 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 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 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 as a capital contribution of $2.0 million in additional paid in capital on the Company’s consolidated balance sheet.
On February 3, 2023, the Company mutually agreed with DSS to enter into a Letter Agreement (the “DSS Letter Agreement”), pursuant to which the Company and DSS have agreed to terminate and release all obligations of the Consulting Agreement effective as of December 31, 2022. In accordance with the DSS Letter Agreement, the Company also agreed to issue shares of the Company’s Common Stock in lieu of cash payment to satisfy the accrued and unpaid service fees equal to $700,000 owed to DSS under the Consulting Agreement.
On February 28, 2023, the Company and DSSI mutually agreed in a Letter Agreement (the “First DSSI Letter Agreement”) to a mutual settlement of the interest accrued on the 2022 Note issued by the Company to DSSI. In accordance with the DSSI Letter Agreement, the Company agreed to issue shares of the Company’s Common Stock, at a price per share of $ in lieu of cash payment to satisfy the accrued and unpaid interest through and including December 31, 2022, in the amount of $552,000 owed to DSSI.
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In March 24, 2023, the Company, DSS and DSSI, entered into a Securities Exchange and Amendment Agreement (the “Agreement”). Pursuant to the Agreement, the parties decided to: 1) exchange and surrender the Assigned Warrants, 2) exchange and surrender the Service Warrants, 3) exchange and surrender the DSSI Warrants, and 4) amend the 2022 Note by removing all conversion rights granted by the 2022 Note. Under the terms of the Agreement, the Company issued shares of its Class A Common Stock in connection with the exchange and surrender of the Assigned Warrants and the Service Warrants. In accordance with GAAP, the Company recognized a deemed dividend of $213,062 on the Company’s consolidated financial statements. In addition, the Company issued shares of its Class A Common Stock in connection with removal of all conversion rights granted by the 2022 Note. The Company recognized the debt modification transaction as a debt extinguishment in accordance with GAAP. Since DSSI is a related party, the difference between the fair value of the new debt instrument and the carrying value of the retired debt instrument was recognized as a deemed dividend of $10.7 million on the Company’s consolidated financial statements.
In May 2022, the Company and certain of its subsidiaries, on the one hand, and Alchemist, the former officer and certain entities affiliated with the former officer, on the other hand, entered into a Confidential Settlement Agreement with Mutual Releases (the “May 2022 Settlement Agreement”) pursuant to which the parties amicably settled all claims and disputes among them; (b) the former officer sold to the Company shares of the Company’s common stock then under the voting and dispositive control of the former officer; (c) the Company made a one-time payment of $1,043,645; and (d) the Company and its relevant subsidiaries, on the one hand, and the former officer and relevant entities affiliated with the former officer, on the other hand, exchanged customary mutual releases of any prior obligations among them. On May 19, 2022, the closing price for the Company’s common stock was $ per share. In the fiscal quarter ending September 30, 2022, the Company measured and recognized the repurchase of its common stock at its fair value of $626,187, derecognized its remaining liability under the Co-Founder’s Agreement, and recognized a recovery of $324,230 in connection with the previously recognized loss related to the Co-Founder’s Agreement. The Company reported the shares of the Company’s common stock in Treasury Stock until the interim period ended September 30, 2023, when it cancelled the stock certificate.
On April 17, 2023, the Company and DSSI, mutually agreed in a subsequent Letter Agreement (the “Second DSSI Letter Agreement”) to a mutual settlement of the interest accrued on the 2022 Note between January 1, 2023, through and including March 31, 2023. In accordance with the Second DSSI Letter Agreement, the Company agreed to issue shares of the Company’s Common Stock, at a price per share of $ in lieu of cash payment to satisfy the accrued and unpaid interest between January 1, 2023, through and including March 31, 2023, equal to $539,806 owed to DSSI under the Second DSSI Letter Agreement. The Company’s shares were trading at $0.0180 on April 17, 2023.
As of September 30, 2023, and March 31, 2023, 376,328,885 shares and shares of our Class A Common Stock remained issued and outstanding, respectively. As of September 30, 2023, and March 31, 2023, there were shares of the Company’s Class B Common Stock outstanding.
On August 31, 2023, the Company and DSSI executed a debt exchange agreement whereby DSSI cancelled the $27 million loan and accepted shares of the Company’s Series D Preferred Stock, $ par value per share (“Preferred D Stock”) in exchange for the cancellation of the $27.0 million loan. Pursuant to the debt exchange agreement, the principal amount together with all unpaid interest, totaling $26,169,367.33 was deemed to be repaid. The holder of Preferred D Stock is entitled to receive dividends in cash valued at a rate of 25% per annum of the operating income of the Company. Any accrued and unpaid dividends shall be payable in cash commencing on August 31, 2024 and continuing each annual anniversary of such date on a perpetual basis.
NOTE 14 - RELATED PARTY TRANSACTIONS
Decentralized Sharing Systems, Inc.
In July 2020, the Company and Heng Fai Ambrose Chan, a Director of the Company, entered into a Stock Purchase and Share Subscription Agreement (the “SPA Agreement”) pursuant to which Mr. Chan invested $ million in the Company and the Company agreed to issue million shares of the Company’s Class A Common Stock and a fully vested Stock Warrant to purchase up to million shares of the Company’s Class A Common Stock at an exercise price of $ per share. Concurrently with the SPA Agreement, Mr. Chan and DSS, then a major shareholder of the Company, entered into an Assignment and Assumption Agreement pursuant to which Mr. Chan assigned to DSS all interests in the SPA Agreement. In July 2020, the Company issued million of its Class A Common Stock pursuant to the SPA Agreement. The Stock Warrant issued pursuant to the SPA Agreement expires on the third anniversary from the issuance date, unless exercised earlier.
