SHRG Sharing Services Global Corporation (PK)

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 Incidental to our Business:

Our dependence upon a direct selling system to sell our products, and the highly competitive and dynamic nature of the direct selling industry.

We market and distribute our products and services through a sales force of independent distributors, which we refer to as “Elepreneurs,” using a marketing strategy that is a form of direct selling. The direct selling industry generally experiences a relatively high rate of salesforce turnover. The distribution of our products and services depends upon our efforts to recruit, train and retain successful distributors. The success of our efforts to recruit and retain distributors may be affected by the competitive environment among direct-to-consumer companies, the conditions in the general labor market, including levels of employment, demographic and cultural changes in the workforce, and our level of marketplace penetration in the geographies in which we operate. There can be no assurance that we will remain competitive in recruiting and retaining enough successful distributors to grow our business.

The direct selling industry is highly competitive and dynamic, and there are few barriers to entering the industry. There are several companies, including many with more resources than the Company, that offer competing health and wellness products. Competing health and wellness products are offered by brick and mortar stores and online-based businesses. These businesses include online retailers, specialty health and wellness stores, drug stores and supermarkets, among others. 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 effectiveness and skills of the sales 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 we will remain competitive or that competition in our industry will not intensify.

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

Our ability to attract and retain key personalities and independent distributors to promote our products; the ability of a key personality or distributor to successfully perform his or her role; and the potential adverse effect of the loss of a high-level distributor or a significant number of distributors for causes out of our control.

The direct-to-consumer sales industry relies on key personalities, including social media influencers, and independent distributors to promote its products and services. We rely on the marketability and skills of key personalities and our distributors to promote our brand, and to distribute our products and services. Our inability to attract and retain qualified key personalities and distributors in the future, the inability or failure of a key personality or distributor to fulfill his or her role, the ineffectiveness of a key personality or distributor as a spokesperson for our products, a reduction in the exposure of a key personality due to the discontinuance of a marketing program or otherwise, the existence of negative publicity about a key personality, or the loss of a high-level distributor or a significant number of distributors for causes out of our control may adversely affect future sales of our products and services. This could have a material adverse effect on our financial condition, results of operations and cash flows.

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

We modify aspects of our sales compensation plan from time to time in order to keep our sales compensation plan competitive and attractive to our existing and future sales force, to address changing market conditions, to provide incentives that we believe will help grow our business, and to conform to changing government regulations, among other reasons. For example, we modified our sales force compensation plan in November 2018 and again in August 2019. In addition, we may be required to modify our sales compensation plan from time to time to comply with existing or new regulations in the future. Changes to our sales compensation plan, including changes perceived to reduce sales commissions earned by our sales force, could be negatively received by our sales force, could fail to achieve the desired long-term goals, and could adversely impact our business, financial condition, results of operations and cash flows.

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

We are an emerging growth company and had no significant sales history prior to December 2017. Our long-term success is dependent on our ability to grow our business. We have made significant investments in strategic growth initiatives, including several marketing initiatives designed to attract new customers, build brand awareness and generate recurring customer orders, which we call “SmartShip” orders. There can be no assurance that these strategic initiatives will result in the consolidated sales growth we anticipate, or at all, which could have a material adverse effect on our 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 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. We anticipate that continuously changing consumer preferences and buying trends will affect future demand for health and wellness products. If we do not effectively identify and respond in a timely manner to evolving consumer preferences and buying trends, and consumer demands for health and wellness products and services, our business, financial condition, results of operations and cash flows may be adversely affected.

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 substantial amount 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 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 failed 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.

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

A substantial portion of our credit card sales is processed by one merchant processor and, at April 30, 2020 and 2019, the Company’s accounts receivable includes $4.0 million and $4.1 million, respectively, from this merchant processor. Any disruption in the operations of this merchant processor, as a result of natural disasters, acts 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. The occurrence of any of these conditions could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our ability to attract and retain talented employees and management.

As an emerging growth business, our 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 an emerging growth 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 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 business, financial condition, results of operations and cash flows.

Our ability to effectively manage and control our operating expenses.

We are an emerging growth company and have not achieved consistent, sustained 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 expand our sales volume and business infrastructure. In furtherance of this goal, we have engaged in ongoing activities to control operating costs and expenses. There can be no assurance that our strategic initiatives and cost control efforts will result in the levels of profitable growth or positive cash flows that we expect, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our quarterly financial performance and potential fluctuations therein.

