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Sharing Services Global Corp (SHRG) SEC Filing 10-K Annual Report for the fiscal year ending Thursday, March 31, 2022

Sharing Services Global Corp

CIK: 1644488 Ticker: SHRG
Cover - USD ($)
12 Months Ended
Mar. 31, 2022
Jun. 10, 2022
Oct. 31, 2021
Cover [Abstract]   
Document Type10-K  
Amendment Flagfalse  
Document Annual Reporttrue  
Document Transition Reportfalse  
Document Period End DateMar. 31, 2022  
Document Fiscal Period FocusFY  
Document Fiscal Year Focus2022  
Current Fiscal Year End Date--03-31  
Entity File Number000-55997  
Entity Registrant NameSHARINGSERVICES GLOBAL CORPORATION  
Entity Central Index Key0001644488  
Entity Tax Identification Number30-0869786  
Entity Incorporation, State or Country CodeNV  
Entity Address, Address Line One1700 Coit Road  
Entity Address, Address Line TwoSuite 290  
Entity Address, City or TownPlano  
Entity Address, State or ProvinceTX  
Entity Address, Postal Zip Code75075  
City Area Code(469)  
Local Phone Number304-9400  
Entity Well-known Seasoned IssuerNo  
Entity Voluntary FilersNo  
Entity Current Reporting StatusYes  
Entity Interactive Data CurrentYes  
Entity Filer CategoryNon-accelerated Filer  
Entity Small Businesstrue  
Entity Emerging Growth Companyfalse  
Entity Shell Companyfalse  
Entity Public Float  $ 4,370,560
Entity Common Stock, Shares Outstanding 288,923,969 
Documents Incorporated by Reference [Text Block]Portionsof the Proxy Statement related to the registrant’s 2022 Annual Meeting of Stockholders are incorporated into Part III of this AnnualReport by reference where so indicated  
ICFR Auditor Attestation Flagfalse  
Auditor Firm ID6121  
Auditor NameAnkit Consulting Services, Inc.  
Auditor LocationRanchoSanta Margarita, California  
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-K

 

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the fiscal year ended MARCH 31, 2022
   
  -OR-
   
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the transition period from ___________ to ___________
   
  Commission File No. 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   (I.R.S. Employer Identification No.)
organization)    
     
1700 Coit Road, Suite 290, Plano, Texas   75075
(Address of principal executive offices)   (Zip Code)

 

 

Registrant’s telephone number, including area code: (469) 304-9400

 

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

 

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

Common Stock, $0.0001 par value per share

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined under Rule 405 of the Securities Act. YES ☐ NO

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐ NO

 

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 pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 an 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 Section13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

 

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 October 31, 2021, the aggregate market value of the registrant’s voting and non-voting Common Stock held by non-affiliates of the registrant, based on the closing price for the registrant’s Common Stock, was $4,370,560. As of June 10, 2022, there were 288,923,969 shares of the registrant’s Common Stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Proxy Statement related to the registrant’s 2022 Annual Meeting of Stockholders are incorporated into Part III of this Annual Report by reference where so indicated.

 

 

 

 
 

 

TABLE OF CONTENTS

 

   

Page

 

PART I

 
     
ITEM 1. BUSINESS 1
ITEM 1A. RISK FACTORS 7
ITEM 1B. UNRESOLVED STAFF COMMENTS 17
ITEM 2. PROPERTIES 17
ITEM 3. LEGAL PROCEEDINGS 17
ITEM 4. MINE SAFETY DISCLOSURES 18
     
 

PART II

 
     
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 19
ITEM 6. [RESERVED] 19
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 61
ITEM 9A. CONTROLS AND PROCEDURES 61
ITEM 9B. OTHER INFORMATION 61
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS 61
     
 

PART III

 
     
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 62
ITEM 11. EXECUTIVE COMPENSATION 62
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 62
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 63
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 63
     
 

PART IV

 
     
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 64
ITEM 16. FORM 10-K SUMMARY 65

 

ii
 

 

In March 2021, the Company changed its fiscal year-end from a fiscal year ending on April 30th to a fiscal year ending on March 31st. In this Annual Report, references to “the Company,” “Sharing Services,” “our company,” “we,” “our,” “ours” and “us” refer to Sharing Services Global Corporation (formerly Sharing Services, Inc.) and its consolidated subsidiaries unless otherwise indicated or the context otherwise requires.

 

cautionary notice regarding forward-looking statements

 

Statements in this Annual Report and in any documents incorporated by reference therein 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 Annual Report and in any documents incorporated by reference therein, 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.

 

iii
 

 

PART I

 

ITEM 1. BUSINESS.

 

Sharing Services Global Corporation (“Sharing Services”) 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.

 

In March 2021, Sharing Services changed its fiscal year-end from a fiscal year ending on April 30th to a fiscal year ending on March 31st. In connection with this change, the Company decided not to restate the information reported for prior accounting periods, because: (a) the Company’s businesses are not inherently seasonal, (b) the change in fiscal years did not otherwise materially distort comparability of the Company’s results of operations and cash flows, and (c) the cost to restate the data reported for prior periods outweighs the usefulness of such restated data. Accordingly, the consolidated financial statements included herein reflect the results of operations and cash flows for the fiscal year ended March 31, 2022 (365 days) compared to the eleven months ended March 31, 2021 (335 days). The Company’s Common Stock is traded, under the symbol “SHRG,” in the OTCQB Market, an over-the-counter trading platforms market operated by OTC Markets Group Inc.

 

Our History

 

Sharing Services was originally incorporated under the name Sharing Services, Inc. on April 24, 2015. In December 2017, the Company, through its U.S.-based subsidiaries, launched its Elevate brand of health and wellness products.

 

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

 

In February 2021, the Company rebranded its product offerings under the new marketing banner, “The Happy Co TM,” to capitalize on its vision that Everyone Deserves to be Happy. As part of this business initiative, the Company updated its customer messaging to re-emphasize the Company’s core values, including, among others: “harnessing the power of happiness;” “offering products you love;” “achieving more together;” and “offering products by people, for people.”

 

In June 2021, the Company expanded its geographical footprint, and through its wholly owned subsidiary, commenced operations in the Republic of Korea (South Korea).

 

Strategic 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 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.

 

Key Global Industry and Business Trends

 

We believe the following industry and business trends will provide opportunities for the Company to grow its business in a sustained manner in the future:

 

The Global direct selling industry is strong. According to the World Federation of Direct Selling Associations (“WFDSA”), worldwide industry sales exceeded $179 billion in 2020, with the Americas and Asia accounting for more than $141 billion in sales.

 

Global interest in direct selling is strong. According to the WFDSA, the worldwide direct selling industry salesforce has grown from 114 million in 2016 to 125 million in 2020, an increase of 10%.

 

The U.S. direct selling industry is growing strongly. For example, total industry sales in the U.S. grew from $28.6 billion in 2010 to $40.1 billion in 2020, an increase of 40%, according to the U.S.-based Direct Selling Association (“DSA”).

 

Interest in direct selling in the U.S. has grown in recent years. The number of direct sellers in the U.S. grew from 6.2 million in 2018 to 7.7 million in 2020, an increase of 24%, according to the DSA.

 

Consumer attitudes to direct selling continue to be favorable. The results of a consumer attitude survey released by the DSA show that 80% of consumers consistently gave the direct selling industry a positive rating during the past 10 years.

 

The level of interest in the direct selling industry is high among younger sectors of the population. Over 70% of the people involved in direct selling, in the U.S. and worldwide, were between the ages of 20 and 54, according to the WFDSA and the DSA. By comparison, the U.S. Census Bureau estimates that persons in this age group make up about 46% of the overall 2020 U.S. population.

 

1

 

 

Participation in the industry by women is high. For example, women made up approximately 74% of the people involved in direct selling in 2020, in the U.S. and worldwide, according to the WFDSA and the DSA. By comparison, the U.S. Census Bureau estimates that women make up about 51% of the overall 2020 U.S. population.

 

Wellness products are the largest sector in the industry. Wellness products (such as our Elevate product line), accounted for over 36% of the industry’s sales in 2020, in the U.S. and worldwide, according to the WFDSA and the DSA.

 

The initial costs and business risks in direct selling are relatively lower. According to “2020 Consumer Attitudes & Entrepreneurship Study,” published by the DSA, the required start-up costs and business risks associated with direct selling in the U.S. are lower than those for most competing entrepreneurial business opportunities.

 

Business Segments, Geographic Area Information and Seasonality

 

The Company currently operates in two business segments: (a) the sale of health and wellness products through an independent sales force and (b) the sale of other products and services, including third-party skincare products, and services sold on a subscription basis. During the fiscal years ended March 31, 2022, and 2021, substantially all and approximately 97%, respectively, of the Company’s consolidated sales were from its health and wellness products.

 

During the fiscal years ended March 31, 2022, and 2021, 87% and 94%, respectively, of the Company’s consolidated sales were made to customers and independent contractor distributors located in the United States (the “U.S.”). See Note 19 - “BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION” of the Notes to Consolidated Financial Statements contained in Item 8 “Financial Statements and Supplementary Data” of this Annual Report for more details.

 

While the Company’s business generally is not highly seasonal, sales activity is normally slower during November and December, when many customers and independent contractor distributors in the U.S. traditionally take a holiday break.

 

Competition

 

The health and wellness products industry is highly competitive and growing, and there are few barriers to entering the industry. Our competitors include a wide range of retailers, including traditional retail stores that offer their products in “brick and mortar” outlets and/or online, and e-commerce-based retailers. These retailers include, among other, CVS Health Corporation (Pharmacies), GNC Holdings (a specialty retailer), Target Corporation, The Vitamin Shoppe, Walgreens Boots Alliance (Pharmacies) and Walmart.

 

The direct selling industry is highly fragmented and competitive, and there are few barriers to entering the industry. We compete with other direct selling businesses, including many that have a longer operating history, higher visibility and name recognition, and more financial resources than we do. Among others, these network marketing companies include Amway Corporation, Avon Products, Herbalife Nutrition, Mary Kay, Nature’s Sunshine Products, The Body Shop, Nu Skin Enterprises and Youngevity International.

 

We compete in these marketplaces by emphasizing differentiators such as our access to exclusive products and ingredients, the quality and efficacy of our product offerings, the reliability and convenience of our distribution system, and a personalized customer service experience. We offer products and services that aim to improve the health and happiness of our customers and distributors. In addition, our direct selling business model, provides our independent contractor distributors the opportunity to build wealth by growing and operating of their own distribution business.

 

We also compete with other direct selling organizations in our efforts to attract and retain our independent contractor distributors by emphasizing the strengths of our product line, entrepreneurship and leadership training, a comprehensive sales compensation plan, a strong marketing focus, positive corporate values, and strong management leadership.

 

Competitive Strengths

 

We believe the following competitive strengths differentiate us from our competitors and will help drive our future growth:

 

A strong management team consisting of senior and middle management professionals with significant direct selling industry and global business experience.

 

A strong financial foundation, including cash and cash equivalents of $17.0 million and $12.1 million as of March 31, 2022, and 2021, respectively.

 

An exclusive line of Nootropic products sourced through one or more exclusive strategic partnerships and not available through traditional sales channels.

 

Best in class marketing process that focuses on the nutritional value and/or other health benefits of our health and wellness products.

 

Our ability to offer our industry-exclusive brands directly to consumers using a friendly, highly trained entrepreneurial sales force.

 

Our 30-day, “full customer satisfaction or your money back” product return policy.

 

2

 

 

International Reach

 

During our fiscal year ended March 31, 2022, sales to customers and independent contractor distributors located in the U.S. accounted for approximately 87% of consolidated sales and sales to customers located in Korea were approximately 5%. In addition, the Company distributes its products from the U.S. to customers located in Canada, Australia, New Zealand and other countries.

 

In June 2021, the Company, through its wholly owned subsidiary, commenced operations in the Republic of Korea (South Korea). During our fiscal year ended March 31, 2022, 95% of our sales were denominated in U.S. dollars. Prior to our fiscal year ended March 31, 2022, substantially all the Company’s sales to customers were denominated in U.S. dollars.

 

Our Health and Wellness Product Line

 

The Company launched its current health and wellness product line, under the name Elevate, in 2017. In 2021, we rebranded our products under The Happy Co trademark. The Company’s health and wellness product line consists of Nootropics, natural products aimed at improving the health and happiness of its customers and distributors. We aim to grow health and wellness product offerings by developing, acquiring, and introducing new products and services. In each of the fiscal years ended March 31, 2022, and 2021, substantially all and approximately 97%, respectively, of the Company’s consolidated sales were from its health and wellness products.

 

Key Products

 

We purchase our proprietary and non-proprietary products from independent formulators and manufacturers who specialize in wellness and skincare products. We take pride in our commitment to offer the finest products in the industry, including, but not limited to:

 

Health & Wellness Products

 

Elevate MAX® Happy Coffee – A delicious 100% Arabica coffee drink with a combination of at least five powerful mood-enhancing ingredients and a non-stimulant thermogenic agent, p-synephrine, known to increase the breakdown of fats. When combined with XanthoMax®, Elevate MAX® coffee completes the set of four hormones that are associated with happiness.

 

XanthoMax® Happy Caps – An encapsulated wellness supplement designed to deliver Xanthohumol, a powerful antioxidant, and Turmeric. Xanthohumol is a natural ingredient that helps the body release elevated amounts of Oxytocin, commonly referred to as the “hormone of happiness.” When combined with any of the Company’s functional beverages XanthoMax® completes the set of four hormones that are associated with happiness.

 

Elevate NITRO® Bold Coffee – A delicious 100% Colombian Arabica coffee drink that blooms with a bold, aromatic body and promotes energy, focus, motivation and muscle-pumping nitric oxide using naturally extracted polyphenols. When combined with XanthoMax®, Elevate NITRO® coffee completes the set of four hormones that are associated with happiness.

 

Elevate Smart Coffee™ - A delicious micro-ground, functional coffee drink that contains a proprietary blend of Nootropic ingredients designed to assist with mental clarity, memory and energy. This beverage provides neuro-transmitter hormone creators for three of the hormones associated with happiness. When combined with XanthoMax®, Elevate Smart Coffee completes the set of four hormones that are associated with happiness.

 

KetoCre® Keto Creamer- A delicious Ketogenic creamer designed to support a healthy Keto diet, and a great addition to any weight management program.

 

Choclevate® Happy Chocolate – A delicious, Nootropic-infused hot chocolate drink designed to assist in the elevation of mood, mental focus and energy. A unique combination of natural nootropics delivers the kind of “happy” that doesn’t stop after the delicious taste goes away. When combined with XanthoMax®, Choclevate® completes the set of four hormones that are associated with happiness.