In April 2021, the Company and DSSI entered into a Securities Purchase Agreement, pursuant to which DSSI granted a $30.0 million loan to the Company in exchange for: (a) a Convertible Promissory Note in the principal amount of $30.0 million (the “Note”) in favor of DSSI, and (b) a detachable Stock Warrant to purchase up to shares of the Company’s Class A Common Stock, at $0.22 per share. At any time during the term of the Note, all or part of the Note, including the principal amount less unamortized prepaid interest, if any, plus any accrued interest can be converted into shares of the Company’s Class A Common Stock at the rate of $0.20 per share, at the option of the holder. Under the terms of the loan agreement, the Company agreed to pay to DSSI a loan origination fee of $3.0 million, payable in shares of the Company’s Class A Common Stock, with the number of shares to be calculated at the rate of $0.20 per share. In April 2021, Sharing Services issued million shares of its Class A Common Stock to DSSI, including 15.0 million shares in payment of the loan origination fee and million shares in prepayment of interest on a loan for the first year.
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In December 2021, the Company and DSSI entered into a Stock Purchase and Share Subscription Agreement pursuant to which DSSI invested $ in the Company in exchange for million shares of Class A Common Stock (the “Shares”) and stock warrants (the “Stock Warrants”) to purchase up to million shares of the Company’s Class A Common Stock. The Stock Warrants are fully vested, have a term of five () years and are exercisable at any time prior to expiration, at the option of DSSI, at a per share price equal to $. On the effective date of the Stock Purchase and Share Subscription Agreement, the closing price for the Company’s common stock was $ per share and the Company recognized a deemed dividend of $ million in connection with the transaction.
In January 2022, the Company and DSS who, together with its subsidiaries, is currently a major shareholder of the Company, entered into a one-year Business Consulting Agreement (the “Consulting Agreement”) pursuant to which DSS will provide to the Company certain consulting services, as defined in the Consulting Agreement. The Consulting Agreement may be terminated by either party on a 60-day’s written notice. In connection with the Consulting Agreement, the Company agreed to pay DSS a flat monthly fee of sixty thousand dollars ($60,000) and DSS received a fully vested detachable Stock Warrant to purchase up to 50.0 million shares of the Company’s Class A Common Stock, at the exercise price of $0.0001 per share. On the effective date of the Consulting Agreement, the closing price of the Company’s common stock was $ per share and the fair value of the Stock Warrant was $3.5 million. The fair value of the Stock Warrant was amortized into consulting expense over the term of one year. During the three months ended September 30, 2022, the Company recognized consulting expense of $872,603, in connection with the Consulting Agreement. In February 2022, the Company issued million shares of its Common Stock Class A to DSS in connection with exercise of the Stock Warrant.
On September 15, 2022, the Company and 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 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 shares of the Company’s Class A Common Stock, at $0.22 per share, issued concurrently with such $30.0 million note.
On February 3, 2023, the Company mutually agreed with DSS to enter into a Letter Agreement (the “DSS Letter Agreement”), pursuant to which the Company and DSS have agreed to terminate and release all obligations of the Consulting Agreement effective as of December 31, 2022. In accordance with the DSS Letter Agreement, the Company also agreed to issue shares of the Company’s Common Stock in lieu of cash payment to satisfy the accrued and unpaid service fees equal to $700,000 owed to DSS under the Consulting Agreement.
On February 28, 2023, the Company and DSSI mutually agreed in a Letter Agreement (the “First DSSI Letter Agreement”) to a mutual settlement of the interest accrued on the 2022 Note issued by the Company to DSSI. In accordance with the DSSI Letter Agreement, the Company agreed to issue shares of the Company’s Common Stock, at a price per share of $ in lieu of cash payment to satisfy the accrued and unpaid interest through and including December 31, 2022, in the amount of $552,000 owed to DSSI.
On March 24, 2023, the Company, DSS and DSSI, entered into a Securities Exchange and Amendment Agreement (the “Agreement”) pursuant to which the parties agreed to: (1) exchange and surrender of the Assigned 60 million Warrants in exchange for shares of the Company’s Class A common stock; (2) exchange and surrender the Service Warrants of warrants for shares of the Company’s Class A common stock; (3) exchange and surrender the DSSI Warrants; and (4) amend the 2022 Note by removing all conversion rights granted by the 2022 Note in exchange for shares of the Company’s Class A common stock. The Company issued shares of the Company’s Class A Common Stock in full satisfaction, exchange and payment for the exchanges and amendments set forth in the Agreement. 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 as a deemed dividend on the Company’s consolidated financial statements.
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On April 17, 2023, the Company and DSSI mutually agreed in a subsequent Letter Agreement (the “Second DSSI Letter Agreement”) to a mutual settlement of the interest accrued on the 2022 Note between January 1, 2023, through and including March 31, 2023. In accordance with the Second DSSI Letter Agreement, the Company agreed to issue shares of the Company’s Common Stock, at a price per share of $ in lieu of cash payment to satisfy the accrued and unpaid interest between January 1, 2023, through and including March 31, 2023, in the amount of $539,806 owed to DSSI.
On May 4, 2023, DSS and DSSI distributed, in the aggregate, shares of SHRG they then held to DSS, Inc. shareholders in connection with the Form S-1 (file no. 333-271184) initially filed with the Securities and Exchange Commission on April 7, 2023, and declared effective on April 25, 2023. Accordingly, after the distribution, DSS ceased to be a majority shareholder of the Company.
Effective June 30, 2023, subject to the terms of a certain Loan Purchase Contract, Assignment of Note and Liens and Other Loan Documents, and Note Allonge document, DSSI purchased from SHRG a Stemtech promissory note in the amount of $1.4 million, along with all SHRG’s rights in any Stemtech warrants, for a purchase price of $1.1 million, with the financial terms generally summarized as follows: (a) DSSI pays the $1.1 million purchase price by crediting the $27.0 million loan, first to interest and then to principal, and (b) DSSI acquired ownership of certain $1.4 million promissory note payable by Stemtech, free and clear of any liens, and any equity or warrant interest in the Stemtech that SHRG may have held. As of June 30, 2023, as a result of the transaction, the Company no longer has an investment in Stemtech.
