SHRG Sharing Services Global Corporation (PK)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 –DESCRIPTION OF OPERATIONS AND BASIS OF PRESENTATION

Description of Operations

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 that augment the Company’s product and services portfolio, business competencies, and geographic reach. Sharing Services was incorporated in the State of Nevada in April 2015.

In March 2021, Sharing Services changed its fiscal year-end from a fiscal year ending on April 30^th to a fiscal year ending on March 31^st. In connection with its change in fiscal year-end, the Company has 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 condensed consolidated financial statements included herein reflect the results of operations and cash flows for the nine months ended December 31, 2021 (275 days) compared to the nine months ended January 31, 2021 (276 days).

Health and Wellness Products - The Company’s subsidiaries operating in the health and wellness products industry, which accounted for substantially all the Company’s consolidated net sales during the periods included in this Quarterly Report, market their products primarily through an independent sales force, using a direct selling business model under the proprietary brand “The Happy Co.” Currently, The Happy Co. ^TM markets and distributes its health and wellness products primarily in the United States (the “U.S.”), Canada, the Republic of Korea, and other countries in the Asia Pacific region. In addition, certain of the Company’s domestic subsidiaries market its health and wellness products on a “not-for-resale” basis to consumers in other countries outside the U.S., including Australia, New Zealand, and parts of Europe.

Subscription-Based Travel Services - Through its subsidiary, Hapi Travel Destinations, the Company is preparing to launch a subscription-based travel services business under the proprietary brand “Hapi Travel.” The Hapi Travel ^TM services are designed to offer the opportunity to travel to destinations in the U.S. and abroad to people of all ages, demographics, and economic backgrounds. Hapi Travel will also provide entrepreneurial opportunities to its subscribers by capitalizing on both the direct selling model and the retail travel business model.

Company-Owned and Franchised Destination Cafes – Sharing Services and Hapi Café, Inc, a company affiliated with Heng Fai Ambrose Chan, a Director of the Company, entered into a Master Franchise Agreement (the “MFA”) pursuant to which Sharing Services acquired the exclusive franchise rights in North America to the brand “Hapi Café.” Under the terms of the MFA, Sharing Services, directly or through its subsidiaries, has the right to operate no less than five (5) corporate-owned stores and can offer to the public sub-franchise rights to own and operate other stores, subject to the terms and conditions contained in the MFA.

Targeted Ownership Interests – Directly or through its subsidiaries, the Company from time to time will invest in emerging businesses, using a combination of debt and equity financing, in efforts to leverage the Company’s resources and business competencies and to participate in the growth of these businesses. As part of the Company’s commitment to these emerging businesses’ success, the Company, directly or through its subsidiaries, also plans to offer non-traditional inventory financing, equity or debt financing, order fulfillment and logistic, CRM “Back Office” solutions, and other success-critical services to these businesses.

Basis of Presentation

The unaudited condensed consolidated interim financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited condensed consolidated interim financial statements reflect all adjustments which are of a normal recurring nature, and which are, in the opinion of management, necessary to present fairly the results of the interim period presented. Certain note disclosures normally included in annual financial statements prepared in accordance with US GAAP have been condensed or omitted as permitted pursuant to the rules and regulations of the SEC. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Transition Report on Form 10-K for the transition period ended March 31, 2021. Unless so stated, the disclosures in the accompanying unaudited condensed consolidated financial statements do not repeal the disclosures in our consolidated financial statements for the transition period ended March 31, 2021.

During the 11-month transition period ended March 31, 2021, and the nine months ended December 31, 2021, consolidated net loss was $1,235,021 and $13,202,933, respectively. During the 11-month transition period ended March 31, 2021, and the nine months ended December 31, 2021, consolidated cash used in operating activities was $1,566,970 and $13,178,848, respectively. As of December 31, 2021, consolidated cash and cash equivalents are $19,780,531. In the near term, the Company anticipates continuing to use operating cash due to: (i) a sustained reduction in sales; (ii) investments in new geographic markets, new lines of business, and/or new products; and (iii) costs associated with the due diligence associated with purchasing strategic assets and companies. The Company believes that funds from the $30 million convertible loan received from Decentralized Sharing Systems, Inc. (“DSSI”) on April 5, 2021 (see Note 8 below) and proceeds from investments by DSSI into the Company, provide the Company with sufficient liquidity to sustain the Company’s plans and operations at current levels over the next twelve months.