 

Elevate ZEST® Happy + LemonadeA refreshing, potent Nootropic blend with a smooth lemonade twist and a proprietary blend of natural Nootropic ingredients designed to assist with mental clarity, memory, and energy. When combined with XanthoMax®, Elevate ZEST® completes the set of four hormones that are associated with happiness.

 

ElevaciTea® Georgia PeachA flavorful, Southern-style tea that delivers natural Georgia Peach flavor in every sip. ElevaciTea® Georgia Peach is a perfect afternoon pick-me-up with a proprietary blend of Nootropic ingredients designed to assist with mental clarity, memory, and energy.

 

ElevaciTea® Vanilla ChaiA flavorful afternoon pick-me-up, ElevaciTea® Vanilla Chai is a creamy, spiced black tea with a proprietary blend of Nootropic ingredients designed to assist with mental clarity, memory, and energy.

 

Fit & Happy Shake– A high-protein, delicious instant shake available in two flavors: vanilla and mocha. Fit & Happy Shakecombines vitamins with pre and probiotics and is a great way to optimize your weight management regiment.

 

3

 

 

All-in-One Happy Shake– A “birthday cake” flavored shake that combines nutrient-dense fruit and veggies with high-quality protein, antioxidants and plant fiber. This Keto-friendly shake has everything you need to feel great and complement your weight loss regiment.

 

Optimal Probiotic 8™ – A healthy dietary supplement containing eight different strains of beneficial probiotics, prebiotics and postbiotics. A healthy microbiome is essential for weight loss, good mood, deep sleep, productive energy, healthy skin, and a balanced immune system.

 

Extreme Energy Patch – An easy application patch designed to sustain a clear, focused stream of energy throughout the day.

 

Skincare Products

 

Age-Defying Intensive Repair Serum - An age-defying serum that can help you restore the appearance of healthy and glowing skin. Our proprietary Synchronized Peptide ComplexTM has been stabilized through a patented process to deliver outstanding results. This potent serum locks in moisture to help restore the skin’s youthful look.

 

Ultimate Revitalizing Cream - A rich, anti-aging cream that helps illuminate and firm up the skin. Our proprietary Synchronized Peptide ComplexTM has been stabilized through a patented process to deliver outstanding results. This luxurious cream helps the skin retain moisture and improve skin texture, for a firm and radiant looking skin.

 

Sales and Marketing

 

We rely on a direct selling model consisting of independent contractor distributors and on customer referrals to promote and sell a majority of our products. We believe this is an effective selling model since our independent contractor distributors can educate consumers about our products in person, provide testimonials, and provide higher levels of customer support, compared to more traditional selling models. The Company also markets and sells its products and services using its proprietary websites, including: www.elevacity.com and www.thehappyco.com.

 

We provide support to our independent contractor distributors with marketing content, websites, events, and technology. We offer our products online and provide our independent distributors with a virtual online Back Office website. This website is where independent distributors can manage, monitor, and operate their businesses 24 hours a day from any location. In addition, we actively communicate with our independent distributors about new products, price changes, policy changes, recruiting opportunities, sales promotions, and other important matters via electronic mail, by phone and during our sales conventions. Sales conventions are currently held once or twice a year and are attended or viewed digitally by a significant number of our current independent distributors and prospective independent distributors. Each sales convention includes the participation of one or more key personalities, including social media influencers, engaged in promoting our products and services. In addition, each sales convention is attended by members of our executive team, providing an opportunity for our sales force to learn about new business initiatives, new products, and other matters relevant to their businesses.

 

As part of our efforts to protect our customers, distributors, employees, and other business partners during the recent COVID pandemic, in 2020, the Company transitioned its sales conventions to a digital format only. In 2022, the Company resumed holding in-person sales events and conventions when it is safe to do so. The Company anticipates resuming the use of all sales conventions in person in the foreseeable future, as the threat of the health emergency fully subsides.

 

Product Distribution

 

Currently, distribution and delivery of our products in the U.S., Canada, and the southern Pacific region is handled primarily by our distribution center in Addison, Texas. On the other hand, sales, distribution, and delivery of our products in Asia is handled by our South Korean subsidiary.

 

We intend to grow, in part, by also offering and distributing our products to customers in additional geographic areas outside the U.S. As product sales reach critical mass levels, we anticipate expanding distribution of our products by facilities, including facilities operated by independent logistics partners, located outside the U..S.

 

Retail Customers and Independent Contractor Distributors

 

The Company distributes its products through two distribution channels: (1) sales to our retail customers – consumers that buy our products from a distributor or through one of our websites, for personal use and (2) sales to our independent contractor distributors that buy product for resale or for personal use. The Company’s goal is to monitor and grow both sales channels using different strategies. To grow our retail customer base, we offer high-quality, unique products. Our strategy for growing our sales force of independent distributors includes providing a meaningful business opportunity to them, a competitive sales compensation plan, sales incentives, and volume-based bonuses, as further discussed below.

 

Any person may join the Company as a distributor, or Brand Partner, by purchasing a Virtual Business System (“VBS”) for $49.00. This kit includes the training and basic marketing materials which better enables our sales force to sell our products and build their organization. Independent distributors may then purchase products for personal use or to build their sales organization. No product purchases are required upon enrollment.

 

4

 

 

Distributor Agreement and Compensation

 

Our distributors are independent contractors, and the Company does not direct or control their efforts. However, the Company requires its distributors to abide by its policies and procedures, and to comply with all applicable laws and regulations. To become a distributor an individual must affirmatively accept our standard Distributor Agreement as well as our Distributor Policies and Procedures. These documents govern the relationship between the Company and each independent distributor. The Distributor Policies and Procedures outline the scope of permissible marketing activities, and the Distributor Agreement defines the relationship between the distributor and the Company. Our policies and procedures require that our distributors present our products, as well as the business opportunity, both ethically and professionally.

 

We believe that our compensation plan offers our independent distributors an exciting and effective way to earn commissions. All our distributors can earn commissions when they sell our products to their retail customers or their downline independent distributors. Additionally, they can earn commissions when their own personally sponsored distributors (or downline) sell products to end users. There is no limit as to the number of personally enrolled distributors or retail customers that an independent distributor may have.

 

Each distributor begins by purchasing a VBS. The VBS includes the training and basic marketing materials which better enables our sales force to sell our products and build their organization. No commissions or bonuses are paid for enrolling other distributors.

 

Additionally, each month, our top producing distributors may also earn commission based on the sales levels achieved by such distributor and his/her downline. This bonus commission is designed to compensate them for mentoring, training, and developing the distributors in their downline.

 

The Company’s compensation plan is designed to promote customer acquisition and retention. The Company provides a back-office website for our independent distributors to use in their ecommerce sales, but an affiliate may also sell directly to their customers.

 

We rely upon our independent distributors to create customer demand and sales. We believe our plan is successful in helping to attract and motivate our sales force and key industry leaders. Please see ITEM 1A. – “RISK FACTORS” – “The dependence of some of our subsidiaries upon a direct selling business model to sell our products, and the highly competitive and dynamic nature of the direct selling industry” and “Our subsidiaries’ ability to attract and retain independent distributors; the ability of a distributor to successfully perform his or her role; and the potential adverse impact of the loss of a high-level distributor or a significant number of distributors for causes out of our subsidiaries’ control” below for more information.

 

Full Customer Satisfaction Product Return Policy

 

If a consumer is not completely satisfied with the products they purchased, we offer a full refund, or exchange of the product, for items returned within 30 days from the date of purchase. For products purchased by our independent distributors, we also offer a generous product return policy that allows our distributors to get full credit for unopened and resalable items returned for up to 30 days from the date of purchase, generally subject to a customary restocking fee.

 

Trademarks and Other Intellectual Property

 

We have obtained 22 trademark registrations issued by the United States Patent and Trademark Office. We anticipate obtaining additional U.S. trademark registrations in the future, in connection with the 34 applications presently pending.

 

In addition, we intend to file for trademark protection in jurisdictions outside the U.S. where we market and distribute or intend to market and distribute our products, including, among others, in Canada, Australia, New Zealand, South Korea, Singapore, Malaysia, Japan, Thailand, and the Philippines. Trademark protection is increasingly important to our growing business.

 

Several of our products are manufactured under formulations and processes owned by some of our key vendors. Some of our key vendors have registered or applied for patent registrations to maintain exclusivity over the ingredients, formulation and processes, and the integrated products they supply to us. Such potential patents, the underlying ingredients, formulation and processes, and integrated products are material to the Company’s business. The Company reserves the right to join in any future actions to defend against any infringement on such patents that could adversely affect the products the Company sells. If our vendors and us were unsuccessful in protecting such intellectual property rights, this could have a material adverse effect on our business. Please see ITEM 1A. – “RISK FACTORS” – “Our dependence on one supplier for a substantial portion of the products we sell and the potential for material disruptions in our supply chain or potential increases in the prices of the products we purchase beyond what we can pass along to our customers” below for more information.

 

To protect our own intellectual property and proprietary processes that are material to the long-term health and profitability of the Company, we maintain disciplined business practices to manage trade secrets and use various forms of confidentiality and non-disclosure agreements. We consider trademark protection to be very important to our business and utilize an internal compliance team to closely monitor the usage of our intellectual property. Please see ITEM 1A. – “RISK FACTORS” – “The success of our efforts to register our trademarks and to protect certain intellectual property rights” below for more information.

 

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Strategic Supply Chain Partnerships

 

We strive to maintain positive relationships with key business partners to ensure the continuous manufacturing, supply, and quality of our products. In the fiscal year ended March 31, 2022, and 2021, product purchases from one supplier accounted for 64% and 99%, respectively, of our product purchases. Please see ITEM 1A. – “RISK FACTORS” – “Our dependence on one supplier for a substantial portion of the products we sell and the potential for material disruptions in our supply chain or potential increases in the prices of the products we purchase beyond what we can pass along to our customers.”

 

We intend to grow, in part, by also offering and distributing our products to customers in geographic areas outside the U.S. As product sales reach critical mass levels, we anticipate expanding manufacturing and distribution of our products by facilities, including facilities operated by independent logistics partners, located outside the U.S.

 

Regulatory Environment

 

Our business is regulated by various federal, state, and local governmental agencies in the U.S. and by similar agencies in Canada and other jurisdictions in which we market and sell our products. These laws and regulations are related to: (a) the manufacturing, labeling, distribution, and sale of our products; (b) product claims and advertising; and (c) our network marketing program.

 

Regulation of Direct Selling Activities

 

In the United States, direct selling programs are subject to a variety of federal and state regulations governed by the United States Federal Trade Commission (the “FTC”) or a similar state agency. These regulations are generally intended to protect consumers from fraudulent or deceptive sales practices. They also ensure that product sales are made to the ultimate consumers and that compensation within the organization is made based upon actual sales transactions, rather than upon recruitment into the organization.

 

The Company monitors and, if necessary, responds to regulatory developments that may adversely affect its network marketing program. We believe the Company is in material compliance with all applicable laws and regulations relating to direct selling activities in the United States and other countries where we operate.

 

Regulation of Personal Care and Nutritional Food Products

 

Personal care and nutritional food products (including the products we sell) and certain related marketing and advertising practices are subject to governmental regulation by various federal, state, and local government agencies and other authorities in the U.S., Canada, and other jurisdictions where we market and distribute or intend to market and distribute our products in the future. These agencies and authorities include the U.S. Food and Drug Administration (the “FDA”), the FTC, the Consumer Product Safety Commission, the U.S. Department of Agriculture, and various similar state and Canadian regulatory agencies. To date, we have not experienced any governmental actions related to health or safety, or food and drug regulations regarding our products.

 

The FDA regulates both finished dietary supplement products (including health and wellness products such as ours) and dietary ingredients. Dietary supplements are specifically regulated under the Dietary Supplement Health and Education Act of 1994 (the DSHEA). Under the DSHEA, manufacturers and distributors of dietary supplements are prohibited from marketing products that are adulterated or misbranded. Generally, such regulations apply prior to a product reaching the market. Once a product reaches the market, the FDA is responsible for taking enforcement action against any product found to be an adulterated or misbranded dietary supplement. Unlike medications, dietary supplements and dietary ingredients, such as those sold by the Company, do not require FDA approval before such products can be marketed and sold.

 

The FTC, which enforces consumer protection laws regarding truth in advertising, and similar state and foreign agencies regulate how we advertise and market our products. The U.S. Consumer Product Safety Commission, and similar state and foreign agencies, seek to protect the public from unreasonable risks of injuries or death associated with consumer products. In the U.S., Canada and other jurisdictions where we operate, our products are also subject to laws and regulations concerning product formulation, labeling and packaging. These laws and regulations often require us to, among other things, conform product labeling to local language and content description requirements, register or qualify the products with the applicable government authorities, or obtain approvals or file required notifications prior to marketing such products within certain jurisdictions. Many of the jurisdictions where we operate also regulate product capability claims and advertising content. These regulations control the type of claims and representations that can be made regarding the capabilities of products. For example, in the United States, it is unlawful to make claims that nutritional supplements will help diagnose, cure, mitigate, treat, or prevent disease. Please see ITEM 1A. – “RISK FACTORS” – “Our ability to comply with current consumer product laws and regulations or our becoming subject to new or more stringent consumer product laws and regulations in the future” below for more information.

 

6

 

 

Employees

 

As of March 31, 2022, and 2021, the Company employed 68 and 76 persons, respectively, as follows:

 

Location  2022   2021 
United States   58    68 
Asia   10    8 
Total   68    76 

 

The amounts above do not include the Company’s approximately 13,000 distributors who are independent contractors. Our employees are not represented by labor unions. We believe that our relationship with our employees is positive, and we do not expect a shortage in qualified personnel to continue our business growth.

 

Access to Public Filings

 

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and any amendments to such reports, are available to any person, without charge, upon written request to our Investor Relations Department at 1700 Coit Road, Suite 290, Plano, Texas 75075. You may also access copies of such reports, and other information about the Company, by visiting our corporate website: www.shrginc.com.

 

In addition, the SEC maintains a website that contains any reports and other information that we file with the SEC: www.sec.gov.

 

ITEM 1A. RISK FACTORS

 

Our operations and financial results are subject to various risks and uncertainties, including those described below, that could adversely affect our business, financial condition, results of operations, and cash flows. If any of these events occurs, the market price of our Common Stock could decline, and you could experience the loss of all or a portion of the value of your investment in our Common Stock. You should not draw any inference about the relative magnitude or relevance of any particular risk from its position in the following discussion.

 

A - Risks Associated with the Direct Selling Business Model:

 

The dependence of some of our subsidiaries upon a direct selling business model to sell our products, and the highly competitive and dynamic nature of the direct selling industry.