On July 1, 2023, the Company and DSSI, entered into a Securities Purchase Agreement, pursuant to which the Company purchased shares of common stock, par value $ per share, (the “Shares”) representing all of the issued and outstanding shares of common stock of HWH World, Inc., a Texas corporation (“HWHW”). The Company purchased the Shares for a consideration of (i) $10 paid immediately in cash, and (ii) up to $711,300 payable from the gross proceeds generated from the sale of HWHW’s inventory, payable quarterly, and as described in detail in the Securities Purchase Agreement.
Effective July 1, 2023, the Company and DSSI cancelled the previously executed Securities Purchase Agreement related to HWHW and replaced it with an Asset Purchase Agreement whereby the Company agreed to purchase the inventory of HWHW as of June 30, 2023 and assumed certain account payable of HWHW as of June 30, 2023. Pursuant to the Asset Purchase Agreement, the Company agreed to pay DSSI a maximum of $757,641.98 from gross proceeds generated from the sale of HWHW inventory.
On July 1, 2023, the Company and DSSI, entered into a Securities Purchase Agreement, pursuant to which the Company purchased shares of common stock, par value $ per share, (the “HWHH Shares”) representing all of the issued and outstanding shares of common stock of HWHH Holdings, Inc., a Texas corporation (“HWHH”). The Company purchased the HWHH Shares for a consideration of (i) $10.00 paid immediately in cash, and (ii) up to $1,210,224 payable from the gross proceeds generated from the sale of HWHH’s inventory, payable quarterly, and as described in detail in the Securities Purchase Agreement.
Effective July 1, 2023, the Company, DSSI and Ascend Management Pte, a Singaporean private limited company (“Ascend Management”) executed an Assignment and Assumption Agreement whereby Ascend Management purchased shares of common stock, par value $ per share, of HWHH, representing all of the issued and outstanding shares of capital stock of HWHH, pursuant to that certain Securities Purchase Agreement made as of July 1, 2023 by and between DSSI and the Company. In connection with the Assignment and Assumption Agreement, the Company and HWHH entered into a business consulting agreement to assist in the management of the business of HWHH.
On August 31, 2023, the Company and DSSI executed a debt exchange agreement whereby DSSI cancelled the $27 million loan and accepted shares of the Company’s Series D Preferred Stock, $ par value per share (“Preferred D Stock”) in exchange for the cancellation of the $27.0 million loan. Pursuant to the debt exchange agreement, the principal amount together with all unpaid interest, totaling $26,169,367.33 was deemed to be repaid. The holder of Preferred D Stock is entitled to receive dividends in cash valued at a rate of 25% per annum of the operating income of the Company. Any accrued and unpaid dividends shall be payable in cash commencing on August 31, 2024 and continuing each annual anniversary of such date on a perpetual basis.
As of September 30, 2023, DSS and its subsidiaries owned, in the aggregate, million shares of the Company’s Class A Common Stock. 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.
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 major 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 September 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 September 1, 2024, is payable in equal monthly instalments of $43,897 commencing on July 1, 2022 (with the remainder due on September 1, 2024). The loan 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 September 17, 2022. APB is a subsidiary of DSS. 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, and Messrs. Chan and Heuszel also serve on the Board of Directors of APB.
On August 11, 2022, the Company executed a revolving credit promissory 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. 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. 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 to $6.0 million.
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As discussed above, effective June 30, 2023 subject to the terms of an Assignment of Limited Liability Company Interests agreement, DSSI purchased the SHRG subsidiary, Linden Real Estate Holdings LLC, with the financial terms generally summarized as follows: (a) DSSI assumed approximately $7.24 million in SHRG liabilities (namely, all amounts due under the APB Loan and the APB Revolving Note), (b) DSSI credited SHRG $239,790 towards accrued interest payable under the 2022 Note (the “$27.0 million loan”), and (c) DSSI acquired ownership of Linden Real Estate Holdings LLC, with its sole asset being a commercial lot and commercial building located in Lindon, Utah, subject to the assumed indebtedness.
HWH International, Inc.
In October 2017, Sharing Services issued a Convertible Promissory Note in the principal amount of $50,000 (the “Note”) to HWH International, Inc. (“HWH” or the “Holder”). HWH is affiliated with Heng Fai Ambrose Chan, who became a Director of the Company in April 2020. The Note is convertible into shares of the Company’s Common Stock. Concurrent with issuance of the Note, the Company issued to HWH a detachable stock warrant to purchase up to an additional 333,333 shares of the Company’s Common Stock, at an exercise price of $0.15 per share. Under the terms of the Note and the detachable stock warrant, the Holder is entitled to certain financing rights. If the Company enters into more favorable transactions with a third-party investor, it must notify the Holder and may have to amend and restate the Note and the detachable stock warrant to be identical. On August 9, 2022, HWH and the Company executed an agreement to settle the Note and cancel the related stock warrant for $78,635, which amount represents the principal plus accrued interest. The Company made the payment to HWH on August 9, 2022.
HWH World, Inc.
A subsidiary of the Company operating in the Republic of Korea subleases office space, on a month-to-month basis, from HWH World, Inc. (“HWH World”), until September 30, 2023, 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 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 September 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 $936 in rent expense 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. The Advisory Agreement was terminated during the three months ended September 30, 2022.
Alchemist Holdings, LLC
In September 2020, the Company and a former Company officer entered into a Settlement Accommodation Agreement and an Amended and Restated Founder Consulting Agreement pursuant to which the Company and the former officer agreed to settle all existing disputes between them, the former officer agreed to continue to provide certain consulting services to the Company, and the Company agreed to pay certain amounts to the former officer. The Company recognized a settlement liability of $2.0 million in connection therewith.