Our quarterly sales and financial results may fluctuate from time to time, and adversely affect the price of our common stock, often for reasons outside our control. Consumer demand for our products and services and, as a result, our quarterly consolidated sales, may increase or decrease materially as a result of, among other things, increased competition, changes in actual or anticipated levels of employment in the U.S., changes in interest rates applicable to credit cards, inflation, national and local political uncertainty, and changes in consumer sentiment in general. For example, consumer demand for our products and services may decrease, over the short-term, during and following a national health crisis, such as the recent crisis associated with the COVID-19 virus outbreak. Further, our results of operations and cash flows may fluctuate as a result of potential increases in our product costs, changes in the willingness or ability of our suppliers to provide product to us in a timely manner, changes in labor rates and in payroll tax rates in the U.S., and changes in the regulatory environment we operate. The occurrence of any of these conditions could have a material adverse effect on our quarterly financial performance.

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.

The Company is an emerging growth company and, prior to its fiscal quarter ended October 31, 2018, had not generated positive cash flows from operations. More recently, the Company has not consistently generated sustained, positive cash flows from operations, has experienced significant fluctuation in its quarterly cash flows from operations, or has otherwise depended on the issuance of equity securities and debt, including convertible notes and short-term borrowings under financing arrangements, to meet its working capital needs. If the Company is unable to generate sustained, positive cash flows from operations or to obtain additional equity or debt financing, if needed, it 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, slow the Company’s recent financial momentum and could have a material adverse effect on its financial condition, results of operations and cash flows.

Our financial performance could be adversely affected by economic slowdowns, particularly over extended periods.

Our results of operations may be materially impacted by changes in economic conditions in general, mainly in the U.S. and Canada. The economy in the U.S. and Canada may be adversely affected by government action and/or by current and future consumer concerns about, among other things, current and future levels of employment, changes in local, state, provincial and federal tax law, increases in energy costs, geopolitical conflict, natural disasters or acts of terrorism, widespread health crises, changes in interest rates applicable to credit cards, and inflation. For example, as further discussed below, in efforts to stop the spread of the COVID-19 virus, business activity in several sectors of the economy in the U.S. and Canada were severely reduced or completely halted, as a result of government action or otherwise, and significant numbers of workers were laid off in the affected businesses. As the affected businesses resume normal operations, there can be no assurance the economic recovery will be complete or, for some businesses, at all. In the event of a significant economic downturn, particularly over an extended period, whether as a result of the COVID-19 virus 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 materially 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.

Potential impact of COVID-19 virus outbreak.

In early March 2020, the World Health Organization declared the coronavirus outbreak (currently known as the “COVID-19” virus) a pandemic. Actions taken in the U.S., Canada and other affected countries, to help mitigate the aggressive spread of this pandemic, included restrictions on travel and movement, mandated quarantines in certain geographic areas, and forced closures for certain public places and businesses. As a result, business activity in several sectors of the economy in the U.S. and Canada (including restaurants, bars and nightclubs, hotels, movie theaters, cruise lines, and other entertainment sectors) were severely reduced or completely halted and significant numbers of workers have been laid off. We believe the COVID-19 virus and actions taken to mitigate it have had, and will continue to have, a potentially adverse material impact on the economies and financial markets of several countries, including the countries in which we operate. Given the widespread, persistent, and evolving nature of the COVID-19 health crisis and the significant degree of uncertainty associated with the disease, including ongoing efforts to develop an effective treatment and a vaccine, the Company cannot reasonably estimate the magnitude of the impact to the Company’s business, if any, and to its consolidated results of operations. In addition, as stated above, there can be no assurance that all the businesses affected will resume normal operations soon or that full economic recovery in the U.S. and Canada will occur soon. Accordingly, it is reasonably possible that estimates made in the Company’s consolidated financial statements have been, or will be, materially impacted in the near term as a result of these conditions. This may include estimates regarding losses on inventory, impairment losses related to long-lived assets, the nature and timing of satisfaction of performance obligations resulting from contracts with customers, and the valuation of loss contingencies. The ultimate resolution of these matters could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our ability to maintain a positive image and brand acceptance in the dynamic and sometimes unpredictable social media environment.

In recent years, there has been a significant increase in the use by businesses of social media platforms, including 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 the company’s reputation and business. Most consumers 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 for redress and correction of the information may be slow and costly. If we were the victim of negative, inaccurate or false information circulated through social media, this could adversely impact our reputation and business.