 

Our subsidiaries operating in the direct selling industry market and distribute our products and services through a sales force of independent contractor distributors. The distribution of our products and services depends upon their continued efforts to recruit, train, and retain qualified and effective independent distributors. The success of their efforts to recruit and retain distributors may be affected by the competitive environment among direct-to-consumer companies, the conditions of the general labor market, including levels of employment, the occurrence of demographic and cultural changes in the workforce, and the extent to which their brand is recognized in the geographies in which they operate. There can be no assurance that our subsidiaries will be successful in recruiting and retaining enough independent distributors to grow their business worldwide.

 

The direct selling industry worldwide is highly competitive and dynamic, and generally there are few barriers to entering the industry. In addition, the sale of health and wellness products by direct selling industry participants, online resellers, and others is highly competitive. There are several companies, including many with more resources than the Company, that offer competing health and wellness products. The primary competitive factors for health and wellness products are (a) price; (b) the quality, perceived value, brand recognition and package appeal of the product; (c) the skills and effectiveness of the independent distributor and customer service staff interacting with the customer or potential customer; and (d) the continuous availability of enough product to fulfill orders promptly. There can be no assurance that our subsidiaries will remain competitive or that competition in the industry will not intensify.

 

If our subsidiaries do not remain competitive and promptly and effectively respond to increased competition, including competition for independent distributors, and to marketplace changes in the future, future sales of our products and services could decline. This could have a material adverse effect on our consolidated financial condition, results of operations and cash flows.

 

7

 

 

Our subsidiaries’ ability to attract and retain independent distributors; the ability of a distributor to successfully perform his or her role; and the potential adverse impact of the loss of a high-level distributor or a significant number of distributors for causes out of our subsidiaries’ control.

 

Our subsidiaries operating in the direct selling industry depend on the skills and marketability of their independent distributors to promote their brand and to market and distribute our products and services. The direct selling industry generally experiences a relatively high rate of salesforce turnover and is very competitive. The success of our subsidiaries’ efforts to recruit and retain distributors may be affected by the competitive environment among direct-to-consumer companies, the conditions of the general labor market, including levels of employment, the occurrence of demographic and cultural changes in the workforce, and the extent to which our subsidiaries’ brand is recognized in the geographies in which they operate. Our subsidiaries’ inability to attract and retain qualified distributors in the future, the inability or failure of a distributor to fulfill his or her role, including his or her role to comply with all laws and regulations applicable to direct-to-consumer sales activities, the ineffectiveness of a distributor as a spokesperson for our subsidiaries’ brand and products, or the loss of a high-level distributor or a significant number of distributors for causes out of their control may adversely affect future sales of our products and services. This could have a material adverse effect on our consolidated financial condition, results of operations and cash flows.

 

Changes to our subsidiaries’ sales compensation plan could be negatively perceived by members of their independent sales force, could fail to achieve the desired long-term goals, and could adversely impact future sales.

 

Some of our subsidiaries operating in the direct selling industry modify aspects of their sales compensation plan from time to time in efforts to keep their sales compensation plan competitive and attractive to their existing and future sales force, to address changing market conditions, to provide incentives that they believe will help grow their business, and to ensure conformance with evolving government regulations, among other reasons. In addition, our subsidiaries may be required to modify their sales compensation plan from time to time to comply with existing or new regulations in the future, including in response to potential governmental enforcement action. Changes to our subsidiaries’ sales compensation plan, including changes perceived to reduce sales commissions earned by their independent sales force, could be negatively received by their sales force, could fail to achieve the desired long-term goals, and could adversely impact future sales. This, in turn, could adversely affect our consolidated business, financial condition, results of operations and cash flows.

 

Certain of our subsidiaries may be held responsible for certain taxes or assessments relating to the activities of their independent distributors.

 

The success of our subsidiaries operating in the direct selling industry depends on the effective use of an independent sales force to market and distribute our products and services. Our subsidiaries’ business activities and the activities of their independent distributors are subject to various local, state, and national laws and regulations and, in some instances, governmental agencies may seek to impose on our subsidiaries an obligation to collect taxes, such as sales or value-added tax, to maintain appropriate tax records, or to otherwise ensure compliance with local, state, or national laws and regulations by their distributors. In addition, some jurisdictions may challenge a company’s classification of its distributors as independent contractors and seek to make the company pay additional compensation to its distributors or seek to make the company responsible to withhold and remit payroll and similar taxes with respect to compensation paid to its distributors or with respect to the activities of its distributors. For example, in 2020, the State of California passed legislation which seeks to expand the classification of employees. Other states and other jurisdictions where we operate, now or in the future, may pass similar laws or interpret existing laws, rules, and regulations to expand the classification of employees. Although the California legislation provides an exemption for direct sellers, such as the Company’s subsidiaries operating in the direct selling industry, there can be no assurance that other jurisdictions where we operate now or in the future will provide a similar exemption or that judicial or regulatory authorities will not assert interpretations of law that would mandate that we change our classification. In the event that any governmental agency challenges the classification of our subsidiaries’ distributors as independent contractors or otherwise seeks to make our subsidiaries responsible to withhold and remit payroll or other taxes in connection with the activities of their independent distributors, we may incur significant costs and expenses to defend us and our subsidiaries from such actions, with no assurance that we will prevail, and our subsidiaries may ultimately be held responsible for such taxes in those jurisdictions in the future. The occurrence of any of these conditions could have a material adverse effect on our consolidated business, financial condition, results of operations and cash flows.

 

Civil or governmental challenges to our subsidiaries’ direct selling system or independent distributor policies could harm our business.

 

The direct-to-consumer industry is subject to extensive governmental scrutiny, including as a result of various national, state, and local laws and regulations. For example, in the U.S., the FTC has actively warned several direct selling companies, and the industry as a whole, about certain business practices associated with direct selling and has entered into settlements with several direct selling companies that required those companies to modify their compensation plans and business models. Those settlements resulted from FTC enforcement actions involving a variety of alleged violations of consumer protection laws, including allegations of earnings potential misrepresentations and challenges about the legal validity of the distributor compensation plans and business models. Elements of the network marketing system or distributor policies of some of our subsidiaries may also be challenged by third parties, including their independent distributors, by competing direct-to-consumer companies, and by others.

 

In the countries where we operate, the direct selling industry relies on the implementation of distributor rules and policies designed to protect consumers, prevent inappropriate sales activities and marketing practices, and distinguish between legitimate direct selling distribution systems and unlawful pyramid schemes. We and our subsidiaries have adopted formal rules and policies that we believe are consistent with best domestic and global direct-to-consumer industry standards. The laws and regulations covering the direct selling industry, however, often involve a high level of subjectivity and are subject to judicial interpretation. Because of this, there can be no assurance that elements of our subsidiaries’ network marketing system, including representations made by their independent distributors, or elements of their distributor policies will not be challenged in civil or governmental actions, or that the application and interpretation of laws or regulations governing the direct-to-consumer industry in the future would not be harmful to our subsidiaries’ business. The occurrence of any of these conditions could have a material adverse effect on our consolidated business, financial condition, results of operations and cash flows.

 

8

 

 

B – Risks Associated with our Growing Business:

 

The success of our growth initiatives, including our efforts to attract new customers, build brand awareness, and expand into international areas, and our efforts to generate recurring customer orders, which we call “SmartShip” orders.

 

Our long-term success is dependent on our ability to achieve sustained growth. We are a developing company and had no significant sales history prior to December 2017, when our U.S.-based subsidiaries launched their Elevate health and wellness product line. During the period from December 2017 through October 2019, our consolidated sales increased at a fast pace. During the following three years, however, we have experienced sales declines or stagnation. In efforts to restore growth, in the fourth quarter of our fiscal year ended March 31, 2021, we launched a multipronged growth strategy intended to accelerate sales growth, including by: (a) expanding our product offerings in the U.S., (b) initiating operations in countries like South Korea, Singapore, Malaysia, Japan, Thailand, and the Philippines, among others, and (c) launching our previously announced membership-based consumer travel products line worldwide. In addition, we have made significant investments in developing and launching a new business brand, “The Happy Co.,” in February 2021, in the U.S. There can be no assurance that these strategic initiatives will result in the consolidated sales growth we anticipate, or any sales growth at all, which could have a material adverse effect on our consolidated business, financial condition, results of operations and cash flows.

 

Our ability to anticipate and effectively respond to changes in consumer preferences and buying trends in several countries in a timely manner.

 

Our success depends in part on our ability to anticipate, evaluate, and respond in a timely manner to changes in consumer preferences and buying trends, particularly for health and wellness products, in the countries we operate. We anticipate that continuously changing consumer preferences and buying trends will affect future worldwide demand for health and wellness products, and other consumer products and services. If we do not effectively identify and respond in a timely manner to evolving consumer preferences and buying trends, including consumer demands for health and wellness products and services, our consolidated business, financial condition, results of operations and cash flows may be adversely affected.

 

Our ability to maintain a positive image and brand acceptance in the dynamic, highly competitive, and sometimes unpredictable marketplace, including the impact of social media.

 

In recent years, there has been a significant increase in the use by businesses of social media platforms, including informal blogs, social media websites, and other forms of internet-based communications. Social media can enable a business to reach a wide selection of consumers and other targeted audiences, generally in a more cost-effective way than more traditional forms of marketing and advertising. However, negative, inaccurate, or false information about a company or the products it sells may be circulated through social media quickly and may damage a company’s reputation and business. In addition, negative, inaccurate, or false information about a company or the products it sells may be circulated through more traditional communication means. Many consumers and independent distributors of direct-to-consumer companies value readily available information and often act on such information without further investigation. The harm caused by the circulation of negative, inaccurate, or false information about a company or its products may be immediate, and opportunities to redress and correct the information may be slow and costly. If we were the victim of allegations, or the dissemination of negative, inaccurate, or false information, circulated through social media or otherwise, this could adversely impact our reputation and business and could result in the loss of independent distributors and in a decline in our future sales.

 

The Company also uses social media platforms, including Facebook and Instagram, to communicate with existing and prospective customers, independent distributors, vendors, and employees, and to otherwise promote its products and services. Laws and regulations intended to govern the use of the Internet and social media platforms are complex and evolving. If we, our employees, our subsidiaries’ independent distributors, or other third parties acting on our behalf were found to be in violation of any of these laws and regulations, this could result in fines and enforcement actions and adversely impact our reputation and business.

 

The occurrence of any of these conditions could have a material adverse effect on our consolidated business, financial condition, results of operations and cash flows.

 

Our dependence on one merchant processor for a material portion of our sales proceeds.

 

The availability of merchant processing providers willing to serve smaller companies is limited. Substantially all our credit card sales in the U.S. are processed by one merchant processor. In addition, as of March 31, 2022, and 2021, our accounts receivable balance includes $1.5 million due from a single merchant processor. Any disruption in the operations of this merchant processor, as a result of organized labor disputes, natural disasters, acts of cyberterrorism or otherwise, could disrupt or substantially decrease our cash flows from operation. If this occurred, particularly for an extended period, we may not be able to meet our obligations, including servicing our debt now or in the future. The occurrence of any of these conditions could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

9

 

 

Our long-term success depends on our ability to attract and retain talented employees and management, and to develop effective management succession plans.

 

As a growing business, our long-term success depends in large part on our ability to attract and retain talented employees and senior executives who have strong knowledge, experience, and managerial skills, including in the direct selling industry. From time to time, key employees may retire or otherwise leave our business, and we may experience delays or be unsuccessful in attracting and integrating the new staff required to grow and operate our business profitably. In addition, as a growing company with a relatively limited number of executives currently on staff, our ability to develop effective management succession plans is limited. Effective management succession planning is important to our long-term success because failure to effectively transfer knowledge and to complete a smooth management transition could hinder or disrupt our strategic planning initiatives and/or adversely affect future execution of those initiatives and our performance. The occurrence of any of these conditions could have a material adverse effect on our consolidated business, financial condition, results of operations and cash flows.

 

Our ability to effectively manage and control our operating expenses.

 

We are a growing company and have not achieved sustained growth and profitability. Our ability to consistently generate earnings from operations depends in large part on our ability to successfully control our operating costs and expenses, while we continue to invest in strategic initiatives intended to grow our sales volume and business infrastructure, including our international footprint. In furtherance of this goal, we have intensified our ongoing activities to control operating costs and expenses, including by strengthening our financial management processes. There can be no assurance that our strategic initiatives and cost control efforts will result in the levels of profitability and positive cash flows that we expect, if at all, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

Our quarterly and annual financial performance and potential fluctuations therein.

 

Our quarterly and annual financial performance may fluctuate and adversely affect the price of our Common Stock, often for causes outside of our control. For example, consumer demand for our products and services and, as a result, our quarterly and annual consolidated sales levels, may increase or decrease materially, among other things, because of changes in actual or anticipated levels of employment, changes in the interest rates applicable to consumer credit cards, inflation, national or local political uncertainty, increased competition, and changes in consumer sentiment in general in the countries where we operate. In addition, our results of operations and cash flows may decrease because of, among other things, potential increases in our product costs beyond that which we can pass along to our customers, changes in the willingness or ability of our suppliers to provide product to us in a timely manner, increases in labor costs and in payroll tax rates, and changes in the regulatory environment in the countries where we operate. The occurrence of any of these conditions could have a material adverse effect on our quarterly financial performance and adversely affect the price of our Common Stock.

 

Our ability to generate sustained positive cash flows from operations or to obtain additional financing, if needed, with which to fund our working capital needs, including servicing or refinancing our debt, now and in the future.

 

We are a developing company and have not consistently generated sustained positive cash flows from operations. We have experienced significant fluctuations in our operating cash flows, or have otherwise depended on the issuance of equity securities and debt, including convertible notes and short-term borrowings under financing arrangements, in order to meet our working capital needs. For example, during the fiscal year ended March 31, 2022, and 2021, our net cash used in operating activities was $15.1 million and $1.6 million, respectively. If the Company is unable to generate sustained positive cash flows from operations or to obtain additional equity or debt financing, if needed, this could inhibit the Company’s ability to implement its business strategies and to grow its business, service its debt, now or in the future, and otherwise meet its business goals. This could, in turn, have a material adverse effect on its financial condition, results of operations and cash flows.

 

10

 

 

Our financial performance could be adversely affected by economic downturns, particularly over an extended period.