In May 2022, the Company and certain of its subsidiaries, on the one hand, and Alchemist Holdings, LLC, the former officer discussed in the preceding paragraph and certain entities affiliated with the former officer, on the other hand, entered into a Confidential Settlement Agreement with Mutual Releases (the “May 2022 Settlement Agreement”) pursuant to which the parties amicably settled all claims and disputes among them; (b) the former officer sold to the Company shares of the Company’s common stock then under the voting and dispositive control of the former officer; (c) the Company made a one-time payment of $1,043,645; and (d) the Company and its relevant subsidiaries, on the one hand, and the former officer and relevant entities affiliated with the former officer, on the other hand, exchanged customary mutual releases of any prior obligations among them. On May 19, 2022, the closing price for the Company’s common stock was $ per share. In the fiscal year ended March 31, 2023, the Company measured and recognized the repurchase of its common stock at its fair value of $652,278, 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. As of each September 30, 2023, and March 31, 2023, the settlement liability balance is $0.
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Stock Warrants
Stock Warrants Issued to Directors, Officers and Employees
In January 2022, the Company and DSS who, together with its subsidiaries, was then a majority shareholder of the Company, entered into a one-year Business Consulting Agreement (the “Consulting Agreement”) pursuant to which the DSS would provide to the Company certain consulting services, as defined in the Consulting Agreement. In connection with the Consulting Agreement, the Company agreed to pay DSS and flat monthly fee of sixty thousand dollars ($60,000) and DSS received a fully vested detachable Stock Warrant to purchase up to 50.0 million shares of the Company’s Class A Common Stock, at the exercise price of $0.0001 per share. On the effective date of the Consulting Agreement, the closing price of the Company’s common stock was $ per share and the fair value of the Stock Warrant was $3.5 million. The fair value of the Stock Warrant was amortized into consulting expense over the term of one year. During the three months ended September 30, 2023, and 2022, the Company recognized consulting expense of $0 and $872,603 million, respectively, in connection with the Consulting Agreement. In February 2023, the Company issued million shares of its Common Stock Class A to DSS in connection with exercise of the Stock Warrant.
In September 2022, the Company and 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. At any time during the term of the 2022 Note, all or part of the Note was convertible into up to shares of the Company’s Class A Common Stock, at the option of the holder. In connection with the SPA, DSSI surrendered to the Company all DSSI’s rights pursuant to: (a) the Convertible Promissory Note in the principal amount of $30.0 million discussed in the preceding paragraph, and (b) the detachable Warrant to purchase up to 150,000,000 shares of the Company’s Class A Common Stock discussed in the preceding paragraph. In March 2023, the parties entered into a Securities Exchange and Amendment Agreement pursuant to which the parties agreed to amend the 2022 Note by removing the conversion rights granted by the 2022 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 as a deemed dividend in the Company’s financial statements in the fiscal year ended March 31, 2023.
In the fiscal year ended March 31, 2023, the Company issued a fully vested warrant to purchase up to shares of the Company’s Common Stock, at the exercise price of $0.0001 per share, to the Company’s CEO John “JT” Thatch. The fair value of the warrant on the grant date was $109,780.
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.
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During the three months ended September 30, 2023, and 2022, the Company recognized a compensatory gain of $0 and $114,960, respectively, in connection with grants with a variable exercise price after service is completed. As of September 30, 2023, there are no warrants outstanding with a variable exercise price.
NOTE 16 – 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 | September 30, 2023 | March 31, 2023 | |||||||
| Operating leases | Right-of-use assets, net | $ | 426,297 | $ | 448,240 | |||||
| Total lease assets | $ | 426,297 | $ | 448,240 | ||||||
| Liabilities | ||||||||||
| Operating leases | Accrued and other current liabilities | $ | 44,650 | $ | 41,385 | |||||
| Operating leases | Lease liability, non-current | 416,277 | 440,478 | |||||||
| Total lease liabilities | $ | 460,927 | $ | 481,863 | ||||||
The following information pertains to the Company’s leases for the periods indicated:
| Three Months Ended September 30, | ||||||||||
| Lease cost | Classification | 2023 | 2022 | |||||||
| Operating lease cost | General and administrative expenses | $ | 28,289 | $ | 21,831 | |||||
| Operating lease cost | Depreciation and amortization | |||||||||
| Operating lease cost | Interest expense, net | |||||||||
| Total lease cost | $ | 28,289 | $ | 21,831 | ||||||
| Six Months Ended September 30, | ||||||||||
| Lease cost | Classification | 2023 | 2022 | |||||||
| Operating lease cost | General and administrative expenses | $ | 55,823 | $ | 45,009 | |||||
| Operating lease cost | Depreciation and amortization | |||||||||
| Operating lease cost | Interest expense, net | |||||||||
| Total lease cost | $ | 55,823 | $ | 45,009 | ||||||
The Company’s lease liabilities are payable as follows:
| Twelve months ending September 30, | Amount | |||
| 2024 | $ | 49,336 | ||
| 2025 | 100,757 | |||
| 2026 | 103,536 | |||
| 2027 | 106,316 | |||
| 2028 | 109,095 | |||
| Thereafter | 196,441 | |||
| Total remaining payments | 665,481 | |||
| Less imputed interest | (204,554 | ) | ||
| Total lease liability | $ | 460,927 | ||
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NOTE 17 – 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 September 30, 2023.