The accompanying condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Reclassifications

Certain reclassifications have been made to the prior year data to conform to the current period’s presentation, primarily consisting, as of March 31, 2021, reclassification of the liability associated with uncertain tax positions of $904,643 and, for the nine months ended January 31, 2021, reclassification of the gain on employee warrants liability of $672,230.

Use of Estimates and Assumptions

The preparation of financial statements in accordance with US GAAP requires the use of judgment and requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosures about contingent assets and liabilities, if any. Matters that require the use of estimates and assumptions include: the recoverability of notes and accounts receivable, the valuation of inventory, the useful lives of fixed assets, the assessment of long-lived assets for impairment, the nature and timing of satisfaction of performance obligations resulting from contracts with customers, allocation of the transaction price to multiple performance obligations in a sales transaction, the measurement and recognition of right-of-use assets and related lease liabilities, the valuation of stock-based compensation awards, the measurement and recognition of uncertain tax positions, and the valuation of loss contingencies, if any. Actual results may differ from these estimates in amounts that are material to our consolidated financial statements. We believe that the estimates and assumptions used in the preparation of our consolidated financial statements are reasonable.

Cash, Cash Equivalents, and Restricted Cash

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company includes in its consolidated cash and cash equivalents credit card receivables due from its merchant processors, which are expected to be settled within 24 to 72 hours. At December 31, 2021, and March 31, 2021, such credit card receivables were $3,481,546 and $6,225,139, respectively. In addition, as of December 31, 2021, and March 31, 2021, cash and cash equivalents held in bank accounts in foreign countries in the ordinary course of business were $1,756,997 and $1,612,026, respectively. Amounts held by merchant processors or held in bank accounts located in foreign countries are generally not insured by any federal agency.

Inventory

Inventory consists of finished goods and promotional materials and are stated at the lower of cost, determined using the first-in, first-out (“FIFO”) method, or net realizable value. The Company periodically evaluates the carrying value of its inventory based on a comparison of current quantities on hand with historical and anticipated sales levels. During the three months ended December 31, 2021, and January 31, 2021, the Company recognized a provision for excess or obsolete inventory of $103,787 and $948,222, respectively, in connection with health and wellness products that are damaged, expired or expiring soon. During the nine months ended December 31, 2021, and January 31, 2021, the Company recognized a provision for excess or obsolete inventory of $448,484 and $990,831, respectively, in connection with health and wellness products that are damaged, expired or expiring soon. The Company reports its provisions for inventory losses in cost of goods sold in its consolidated statements of operations.

Note Payable

In May 2020, Sharing Services was granted a loan (the “PPP Loan”) by a commercial bank in the amount of approximately $1.0 million, pursuant to the Paycheck Protection Program features of the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”).

At March 31, 2021, loan principal in the amount of approximately $1.0 million was outstanding. The Company’s borrowings under the PPP Loan were eligible for loan forgiveness under the provisions of the CARES Act. In June 2021, the Company was formally notified by the lender that the Company’s obligations under the loan were forgiven effective May 25, 2021. The loan forgiveness applied to all principal and interest accrued through the loan forgiveness effective date. The Company recognized a gain on extinguishment of debt of $1,040,400 in connection with such loan forgiveness.

Foreign Currency Translation

Prior to April 1, 2021, substantially all consolidated revenues and expenses were denominated in U.S. dollars. As part the Company’s growth initiatives, it is in the process of expanding its operations outside the United States. The functional currency of each of our foreign operations is generally their respective local currency. Balance sheet accounts are translated into U.S. dollars (our reporting currency) at the rates of exchange in effect at the balance sheet date, while the results of operations and cash flows are generally translated using average exchange rates for the periods presented. Individually material transactions, if any, are translated using the actual rate of exchange on the transaction date. The resulting translation adjustments are reported in cumulative translation adjustments in our consolidated balance sheets.

Comprehensive Income (Loss)

For the three and nine months ended December 31, 2021, the Company’s consolidated comprehensive income (loss) consists of currency translation adjustments and net loss. Prior to April 1, 2021, the only component of the Company’s comprehensive income was its net earnings (loss).