 

Our results of operations may be materially impacted by changes in general economic conditions in the countries where our products are sold. The economies in such countries may be adversely affected by changes in government policy and/or by, among other things, changes in levels of employment, changes in tax laws, increases in energy costs, geopolitical conflict, natural disasters or acts of terrorism, widespread health crises, changes in consumer credit card interest rates, inflation, and changes in consumer sentiment in general. For example, as further discussed below, business activity in several sectors of the global economy were severely reduced because of the recent COVID pandemic. These conditions, in turn, resulted in significant economic contraction in countries where we operate. In the event of a significant economic downturn, particularly over an extended period of time, whether as a result of a similar health crisis or otherwise, consumer spending habits could be adversely affected over a longer term, and we could experience lower than expected sales. Any economic downturn could also adversely affect one or more of our key suppliers. The occurrence of any of these events could have a material adverse effect on our business, financial condition, and results of operations.

 

Our business and financial performance could be adversely affected by inflation.

 

In recent history, the inflation has generally been low in the geographies where we operate. However, at the time of this Annual Report, the inflation rate in the United States has reached a 40-year high, primarily as a result of higher energy costs and global supply chain disruptions. In the event of a significant increase in consumer prices, particularly over an extended period of time, consumer demand for discretionary products, such as our health and wellness products, could be adversely affected, and we could experience lower than expected sales. In addition, if any of our suppliers implemented price increases, in response to higher raw material, labor, and energy costs or otherwise, we may not be able to pass along such price increases to our customers and our profitability may be reduced. The occurrence of any of these events could have a material adverse effect on our business, financial condition, and results of operations.

 

The success of our efforts to register our trademarks and to protect certain intellectual property rights.

 

We have applied for, or are in the process of applying for, trademark protection in the U.S. and in other jurisdictions where we market and distribute or intend to market and distribute our products. We have obtained 22 trademarks and have over 34 pending trademark applications in the U.S. We anticipate securing additional U.S. trademarks and foreign trademarks. Trademark protection is increasingly important to our business. If we fail to register or enforce our intellectual property rights or if our intellectual property rights are successfully challenged, this could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

Several of our products are manufactured under formulations and processes owned by some of our key vendors. Some of our key vendors have registered or applied for patent registrations to maintain exclusivity over the ingredients, formulation and processes, and the integrated products they supply to us. Such existing or potential patents, the underlying ingredients, formulation and processes, and integrated products could be material to our business. The Company reserves the right to join in any actions to defend against any infringement on such vendor-owned patents that could adversely affect the products the Company sells. If we, and our vendors were unsuccessful in protecting such intellectual property rights, this could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

Our potential unintended infringement on the intellectual property rights of others.

 

The health and wellness industry is competitive and characterized by the need for trademarks to protect intellectual property rights, and by claims of infringement or other violation of intellectual property rights. A third-party may assert that one or more of our products violates that party’s intellectual property rights. Any successful intellectual property claim against us in the future could result in significant financial liability and/or prevent us from selling the affected product afterwards. In addition, the resolution of infringement claims may require that we redesign our products, obtain licenses to use intellectual property belonging to a third party, or cease using the intellectual property altogether. Moreover, any intellectual property claim, regardless of its merits, could be expensive and time-consuming to defend against. As a result, claims based on allegations of infringement or other violations of intellectual property rights, regardless of the outcome, could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

From time to time, we are a party to lawsuits and other claims that may result in adverse outcomes.

 

In recent years, we have been a party to several claims and lawsuits arising from a wide variety of business activities, including acquisition-related contingencies, disputes between the Company and certain former officers, disputes between the Company and certain shareholders, and disputes between the Company and former independent distributors. Litigation and other claims are subject to inherent uncertainties and management’s assessment of these uncertainties may change in the future, including as a result of new information. A material adverse impact to our consolidated financial position and results of operations could occur in a period in which an unfavorable outcome becomes probable and reasonably estimable, and a material adverse cash flow could occur in the period when these lawsuits or claims are settled.

 

11

 

 

Our efforts to expand into foreign markets will increasingly expose us to foreign currency exchange rate fluctuations, and other risks inherent to foreign operations.

 

During the fiscal year ended March 31, 2022, and 2021, 87% and 94%, respectively, of our sales have been to customers and independent distributors located in the United States. However, as part of our strategic growth initiatives, in recent years we initiated efforts to expand our operations in other countries, mainly in Asia. As a result, the amount of our reported consolidated sales, expenses, and cash flows may be significantly affected by fluctuations in the relevant foreign currency exchange rates, as we translate the financial statements of our foreign operations from their functional currency into our reporting currency, the U.S. Dollar. In addition, as a multinational consolidated group, we and some of our domestic or foreign affiliates may obtain and hold assets and liabilities denominated in a currency different from our or their functional currency, in the normal course of business. As a result, we and some of our affiliates may incur foreign currency transaction gains and losses in connection with such assets and liabilities.

 

Our business may also become exposed to more adverse economic, regulatory, and other conditions in the international areas to which we market and distribute our products now or in the future, compared to those in the U.S. For example, our future international operations may result in exposure to more restrictive consumer safety, product labeling and other consumer product regulations; more restrictive labor laws and regulations; more frequent or unexpected changes in the regulatory environments; more economic volatility; higher rates of inflation; or higher political instability, compared to the U.S. Furthermore, our international operations may expose us to higher consolidated income tax rates, import and export restrictions and tariffs, restrictions on the expatriation of cash to the U.S., and potentially adverse changes in trade agreements between the U.S. and a particular foreign country where we market and distribute our products now or in the future.

 

The occurrence of any of these conditions could have a material adverse effect on our future business, financial condition, results of operations and cash flows.

 

Our ability to respond to any natural disasters, epidemics, and other health emergencies, or acts of violence or terrorism that may affect our customers and/or our business effectively and cost-efficiently.

 

The occurrence of natural disasters, epidemics or other health emergencies, or acts of violence or terrorism in the geographies we market and distribute our products now and in the future, could result in physical damage to our property, the temporary or long-term closure of a facility, the temporary or long-term disruption in the supply of products (or a substantial increase in the cost of those products) to us, the temporary or long-term reduction in our ability to sell products and grow our business, and/or the temporary reduction in consumer demand for our products and services. In addition, if one or more natural disasters, epidemics, or other health emergencies, or acts of violence or terrorism were to impact our global business, our insurance costs may rise significantly afterwards. The occurrence of any of these conditions could have a material adverse effect on our financial condition, results of operations and cash flows.

 

C – Risks Associated with our Products, and with Product and Consumer Laws and Regulations:

 

Our dependence on one supplier for a substantial portion of the products we sell and the potential for material disruptions in our supply chain or potential increases in the prices of the products we purchase beyond what we can pass along to our customers.

 

We depend on one supplier for a significant portion of the products we sell. Any disruption or substantial decrease in the supply of product by this supplier, as a result of a shortage of raw materials, organized labor disputes, natural disasters, acts of cyberterrorism, or otherwise, could disrupt or substantially decrease our ability to fulfill customer orders. If this occurred, particularly for an extended period, we may not be able to continue to offer these or similar products and our future sales may decline. In such event, we may not be able to offset the decline in sales through substitution of product, price increases, or otherwise. In addition, if this supplier or any of our suppliers implemented unilateral price increases, we may not be able to pass along such price increases to our customers and our profitability may be reduced. Further, if this supplier or any of our suppliers fails to continue to supply product of adequate quality and in a timely fashion to us, this could adversely affect our future sales. The occurrence of any of these conditions could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

Past or future reformulations of our products, including in response to potential governmental enforcement action, could be negatively received by our independent sales force and customers, and adversely impact future sales.

 

As part of our commitment to continuously improve our products, we introduce product reformulations and other product enhancements from time to time. In addition, we may be required to modify our product formulations from time to time to comply with existing or new regulations in the future, including in response to potential governmental enforcement action. Changes to our product formulations, whether as a result of potential governmental enforcement action or not, could be negatively received by our independent sales force and customers, and could adversely impact future sales, and our business, financial condition, results of operations and cash flows.

 

Potential product liability claims could harm our business.

 

Historically, product liability claims have not been material to our business. However, given the increase in product liability claim activity in recent years and the increased application of a “strict liability” legal standard to those claims particularly in the U.S., we purchase product liability insurance to minimize the financial risks associated with such claims or potential claims. The sources of product liability insurance coverage in the countries where we market and distribute our products are limited, product liability coverage is increasingly expensive, and product liability insurance policies contain many exclusions. We believe our product liability insurance policies significantly mitigate the potentially adverse financial impact to us resulting from most potential product liability claims. However, there can be no assurance that our product liability coverages are adequate to protect us sufficiently and against all potential claims. For example, if any of our products is found to have caused personal injury to a consumer, we might be subjected to liability substantially in excess of our insurance coverages. Any of these conditions could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

12

 

 

Nutritional supplements are often supported only by limited available clinical studies.

 

Nutritional supplements, such as many of the Company’s health and wellness products, have a long history of human consumption. Some of our products may contain innovative ingredients or contain combinations of ingredients. Although we believe that all our products are safe when taken as directed, there is only limited data available about human consumption of certain of these product ingredients or combinations of ingredients in concentrated form. We and our key suppliers conduct research and test the formulation and production of our products, however, there are only limited, if any, conclusive clinical studies available about our products and similar product in the marketplace. Furthermore, because we are highly dependent on consumer perception of the efficacy, safety, and quality of our products, we could be adversely affected in the event that our products, or similar product in the marketplace, are proven or asserted to be ineffective or harmful to consumers or in the event of publicity associated with any adverse effects resulting from the use or misuse of our products, or similar products in the marketplace. Any of these conditions could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

Our ability to comply with current consumer product laws and regulations or our becoming subject to new or more stringent consumer product laws and regulations in the future.

 

Our business and the products we sell are subject to several national, state, and local laws and regulations in the countries where we currently market and distribute or intend to market and distribute our products. These laws and regulations generally govern the composition, packaging, labeling and consumer safety of the products we sell, as well as the information we use to market these products. In addition, the laws and regulations applicable to us and our products may become more stringent in the future. For example, the State of California enforces recent legislation that requires that “clear and reasonable” warnings be given to consumers who are exposed to chemicals known to the State of California to cause cancer or reproductive toxicity. Although we actively seek to comply with the requirements of this and all other laws and regulations applicable to our business and products, there can be no assurance our products would not be found to be defective in labeling or content, or that the labeling and content of our products will not be challenged in civil or enforcement actions in the future. Our continued compliance with existing or new consumer product laws and regulations could also require the review and possible reformulation or relabeling of our products, as well as the potential removal of some products from the marketplace. In addition, the existence of more stringent consumer product laws and regulation in countries where we intend to market and distribute our products, could hinder our ability to grow our business into such countries. If we were found to be in violation of existing or new consumer product laws or regulations in the future, this could result in significant fines or damages and other enforcement actions, in addition to significant costs and expenses to defend the resulting claims. The occurrence of any of these conditions could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

D - Risks Associated with our System of Internal Controls, and with our Disclosure Controls:

 

If we fail to maintain an effective system of internal control over financial reporting in the future, we may not be able to accurately report our financial condition, results of operations or cash flows, which may adversely affect investor confidence in us and, as a result, the value of our securities.

 

The Sarbanes-Oxley Act of 2002 requires, among other things, that we maintain effective internal control over financial reporting, and disclosure controls and procedures. Under Section 404(a) of the Sarbanes-Oxley Act, we are required to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This report must include disclosure of any material weaknesses identified by our management during its periodic assessment of our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting that results in more than a reasonable possibility that a material misstatement of the financial statements will not be prevented or detected on a timely basis. Our compliance with Section 404(a) of the Sarbanes-Oxley Act requires that we incur substantial accounting expense, and that our management spend significant time and efforts in its assessment of such internal control over financial reporting.

 

During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we would be required to implement remediation procedures aimed at mitigating the control weakness or weaknesses. Until such remediation procedures succeed in mitigating the control weakness or weaknesses, we would be unable to assert that our internal control over financial reporting is effective. We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely inhibit our ability to timely and accurately report our financial condition, results of operations or cash flows. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness or significant deficiency in our internal control over financial reporting in the future, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our securities could decline, and we could be subject to enforcement actions by the SEC or other regulatory authorities. Any failure to promptly remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.

 

13

 

 

Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.

 

Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Securities Act, or the Exchange Act is accumulated and communicated to management, recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and executed, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple human error or mistake. Additionally, controls can be circumvented by the individual acts of a person, by collusion of two or more people, or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in any control system, misstatements, or insufficient disclosures due to error or fraud may occur and not be detected.

 

E – Risks Associated with our Information Technology Systems and with Cybersecurity:

 

We may be adversely affected by any disruption in our information technology systems.

 

We depend on our information technology systems to manage most of our major business functions, including sales order processing, independent sales force service and support, billings and collection, human resources and recordkeeping, and accounting and reporting. More specifically, we rely upon our information technology systems to procure and replenish inventory, to fulfill and ship customer orders, to coordinate our sales activities across several functional areas, to carry out our administrative activities, and to protect personal or sensitive information about our customers, independent distributors, employees, vendors, and other business partners that we received in the ordinary course of our business. A substantial disruption in our information technology systems could result in delays in receiving product and in filling customer orders, and adversely affect our relationships with our customers, independent distributors, employees, vendors, and other business partners, and damage our reputation and business.

 

As our operations rapidly grow in both size and scope, we continuously need to scale and upgrade our systems and infrastructure to meet increased demand, while preserving their reliability and integrity. For example, we recently implemented an information system upgrade in the U.S. to better accommodate our current and anticipated growth. Any expansion or upgrade to our systems and infrastructure in the future will require us to commit substantial financial, operational, technical, and human resources before the volume of our business increases, with no assurance that the volume of business will increase to the extent we expect or at all. Also, there can be no assurance that any system expansion or upgrade will result in the anticipated benefits and efficiencies, or that the costs of such system expansion or upgrade will not outweigh the benefits and efficiencies derived.

 

Any of these conditions could have a material adverse effect on our financial condition, results of operations and cash flows.

 

We may be adversely affected by potential acts of cyberterrorism.

 

The normal course of our business requires the collection, transmission, and retention of large volumes of confidential and proprietary information, including personal or confidential information of our customers, independent distributors, suppliers, and employees in the information technology systems that we maintain and in those maintained by certain third parties with which we do business. We operate in a global environment characterized by increasing threats of cyberterrorism. Information technology system threats can take a variety of forms. Individual hackers, groups of hackers, and sophisticated organizations, including state-sponsored organizations or nation-states, often commit cyberattacks that pose threats to government, military, educational, and business institutions, among others. These actors could use a wide variety of methods, which could include the development and deployment of malicious software or exploiting vulnerabilities in hardware, software, or other infrastructure in order to gain access to networks and data, potentially compromising sensitive customer, independent distributor, supplier, employee, or other information.