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. The Plaintiffs filed their Proposed Sufficient Brief of Appellants with the Fifth Circuit on January 2, 2023. The Company filed e a Response Brief on February 22, 2023. The appeal is still pending as of September 30, 2023. |
| (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 entered on October 7, 2022. |
| (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 April 4, 2023, this legal proceeding was settled between the parties. |
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| (d) | 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. On December 30, 2022, the Plaintiffs filed a status report to the Court that a settlement had been reached. On February 2, 2023, the Parties filed a Joint Motion for Dismissal. The Court entered a Dismissal with Prejudice on February 6, 2023. |
| (e) | 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. On April 10, 2023, this legal proceeding was settled between the parties. |
| (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. On April 10, 2023, this legal proceeding was settled between the parties. |
NOTE 18 - 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 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:
| September 30, 2023 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Assets | ||||||||||||||||
| Investment in unconsolidated entities | $ | $ | $ | |||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||
| Liabilities | ||||||||||||||||
| Notes payable | $ | $ | $ | $ | ||||||||||||
| Total liabilities | $ | $ | $ | $ | ||||||||||||
| As of March 31, 2023 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Assets | ||||||||||||||||
| Investment in unconsolidated entities | $ | 206,231 | $ | $ | $ | 206,231 | ||||||||||
| Total assets | $ | 206,231 | $ | $ | $ | 206,231 | ||||||||||
| Liabilities | ||||||||||||||||
| Notes payable | $ | 24,827,086 | $ | $ | 24,827,086 | |||||||||||
| Total liabilities | $ | 24,827,086 | $ | $ | 24,827,086 | $ | ||||||||||
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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 financial condition and the results of operations and cash flows of Sharing Services Global Corporation and consolidated subsidiaries. This section should be read in conjunction with: (a) our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2023, and (b) our condensed consolidated financial statements included elsewhere in this Quarterly Report. This section may contain forward-looking statements. See “Cautionary Notice Regarding Forward-Looking Statements” above for a discussion of forward-looking statements.
Summary Results of Operations:
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
| September 30, 2023 | September 30, 2022 | Increase (Decrease) | % Change | September 30, 2023 | September 30, 2022 | Increase (Decrease) | % Change | |||||||||||||||||||||||||
| Net sales | $ | 2,408,704 | $ | 4,188,152 | $ | (1,779,448 | ) | -42.5 | % | $ | 5,286,825 | $ | 9,491,770 | $ | (4,204,945 | ) | -44.3 | % | ||||||||||||||
| Gross profit | 1,738,901 | 2,428,375 | (689,474 | ) | -28.4 | % | 3,771,193 | 6,074,966 | (2,303,773 | ) | -37.9 | % | ||||||||||||||||||||
| Operating expenses | (2,859,297 | ) | (6,595,518 | ) | 3,736,221 | -56.6 | % | (6,567,857 | ) | (13,904,221 | ) | 7,336,364 | -52.8 | % | ||||||||||||||||||
| Operating loss | (1,120,396 | ) | (4,167,142 | ) | 3,046,746 | -73.1 | % | (2,796,664 | ) | (7,829,255 | ) | 5,032,591 | -64.3 | % | ||||||||||||||||||
| Non-Operating (expense), net | (346,496 | ) | (14,772,836 | ) | 14,426,339 | -97.7 | % | (1,082,484 | ) | (12,803,590 | ) | 11,721,106 | -91.5 | % | ||||||||||||||||||
| Loss before income taxes | (1,466,892 | ) | (18,939,978 | ) | 17,473,086 | -92.3 | % | (3,879,148 | ) | (20,632,845 | ) | 16,753,697 | -81.2 | % | ||||||||||||||||||
| Income tax (benefit) expense | (12,102 | ) | (554,075 | ) | 541,973 | -97.8 | % | - | (893,932 | ) | 893,932 | -100.0 | % | |||||||||||||||||||
| Net loss | $ | (1,454,790 | ) | $ | (18,385,903 | ) | $ | 16,931,113 | -92.1 | % | $ | (3,879,148 | ) | $ | (19,738,913 | ) | $ | 15,859,765 | -80.3 | % | ||||||||||||
Highlights for the Three months ended September 30, 2023:
| ● | For the three months ended September 30, 2023, our consolidated net sales decreased $1.8 million, or 42.5%, compared to the three months ended September 30, 2022. | |
| ● | For the three months ended September 30, 2023, our consolidated gross profit decreased $0.7 million, or 28.4%, compared to the three months ended September 30, 2022. Our consolidated gross margin was 72.2% for the three months ended September 30, 2023, compared to 58% for the three months ended September 30, 2022. | |
| ● | For the three months ended September 30, 2023, our consolidated operating expenses decreased $3.7 million, or 56.6% to 2.9 million, compared to the three months ended September 30, 2022. | |
| ● | For the three months ended September 30, 2023, our consolidated operating loss was $1.1 million, compared to operating loss of $4.2 million for the three months ended September 30, 2022. | |
| ● | For the three months ended September 30, 2023, our consolidated net non-operating expense was $0.3 million, compared to net non-operating income of $14.8 million for the three months ended September 30, 2022. | |
| ● | For the three months ended September 30, 2023, our consolidated net loss was $1.5 million compared to $18.4 million for the three months ended September 30, 2022. For the three months ended September 30, 2023, and 2022, our diluted loss per share was $0.004 and $0.07, respectively | |
| ● | For the six months ended September 30, 2023, our consolidated net cash used by operating activities was $3.0 million, compared to $5.4 million for the six months ended September 30, 2022. |
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| ● | In August 2023, Sharing Services and DSSI entered into a debt exchange agreement pursuant to which DSSI agreed to cancel the $27.0 million note dated June 15, 2022, including the aggregate principal amount of the note and unpaid interest of approximately $26.2 million in exchange for 26,000 shares of Sharing Services Series D Preferred Stock, par value $0.0001 per share. | |
| ● | In September 2023, Sharing Services qualified and is eligible for a U.S. government ERTC (employee retention tax credit) for $1.8 million. Based on this, the Company applied for a bridge loan and received net proceeds of approximately $1.2 million. |
Overview
Summary Description of Business
Sharing Services Global Corporation and subsidiaries (“Sharing Services”, “we,” or the “Company”) aim to build shareholder value by developing or acquiring businesses and technologies that increase the Company’s product and services portfolio, business competencies, and geographic reach.
Currently, the Company, through its subsidiaries, markets and distributes its health and wellness and other products primarily in the U.S. and Canada using a direct selling business model. In addition, the Company’s U.S. subsidiaries market our products and services through an independent sales force, using their proprietary websites, including: www.thehappyco.com.
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, 2023, is incorporated herein by reference.