Revenue Recognition

The Company’s subsidiaries operating in the health and wellness products industry, which accounted for substantially all the Company’s consolidated net sales during the periods included in this Quarterly Report, market their products primarily through an independent sales force, using a direct selling business model under the proprietary brand “The Happy Co.” As of December 31, 2021, and March 31, 2021, deferred sales revenue associated with product invoiced but not received by customers at the balance sheet date was $655,918 and $1.2 million, deferred sales revenue associated with unfulfilled performance obligations for services offered on a subscription basis was $76,722 and $153,216, and deferred sales revenue associated with performance obligations for customers’ right of return was $68,831 and $95,780, respectively. Deferred sales revenue is expected to be recognized over one year.

During the nine months ended December 31, 2021, no individual customer, or affiliated group of customers, represents 10% or more of net sales, and approximately 67% of consolidated net sales were to consumers (including 32% to recurring customers, referred to herein as “SmartShip” sales, and approximately 35% to new customers) and approximately 33% of net sales were to independent distributors. During the nine months ended January 31, 2021, no individual customer, or affiliated group of customers, represents 10% or more of our consolidated net sales, and approximately 71% of our net sales were to customers (including 45% to recurring customers, and approximately 26% to new customers) and approximately 29% of our net sales were to our independent distributors.

During the nine months ended December 31, 2021, and January 31, 2021, approximately 86% and 94%, respectively, of net sales were to customers and/or independent distributors located in the U.S. No other country accounted for 10% or more of net sales.

During the nine months ended December 31, 2021, substantially all net sales are from health and wellness products (including approximately 39% from the sale of Nutraceutical products, 29% from the sale of coffee and other functional beverages, 12% from the sale of weight management products, and approximately 20% from the sale of all other health and wellness products). During the nine months ended January 31, 2021, approximately 99% of consolidated net sales are from the sale of health and wellness products (including 55% from the sale of Nutraceutical products, 27% from the sales of coffee and other functional beverages, and 17% from the sale of all other health and wellness products).

During the nine months ended December 31, 2021, approximately 58% of product purchases were from a third-party manufacturer based in the U.S., and approximately 41% of product purchases were from various suppliers located in Asia. During the nine months ended January 31, 2021, product purchases from a third-party manufacturer (the same U.S.-based supplier discussed in the preceding sentence) accounted for approximately 98% of total product purchases.

Sales Commissions

The Company’s subsidiaries recognize sales commission expense, which is included in selling and marketing expenses in its consolidated statements of operations and comprehensive loss, when incurred, in accordance with U.S. GAAP. During the three months ended December 31, 2021, and January 31, 2021, consolidated sales commission expense was $3.7 million and $7.0 million, respectively, and during the nine months ended December 31, 2021, and January 31, 2021, $13.6 million and $25.1 million, respectively.

Recently Issued Accounting Standards - Adopted This Fiscal Year

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12, among other things, (a) eliminates the exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income (or a gain) from other items, (b) eliminates the exception to the general methodology for calculating income taxes in an interim period when the year-to-date loss exceeds the anticipated loss for the year, (c) requires than an entity recognize a franchise tax (or a similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax, and (d) requires than an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation for the interim period that includes the enactment date. The Company adopted ASU 2019-12 effective April 1, 2021, and the adoption did not have a material impact on its consolidated financial statements.

Recently Issued Accounting Standards - Pending Adoption

In August 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (ASU 2020-06), which simplifies the accounting for certain convertible instruments. Among other things, under ASU 2020-06, the embedded conversion features no longer must be separated from the host contract for convertible instruments with conversion features not required to be accounted for as derivatives, or that do not result in substantial premiums accounted for as paid-in capital. ASU 2020-06 also eliminates the use of the treasury stock method when calculating the impact of convertible instruments on diluted Earnings per Share. For the Company, the provisions of ASU 2020-06 are effective for its fiscal quarter beginning on April 1, 2024. Early adoption is permitted, subject to certain limitations. The Company is evaluating the potential impact of adoption on its consolidated financial statements.

NOTE 2 – EARNINGS (LOSS) PER SHARE

The Company calculates its basic earnings (loss) per share by dividing net earnings (loss) available to common shareholders by the weighted average number of common shares outstanding during the reporting period. Diluted earnings (loss) per share is calculated similarly but reflects the potential impact of shares issuable upon the conversion or exercise of outstanding convertible preferred stock, convertible notes payable, stock warrants, and other commitments to issue common stock, except where the impact would be anti-dilutive.