 

Cyber-threats are constantly evolving, making it increasingly difficult to prevent, detect and successfully defend against. A potential breach of our facilities, data systems or data security could disrupt the operations of our information technology systems and business, impair our ability to ship product or provide services to our customers, and potentially compromise the privacy of our data, including our confidential or technical business information. In addition, the risk of one or more cybersecurity incidents may be heightened as many of our employees work remotely, for example, as a result of the recent COVID crisis. Any of these things could harm our reputation or competitive position, require us to allocate more resources to improve our systems, technologies, and infrastructure, or otherwise adversely affect our business, financial condition, results of operations and cash flows.

 

14

 

 

F – Risks Associated with the COVID Pandemic and Economic Impact Thereof:

 

The recent COVID pandemic and actions to mitigate it have adversely impacted the economies in the countries where we our products are sold, and are likely to have adversely impacted our business.

 

In 2020, in response to the COVID pandemic, governments in the countries where we market and distribute our products mandated or recommended various containment measures, including selective business closures, social distancing, quarantine, stay-at-home or shelter-in-place directives, and limitations on, or cancellations of, larger meetings and other public events. We believe that the actual impact of the health crisis, and/or actions taken to contain the spread of the virus, have had and continue to have an adverse impact on the economies in the geographies we serve. Consumer demand for discretionary products such as ours is sensitive to significant downturns in the economy, increases in unemployment or decreases in perceived employment security, and decreases in consumer sentiment in general.

 

In efforts to protect our customers, distributors, employees, and other business partners, in 2020, we instituted several preventive measures, including temporarily transitioning a significant number of our corporate employees to working remotely, increasing efforts to clean and sanitize our business facilities, increasing employee safety communication, and transitioning our sales conventions to a virtual convention platform. While these temporary measures are increasingly being eased or fully reversed at the time of this Annual Report, we believe these necessary, temporary measurements are likely to have had an adverse impact on our business.

 

As a result of the foregoing, we cannot predict with certainty the scope, duration, and ultimate impact of this public health emergency in the countries where our products are sold, including its impact on the economy, but we believe these conditions are likely to have had and continue to have a material adverse impact on our business, financial condition, cash flows, and results of operations (including revenues and profitability), and those of our key suppliers.

 

G – Risks Associated with our Common Stock, with our Preferred Shareholder Rights, and with the current concentration of the majority of our Common Stock under the control of a corporate shareholder:

 

Future sales and issuances of our Common Stock or rights to purchase our Common Stock, including issuances pursuant to convertible notes and stock warrants currently outstanding, will result in additional dilution of the percentage ownership by our existing stockholders and could cause our trading price to decline.

 

We expect that significant additional capital will be needed in the future to fund our planned growth, including our ongoing efforts to expand our footprint outside the U.S. To raise capital, we may sell substantial amounts of Common Stock or securities convertible into or exchangeable for Common Stock. Convertible notes and stock warrants currently held by DSS, Inc. and its affiliates may result in the issuance of up to 360,000,000 additional shares of our Common Stock. In addition, convertible notes and stock warrants currently held by HWH International, Inc. may result, in the aggregate, in the issuance of 666,666 or more additional shares of our Common Stock. DSS, Inc. and its affiliates, and HWH International, Inc. are affiliated with Heng Fai Ambrose Chan, the Executive Chairman of the Company’s Board of Directors. Future issuances of equity or equity-linked securities, together with future conversions of our Preferred Stock and exercises of stock warrants currently outstanding or granted in the future, and shares issued in connection with future acquisitions, if any, may result in material dilution to the equity interests of our existing investors. In addition, as a result of such future issuances, new investors could gain rights, preferences and privileges senior to those of the current holders of our Common Stock.

 

Our Board of Directors may adopt an equity compensation plan in the future to enhance our efforts to attract and reward employees, executives, and consultants with grants of equity-based awards. Future issuances of equity-based awards, including issuances under any such future equity compensation plan, may result in material dilution to the equity interests of our existing investors and have an adverse effect on the market price of our securities.

 

Certain corporate stockholders own a significant combined amount of our Common Stock, which could allow them to influence corporate transactions and other matters and could otherwise limit the potential growth in the price of our Common Stock.

 

As of the date of this filing, 191,879,003 shares representing 66% of our total issued and outstanding Common Stock were held by DSS, Inc. (“DSS”) and its affiliates and under the voting control of Heng Fai Ambrose Chan, the Executive Chairman of our Board of Directors. In addition, the CEO and Vice Chairman of the Board of Directors of the Company, and two additional Directors of the Company, including Mr. Chan, also serve on the Board of Directors of DSS. Further, as discussed above, convertible notes and stock warrants held by DSS and HWH International, Inc., both affiliated with Mr. Chan, may result in the issuance of a substantial additional Common Stock and in a substantial additional concentration of our Common Stock under the voting control of Mr. Chan. As a result, before or after the potential exercises or conversions of such convertible notes and stock warrants, DSS and its affiliates control the majority of the total voting rights of our Common Stock, which could affect the outcome of a shareholder vote, including, the election of directors, the adoption of employee stock option plans, the adoption of amendments to our articles of incorporation and bylaws, the approval of acquisitions, mergers and other corporate transactions, or the potential declaration and payment of dividends and distributions on our Common Stock.

 

15

 

 

The conditions discussed above may constitute a material limitation on the rights of our other Common Stockholders, including the right to receive dividends and other to distributions, if any, in the future and may limit the relative voting power of our other stockholders or otherwise limit the potential growth in the price of our Common Stock.

 

Our Common Stock has historically had a limited market and high stock price volatility. If an active trading market for our Common Stock develops, trading prices for our stock may be more volatile.

 

The principal U.S. market for our Common Stock is the OTCQB Market, an over-the-counter trading platforms market operated by OTC Markets Group Inc. Our Common Stock has historically had limited daily trading activity. In addition, the price of our stock has historically been volatile. For example, the 52-week trading price for our Common Stock has ranged been $0.023 to $0.229 per share. Many factors, some of which are beyond our control, may cause the price of our Common Stock to decline over the short-term or over a long-term, regardless of our operating results. These factors include, among others, fluctuations in our operating results; trends or adverse publicity related to our business, products, competitors or industry; the unwillingness of some stockbrokers to place trading orders in our stock and the resulting limitations in the number of stockbrokers willing to trade our stock; the concentration of a large number of shares of our Common Stock in one or a few stockholders, the sale of our Common Stock by one or more significant stockholders, changes in the economic conditions in the geographies where we operate, and a decline in the stock market in general. If an active market for our Common Stock develops, trading prices for our stock may be more volatile and expose our stockholders to a higher risk of loss of principal over the short-term or over a long-term.

 

We will continue to incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance requirements as a result of our disclosed intent to uplist our stock in the NASDAQ Capital Market.

 

We will continue to incur significant increased administrative costs, including legal, accounting, and other expenses, as a result of operating as a public company, and our management will be required to devote substantial time to incremental compliance requirements as a result of our disclosed intent to uplist our stock in the NASDAQ Capital Market. For example, we have incurred and will continue to incur costs associated with the preparation and filing of annual, quarterly, and current reports pursuant to the Exchange Act. In addition, after our disclosed intent to uplist our stock in the NASDAQ Capital Market, we will be subject to mandatory incremental corporate governance and other compliance requirements. Further, the Sarbanes-Oxley Act, and rules subsequently implemented by the SEC, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the NASDAQ Capital Market have imposed various demanding reporting and corporate governance requirements on public companies. Stockholder activism, the current political environment, and the current high level of government intervention and regulatory reforms may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and adversely impact (in ways we cannot currently anticipate) the way we operate our business. Our management and staff will need to devote substantial amounts of time to these compliance initiatives. Moreover, these rules and regulations have and will continue to increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we will incur additional expense to increase our director and officer liability insurance.

 

In addition, if we cease to be a smaller reporting company and become subject to Section 404(b) of the Sarbanes-Oxley Act, we will be required to furnish an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed period of time, we will continue to be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and time-consuming. In this regard, we will need to dedicate substantially greater internal resources, potentially engage outside consultants, and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate, through testing, that the controls are functioning as documented and intended, and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that our independent registered public accounting firm, when required, will not be able to conclude within the prescribed timeframe that our internal control over financial reporting is effective as required by Section 404. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.

 

Certain rights of our Preferred Stockholders may limit your rights as a Common Stockholder.

 

The Company’s authorized capital stock structure is comprised of multiple classes of Common Stock (Class A and Class B) as well as Preferred Stock ( Series A, B and C). As of the date of this filing, there are 288,923,969 shares of our Class A Common Stock and 6,320,000 shares of our convertible Preferred Stock (including the Series A and the Series C Preferred Stock) issued and outstanding. There are no shares of the Company’s Class B Common Stock or Series B Preferred Stock currently issued and outstanding.

 

The rights of the holders of Series A and C Preferred Stock are set out in a Certificate of Designation (for each such series) filed in the State of Nevada. Pursuant to such Certificates of Designation, each share of Series A and Series C Preferred Stock entitles the holder to one vote and is convertible into one share of our Class A Common Stock, at the option of the holder, subject to certain regulatory restrictions. In addition, pursuant to such Certificates of Designation, the affirmative vote of the holders of at least 86% of the shares of the Series A and the Series C Preferred Stock outstanding is required for the Board to declare and pay dividends and other distributions upon the shares of the Company’s Common Stock, unless, with respect to a cash dividend, the holders of the Company’s Preferred Stock (including the Series A and the Series C Preferred Stock) are to receive the same cash dividend as the Common Stock, on an if converted basis. Further, the shares of our Preferred Stock are senior to the shares of our Common Stock with regards to distributions in the event of dissolution, liquidation, or winding up of the Company, whether voluntary or involuntary.

 

The preferred shareholder rights discussed above may constitute a material limitation on the rights of our Common Stockholders, including the right to receive dividends and other to distributions, if any.

 

16

 

 

Because we do not anticipate paying cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, likely will be your sole source of gain.

 

We have not declared or paid cash dividends on our capital stock at any time since our inception. We currently intend to retain our future earnings to finance the growth and development of our business. In addition, the terms of any future debt agreements may preclude us from paying dividends or may materially restrict the amount of such dividends. As a result, capital appreciation, if any, of our securities likely will be your sole source of gain for the foreseeable future.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None

 

ITEM 2. PROPERTIES

 

The following table provides information about our material facilities:

 

Location  Type of Facility  Leased/Owned  Sq. Feet 
Plano, Texas  Corporate Headquarters  Leased   5,560 
Addison, Texas  Distribution Center  Leased   11,100 
Lindon, Utah  Office Building  Owned   25,800 
Seoul, South Korea  Asian Office  Leased   2,612 

 

In March 2022, the Company entered into a 7-year lease, for its new Corporate Headquarters in Plano, Texas. The Company intends to relocate to its new headquarters in the first quarter of its fiscal year 2023.

 

In June 2021, the Company commenced operations in Seoul, South Korea in a facility subleased from HWH World, Inc. (“HWH World”), a subsidiary of DSS and a company affiliated with Heng Fai Ambrose Chan, a Director of the Company. In May 2022, the Company and HWH World amended the related sublease agreement to reduce the space subleased by the Company and to reduce the related rent obligation.

 

During the fiscal years ended March 31, 2022, and 2021, a significant portion of the Company’s products were warehoused at a facility operated by a third-party warehouse and logistic partner located in Addison, Texas. That facility is not listed on the table above and is not owned or leased by the Company.

 

ITEM 3. LEGAL PROCEEDINGS

 

We may be involved, from time to time, in claims and lawsuits incidental to the conduct of our business in the ordinary course. We carry insurance coverage in such amounts as we believe to be reasonable under the circumstances and that may or may not cover any or all of our liabilities in respect of these matters. We do not believe that the ultimate resolution of these matters will have a material adverse impact on our consolidated financial position, cash flows or results of operations.

 

We are subject to several U.S. federal, state and local laws and regulations. These laws and regulations govern, among other things, labor relations, the labeling and safety of the products we sell, and the methods we use to sell these products. We believe that we are in material compliance with all such laws and regulations, although no assurance can be provided that this will remain true indefinitely in the future.

 

(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 investors in 2015. The Company and its affiliated entities have filed an answer denying the three investors’ claims. Plaintiffs filed a first amended complaint on October 14, 2021. This matter remains pending as of March 31, 2022.

 

17

 

 

(b)

AAA Ref. No. 01-20-0019-3907; Sharing Services Global Corporation, Elevacity Holdings, LLC, Elevacity U.S., LLC, Elepreneurs Holdings, LLC and Elepreneurs U.S., LLC v. Robert Oblon, pending before the American Arbitration Association. On December 30, 2020, the Company and its affiliated companies filed an arbitration complaint against Robert Oblon for breach of contract and a declaratory judgment relating to the Multi-Party Settlement Agreement with Robert Oblon. This matter remains pending as of March 31, 2022.

   
(c)

Case No. 4:20-cv-00989; Sharing Services Global Corporation, Elevacity Holdings, LLC, Elevacity U.S., LLC, Elepreneurs Holdings, LLC and Elepreneurs U.S., LLC v. Robert Oblon, pending in the in the United States District Court for the Eastern District of Texas. On December 30, 2020, the Company and its affiliated companies filed a lawsuit against Robert Oblon seeking injunctive relief relating to the Multi-Party Settlement Agreement with Robert Oblon. This matter is a companion case to the AAA arbitration proceeding described in paragraph (b) above and, while it remains pending as of December 31, 2021, further action in this case has been stayed by court order, pending final adjudication of the referenced AAA arbitration proceeding.

   
(d)

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 matter remains pending as of March 31, 2022.

   
(e)

Case No. 4:21-cv-00183; Sharing Services Global Corporation f/k/a Sharing Services, Inc., Elepreneurs Holdings, LLC n/k/a Elevacity Holdings, LLC, Elepreneurs U.S., LLC n/k/a Elevacity U.S., LLC and SHRG IP Holdings, LLC v. AmplifeiIntl, LLC d/b/a HAPInss and HAPInssBrands, LLC pending in the United States District Court for the Eastern District of Texas. On March 5, 2021, the Company and its affiliated entities filed suit against a newly formed competitor for various claims including trademark infringement, trade secret violations, unfair competition under state and federal law as well as tortious interference with contracts and business relationships. The matter remains pending as of March 31, 2022.

   
(f) Cause 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. The matter remains pending as of March 31, 2022.
   
(g) Case No. 4:22-cv-00042; Elevacity U.S., LLC d/b/a The Happy Co. and Elepreneurs U.S., LLC d/b/a Elepreneurs, LLC v. Brian Christopher Schweda, Jr., pending in the United States District Court for the Eastern District of Texas. On January 20, 2022, the Company filed suit against a former distributor. The matter remains pending as of March 31, 2022.
   