The Company also uses social media platforms, including Facebook and Instagram, to communicate with existing and prospective customers, Elepreneurs, 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 Elepreneurs, 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 business, financial condition, results of operations and cash flows.

Our ability to comply with current laws and regulations or our becoming subject to new or more stringent laws and regulations in the future, including applicable laws and regulations in jurisdictions outside the United States.

The products we sell are subject to several federal, state and local laws and regulations, mainly in the U.S. and Canada. 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 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 products we sell will not be challenged in civil or enforcement actions in the future. Our continued compliance with new and existing federal and state “safe-consumer-product” regulations, could also require the review and possible reformulation or relabeling of our products, as well as the possible removal of some products from the marketplace. If we were found to be in violation of existing or new regulations in the future, this could result in significant fines or damages and other enforcement actions, in addition to 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.

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 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 U.S. are limited and product liability insurance policies contain many exclusions. We believe our product liability insurance policies significantly reduce 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 was 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.

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

We have applied for, or are in the process of applying for, trademark protection in the United States and in other jurisdictions where we operate or intend to operate in the future. We have obtained 16 U.S. trademarks and anticipate securing additional U.S. trademarks and foreign trademarks. Trademark protection is increasingly important to our growing business. If we failed to register or enforce our intellectual property rights under trademark registrations or if our intellectual property rights were 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 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, financial condition, results of operations and cash flows.

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

The industry in which we operate 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 our products violate 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.

We are a party to lawsuits and other claims that may result in adverse outcomes.

We are a party to several claims and lawsuits that arise from a wide variety of business initiatives, including acquisition-related contingencies, disputes between the Company and certain former officers, and disputes between the Company and certain shareholders, as further detailed elsewhere in this Annual Report. Adverse outcomes in any of these claims may result in significant monetary damages or injunctive relief that could adversely affect our business. 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 in our consolidated financial position and results of operations could occur in the period in which the effect of 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.

Past or future reformulations of our products, including as a result of potential governmental enforcement action, could be negatively received by our 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 or 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 sales force and customers, and could adversely impact our business, financial condition, results of operations and cash flows.

Our stated intension to expand into foreign markets may expose us to foreign currency exchange rate fluctuations and other risks inherent to foreign operations.

Historically, approximately 95% or more of our sales have been to customers and/or independent distributors located in the U.S. As part of our growth strategies, however, we intend to pursue opportunities to also sell our products and services outside the U.S. As a result, our reported sales, expenses and cash flows in the future may be affected by fluctuations in applicable foreign currency exchange rates, and by economic and other conditions in the non-U.S. geographic areas we expand into. For example, international operations may result in exposure to more restrictive consumer safety, product labeling and other product regulations, more restrictive labor laws and regulations, frequent or unexpected changes in the regulatory environments, higher inflation rates, and political instability compared to the U.S. In addition, international operations may result in exposure to higher income tax rates, import and export restrictions and tariffs, and restrictions on the expatriation of cash. 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 effectively and cost-efficiently 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.

The occurrence of natural disasters, epidemics or other health emergencies, or acts of violence or terrorism in the geographies we operate 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 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.

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’s 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 annual or interim financial statements will not be prevented or detected on a timely basis. We currently do not have an internal audit team to assist management in its assessment of our internal control over financial reporting. 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.

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, 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 sanctions or investigations by the SEC or other regulatory authorities. Failure to 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.

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

Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by us in reports we file or submit under 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 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 our control system, misstatements or insufficient disclosures due to error or fraud may occur and not be detected.

If securities or industry analysts do not publish research or reports about our business, if our operating results do not meet their expectations, or if they adversely change their recommendations regarding our common stock, our stock price and trading volume could decline.

As an emerging market issuer, the trading market for our common stock would be influenced by the research and reports that securities or industry analysts publish about our business in the future. We do not currently have, and may never obtain, research coverage by securities analysts. We do not have any control over these reports or analysts. If any of the analysts who cover the Company in the future downgrades our stock, or if our operating results do not meet the analysts’ expectations, our stock price could decline. Moreover, if any of these analysts ceases coverage of the Company in the future or fails to publish regular reports on our business, we could lose visibility in the financial markets, which in turn could cause our stock price and trading volume to decline.

Because we do not anticipate paying any 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, if any, 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.

Future sales and issuances of our common stock or rights to purchase our common stock, including pursuant to our equity incentive plans, will result in additional dilution of the percentage ownership of our stockholders and could cause our trading price to decline.