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

The preceding table does not include 3,750,000 and 14,250,000 stock warrants held by employees which are not vested (or exercisable) at December 31, 2021, and January 31, 2021, respectively.

The following potentially dilutive securities and instruments were outstanding as of December 31, 2021, and January 31, 2021, but were excluded from the table above because their impact would be anti-dilutive:

NOTE 3 – INVENTORY

Inventory consists of the following:

The increase in finished goods as of December 31, 2021, compared to as of March 31, 2021, reflects the inventory of the Company’s South Korean subsidiary, which started its operations in June 2021, of approximately $2.0 million.

NOTE 4 – OTHER CURRENT ASSETS

Other current assets consist of the following:

NOTE 5 – INVESTMENT IN UNCONSOLIDATED ENTITIES

In September 2021, the Company, Stemtech Corporation (“Stemtech”) and Globe Net Wireless Corp. (“GNTW”) entered into a Securities Purchase Agreement (the “SPA”) pursuant to which the Company invested $1.4 million in Stemtech in exchange for: (a) a Convertible Promissory Note in the amount of $1.4 million in favor of the Company (the “Convertible Note”) and (b) a detachable Warrant to purchase shares of GNTW common stock (the “GNTW Warrant”). Stemtech is a subsidiary of GNTW. As an inducement to enter into the SPA, GNTW agreed to pay to the Company an origination fee of $500,000, payable in shares of GNTW’s common stock. The Convertible Note matures on September 9, 2024, bears interest at the annual rate of 10%, and is convertible, at the option of the holder, into shares of GNTW’s common stock at a conversion rate calculated based on the closing price per share of GNTW’s common stock during the 30-day period ended September 19, 2021. The GNTW Warrant expires on September 13, 2024, and conveys the right to purchase up to 1.4 million shares of GNTW’s common stock at a purchase price calculated based on the closing price per share of GTNW’s common stock during the 10-day period ended September 13, 2021. In September 2021, GNTW issued to the Company 154,173 shares of its common stock, or less than 1% of the shares of GNTW then issued and outstanding, in payment of the origination fee.

The Company carries its investment in the Convertible Note, the GNTW Warrant and the shares of GNTW common stock at fair value in accordance with U.S. GAAP. During the three and nine months ended December 31, 2021, the Company recognized unrealized gains, before income tax, of $1.2 million and $3.3 million, respectively, in connection with its investment in the Convertible Note, the GNTW Warrant and the shares of GNTW common stock.

In September 2021, the Company entered into a Membership Unit Purchase Agreement pursuant to which the Company acquired a 30.75% equity interest in MojiLife, LLC, a limited liability company organized in the State of Utah, in exchange for $1,537,000. MojiLife is an emerging growth distributor of technology-based consumer products, such as cordless scent diffusers, for the home and the car, as well as proprietary home cleaning products and accessories. During the nine months ended December 31, 2021, the Company recognized equity in losses of $59,629, before income tax, in connection with its investment in MojiLife.

Investment in unconsolidated entities consists of the following:

NOTE 6 - PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

For the three months ended December 31, 2021 and January 31 2021, depreciation and amortization expense was $77,688 and $43,735, respectively. For the nine months ended December 31, 2021 and January 31 2021, depreciation and amortization expense was $255,087 and $161,663, respectively.

On December 8, 2021, the Company, through one of its subsidiaries, purchased an office building in Lindon, Utah for $8,942,640, including $3,675,000 allocated to land. The capitalized costs include legal and other professional fees incurred directly in connection with the purchase of the property. Once placed in service, the building will be depreciated over its estimated remaining useful life, approximately 28 years.

During the fiscal year ended March 31, 2021, the Company capitalized $715,354 in computer software in connection with upgrades to its information technology systems then placed in service. In addition, during the fiscal year ended March 31, 2021, the Company incurred $163,106 in capitalizable costs primarily in connection with leasehold improvements for office facilities and ongoing upgrades to its information technology systems yet to be placed in service as of March 31, 2021. These costs were reported in other assets in our consolidated balance sheets until the related assets were placed in service in the current fiscal year.

NOTE 7 – ACCRUED AND OTHER CURRENT LIABILITIES

Accrued and other current liabilities consist of the following:

NOTE 8 - CONVERTIBLE NOTES PAYABLE

Convertible notes payable consists of the following:

The Company’s convertible notes are convertible, at the option of the holder, into shares of the Company’s Common Stock at the conversion prices shown above.