(h) 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. The matter remains pending as of March 31, 2022.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable

 

18

 

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market for the Company’s Common Stock

 

(a) - Market Information

 

The principal U.S. market for our Common Stock is the OTCQB Market, an over-the-counter trading platforms market operated by OTC Markets Group Inc. Readers should be aware that over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions.

 

Our Common Stock is traded under the symbol “SHRG.” Sharing Services, Inc.’s Common Stock commenced trading on March 7, 2017, under the symbol SHRV. In January 2019 the Company changed its corporate name to Sharing Services Global Corporation, as discussed elsewhere in this Annual Report. In connection with the name change, effective April 4, 2019, the Company’s Common Stock commenced trading under the symbol SHRG.

 

(b) - Holders

 

As of June 10, 2022, there were 170 stockholders of record of our Common Stock.

 

(c) - Dividends

 

We have not declared or paid dividends at any time during our past two fiscal years. We currently anticipate that we will retain future earnings to support reinvestments in our business and our growth plans. Any payment of cash dividends in the future will be at the discretion of our Board of Directors and will depend upon, among other things, future operating earnings and cash flows, future capital requirements, contractual restrictions (including those contained in the agreements and instruments governing our debt and the Certificates of Designation of our convertible Preferred Stock) and general business conditions.

 

(d) Securities Authorized for Issuance Under Equity Compensation Plans

 

The information contained under the caption “Equity Compensation Plans” in ITEM 12 – “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS” is incorporated herein by reference.

 

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

 

In the month ended February 28, 2022, the Company issued 50,000,000 shares of its Class A Common Stock in connection with the exercise of warrants by DSS, Inc., a majority shareholder of the Company. The proceeds from these stock issuances were used for general corporate purposes.

 

In connection with the transactions described in the preceding paragraph, no underwriters were involved, there were no proceeds generated (except as indicated in the preceding paragraph), and the issuances were made in reliance on the exemption from the registration requirements of the Securities Act of 1933 provided under Section 4(a)(2) thereof.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

None.

 

We are a Smaller Reporting Company, as defined in Rule 12b-2 of the Exchange Act. Accordingly, we have omitted the performance graph otherwise required by Item 5 of this Annual Report as permitted by applicable scaled disclosure rules.

 

ITEM 6. [RESERVED]

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

In March 2021, the Company changed its fiscal year-end from a fiscal year ending on April 30th to a fiscal year ending on March 31st. This section reflects management’s views of the consolidated financial condition as of March 31, 2022, and 2021, and the consolidated results of operations and changes in financial condition for the fiscal year ended March 31, 2022 (a 12-month period) and the fiscal year ended March 31, 2021 (an 11-month period) of Sharing Services Global Corporation and consolidated subsidiaries. This section should be read in conjunction with, the Company’s audited consolidated financial statements and related notes contained in Item 8 of this Annual Report. We believe the recent COVID pandemic is likely to have had and continues to have a material adverse impact on our business, financial condition, cash flows, and results of operations. See Overview – “Continuing Uncertainty Regarding the Recent COVID Pandemic” below. This section may contain forward-looking statements. Please see “Cautionary Notice Regarding Forward-Looking Statements.” located at the front of this report.

 

Summary Results of Operations:

 

   Fiscal Year Ended March 31,     
   2022   2021   Increase (Decrease)  

%

Change

 
Net sales  $34,424,314   $64,811,151   $(30,386,836)   -46.9%
Gross profit   23,622,443    46,546,657    (22,924,214)   -49.2%
Operating expenses   (36,954,618)   (48,724,183)   (11,769,565)   -24.2%
Operating loss   (13,332,175)   (2,177,526)   11,154,649    512%
Non-operating income (loss), net   (6,810,312)   347,996    7,158,308    2057%
Loss before income taxes   (20,142,487)   (1,829,530)   18,312,957    966%
Income tax benefit   (3,035,990)   (594,509)   2,441,481    411%
Net loss  $(17,106,497)  $(1,235,021)  $15,871,476    1285%

 

Highlights for the Fiscal Year Ended March 31, 2022:

 

For the fiscal year ended March 31, 2022, our consolidated net sales decreased by $30.4 million, to $34.4 million, compared to $64.8 million for the fiscal year ended March 31, 2021.

 

For the fiscal year ended March 31, 2022, our consolidated gross profit decreased by $22.9 million, to $23.6 million, compared to $46.5 million for the fiscal year ended March 31, 2021, and our consolidated gross margin was 69.1% and 71.8%, respectively.

 

For the fiscal year ended March 31, 2022, our consolidated operating loss was $13.3 million compared to $2.2 million for the fiscal year ended March 31, 2021.

 

For the fiscal year ended March 31, 2022, our consolidated net non-operating expenses were $6.8 million compared to a net non-operating income of $347,996 for the fiscal year ended March 31, 2021.

 

For the fiscal year ended March 31, 2022, our consolidated net loss was $17.1 million, compared to $1.2 million for the fiscal year ended March 31, 2021. Our diluted loss per share was $0.08 for the fiscal year ended March 31, 2022, compared $0.01 for the fiscal year ended March 31, 2021.

 

For the fiscal year ended March 31, 2022, our consolidated net cash used in operating activities was $15.2 million compared to $1.6 million for the fiscal year ended March 31, 2021.

 

In April 2021, Sharing Services borrowed $30.0 million from Decentralized Sharing Systems, Inc. (“DSSI”), a subsidiary of DSS, Inc. (formerly Document Security Systems, Inc.) (“DSS”), and, together with DSS, a majority shareholder of the Company.

 

In April 2021, Sharing Services issued to DSSI 27,000,000 shares of its Class A Common Stock, including 15,000,000 shares in payment of a loan origination fee of $3.0 million and 12,000,000 shares in prepayment of $2.4 million in interest in connection with the DSSI loan discussed in the preceding item.

 

In September 2021, Sharing Services invested $1.4 million in Stemtech Corporation and $1.5 million in MojiLife, LLC, both emerging growth businesses.

 

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In December 2021, Sharing Services, through a subsidiary, purchased a 25,800 square feet office building in Lindon, Utah for $8.9 million.

 

In December 2021, DSSI invested $3.0 million in Sharing Services in exchange for 50,000,000 shares of Sharing Services’ Class A Common Stock and a stock Warrant to purchase up to 50,000,000 shares of Class A Common Stock.

 

In January 2022, DSS agreed to provide certain consulting services to Sharing Services in exchange for a monthly fee of $60,000 and a fully vested detachable stock warrant to purchase up to 50,000,000 shares of its Class A Common Stock. The stock warrant may be exercised at the exercise price of $0.0001 per share.

 

In February 2022, Sharing Services issued 50,000,000 shares of Class A Common Stock to DSS upon exercise of the Warrant discussed in the preceding item.

 

In March 2022, the Company entered into a 7-year lease, for its new Corporate Headquarters located in Plano, Texas. The Company intends to relocate to its new headquarters in the first half of its fiscal year 2023.

 

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 distributes its products from the U.S. to customers located in Australia, New Zealand and other countries. The Company’s U.S. subsidiaries market our products and services through an independent sales force, using their proprietary websites, including: www.elevacity.com and www.thehappyco.com. In June 2021, the Company, through a subsidiary, commenced operations in the Republic of Korea (South Korea).

 

The Company was incorporated in the State of Nevada on April 24, 2015.

 

As further discussed below, the Company intends to continue to grow its business both organically and by making strategic acquisitions from time to time of businesses and technologies that augment its product portfolio, complement its business competencies and fit its growth strategy.

 

Corporate Name Change

 

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

 

Change of Fiscal Year

 

In March 2021, Sharing Services changed its fiscal year-end from a fiscal year ending on April 30th to a fiscal year ending on March 31st. In connection with this change, the Company decided not to restate the information reported for prior accounting periods, because: (a) the Company’s businesses are not inherently seasonal, (b) the change in fiscal years did not otherwise materially distort comparability of the Company’s results of operations and cash flows, and (c) the cost to restate the data reported for prior periods outweighs the usefulness of such restated data. Accordingly, the consolidated financial statements included herein reflect the results of operations and cash flows for the fiscal year ended March 31, 2022 (365 days) compared to the eleven months ended March 31, 2021 (335 days).

 

Strategic 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.

 

21

 

 

Continuing Uncertainty Regarding the Recent COVID Pandemic

 

In 2020, in response to the COVID pandemic, governments in the countries where our products are sold mandated or recommended various containment measures, including selective business closures, social distancing, quarantine, stay-at-home or shelter-in-place directives, and limitations on, or cancellations of, larger meetings and other public events. We believe that the actual impact of the health crisis, and/or actions taken to contain the spread of the virus, have had and continue to have an adverse impact on the economies in the geographies we serve. Consumer demand for discretionary products such as ours is sensitive to significant downturns in the economy, increases in unemployment or decreases in perceived employment security, and decreases in consumer sentiment in general.

 

In efforts to protect our customers, distributors, employees, and other business partners, in 2020, we instituted several preventive measures, including temporarily transitioning a significant number of our corporate employees to working remotely, increasing efforts to clean and sanitize our business facilities, increasing employee safety communication, and transitioning our sales conventions to a virtual convention platform. While these temporary measures are increasingly being eased or fully reversed at the time of this Annual Report, we believe these necessary, temporary measurements are likely to have had an adverse impact on our business.

 

As a result of the foregoing, we cannot predict with certainty the scope, duration, and ultimate impact of this public health emergency in the countries where we operate, including its impact on the economy, but we believe these conditions are likely to have had and continue to have a material adverse impact on our business, financial condition, cash flows, and results of operations (including revenues and profitability), and those of our key suppliers.

 

The COVID emergency also may have the effect of exacerbating some of the other risk factors described elsewhere in this Annual Report, including the success of our growth initiatives, our ability to anticipate and effectively respond to changes in consumer preferences and buying trends in a timely manner, our dependence on one supplier for a substantial portion of the products we sell, potential fluctuations in our quarterly financial performance, our ability to generate sustained, positive cash flows from operations with which to fund our working capital needs, the potential impact on our financial performance from economic slowdowns, our ability to effectively and cost-efficiently respond to any epidemics and other health emergencies, and the potential impact on our business of any disruption in our information technology systems.

 

The Fiscal Year Ended March 31, 2022, Compared to the Fiscal Year Ended March 31, 2021

 

Results of Operations

 

Net Sales

 

For the fiscal year ended March 31, 2022 (a 12-month period), our consolidated net sales decreased by $30.4 million, to $34.4 million, compared to the fiscal year ended March 31, 2021 (an 11-month period). The decrease in net sales mainly reflects: (a) continuation of the decline in consumer orders that we experienced since the fourth quarter of the fiscal year 2020, (b) a decline in independent distributor orders, in the number of new independent distributors and in the number of continuing active distributors, resulting, in part, from recent product reformulations and increased competition for independent distributors, and (c) the generally adverse impact on consumer buying trends resulting from the recent COVID pandemic and actions taken to help mitigate the spread of the virus in the U.S. and Canada. In efforts to restore sales growth, in the past several months, we have developed and launched our new business brand, “The Happy Co TM,” at our Elevacity division, have accelerated our previously announced initiatives to expand our operations into additional international geographies, and have further intensified our efforts to recruit, develop and reward our distributors and our efforts reach new consumers, including through the continued introduction of new products. This decrease was partially mitigated by sales (approximately $1.4 million) of our new operations in Asia and sales (approximately $5.2 million) of health and wellness products introduced in the U.S. since March 31, 2021.

 

We believe there has been and continues to be significant uncertainty about the potentially adverse impact of the current health crisis on the economies and employment markets of several countries, including the U.S. and Canada. Please see Overview – “Continuing Uncertainty Regarding the Recent COVID Pandemic” above.

 

The decrease of $30.4 million in consolidated net sales reflects a decrease in number of comparable product units sold (26%) and a decrease in average unit sales prices (74%).

 

During the fiscal year ended March 31, 2022, and 2021, the Company derived approximately 87% and 99%, respectively, of its consolidated net sales from the sale of its health and wellness product line.

 

During the fiscal year ended March 31, 2022, approximately 66% of consolidated net sales were to consumers (including approximately 32% to recurring customers, which we refer to as “SmartShip” sales, and approximately 34% were to new customers) and approximately 34% of consolidated net sales were to independent distributors. During the fiscal year ended March 31, 2021, approximately 71% of our net sales were to customers (including approximately 43% to recurring customers and approximately 28% were to new customers) and approximately 29% of our net sales were to our independent distributors.

 

Gross Profit

 

For the fiscal year ended March 31, 2022, our consolidated gross profit decreased by $22.9 million, to $23.6 million, compared to the fiscal year ended March 31, 2021, and our consolidated gross margin was 68.6% and 71.8%, respectively. During the fiscal year ended March 31, 2022, gross margin was adversely affected by aggressive product pricing and a shift in product sales mix (to lower margin products) in the normal course of business, partially offset by a decrease in our provision for expiring, damaged or excess (slow-moving) inventory of $399,050.

 

22

 

 

Selling and Marketing Expenses

 

For the fiscal year ended March 31, 2022, our consolidated selling and marketing expenses decreased to $17.2 million, or 50.1% of consolidated net sales, compared to $29.7 million, or 45.9% of consolidated net sales for the fiscal year ended March 31, 2021. The decrease of $12.5 million in consolidated selling and marketing expenses is primarily due to lower sales commissions of $13.1 million (which reflects decrease in consolidated net sales discussed above), partially offset by higher sales convention expenses of $417,369 (as we resumed holding some in-person conventions in 2022) and higher marketing expense of $159,124.

 

General and Administrative Expenses

 

For the fiscal year ended March 31, 2022, our general and administrative expenses (which include corporate employee compensation and benefits, share-based compensation, professional fees, rent and other occupancy costs, certain consulting fees, telephone and information technology expenses, insurance premiums, and other administrative expenses) increased to $19.7 million, or 57.3% of consolidated net sales compared to $19.0 million, or 29.3% of consolidated net sales, for the fiscal year ended March 31, 2021. The increase in general and administrative expenses was due to higher consulting and professional fees of $3.0 million (including consulting fees of $766,415 in connection with a Consulting Agreement with DSS), higher loss on impairment of notes receivable and other assets of $543,042, higher depreciation and amortization expenses of $492,019, and higher other general corporate administrative expenses (other than consulting and professional fees, and bad debt expense) of $78,387, partially offset by lower stock-based compensation expense of $3.4 million.