We expect that significant additional capital will be needed in the future to continue our planned growth. To raise capital, we may sell substantial amounts of common stock or securities convertible into or exchangeable for common stock. These future issuances of equity or equity-linked securities, together with the exercise of stock options and warrants currently outstanding or granted in the future and any additional shares issued in connection with acquisitions, if any, may result in material dilution to the equity interests of our existing stockholders. In addition, as a result of such future sales, new investors could gain rights, preferences and privileges senior to those of current holders of our common stock.

Our Board of Directors expects to adopt an equity compensation plan in the future to attract and reward employees, executives and consultants with grants of our common stock. Future equity incentive grants and issuances of common stock under our potential future equity compensation plans 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.

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 efforts to uplist our stock in the NASDAQ Capital Market.

We will continue to incur significant increased costs, including significant 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 efforts 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. Furthermore, after our disclosed efforts to uplist our stock in the NASDAQ Capital Market, we will be subject to mandatory incremental corporate governance and other compliance requirements. In addition, 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 reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact (in ways we cannot currently anticipate) the way we operate our business. Our management and other personnel will need to devote a substantial amount 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 time period, we will continue to be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. 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 controls are functioning as documented 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.

B - Risks Incidental to our Information Technology Systems and 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 processing, Elepreneur 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, Elepreneurs, employees, vendors and other business partners that we received in the ordinary course of our business. A substantial disruption in our information technology systems, particularly for an extended period, could result in delays in receiving product and in filling customer orders, and adversely affect our relationships with our customers, Elepreneurs, 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 are currently in the process of implementing an information system upgrade that can accommodate the Company’s current and anticipated growth. Any expansion or upgrade to our systems and infrastructure 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 provide us with 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.

Threats to information technology security can take a variety of forms. Individual and groups of hackers and sophisticated organizations, including state-sponsored organizations or nation-states, frequently 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, employee, vendor or other information.

Cyberthreats are constantly evolving, making it increasingly difficult to prevent, detect and successfully defend against. A potential breach of our facilities, network 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. 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.

C - Risk Incidental to our Preferred Shareholder Rights:

Certain rights of our preferred stockholders may limit your rights as a common stockholder.

The Company 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). These various classes of common stock and series of preferred stock purport to establish certain preferential rights as to voting, Board member election, and decision-making processes. As of April 30, 2020, there are 136,072,386 shares of our common stock (including the Class A and the Class B) and 45,968,750 shares of our convertible preferred stock (including the Series A, the Series B, and the Series C preferred stock) issued and outstanding.

The rights of the holders of Series A, B and C Preferred Stock are set out in a Certificate of Designation (for each such series) filed in the State of Nevada. Given the questionable circumstances under which the Series B Certificate of Designation (“COD”) was created as well as the inclusion of provisions in such COD which are in contravention of the rights of the shareholders as established by the Amended And Restated Article of Incorporation and Nevada law, the Company caused the filing of a corrected COD for such Series B Preferred Class. In a related action, in order to protect the rights of the other shareholders, the Company subsequently filed a lawsuit against the two shareholders holding the entirety of this series of Preferred Stock seeking a declaratory action to establish: (i) the propriety of the Amended Series B COD and (ii) the infirmities of the original Series B COD. The nature and scope of this litigation is described in ITEM 3. – “LEGAL PROCEEDINGS” below.

In a related action, the Company further filed a lawsuit against Bear Bull Market Dividends, Inc. in Texas state court seeking a determination that this entity is properly designated as a shareholder of the Company. The basis for this lawsuit, which has been subsequently transferred to the Clark County, Nevada District Court, is the determination by the Company that the purported award of stock to Bear Bull Market Dividends, Inc. was improper on the basis of fraud in the inducement and the failure of consideration for the original stock transfer transaction. The underpinning of lawsuit is to contest the status of Bear Bull Market Dividends, Inc. as a shareholder of any class or series of stock of the Company. The nature and scope of this litigation is described in ITEM 3. – “LEGAL PROCEEDINGS” below.

As further reported in ITEM 3. – “LEGAL PROCEEDINGS” below, an entry of default in favor of the Company has been recorded in the Nevada proceedings, in both cases.

The result of these legal actions will be to establish that the party which controls all votes under the Common B and Series B Preferred shares is Alchemist Holdings, LLC, which, in turn, is subject to a series of agreements favorable to the Company regarding the voting of those classes of stock and the prohibition of such shareholder of taking actions which are adverse to the Company.