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 became a Director of the Company in April 2020. The Note is convertible into 333,333 shares of the Company’s Common Stock. Concurrent with issuance of the Note, the Company issued to HWH a detachable 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. See Note 11 below.

In December 2019, the Company and the holder of the Company’s $100,000 convertible note dated April 13, 2018 (the “April 2018 Note”) entered into an amendment to the underlying promissory note. Pursuant to the amendment, the parties extended the maturity date of the note to April 2021. In addition, after giving effect to the amendment, the April 2018 Note is non-interest bearing. All other terms of the April 2018 Note remain unchanged. As of the date of this Quarterly Report, the Company and the holder of the note are discussing options, which may include the conversion in full or in part of the note, and the repayment of any remainder of the note. The Company intends to conclude these discussions and to settle the April 2018 Note in the foreseeable future.

On April 5, 2021, the Company and DSSI entered into a Securities Purchase Agreement, pursuant to which the Company issued: (a) a Convertible Promissory Note in the principal amount of $30.0 million (the “Note”) in favor of DSSI, and (b) a detachable Warrant to purchase up to 150,000,000 shares of the Company’s Class A Common Stock, at $0.22 per share, and DSSI loaned to the Company $30.0 million. DSSI, is a subsidiary of DSS, Inc. (formerly Document Security Systems, Inc.) (“DSS”), and, together with DSS, is a majority shareholder of the Company. Under the terms of the loan, the Company agreed to pay to DSSI a loan origination fee of $3.0 million, payable in shares of the Company’s Class A Common Stock, at the rate of $0.20 per share. The Note bears interest at the annual rate of 8% and matures on April 5, 2024, subject to certain acceleration provisions upon the occurrence of an Event of Default, as defined in the Note. At any time during the term of the Note, all or part of the Note, including the principal amount less unamortized prepaid interest, if any, plus any accrued interest can be converted into shares of the Company’s Class A Common Stock at the rate of $0.20 per share, at the option of the holder. 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 is pre-payable in shares of the Company’s Class A Common Stock, at the rate of $0.20 per share.

In connection with the issuance of the Note and the detachable Warrant, the Company allocated $15.0 million of the net proceeds from the loan to the detachable Warrant, allocated $12.0 million of the net proceeds to the beneficial conversion feature embedded in the Note and recognized deferred financing costs of $3.0 million. The resulting debt discount and the deferred financing costs are being amortized into interest expense over the term of the note (three years). During the nine months ended December 31, 2021, the Company issued to DSSI 27,000,000 shares of its Class A Common Stock, including 15,000,000 shares in payment of the loan origination fee discussed above and 12,000,000 shares in prepayment of interest for the first year. In connection therewith, the Company recognized a deemed dividend of $1,080,000 for the excess of the fair value of the shares issued over the amounts settled.

During the three months ended December 31, 2021, and January 31, 2021, interest expense in connection with the Company’s convertible notes was $605,934 and $1,512, respectively, excluding amortization of debt discount of $2,268,942 and $5,121, respectively, and, during the three months ended December 31, 2021, amortization of deferred financing costs of $251,825. During the nine months ended December 31, 2021, and January 31, 2021, interest expense in connection with the Company’s convertible notes was $1,779,353 and $4,537, respectively, excluding amortization of debt discount of $6,659,359 and $15,363, respectively, and, during the nine months ended December 31, 2021, amortization of deferred financing costs of $739,051. These amounts are included in interest expense in our consolidated statements of operations.

NOTE 9 – INCOME TAXES

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

For the nine months ended December 31, 2021, and January 31, 2021, the consolidated effective tax rate was -11.1% and -134.6%, respectively. For the nine months ended December 31, 2021, the effective tax rate was different from the federal statutory rate primarily due to the valuation allowance of $4.5 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. For the nine months ended January 31, 2021, the effective tax rate was different from the federal statutory rate primarily due to the provision for state and local income taxes. Income taxes applicable to our foreign operations are not material in the periods presented.