 

Interest Expense, Net

 

For the fiscal year ended March 31, 2022, interest expense was $2.4 million, excluding amortization of debt discount of $8.9 million, amortization of deferred financing costs of $985,401, and interest income of $83,356. Interest expense of $2.4 million reflects mainly interest associated with borrowings under the $30.0 million loan from “DSSI.”

 

For the fiscal year ended March 31, 2021, our consolidated interest expense was $42,932, excluding amortization of debt discount of $18,647 and interest income of $13,966. Consolidated interest expense of $42,932 includes $37,425 associated with borrowings under short-term financing arrangements and $5,507 associated with our convertible notes.

 

Gain (loss) on Employee Warrants Liability

 

For the fiscal year ended March 31, 2022, 2021, gains in connection with employee warrants with a variable exercise price after service was completed were $2.5 million and $530,335, respectively.

 

Gain on Extinguishment of Debt

 

In June 2021, Sharing Services’ borrowings under the Paycheck Protection Program features of the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”) were forgiven pursuant to the CARES Act. The Company recognized a gain on extinguishment of debt of approximately $1,040,400 in connection therewith.

 

Unrealized Gains (Losses) on Investment in Unconsolidated Entities

 

For the fiscal year ended March 31, 2022, net unrealized gains in connection with our investment in equity instruments of unconsolidated entities were $3.6 million. See Note 9 of the Notes to Consolidated Financial Statements for more details.

 

Impairment Losses on Assets

 

For the fiscal year ended March 31, 2022, impairment losses, before income tax, in connection with our investment in unconsolidated entities and in connection with long-lived assets, in the aggregate, were $1.6 million.

 

Other Non-operating Income/Expense, net

 

For the fiscal year ended March 31, 2022, other non-operating expense was $211,035, consisting primarily of foreign currency transaction losses of approximately $170,000 and litigation settlement expenses of approximately $26,000. For the fiscal year ended March 31, 2021, consolidated other non-operating expense (consisting of litigation settlement expenses) were $134,726.

 

Income Tax Benefit

 

During the fiscal year ended March 31, 2022, the Company recognized a current federal income tax benefit of $2.1 million, including a valuation allowance of $2.1 million placed on certain deferred tax assets being carried forward or projected to reverse in future years due to the uncertainty of the Company generating sufficient taxable income in the foreseeable future to make realization probable, a deferred income tax benefit of $1.0 million, and a provision for state and local taxes of $100,569. During the fiscal year ended March 31, 2021, the Company recognized a current federal income tax benefit of $326,121, a deferred income tax benefit of $536,861, and a provision for state and local taxes of $268,473 million. See Note 2 - “SIGNIFICANT ACCOUNTING POLICIES” of the Notes to Consolidated Financial Statements in ITEM 8 “Financial Statements and Supplementary Data” contained elsewhere in this Annual Report for information about the Company’s accounting policies regarding accounting for income taxes.

 

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Net Earnings (Loss) and Earnings (Loss) per Share

 

As a result of the foregoing, for the fiscal year ended March 31, 2022, and 2021, our consolidated net loss was $17.1 million and $1.2 million, respectively. For the fiscal year ended March 31, 2022, and 2021, our diluted loss per share was $0.08 and $0.01, respectively.

 

Liquidity and Capital Resources

 

We broadly define liquidity as our ability to generate sufficient cash, from internal and external sources, to meet our obligations and commitments. We believe that, for this purpose, liquidity cannot be considered separately from capital resources.

 

Working Capital

 

Working capital (total current assets minus total current liabilities) was $7.4 million and $3.5 million as of March 31, 2022, and 2021, respectively.

 

As of March 31, 2022, and 2021, cash and cash equivalents were $17.0 million and $12.1 million, respectively. Based upon the current level of operations and anticipated investments necessary to grow our business, we believe that existing cash balances and anticipated funds from operations will likely be sufficient to meet our working capital requirements over the next 12 months. However, when needed to compensate for any temporary fluctuations in our working capital needs, compared to our operating cash flows, we may obtain occasional additional financing through the issuance of equity securities and secured and unsecured debt, including borrowings under convertible notes and short-term financing arrangements. Please see ITEM 1A – “RISK FACTORS” - “Our ability to generate sustained positive cash flows from operations or to obtain additional financing, if needed, with which to fund our working capital needs, including servicing or refinancing our debt, now and in the future.”

 

Historical Cash Flows

 

Historically, our primary sources of cash have been capital transactions involving the issuance of equity securities and secured and unsecured debt (See “Recent Issuances of Equity Securities” and “Short-term Borrowings and Convertible Notes” below) and cash flows from operating activities; and our primary uses of cash have been for operating activities, capital expenditures, acquisitions, net cash advances to related parties, and debt repayments in the ordinary course of our business.

 

The following table shows our cash flow activities for the fiscal year ended March 31, 2022, compared to the fiscal year ended March 31, 2021:

 

   Fiscal Year Ended March 31 
   2022   2021   Increase
(Decrease)
 
Net cash used in operating activities  $(15,226,654)  $(1,566,970)  $13,659,684 
Net cash used in investing activities   (12,843,757)   (1,195,639)   11,648,118 
Net cash provided by financing activities   32,978,607    3,164,290    29,814,317 
Impact of currency rate changes in cash   (29,339)   -    29,339 
Net increase (decrease) in cash and cash equivalents  $4,878,857   $401,681   $4,477,176 

 

Net Cash Used in Operating Activities

 

Net cash used in operating activities increased by $13.7 million, to $15.2 million, for the fiscal year ended March 31, 2022, compared to the fiscal year ended March 31, 2021. The $13.7 million increase was due to an increase in our operating loss of $9.6 million, excluding non-cash items, such as depreciation and amortization, stock-based compensation expense, provision for obsolete inventory losses, amortization of debt discount, gains (losses) on investments in unconsolidated entities and losses on impairment of notes receivable and other assets, and deferred income taxes and net changes in operating assets and liabilities of $4.1 million.

 

Net Cash Used in Investing Activities

 

Net cash used in investing activities increased by $11.6 million, to $12.8 million, for the fiscal year ended March 31, 2022, compared to the fiscal year ended March 31, 2021. The $11.6 million increase was primarily due to higher capital expenditures (including the impact of the December 2021 purchase of our Lindon, Utah building) and capitalizable costs related to ongoing upgrades to our information technology systems, in the aggregate, of $8.4 million, higher payments for investments in unconsolidated entities of $2.9 million and higher net payments for notes receivable of $483,638. This increase was partially offset by lower payments for intangible assets of $190,151.

 

Net Cash Provided by Financing Activities

 

Net cash provided by financing activities increased by $29.8 million, to $33.0 million for the fiscal year ended March 31, 2022, compared to the fiscal year ended March 31, 2021. The $29.8 million increase was mainly due to higher net proceeds ($29.0 million) from borrowings under short-term financing arrangements and/or convertible promissory notes (including borrowings of $30.0 million from DSSI in the fiscal year ended March 31, 2022) and lower repurchases of common stock of $899,500. This increase was partially offset by repayment of a convertible note of $100,000.

 

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Impact of currency rate changes in cash

 

Prior to April 1, 2021, substantially all consolidated net sales were denominated in U.S. dollars. Effective April 1, 2021, the Company’s consolidated financial statements reflect the operation of our wholly owned subsidiaries operating in the Asia Pacific region. See Note 2 - “SIGNIFICANT ACCOUNTING POLICIES” of the Notes to Consolidated Financial Statements contained elsewhere in this Annual Report for information about our translation of foreign currency financial statements.

 

Potential Future Acquisitions

 

The Company intends to further grow its business by pursuing a multipronged growth strategy, which includes increasing the number of product offerings in the U.S. and Canada, expanding its geographic footprint primarily in the Asia Pacific region, and developing and launching a line of consumer travel services. This growth strategy may also include the use of strategic acquisitions, subject to the approval of the Company’s Board of Directors, of businesses that augment the Company’s product and services portfolio, business competencies and geographic reach. Such potential acquisitions and purchases of equity interests are expected to be funded with cash and cash equivalents, cash provided by operations, and issuance of equity securities and debt, including convertible debt. See “Short-term Borrowings and Convertible Notes” below.

 

Recent Issuances of Equity Securities

 

In the fiscal year ended March 31, 2022:

 

  Sharing Services issued to DSSI 27,000,000 shares of its Class A Common Stock, including 15,000,000 shares in payment of a loan origination fee of $3.0 million and 12,000,000 shares in prepayment of $2.4 million in interest in connection with the April 5, 2021, DSSI loan discuss below.
     
 

DSSI invested $3.0 million in Sharing Services in exchange for 50,000,000 shares of its Class A Common Stock and a warrant to purchase up to 50,000,000 shares of Class A Common Stock.
     
  Sharing Services issued 50,000,000 shares of Class A Common Stock to DSS upon exercise of the stock warrant granted to DSS in connection with a consulting agreement entered into in January 2022. See NOTE 15, “RELATED PARTY TRANSACTIONS,” of the Notes to Consolidated Financial Statements in ITEM 8 “Financial Statements and Supplementary Data” contained elsewhere in this Annual Report for more details.

 

Short-term Borrowings and Convertible Notes

 

Borrowing Under Financing Arrangements (Note Payable)

 

In May 2020, the Company applied for and was granted a loan (the “PPP Loan”) by a commercial bank in the amount of $1,040,400, pursuant to the Paycheck Protection Program features of the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”). The Company’s borrowings under the PPP Loan were eligible for loan forgiveness under the provisions of the CARES Act. In June 2021, the Company was formally notified by the lender that the Company’s obligations under the loan were forgiven effective May 25, 2021.

 

In May 2022, Linden Real Estate Holdings, LLC, a wholly owned subsidiary of the Company, American Pacific Bancorp, Inc. (“APB”), and the Company entered a term sheet pursuant to which APB agree to extend a loan to the Company for approximately $5.7 million. The loan would bear interest at 8%, mature on June 1, 2024, and be secured by a first mortgage interest on the Company’s Lindon, Utah office building. APB is a subsidiary of Alset eHome International Inc (NASDAQ:AEI). Heng Fai Ambrose Chan, and Frank D. Heuszel, each a Director of the Company, also serve on the Board of Directors of APB, and Mr. Chan also serves on the Board of Directors of Alset eHome International.

 

Convertible Notes Payable

 

In the fiscal year ended March 31, 2022, the Company repaid convertible notes payable in the aggregate amount of $100,000. As of March 31, 2022, Convertible Notes Payable consist of a Convertible Promissory Note in the principal amount of $30.0 million in favor of DSSI, and a Convertible Promissory Note in the principal amount of $50,000 , before unamortized discount of $5,244, held by HWH International, as further discussed below.

 

On April 5, 2021, the Company and Decentralized Sharing Systems, Inc. (“DSSI”) who, together with its parent, DSS, Inc. (formerly Document Security Systems, Inc.), is currently a majority shareholder of the Company, entered into a Securities Purchase Agreement pursuant to which the Company issued: (a) a Convertible Promissory Note in the principal amount of $30.0 million (the “Note”) in favor of DSSI, and (b) a detachable Warrant to purchase up to 150,000,000 shares of the Company’s Class A Common Stock, at $0.22 per share. The Note bears interest at the annual rate of 8% and matures on April 5, 2024. 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. Interest on the Note is 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. Borrowings under the Note may be prepaid without penalty, in full or in part, at the option of the Company, at any time after the first anniversary of the Note. At any time during the term of the Note, all or part of the Note, including principal, less unamortized prepaid interest, if any, plus any accrued interest and other fees 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. In April 2021, the Company issued to DSSI 27,000,000 shares of its Class A Common Stock, including 15,000,000 shares in payment of the loan Origination Fee discussed above and 12,000,000 shares in prepayment of interest for the first year.

 

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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 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. HWH has informed the Company that it believes that during the term of the Note, the Company has granted more favorable financing terms to third-party lenders. As of the date of this Annual Report, the Company and HWH are evaluating alternative options to settle this Note in the foreseeable future.

 

Capital Resources

 

During the two fiscal years in the period ended March 31, 2022, the Company did not have material commitments for capital expenditures. During the fiscal year ended March 31, 2022 (a 12-month period) and March 31, 2021 (an 11-month period), our consolidated capital expenditures were $364,589 and $751,230, respectively, primarily consisting of the purchase of furniture and fixtures, computer equipment and software, and leasehold improvements in the ordinary course of our business.

 

In addition, in the fiscal year ended March 31, 2022, our consolidated capital expenditures include our purchase, through one of our subsidiaries, of an office building in Lindon, Utah for $8,942,640. Further, in the fiscal year ended March 31, 2021, the Company capitalized costs related to ongoing upgrades to its information technology systems and office renovations, in the aggregate, of $163,106. These capitalized costs were carried in other assets in our Consolidated Balance Sheets until the related assets were placed in service in the fiscal year ended March 31, 2022.

 

Cash Requirements from Known Contractual and Other Obligations

 

As of March 31, 2022, the Company’s contractual obligations consist of (a) future principal and interest payments in the aggregate amount of $34.9 million in connection with the Company’s convertible debt and (b) obligations associated with Type B leases (as defined by Accounting Standards Codification (“ASC”) Topic 842, Leases) of $816,016. See Note 13 – “LEASES” of the Notes to Consolidated Financial Statements contained in Item 8 “Financial Statements and Supplementary Data” of this Annual Report for more details about the Company’s leases.

 

As discussed above, on April 5, 2021, the Company and Decentralized Sharing Systems, Inc. (“DSSI”) who, together with its parent, DSS, Inc., is currently a majority shareholder of the Company, entered into a Securities Purchase Agreement pursuant to which the Company issued: (a) a Convertible Promissory Note in the principal amount of $30.0 million (the “Note”) in favor of DSSI, and (b) a detachable Warrant to purchase up to 150,000,000 shares of the Company’s Class A Common Stock, at $0.22 per share. The Note bears interest at the annual rate of 8% and matures on April 5, 2024. In May 2022, the parties to the Securities Purchase Agreement entered into a term sheet pursuant to which the Company agreed to issue to DSSI (a) a two-year Convertible, Advancing Promissory Note in the principal amount of $27.0 million (the “2022 Note”) in favor of DSSI and (b) a detachable Warrant to purchase up to 818,181,819 shares of the Company’s Class A Common Stock at the exercise price of $0.033 per share. The 2022 Note bears interest at the annual rate of 8% and is due and payable on demand or, if no demand, on May 1, 2024. At any time during the term of the 2022 Note, all or part of the Note may be converted into up to 818,181,819 shares of the Company’s Class A Common Stock, at the option of the holder. Under the terms of the term sheet, the Company agreed to pay to DSSI a loan origination fee of $270,000, payable in shares of the Company’s Class A Common Stock or in cash, at the Company option. In addition, pursuant to the letter of intent, 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 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 will recognize the exchange of the 2022 Note and detachable warrant for the April 2021 note and detachable warrant as a modification of debt upon closing of the transaction, expected in the first quarter of its fiscal year ending March 31, 2023.