Strategic Profitable Growth Initiatives
The Company intends to grow its business by pursuing a multipronged growth strategy, that includes: (a) expanding its product offerings, both within the health and wellness category and in new product categories, (b) expanding its direct-to-consumer geographic footprint (primarily in Asia), and (c) launching its previously announced membership-based consumer travel products line worldwide. This growth strategy may also include the use of strategic acquisitions of businesses that augment the Company’s product and services portfolio, business competencies and geographic reach.
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Results of Operations
The Three months ended September 30, 2023, Compared to the Three months ended September 30, 2022
Net Sales
For the three months ended September 30, 2023, our consolidated net sales decreased by $1.8 million, or 42.5%, to $2.4 million, compared to the three months ended September 30, 2022. The decrease in net sales mainly reflects: (a) continuation of the decline in consumer orders that we experienced since 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.
The $1.8 million decrease in consolidated net sales primarily reflects a decrease in the number of comparable product units sold.
During the three months ended September 30, 2023, and 2022, the Company derived substantially all its consolidated net sales from the sale of its health and wellness product line.
Gross Profit
For the three months ended September 30, 2023, our consolidated gross profit decreased by $0.7 million, or 28.4 %, to $1.7 million, compared to the three months ended September 30, 2022, and our consolidated gross margins were 72.2% and 58%, respectively. For the three months ended September 30, 2023, gross margin benefited from a decrease in shipping expenses and promotional pricing, as a percentage of sales.
Selling and Marketing Expenses
For the three months ended September 30, 2023, our consolidated selling and marketing expenses decreased by $1.3 million, to $0.7 million, or 30.8% of consolidated net sales, compared to $2.0 million, or 48.7% of consolidated net sales, for the three months ended September 30, 2022. The $1.3 million decrease in consolidated selling and marketing expenses is due primarily to lower sales commissions of $0.7 million (which reflects the decrease in our consolidated net sales discussed above).
General and Administrative Expenses
For the three months ended September 30, 2023, 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 $2.4 million, to $2.0 million, or 87.9% of consolidated net sales compared to $4.6 million, or 108.8% of consolidated net sales, for the three months ended September 30, 2022. The $2.4 million decrease in consolidated general and administrative expenses was primarily due to lower consulting expense of approximately $1.7 million, and lower employee compensation and compensation-related benefits of $0.9 million due to less headcount year over year.
Interest Expense, Net
For the three months ended September 30, 2023, our consolidated interest expense was $387,907, excluding amortization of debt discount and amortization of deferred financing costs of $1.6 million.
For the three months ended September 30, 2022, our consolidated interest expense was $736,990, excluding amortization of debt discount and amortization of deferred financing costs of $2.6 million, and interest income of $101,981.
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Other Income
For the three months ended September 30, 2023, Sharing Services qualified and is eligible for a U.S. government ERTC (employee retention tax credit) for $1.8 million.
Gain (loss) on employee warrants liability
For the three months ended September 30, 2023, no compensatory gain or loss on employee warrants was recognized. For the three months ended September 30, 2022, $52,875 of compensatory gain on employee warrants was recognized.
Loss on Extinguishment of Debt
In August 2023, Sharing Services and DSSI entered into an agreement pursuant to which DSSI agreed to cancel the promissory note dated June 15, 2022, including the aggregate principal amount of the Note and unpaid interest of $26.2 million in exchange for 26,000 shares of Sharing Services Series D Preferred Stock, par value $0.0001 per share. The Company recognized a loss on extinguishment of debt of $188,842 in connection therewith.
Income Tax (Benefit) Provision
Income tax (benefit) provision includes current and deferred income taxes for both our domestic and foreign operations. Income from our international operations is subject to taxation in the countries in which we operate.
During the three months ended September 30, 2023, the Company recognized a current federal income tax benefit of $3,548, and a state and local tax provision of $85. During the three months ended September 30, 2022, the Company had a state and local tax benefit of $3,294 and a provision for deferred federal income taxes of $550,781.
Net Loss and Loss per Share
As a result of the foregoing, for the three months ended September 30, 2023, our consolidated net loss was $1.5 million, compared to $18.4 million for the three months ended September 30, 2022. For the three months ended September 30, 2023, and September 30, 2022, our diluted loss per share was $0.004 and $0.07, respectively.
Six months ended September 30, 2023, Compared to the Six months ended September 30, 2022
Net Sales
For the six months ended September 30, 2023, our consolidated net sales decreased by $4.2 million, or 44.3%, to $5.3 million, compared to the six months ended September 30, 2022. The decrease in net sales mainly reflects: (a) continuation of the decline in consumer orders that we experienced since 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. In efforts to restore strong sales growth, in the past several months, we 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.
The $4.2 million decrease in consolidated net sales primarily reflects a decrease in the number of comparable product units sold.
During the six months ended September 30, 2023, and 2022, the Company derived substantially all its consolidated net sales from the sale of its Elevate health and wellness product line.
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Gross Profit
For the six months ended September 30, 2023, our consolidated gross profit decreased by $2.3 million, or 37.9%, to $3.8 million, compared to the six months ended September 30, 2022, and our consolidated gross margins were 71.3% and 64%, respectively. For the six months ended September 30, 2023, gross margin benefited from a decrease in shipping expenses and promotional pricing, as a percentage of sales.
Selling and Marketing Expenses
For the six months ended September 30, 2023, our consolidated selling and marketing expenses decreased by $2.6 million, to $2.2 million, or 40.9% of net sales compared to $4.8 million, or 50.5% of net sales for the six months ended September 30, 2022. The decrease in consolidated selling and marketing expenses is due primarily to lower sales commissions of $1.8 million (which reflects decrease in our consolidated net sales discussed above) and lower sales convention expenses of $0.5 million.