For the nine months ended December 31, 2021, and January 31, 2021, our income tax rate reconciliation is as follows:

NOTE 10 - STOCKHOLDERS’ EQUITY

Common Stock

On July 28, 2021, the Company held its Annual Meeting of Stockholders. At the meeting, the Company’s Shareholders ratified the Second Amended and Restated Articles of Incorporation of the Company, which was previously approved by the Board of Directors. The Second Amended and Restated Articles of Incorporation, among other things, increased the authorized number of shares of the Company’s stock to 1,000,000,000 shares, including: (a) 800,000,000 shares of Common Stock having a par value of $0.0001 per share, and (b) 200,000,000 shares of Preferred Stock having a par value of $0.0001 per share and comprised of the Company’s Convertible Series A Preferred Stock and Convertible Series C Preferred Stock.

During the nine months ended December 31, 2021, Sharing Services 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, as more fully discussed in Note 8 above. In addition, on December 23, 2021, Sharing Services and DSSI entered into a Stock Purchase and Share Subscription Agreement pursuant to which DSSI invested $3,000,000 in the Company in exchange for an aggregate of 50,000,000 shares of Class A Common Stock and warrants to purchase up to 50,000,000 shares of the Company’s Class A Common Stock. Further, during the nine months ended December 31, 2021, the holders of 10,000 shares of the Company’s Series C preferred stock converted such holdings into 10,000 shares of the Company’s Class A Common Stock, and the Company issued 1,813,200 shares of its Class A Common Stock in connection with the exercise of stock warrants by its employees and/or independent distributors.

As of December 31, 2021, 238,923,969 shares of our Class A Common Stock are issued and outstanding.

NOTE 11 - RELATED PARTY TRANSACTIONS

Decentralized Sharing Systems, Inc.

On April 5, 2021, Sharing Services and DSSI entered into a Securities Purchase Agreement, pursuant to which the Company issued: (a) a Convertible Promissory Note in the principal amount of $30.0 million (the “Note”) in favor of DSSI, and (b) a detachable Warrant to purchase up to 150,000,000 shares of the Company’s Class A Common Stock, at $0.22 per share, and DSSI loaned to the Company $30.0 million. 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. See Note 8 for more information.

On December 23, 2021, Sharing Services and DSSI entered into a Stock Purchase and Share Subscription Agreement pursuant to which DSSI invested $3,000,000 in the Company in exchange for an aggregate of 50,000,000 shares of Class A Common Stock (the “Shares”) and warrants (the “Warrants”) to purchase up to 50,000,000 shares of the Company’s Class A Common Stock. The Warrants are fully vested, have a term of five (5) years and are exercisable at any time prior to expiration, at the option of DSSI, at a per share price equal to $0.063 ( “Transaction”). On the Warrants issuance date, the closing price for the Company’s common stock was $0.075 per share. The Company recognized a deemed dividend of $2.3 million in connection with its issuance of the Shares and the Warrants.

As of December 31, 2021, DSS and its affiliates owned, in the aggregate, 141.9 million shares of the Company’s Class A Common Stock, excluding 210.0 million shares issuable upon the exercise of warrants held by DSS and 150.0 million shares issuable upon conversion of the Note discussed in the preceding paragraph. Heng Fai Ambrose Chan, Frank D. Heuszel, and John (“JT”) Thatch, each a Director of the Company, also serve on the Board of Directors of DSS. Mr. Chan serves as Chairman of the Board of Directors of the Company. Mr. Thatch also serves as President, CEO and Vice Chairman of the Board of Directors of the Company.

Alset Title Company, Inc.

On December 8, 2021, Sharing Services, through one of its subsidiaries, purchased an office building in Lindon, Utah for $8,942,640. In connection therewith, Alset Title Company, Inc. (“Alset Title”), a subsidiary of DSS, issued an Owner’s Title Insurance Policy in favor of Sharing Services and acted as escrow and closing agent for the transaction. DSS, together with its subsidiaries, is a majority shareholder of the Company.

Hapi Café, Inc.

In November 2021, Sharing Services and Hapi Café, Inc, a company affiliated with Heng Fai Ambrose Chan, a Director of the Company, entered into a Master Franchise Agreement pursuant to which Sharing Services acquired the exclusive franchise rights in North America to the brand “Hapi Café.” Under the terms, Sharing Services, directly or through its subsidiaries, has the right to operate no less than five (5) corporate-owned stores and can offer to the public sub-franchise rights to own and operate other stores, subject to the terms and conditions contained in the Master Franchise Agreement.

HWH International, Inc.