 

26

 

 

Critical Accounting Estimates

 

The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at each balance sheet date, reported amount of revenues and expenses for each reporting period presented, and related disclosures of contingent liabilities. Actual results may differ from these estimates. We believe the Company’s estimates and assumptions are reasonable.

 

Our critical accounting estimates relate to the valuation of inventory, the assessment of long-lived assets for impairment, the valuation of share-based compensation awards, the assessment of loss contingencies, and income taxes.

 

Valuation of Inventory - Our inventory is stated at the lower of cost, determined using the first-in, first-out (“FIFO”) method, or net realizable value. Determining the net realizable value of inventory involves the use of judgment. In assessing the net realizable value of inventory, we consider factors including estimates of the future demand for our products, historical turn-over rates, and the age and sales history of the inventory. When necessary, we adjust the carrying value of inventory for estimated inventory shrinkage and damage. We estimate inventory shrinkage between physical counts and product damage based upon our historical experience. Actual results differing from these estimates could significantly affect our inventory and cost of products sold. We take physical counts of inventory on hand, at least annually and adjust our financial statements to match actual quantities counted.

 

Assessment of Long-Lived Assets for Impairment - Long-lived assets, such as office furniture, fixtures and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. The recoverability of long-lived assets is assessed by comparing the net carrying amount of each asset to its total estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds the sum of its undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset.

 

Valuation of Share-Based Compensation Awards - The Company uses the Black Scholes option pricing model to calculate the fair value of share-based compensation awards (such as stock options and warrants). The Black Scholes pricing model requires six data inputs: (1) the contractual exercise or strike price, (2) the expected life (in years), (3) the risk-free interest rate, (4) the current stock price, (5) the expected volatility for the Company’s Common Stock, and (6) the expected dividend yield. Changes to these data inputs could result in a significantly higher or lower fair value measurement.

 

Loss Contingencies - From time to time, we are involved in legal proceedings. We record a contingent liability when it is probable that a loss has been incurred and the amount is reasonably estimable. We also perform an assessment of the materiality of loss contingencies where a loss is either not probable or it is reasonably possible that a loss could be incurred in excess of amounts accrued. If a loss or an additional loss has at least a reasonable possibility of occurring and the impact on the financial statements would be material, we provide disclosure of the loss contingency in the notes to our consolidated financial statements. We review all contingencies at least quarterly to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or the range of the loss can be made. An adverse judgment or negotiated resolution in any of these matters could have a material adverse effect on our business, financial position, results of operations or cash flows.

 

Income Taxes - Income taxes have a significant effect on our net earnings. As of March 31, 2022, we are subject to income taxes primarily in the U.S. The determination of our provision for income taxes requires judgment, the use of estimates in certain cases and the interpretation and application of complex tax laws and regulations. Our effective income tax rate is affected by many factors, including changes in our assessment of certain tax contingencies, increases and decreases in valuation allowances, changes in tax law, outcomes of administrative audits, the impact of discrete items, and may fluctuate as a result.

 

The benefits of uncertain tax positions are recorded in our financial statements only after determining a more likely than not probability that the uncertain tax positions will withstand challenge, if any, from taxing authorities. When facts and circumstances change, we reassess these probabilities and record any changes in the financial statements as appropriate. We account for uncertain tax positions by determining the minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. This determination requires the use of judgment in evaluating our tax positions and assessing the timing and amounts of deductible and taxable items.

 

Deferred tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carryforwards. Deferred tax assets are evaluated for future realization and reduced by a valuation allowance to the extent that a portion is not more likely than not to be realized. Many factors are considered when assessing whether it is more likely than not that the deferred tax assets will be realized, including recent cumulative earnings, expectations of future taxable income, carryforward periods and other relevant quantitative and qualitative factors. The recoverability of the deferred tax assets is evaluated by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. This evaluation relies on estimates.

 

Recent Accounting Pronouncements and Accounting Changes

 

The information contained in Note 2 of the Notes to Consolidated Financial Statements, under the sub-headings: “Recently Issued Accounting Standards - Pending Adoption” and “Recently Issued Accounting Standards – Recently Adopted,” in ITEM 8 “Financial Statements and Supplementary Data” below, is incorporated herein by reference.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are a Smaller Reporting Company, as defined in Rule 12b-2 of the Exchange Act, and, accordingly, are not required to provide the information required by Item 7A of this Annual Report.

 

27

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Index to Consolidated Financial Statements

 

    Page
     
Report of Independent Registered Public Accounting Firm (PCAOB No. 6121)   29
     
Consolidated Balance Sheets as of March 31, 2022, and 2021   31
     
Consolidated Statements of Operations and Comprehensive Loss for the Fiscal Years ended March 31, 2022, and 2021   32
     
Consolidated Statements of Cash Flows for the Fiscal Years ended March 31, 2022, and 2021   33
     
Consolidated Statements of Changes in Stockholders’ Equity for the Fiscal Years ended March 31, 2022, and 2021   34
     
Notes to the Consolidated Financial Statements   35

 

28

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and

Stockholders of Sharing Services Global Corporation

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheet of Sharing Services Global Corporation, formerly Sharing Services, Inc. (the “Company”) as of March 31, 2022 and 2021, and the related consolidated statements of operations and comprehensive loss, cash flows and changes in stockholders’ equity, for the each of the two fiscal years in the 23-month period ended March 31, 2022 and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two fiscal years in the 23-month period ended March 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matters

 

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the Board of Directors and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

Employee Stock Warrants

 

As described in Note 2 and Note 17 to the consolidated financial statements, the Company granted warrants to its employees and officers in connection with multi-year employment agreements which are exercisable at a variable exercise price.

 

The principal considerations for our determination that performing procedures relating to the valuation of employee stock warrants is a critical audit matter were (i) there was a high degree of auditor judgment and subjectivity in applying procedures relating to the fair value measurement of the warrants due to the significant amount of judgment by management when developing the estimate; (ii) significant audit effort was required in evaluating the significant assumptions relating to the estimates.

 

Our audit of the valuation of employee stock warrants included, but was not limited to, the following procedures:

 

  understanding of controls relating to stock warrants granted;
  examining original employment agreements;
  reviewing management’s assumptions used in the valuation and revaluation of the fair value;
  reviewing management’s criteria of allocation of expenses between compensatory expense and non-operating expense;
  reviewing the fair value computations of the warrants at each revaluation date;
  obtaining technical guidance from third party experts on the accounting treatment;
  evaluating the sufficiency of the Company’s disclosures relating to share- based payments.

 

29

 

 

Investment in Unconsolidated Entities

 

As described in Note 9 to the consolidated financial statements, the Company made investments in certain unconsolidated entities.

 

The principal considerations for our determination that performing procedures relating to the valuation of the investments is a critical audit matter were (i) there was a high degree of auditor judgment and subjectivity in applying procedures relating to the fair value measurement of the investments due to the significant amount of judgment by management when developing the estimate; (ii) significant audit effort was required in evaluating the significant assumptions relating to the estimates.

 

Our audit of the valuation of investment in unconsolidated entities included, but was not limited to, the following procedures:

 

  understanding of controls relating to investments made;
  examining original investment agreements;
  reviewing management’s assumptions used in the valuation and revaluation of the fair value of the investment;
  reviewing management’s criteria of allocation of fair value between components of investment;
  obtaining technical guidance from third party experts on the accounting treatment;
  reviewing management’s assumptions for impairment of investment;
  evaluating the valuation and presentation of the unrealized gain/loss on investments;
  evaluating the adequacy of the Company’s disclosures relating to investment in unconsolidated entities;

 

Related Party Convertible Note Payable

 

As described in Note 9 to the consolidated financial statements, the Company entered into a securities purchase agreement with a related party pursuant to which a convertible note was issued with detached warrants.

 

The principal considerations for our determination that performing procedures relating to the accounting treatment of the transaction is a critical audit matter were (i) there was a high degree of auditor judgment and subjectivity in applying procedures relating to the fair value measurement of the transaction due to the significant amount of judgment by management when developing the estimate; (ii) significant audit effort was required in evaluating the significant assumptions relating to the estimates.

 

Our audit of the valuation of the convertible notes payable and attached warrants included, but was not limited to, the following procedures:

 

  understanding of controls relating to the loan raised;
  examining original convertible note and warrants agreements;
  reviewing management’s assumptions used in the valuation of the note, warrants and related interest and fee;
  reviewing management’s criteria of allocation of fair value allocation between note and warrants;
  obtaining technical guidance from third party experts on the accounting treatment;
  reviewing management’s assumptions for accounting treatment of the whole transaction;
  evaluating the adequacy of the Company’s disclosures relating to the loan raised from related party;

 

Income Taxes

 

As described in Note 2 and Note 14 to the consolidated financial statements, the Company uses the asset and liability method in accounting for income taxes. The Company recognizes deferred tax assets and liabilities for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases (“temporary differences”).

 

The principal considerations for our determination that auditing income tax matters is a critical audit matter included the significant judgment made by management when considering factors in assessing the more-likely-than-not tax position. In turn, such management’s assessment led to challenging and subjective auditor judgment in performing our audit procedures.

 

Our audit of income tax matters included, but was not limited to, the following procedures:

 

  understanding of controls relating to management assessment of the tax positions;
  reviewing management’s tax computations, testing the completeness and accuracy of data used in computations;
  evaluating the appropriateness of the tax positions.

 

/s/ Ankit Consulting Services, Inc.

 

We have served as the Company’s auditor since September 2017.

Rancho Santa Margarita, California

June 20, 2022

 

30

 

 

SHARING SERVICES GLOBAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

           
   As of March 31, 
   2022   2021 
ASSETS          
Current Assets          
Cash and cash equivalents  $17,023,266   $12,144,409 
Trade accounts receivable   1,682,958    1,514,359 
Income taxes receivable   300,000    1,011,740 
Notes receivable, net   -    94,600 
Inventory, net   4,374,236    2,471,310 
Other current assets, net   3,511,282    2,403,634 
Total Current Assets   26,891,742    19,640,052 
Property and equipment, net   9,585,141    887,950 
Right-of-use assets, net   593,389    428,075 
Deferred income taxes, net   

81,205

    1,873,170 
Investment in unconsolidated entities   5,063,940    - 
Intangible assets, net   688,670    188,567 
Other assets   260,637    219,142 
TOTAL ASSETS  $43,164,724   $23,236,956 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current Liabilities          
Accounts payable  $985,139   $1,295,174 
Accrued sales commission payable   3,745,481    4,713,777 
Employee stock warrants liability   452,050    3,132,161 
State and local taxes payable   1,339,366    1,048,717 
Note payable   -    1,040,400 
Accrued and other current liabilities   3,079,782    4,827,414 
Convertible notes payable, net of unamortized debt discount of $18,136,631 and unamortized deferred financing costs of $2,014,599 in 2022 and unamortized debt discount of $369 in 2021   9,898,770    99,631 
Total Current Liabilities   19,500,588    16,157,274 
Convertible notes payable, net of unamortized debt discount of $15,238 in 2021   -    34,762 
Settlement liability, long-term   373,677    808,071 
Lease liability, long-term   461,515    77,810 
TOTAL LIABILITIES   20,335,780    17,077,917 
Commitments and contingencies   -    - 
Stockholders’ Equity   -    - 
Preferred stock, $0.0001 par value, 200,000,000 shares authorized:          
Series A convertible preferred stock, $0.0001 par value, 100,000,000 shares designated, 3,100,000 shares and 5,100,000 shares issued and outstanding in 2022 and 2021, respectively   310    510 
Series B convertible preferred stock, $0.0001 par value, 10,000,000 shares designated, no shares issued and outstanding   -    - 
Series C convertible preferred stock, $0.0001 par value, 10,000,000 shares designated, 3,220,000 shares and 3,230,000 shares issued and outstanding in 2022 and 2021, respectively   322    323 
Common Stock, $0.0001 par value, 500,000,000 Class A shares authorized, 288,923,969 shares and 160,100,769 shares issued and outstanding in 2022 and 2021, respectively   28,892    16,010 
Common Stock, $0.0001 par value, 10,000,000 Class B shares authorized, no shares issued and outstanding   -    - 
Additional paid in capital   80,738,719    43,757,768 
Shares to be issued   12,146    12,146 
Accumulated deficit   (57,886,336)   (37,627,718)
Accumulated other comprehensive loss   (65,109)   - 
Total Stockholders’ Equity   22,828,944    6,159,039 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $43,164,724   $23,236,956 

 

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

 

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SHARING SERVICES GLOBAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

           
     
   For the Fiscal Years Ended March 31, 
   2022   2021 
Net sales  $34,424,314   $64,811,151 
Cost of goods sold   10,801,871    18,264,494 
Gross profit   23,622,443    46,546,657 
Operating expenses          
Selling and marketing expenses   17,239,655    29,740,974 
General and administrative expenses   19,714,963    18,983,209 
Total operating expenses   36,954,618    48,724,183 
Operating loss   (13,332,175)   (2,177,526)
Other income (expense)          
Interest expense, net   (12,204,444)   (47,613)
Gain on employee warrants liability   2,511,350    530,335 
Gain on extinguishment of debt   1,040,400    - 
Impairment loss on assets   (1,610,523)   - 
Unrealized gain on investments   3,663,940    - 
Other non-operating expense   (211,035)   (134,726)
Total other income (expense), net   (6,810,312)   347,996 
Loss before income taxes   (20,142,487)   (1,829,530)
Income tax benefit   (3,035,990)   (594,509)
Net loss  $(17,106,497)  $(1,235,021)
Other comprehensive loss (net of tax):          
Currency translation adjustments   (65,109)   - 
Total other comprehensive loss   (65,109)   - 
Comprehensive loss  $(17,171,606)  $(1,235,021)
Loss per share:          
Basic and diluted  $(0.08)  $(0.01)
Weighted average shares:          
Basic and diluted   206,211,711    172,046,517 

 

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

 

32

 

 

SHARING SERVICES GLOBAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

           
   For the Fiscal Years Ended March 31, 
   2022   2021 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(17,106,497)  $(1,235,021)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   655,267    163,248 
Stock-based compensation   (2,120,111)   3,578,707 
Deferred income taxes   (1,038,359)   (536,862)
Amortization of debt discount and other   12,231,501    18,647 
Gain on extinguishment of debt   (1,040,400)   - 
Impairment loss on assets   2,331,554    - 
(Gain) loss on investments and other assets   (3,663,940)   114,599