General and Administrative Expenses
For the six months ended September 30, 2023, 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 $4.7 million to $4.4 million, or 83% of consolidated net sales compared to $9.1 million, or 96% of consolidated net sales, for the six months ended September 30, 2022. The decrease in consolidated general and administrative expenses was primarily driven by lower professional and legal expenses by $3.1 million, decrease on employee compensation and related benefits by $1.4 million.
Interest Expense
For the six months ended September 30, 2023, our consolidated interest expense was $1.1 million, excluding amortization of debt discount and amortization of deferred financing costs of $2.0 million, and interest income of $290,024.
For the six months ended September 30, 2022, consolidated interest expense was $6.4 million, including amortization of debt discount and deferred financing cost, interest income, and other expenses associated with borrowings from “DSSI” and related parties.
Other Non-operating Income/Expenses
For the six months ended September 30, 2023, our net consolidated non-operating income, includes litigation settlements and other non-operating income of $103,434. For the six months ended September 30, 2022, our net consolidated non-operating income, includes litigation settlements and other non-operating income of $139,798.
Gain (loss) on employee warrants liability
For the six months ended September 30, 2023, no compensatory gain or loss on employee warrants was recognized. For the six months ended September 30, 2022, we recognized a compensatory gain of $167,835.
Loss on Extinguishment of Debt
Effective June 30, 2023, the Company, and DSSI, entered into three transactions whereby such transactions offset certain liabilities through the sale of assets. The Company recognized the transactions as extinguishment of debt of with a gain of $150,634, before income tax, in connection therewith. In August 2023, Sharing Services and DSSI entered into an agreement pursuant to which DSSI agreed to cancel the promissory note dated June 15, 2022, including the aggregate principal amount of the Note and unpaid interest of $26.2 million in exchange for 26,000 shares of Sharing Services Series D Preferred Stock, par value $0.0001 per share. The Company recognized a loss on extinguishment of debt of $188,842 in connection therewith.
For the six-month ended September 31, 2022, no amounts were incurred related to extinguishment of debt.
Income Tax Benefit
During the six months ended September 30, 2023, no amounts were recognized as income tax provision or benefit.
During the six months ended September 30, 2022, the Company recognized a deferred tax benefit of approximately $880,000 and a state and local tax benefit of $12,904.
Net Loss and Loss per Share
As a result of the foregoing, for the six months ended September 30, 2023, our consolidated net loss was $3.9 million, compared to $19.7 million for the six months ended September 30, 2022. For the six months ended September 30, 2023, and September 30, 2022, our diluted loss per share was $0.01 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
Working capital (total current assets minus total current liabilities). We had a deficiency in our working capital of approximately $2.0 million as of September 30, 2023, compared to $33.9 million as of March 31, 2023.
As of September 30, 2023, and March 31, 2023, our cash and cash equivalents were $1.4 million and $3.0 million, respectively. Based upon the current level of operations and anticipated investments necessary to grow our business, we believe that anticipated funds from operations will likely be sufficient to meet our working capital requirements over the next 12 months.
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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 “Short-term Borrowings and Convertible Notes” below) and cash flows from operating activities; and our primary uses of cash have been for operating activities, capital expenditures, acquisitions, net cash advances to related parties, and debt repayments in the ordinary course of our business.
The following table summarizes our cash flow activities for the six months ended September 30, 2023, compared to the six months ended September 30, 2022:
| Six Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Net cash used in operating activities | $ | (2,970,305 | ) | $ | (5,436,809 | ) | ||
| Net cash used in investing activities | - | (11,504,734 | ) | |||||
| Net cash provided by financing activities | 1,200,000 | 6,527,264 | ||||||
| Impact of currency rate changes in cash | 160,759 | (150,122 | ) | |||||
| Decrease in cash and cash equivalents | $ | (1,609,546 | ) | $ | (10,564,401 | ) | ||
Net Cash Used in Operating Activities
For the six months ended September 30, 2023, net cash used in operating activities was $3.0 million, compared to $5.4 million for the six months ended September 30, 2022. The $2.5 million decrease was due to a decline in operating losses of $2.3 million (excluding non-cash items, such as depreciation and amortization, stock-based compensation expense, provision for obsolete inventory losses, amortization of debt discount, unrealized gain (loss) on investments, losses on impairment of investments in unconsolidated entities and notes receivable, and gains on extinguishment of debt), and a change in operating assets and liabilities of $207,021.
Net Cash Used in Investing Activities
For the six months ended September 30, 2023, net cash used in investing activities was $0, compared to $11.5 million for the six months ended September 30, 2022. The $11.5 million change was due to lower capital expenditures.
Net Cash Provided by Financing Activities
For the six months ended September 30, 2023, net cash provided by financing activities was $1.2 million, compared to $6.5 million for the six months ended September 30, 2022. The decrease was due to lower proceeds from loans under promissory notes, net of loan repayments, of $7.5 million. The decrease was partially offset by lower Sharing Services common stock received in connection with a litigation settlement of $1.0 million.
Impact of currency rate changes in cash
For the six months ended September 30, 2023, the impact of currency rate changes in cash was $160,759, compared to negative $150,122 for the six months ended September 30, 2022.
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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
Convertible Notes from Related Parties
Decentralized Sharing Systems, Inc. (“DSSI”)
In April 2021, the Company and DSSI which, together with DSS, Inc., is a major 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. 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. As further discussed below, the Note and the detachable Warrant were redeemed in September 2022.
In September 2022, the Company and 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 was convertible into up to 818,181,819 shares of the Company’s Class A Common Stock, at the option of the holder. In connection with SPA, DSSI surrendered 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.
In March 2023, the Company and DSSI entered into a Securities Exchange and Amendment Agreement pursuant to which the parties agreed to amend the 2022 Note by removing the conversion rights granted by the 2022 Note.
On February 3, 2023, the Company mutually agreed with DSS to enter into a Letter Agreement (the “DSS Letter
Agreement”), pursuant to which the Company and DSS have agreed to terminate and release all obligations of the Consulting Agreement effective as of December 31, 2022. In accordance with the DSS Letter Agreement, the Company also agreed to issue 33,333,333 shares of the Company’s Common Stock in lieu of cash payment to satisfy the accrued and unpaid service fees equal to $700,000 owed to DSS under the Consulting Agreement.