In October 2017, Sharing Services issued a Convertible Promissory Note in the principal amount of $50,000 (the “Note”) to HWH International, Inc (“HWH” or the “Holder”). HWH is affiliated with Heng Fai Ambrose Chan, who became a Director of the Company in April 2020. The Note is convertible into 333,333 shares of the Company’s Common Stock. Concurrent with issuance of the Note, the Company issued to HWH a detachable stock warrant to purchase up to an additional 333,333 shares of the Company’s Common Stock, at an exercise price of $0.15 per share. Under the terms of the Note and the detachable stock warrant, the Holder is entitled to certain financing rights. If the Company enters into more favorable transactions with a third-party investor, it must notify the Holder and may have to amend and restate the Note and the detachable stock warrant to be identical. As of the date of this Quarterly Report, the Company and HWH are jointly reviewing the Note and the detachable stock warrant. The number of shares that HWH may acquire upon conversion of the HWH Note and exercise of the detachable stock warrant may be greater than the amounts described in this paragraph, depending on the results of such review.

HWH World, Inc.

A subsidiary of the Company operating in the Republic of Korea subleases office space from HWH World, Inc., a subsidiary of DSS and a company affiliated with Heng Fai Ambrose Chan, a Director of the Company. Pursuant to the terms of the sublease agreement, the Company recognized a right-of-use asset and an operating lease liability of $303,322 in connection therewith. In the nine months ended December 31, 2021, the Company recognized expense of $129,113 in connection this lease. As of December 31, 2021, accounts payable includes payments due to HWH World under the lease of $179,763.

In September 2021, the Company and HWH World, Inc., a subsidiary of DSS and a company affiliated with Heng Fai Ambrose Chan, a Director of the Company, entered into an Advisory Agreement pursuant to which the Company provides strategic advisory services to HWH World, Inc. in connection with its North America expansion plans in exchange for a monthly fee of $10,000. During the three and nine months ended December 31, 2021, the Company recognized consulting income of $36,700 in connection therewith.

Impact Biomedical, Inc.

In the nine months ended December 31, 2021, a wholly owned subsidiary of the Company purchased health and wellness products from Impact Biomedical, Inc., a subsidiary of DSS, in the aggregate amount of $82,664.

K Beauty Research Lab. Co., Ltd

In the nine months ended December 31, 2021, a wholly owned subsidiary of the Company purchased skin care products manufactured by K Beauty Research Lab. Co., Ltd (“K Beauty”), a South Korean-based supplier of skin care products that is affiliated with Heng Fai Ambrose Chan, a Director of the Company, in the aggregate amount of $2.3 million. The Company’s affiliates operating in Asia intend to distribute skin care and other products in South Korea and other countries, including skin care products procured from K Beauty, as part of the Company’s previously announced strategic growth plans.

Premier Packaging Corporation

In the nine months ended December 31, 2021, a wholly owned subsidiary of the Company issued purchase orders to Premier Packaging Corporation, a subsidiary of DSS, to acquire printed packaging materials in the aggregate amount of $152,813.

Alchemist Holdings, LLC - Related Party Sublease

The Company subleases warehouse and office space from Alchemist Holdings, LLC, a shareholder of the Company. During the nine months ended December 31, 2021, and January 31, 2021, rent expense associated with such sublease agreement was $75,486 and $68,643, respectively.

As disclosed in our Transition Report for the transition period ended March 31, 2021, in June 2020, the Company entered into a Settlement Accommodation Agreement and an Amended and Restated Founder Consulting Agreement with a former officer of the Company who is a principal of Alchemist Holdings, LLC. The Company recognized a settlement liability of $2.0 million in connection therewith. As of December 31, 2021, the settlement liability balance is $715,596.

NOTE 12 – STOCK-BASED COMPENSATION

Stock Warrants

Stock Warrants Issued to Directors, Officers and Employees

In July 2020, Sharing Services and Heng Fai Ambrose Chan, a Director of the Company, entered into a Stock Purchase and Share Subscription Agreement (the “SPA Agreement”) pursuant to which Mr. Chan invested $3.0 million in the Company in exchange for 30.0 million shares of the Company’s Class A Common Stock and a fully vested Stock Warrant to purchase up to 10.0 million shares of the Company’s Class A Common Stock at an exercise price of $0.20 per share. In July 2020, Mr. Chan assigned to DSS all interests in the SPA Agreement and the transactions contemplated in the SPA Agreement were completed. Mr. Chan is also a Director of DSS.