On February 28, 2023, the Company and DSSI mutually agreed in a Letter Agreement (the “First DSSI Letter Agreement”) to a mutual settlement of the interest accrued on the 2022 Note issued by the Company to DSSI. In accordance with the DSSI Letter Agreement, the Company agreed to issue 26,285,714 shares of the Company’s Common Stock, at a price per share of $0.021 in lieu of cash payment to satisfy the accrued and unpaid interest through and including December 31, 2022, in the amount of $552,000 owed to DSSI.
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On April 17, 2023, the Company and DSSI mutually agreed in a subsequent Letter Agreement (the “Second DSSI Letter Agreement”) to a mutual settlement of the interest accrued on the 2022 Note between January 1, 2023, through and including March 31, 2023. In accordance with the Second DSSI Letter Agreement, the Company agreed to issue 28,877,005 shares of the Company’s Common Stock, at a price per share of $0.0187 in lieu of cash payment to satisfy the accrued and unpaid interest between January 1, 2023, through and including March 31, 2023, in the amount of $539,806 owed to DSSI.
On May 4, 2023, DSS and DSSI distributed, in the aggregate, 280,528,500 shares of SHRG they then held to DSS, Inc. shareholders in connection with the Form S-1 (file no. 333-271184) initially filed with the Securities and Exchange Commission on April 7, 2023, and declared effective on April 25, 2023. Accordingly, after the distribution, DSS ceased to be a majority shareholder of the Company.
On August 31, 2023, the Company and DSSI executed a debt exchange agreement whereby DSSI cancelled the $27 million loan and accepted 26,000 shares of the Company’s Series D Preferred Stock, $0.0001 par value per share (“Preferred D Stock”) in exchange for the cancellation of the $27.0 million loan. Pursuant to the debt exchange agreement, the principal amount together with all unpaid interest, totaling $26,169,367.33 was deemed to be repaid. The holder of Preferred D Stock is entitled to receive dividends in cash valued at a rate of 25% per annum of the operating income of the Company. Any accrued and unpaid dividends shall be payable in cash commencing on August 31, 2024 and continuing each annual anniversary of such date on a perpetual basis.
As of September 30, 2023, DSS and its affiliates owned, in the aggregate, 24,821,089 shares of the Company’s Class A Common Stock. 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 Executive Chairman of the Board of Directors of the Company. Mr. Thatch serves as President, CEO and Vice Chairman of the Board of Directors of the Company.
American Pacific Bancorp, Inc.
On September 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 “APB Loan”). The APB Loan bears interest at the annual rate of 8% matures on September 1, 2024, is payable in equal monthly instalments of $43,897 commencing on July 1, 2022 (with the remainder due on September 1, 2024). The loan 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 September 17, 2022. APB is a subsidiary of DSS. 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, and Messrs. Chan and Heuszel also serve on the Board of Directors of APB.
On August 11, 2022, the Company executed a revolving credit promissory 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. 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. 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 to $6.0 million. As of March 31, 2023, the Company had $1,430,459 outstanding under the APB Revolving Note.
Effective June 30, 2023 subject to the terms of an Assignment of Limited Liability Company Interests agreement, DSSI purchased the SHRG subsidiary, Linden Real Estate Holdings LLC, with the financial terms generally summarized as follows: (a) DSSI assumed approximately $7.24 million in SHRG liabilities (namely, all amounts due under the APB Loan and the APB Revolving Note), (b) DSSI credited SHRG $239,790 towards accrued interest payable under the 2022 Note, and (c) DSSI acquired ownership of Linden Real Estate Holdings LLC, with its sole asset being a commercial lot and commercial building located in Lindon, Utah, subject to the assumed indebtedness.
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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 three months ended September 30, 2023, there were no 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.
Contractual Obligations
There were no material changes to our contractual cash obligations during the three months ended September 30, 2023.
Off-Balance Sheet Financing Arrangements
As of September 30, 2023, we had no off-balance sheet financing arrangements.
Inflation
In recent history, inflation has generally been low in the geographies where we operate. However, during the fiscal period covered by this Quarterly Report, the inflation rate in the United States averaged around 4%, primarily as a result of higher energy, housing, and food costs. 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, 2023.
Critical Accounting Estimates
There were no material changes to the Company’s critical accounting estimates or assumptions since March 31, 2023.
Accounting Changes and Recent Accounting Pronouncements
For discussion of accounting changes and recent accounting pronouncements, see Note 3 of the Notes to Condensed Consolidated Financial Statements contained elsewhere in this Quarterly Report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The Company is a Smaller Reporting Company, as defined in Rule 12b-2 of the Exchange Act, and, accordingly, is not required to provide the information called for by this Item.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, as of the end of the fiscal period covered by this Quarterly Report, and concluded that, as of September 30, 2023, 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.
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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.
Changes in Internal Control over Financial Reporting. 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 17, 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, 2023, are incorporated herein by reference.
Item 2. Unregistered Sales of Securities and Use of Proceeds.
(a) Unregistered Sales of Securities
None
(b) Not applicable
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None
Item 3. Defaults Upon Senior Securities.
(a) Not applicable
(b) Not applicable
Item 4. Mining Safety Disclosures.
Not applicable
Item 5. Other Information.
None
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Item 6. Exhibits.
The following exhibits are filed as part of this Quarterly Report unless otherwise indicated:
*Filed herewith
**Furnished 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: November 14, 2023 | ||
| By: | /s/ John Thatch | |
| John Thatch | ||
| President, Chief Executive Officer and Vice Chairman of the Board of Directors | ||
| (Principal Executive Officer) | ||
| Date: November 14, 2023 | ||
| By: | /s/ Anthony S. Chan | |
| Anthony S Chan | ||
| Chief Financial Officer | ||
| (Principal Financial Officer) | ||
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