In October 2017, Sharing Services issued a convertible note in the principal amount of $50,000 to HWH International, Inc (“HWH”) and a detachable stock warrant to purchase up to 333,333 shares of the Company’s Common Stock, at an exercise price of $0.15 per share. The Note is convertible into 333,333 shares of the Company’s Common Stock and expires in October 2022. HWH is affiliated with Heng Fai Ambrose Chan, who became a Director of the Company in April 2020.

During the fiscal year 2020, certain domestic subsidiaries of the Company entered multi-year employment agreements with certain of its key employees. In general, each employment contract contained a fully vested initial grant of warrants exercisable at a fixed exercise price and, provided for subsequent grants that were exercisable at a discounted price based on the 10-day average stock price determined at the time of exercise. The subsequent grants would vest at each anniversary date of the employment agreement effective date. The Company begins recognizing the compensatory nature of the warrants at the service inception date and ceases recognition at the vesting date. Due to the variable nature of the exercise price for some grants, the Company will continue to recognize expense (or benefit) after the end of the service period until the warrants are exercised or expire. As such, the Company disclosures below are based, as appropriate, on either (i) the fixed exercise price of the warrant; or (ii) the variable exercise price of the warrant as determined on the last day of the period.

During the three months ended December 31, 2021, and January 31, 2021, the Company recognized a gain of $154,488 and a loss of $234,145, respectively, in connection with grants with a variable exercise price after the service period ended. During the nine months ended December 31, 2021, and January 31, 2021, the Company recognized a gain of $1,935,588 and $672,230, respectively, in connection with grants with a variable exercise price after the service period ended.

NOTE 13 – LEASES

The Company leases space for its offices and warehouse space, under lease agreements classified as “operating leases’” as defined in ASC Topic 842. The weighted-average remaining lease term and discount rate related to the Company’s lease liabilities as of December 31, 2021, were 1.0 year and 12% respectively. The Company’s discount rate is generally based on estimates of its incremental borrowing rate, as discount rates implicit in the Company’s leases cannot be readily determined.

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

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

The Company’s lease liability is payable as follows:

NOTE 14 – COMMITMENTS AND CONTINGENCIES

Regulatory Matters

In May 2021, the Company announced that it has received a notice from the pertinent licensing authority in the Republic of Korea, (“KOSSA”) stating that the multi-level license previously issued to the Company’s subsidiary organized in South Korea has been cancelled by KOSSA. The Company is actively investigating the facts surrounding the cancellation and is reviewing all available options to resolve all outstanding issues raised by KOSSA. In addition, the Company has retained a well-respected local law firm and is evaluating several options available to the Company to conduct business in South Korea.

Legal Matters in General

The Company and its subsidiaries have incurred several claims in the normal course of business. The Company believes such claims can be resolved without any material adverse effect on our consolidated financial position, results of operations, or cash flows.

The Company maintains certain liability insurance. However, certain costs of defending lawsuits are not covered by or only partially covered by its insurance policies, including claims that are below insurance deductibles. Additionally, insurance carriers could refuse to cover certain claims, in whole or in part. The Company accrues costs to defend itself from litigation as they are incurred.

The outcome of litigation is uncertain, and despite management’s view of the merits of any litigation, or the reasonableness of the Company’s estimates and reserves, the Company’s financial statements could nonetheless be materially affected by an adverse judgment. The Company believes it has adequately reserved for the contingencies arising from current legal matters where an outcome was deemed to be probable, and the loss amount could be reasonably estimated. No provision for legal matters was deemed necessary as of December 31, 2021.

Legal Proceedings

The Company from time to time is involved in various claims and lawsuits incidental to the conduct of its business in the ordinary course. We do not believe that the ultimate resolution of these matters will have a material adverse impact on our consolidated financial position, results of operations or cash flows.

NOTE 15 – FAIR VALUE MEASURENTS OF FINANCIAL INSTRUMENTS

Our financial instruments consist of cash equivalents, if any, accounts receivable, notes receivable, investments in unconsolidated entities, accounts payable and convertible notes payable. The carrying amounts of cash equivalents, if any, trade accounts receivable and accounts payable approximate their respective fair values due to the short-term nature of these financial instruments.

Consistent with the valuation hierarchy contained in ASC Topic 820, we categorized certain of our consolidated financial assets and liabilities as follows: