SHARING SERVICES GLOBAL CORP MANAGEMENT REPORT OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)
March 2021, the Company changed its fiscal year-end from a fiscal year ending on April 30thto a fiscal year ending on March 31st. This section reflects management's views of the consolidated financial condition as of March 31, 2022, and 2021, and the consolidated results of operations and changes in financial condition for the fiscal year ended March 31, 2022(a 12-month period) and the fiscal year ended March 31, 2021(an 11-month period) of Sharing Services Global Corporationand consolidated subsidiaries. This section should be read in conjunction with, the Company's audited consolidated financial statements and related notes contained in Item 8 of this Annual Report. We believe the recent COVID pandemic is likely to have had and continues to have a material adverse impact on our business, financial condition, cash flows, and results of operations. See Overview - "Continuing Uncertainty Regarding the Recent COVID Pandemic" below. This section may contain forward-looking statements. Please see "Cautionary Notice Regarding Forward-Looking Statements." located at the front of this report.
Summary of the results of the operations:
Fiscal Year Ended March 31, Increase % 2022 2021 (Decrease) Change Net sales
$ 34,424,314 $ 64,811,151 $ (30,386,836 )-46.9 % Gross profit 23,622,443 46,546,657 (22,924,214 ) -49.2 %
Operating expenses (36,954,618 ) (48,724,183 ) (11,769,565 ) -24.2 % Operating loss (13,332,175 ) (2,177,526 ) 11,154,649 512 % Non-operating income (loss), net (6,810,312 ) 347,996 7,158,308 2057 % Loss before income taxes (20,142,487 ) (1,829,530 )
18,312,957 966 % Income tax benefit (3,035,990 ) (594,509 ) 2,441,481 411 % Net loss
$ (17,106,497 ) $ (1,235,021 ) $ 15,871,4761285 %
Highlights of the year ended
? For the year ended
? For the year ended
financial year ended
and 71.8%, respectively.
? For the year ended
? For the year ended
for the year ended
? For the year ended
the diluted loss per share was
? For the year ended
operating activities has been
March 31, 2021.
Sharing Systems, Inc. (“DSSI”), a subsidiary of DSS, Inc. (formerly Document
of the Company.
Ordinary shares, including 15,000,000 shares in payment of a loan origination fee
under the DSSI loan mentioned in the previous point.
square foot office building in
for 50,000,000 Class A common shares of Sharing Services and one share
Warrant to purchase up to 50,000,000 shares of Class A Common Stock.
Services in exchange for a monthly fee of
share purchase warrant to purchase up to 50,000,000 Class A common shares.
The BSA may be exercised at the exercise price of
Stock at DSS during the exercise of the Warrant discussed in the previous point.
Head office located at
new headquarters in the first half of its fiscal year 2023. Overview
Brief description of the company
Sharing Services Global Corporationand subsidiaries ("Sharing Services", "we," or the "Company") aim to build shareholder value by developing or acquiring businesses and technologies that increase the Company's product and services portfolio, business competencies, and geographic reach. Currently, the Company, through its subsidiaries, markets and distributes its health and wellness and other products primarily in the U.S.and Canadausing a direct selling business model. In addition, the Company distributes its products from the U.S.to customers located in Australia, New Zealandand other countries. The Company's U.S.subsidiaries market our products and services through an independent sales force, using their proprietary websites, including: www.elevacity.com and www.thehappyco.com. In June 2021, the Company, through a subsidiary, commenced operations in the Republic of Korea( South Korea).
The Company was incorporated in the
As further discussed below, the Company intends to continue to grow its business both organically and by making strategic acquisitions from time to time of businesses and technologies that augment its product portfolio, complement its business competencies and fit its growth strategy. Corporate Name Change
Sharing Services Global Corporationwas originally incorporated under the name Sharing Services, Inc.In January 2019, Sharing Services, Inc.changed its corporate name to Sharing Services Global Corporationto better reflect the Company's strategic intent to grow its business globally. In connection with the name change, the Company adopted the trading symbol SHRG effective April 4, 2019. Prior to this the Company's Common Stock traded under the trading symbol SHRV. Change of Fiscal Year In March 2021, Sharing Services changed its fiscal year-end from a fiscal year ending on April 30thto a fiscal year ending on March 31st. In connection with this change, the Company decided not to restate the information reported for prior accounting periods, because: (a) the Company's businesses are not inherently seasonal, (b) the change in fiscal years did not otherwise materially distort comparability of the Company's results of operations and cash flows, and (c) the cost to restate the data reported for prior periods outweighs the usefulness of such restated data. Accordingly, the consolidated financial statements included herein reflect the results of operations and cash flows for the fiscal year ended March 31, 2022(365 days) compared to the eleven months ended March 31, 2021(335 days). Strategic Growth Initiatives
The Company intends to grow its business by pursuing a multipronged growth strategy, that includes: (a) expanding its product offerings, both within the health and wellness category and in new product categories, (b) expanding its direct-to consumer geographic footprint (primarily in
Asia), and (c) launching its previously announced membership-based consumer travel products line worldwide. This growth strategy may also include the use of strategic acquisitions of businesses that augment the Company's product and services portfolio, business competencies and geographic reach. 21
Ongoing uncertainty regarding the recent COVID pandemic
In 2020, in response to the COVID pandemic, governments in the countries where our products are sold mandated or recommended various containment measures, including selective business closures, social distancing, quarantine, stay-at-home or shelter-in-place directives, and limitations on, or cancellations of, larger meetings and other public events. We believe that the actual impact of the health crisis, and/or actions taken to contain the spread of the virus, have had and continue to have an adverse impact on the economies in the geographies we serve. Consumer demand for discretionary products such as ours is sensitive to significant downturns in the economy, increases in unemployment or decreases in perceived employment security, and decreases in consumer sentiment in general. In efforts to protect our customers, distributors, employees, and other business partners, in 2020, we instituted several preventive measures, including temporarily transitioning a significant number of our corporate employees to working remotely, increasing efforts to clean and sanitize our business facilities, increasing employee safety communication, and transitioning our sales conventions to a virtual convention platform. While these temporary measures are increasingly being eased or fully reversed at the time of this Annual Report, we believe these necessary, temporary measurements are likely to have had an adverse impact on our business. As a result of the foregoing, we cannot predict with certainty the scope, duration, and ultimate impact of this public health emergency in the countries where we operate, including its impact on the economy, but we believe these conditions are likely to have had and continue to have a material adverse impact on our business, financial condition, cash flows, and results of operations (including revenues and profitability), and those of our key suppliers. The COVID emergency also may have the effect of exacerbating some of the other risk factors described elsewhere in this Annual Report, including the success of our growth initiatives, our ability to anticipate and effectively respond to changes in consumer preferences and buying trends in a timely manner, our dependence on one supplier for a substantial portion of the products we sell, potential fluctuations in our quarterly financial performance, our ability to generate sustained, positive cash flows from operations with which to fund our working capital needs, the potential impact on our financial performance from economic slowdowns, our ability to effectively and cost-efficiently respond to any epidemics and other health emergencies, and the potential impact on our business of any disruption in our information technology systems.
The financial year has ended
Results of Operations
Net SalesFor the fiscal year ended March 31, 2022(a 12-month period), our consolidated net sales decreased by $30.4 million, to $34.4 million, compared to the fiscal year ended March 31, 2021(an 11-month period). The decrease in net sales mainly reflects: (a) continuation of the decline in consumer orders that we experienced since the fourth quarter of the fiscal year 2020, (b) a decline in independent distributor orders, in the number of new independent distributors and in the number of continuing active distributors, resulting, in part, from recent product reformulations and increased competition for independent distributors, and (c) the generally adverse impact on consumer buying trends resulting from the recent COVID pandemic and actions taken to help mitigate the spread of the virus in the U.S.and Canada. In efforts to restore sales growth, in the past several months, we have developed and launched our new business brand, "The Happy Co TM," at our Elevacity division, have accelerated our previously announced initiatives to expand our operations into additional international geographies, and have further intensified our efforts to recruit, develop and reward our distributors and our efforts reach new consumers, including through the continued introduction of new products. This decrease was partially mitigated by sales (approximately $1.4 million) of our new operations in Asiaand sales (approximately $5.2 million) of health and wellness products introduced in the U.S.since March 31, 2021. We believe there has been and continues to be significant uncertainty about the potentially adverse impact of the current health crisis on the economies and employment markets of several countries, including the U.S.and Canada. Please see Overview - "Continuing Uncertainty Regarding the Recent COVID Pandemic" above. The decrease of $30.4 millionin consolidated net sales reflects a decrease in number of comparable product units sold (26%) and a decrease in average unit sales prices (74%).
During the year ended
During the fiscal year ended
March 31, 2022, approximately 66% of consolidated net sales were to consumers (including approximately 32% to recurring customers, which we refer to as "SmartShip" sales, and approximately 34% were to new customers) and approximately 34% of consolidated net sales were to independent distributors. During the fiscal year ended March 31, 2021, approximately 71% of our net sales were to customers (including approximately 43% to recurring customers and approximately 28% were to new customers) and approximately 29% of our net sales were to our independent distributors. Gross Profit For the fiscal year ended March 31, 2022, our consolidated gross profit decreased by $22.9 million, to $23.6 million, compared to the fiscal year ended March 31, 2021, and our consolidated gross margin was 68.6% and 71.8%, respectively. During the fiscal year ended March 31, 2022, gross margin was adversely affected by aggressive product pricing and a shift in product sales mix (to lower margin products) in the normal course of business, partially offset by a decrease in our provision for expiring, damaged or excess (slow-moving) inventory of $399,050. 22
Sales and marketing expenses
For the fiscal year ended
March 31, 2022, our consolidated selling and marketing expenses decreased to $17.2 million, or 50.1% of consolidated net sales, compared to $29.7 million, or 45.9% of consolidated net sales for the fiscal year ended March 31, 2021. The decrease of $12.5 millionin consolidated selling and marketing expenses is primarily due to lower sales commissions of $13.1 million(which reflects decrease in consolidated net sales discussed above), partially offset by higher sales convention expenses of $417,369(as we resumed holding some in-person conventions in 2022) and higher marketing expense of $159,124.
General and administrative expenses
For the fiscal year ended
March 31, 2022, our general and administrative expenses (which include corporate employee compensation and benefits, share-based compensation, professional fees, rent and other occupancy costs, certain consulting fees, telephone and information technology expenses, insurance premiums, and other administrative expenses) increased to $19.7 million, or 57.3% of consolidated net sales compared to $19.0 million, or 29.3% of consolidated net sales, for the fiscal year ended March 31, 2021. The increase in general and administrative expenses was due to higher consulting and professional fees of $3.0 million(including consulting fees of $766,415in connection with a Consulting Agreement with DSS), higher loss on impairment of notes receivable and other assets of $543,042, higher depreciation and amortization expenses of $492,019, and higher other general corporate administrative expenses (other than consulting and professional fees, and bad debt expense) of $78,387, partially offset by lower stock-based compensation expense of $3.4 million. Interest Expense, Net For the fiscal year ended March 31, 2022, interest expense was $2.4 million, excluding amortization of debt discount of $8.9 million, amortization of deferred financing costs of $985,401, and interest income of $83,356. Interest expense of $2.4 millionreflects mainly interest associated with borrowings under the $30.0 millionloan from "DSSI." For the fiscal year ended March 31, 2021, our consolidated interest expense was $42,932, excluding amortization of debt discount of $18,647and interest income of $13,966. Consolidated interest expense of $42,932includes $37,425associated with borrowings under short-term financing arrangements and $5,507associated with our convertible notes.
Gain (loss) on employee warrant liability
For the year ended
Gain on extinguishment of debt
June 2021, Sharing Services' borrowings under the Paycheck Protection Program features of the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the "CARES Act") were forgiven pursuant to the CARES Act. The Company recognized a gain on extinguishment of debt of approximately $1,040,400in connection therewith.
Unrealized gains (losses) on investments in unconsolidated entities
For the fiscal year ended
March 31, 2022, net unrealized gains in connection with our investment in equity instruments of unconsolidated entities were $3.6 million. See Note 9 of the Notes to Consolidated Financial Statements for more details. Impairment Losses on Assets
For the fiscal year ended
March 31, 2022, impairment losses, before income tax, in connection with our investment in unconsolidated entities and in connection with long-lived assets, in the aggregate, were $1.6 million.
Other non-operating income/expenses, net
For the year ended
Income Tax Benefit During the fiscal year ended
March 31, 2022, the Company recognized a current federal income tax benefit of $2.1 million, including a valuation allowance of $2.1 millionplaced on certain deferred tax assets being carried forward or projected to reverse in future years due to the uncertainty of the Company generating sufficient taxable income in the foreseeable future to make realization probable, a deferred income tax benefit of $1.0 million, and a provision for state and local taxes of $100,569. During the fiscal year ended March 31, 2021, the Company recognized a current federal income tax benefit of $326,121, a deferred income tax benefit of $536,861, and a provision for state and local taxes of $268,473 million. See Note 2 - "SIGNIFICANT ACCOUNTING POLICIES" of the Notes to Consolidated Financial Statements in ITEM 8 - "Financial Statements and Supplementary Data" contained elsewhere in this Annual Report for information about the Company's accounting policies regarding accounting for income taxes. 23
Net earnings (loss) and earnings (loss) per share
As a result of the above, for the year ended
Cash and capital resources
We broadly define liquidity as our ability to generate sufficient cash, from internal and external sources, to meet our obligations and commitments. We believe that, for this purpose, liquidity cannot be considered separately from capital resources. Working Capital
Working capital (total current assets minus total current liabilities) was
March 31, 2022, and 2021, cash and cash equivalents were $17.0 millionand $12.1 million, respectively. Based upon the current level of operations and anticipated investments necessary to grow our business, we believe that existing cash balances and anticipated funds from operations will likely be sufficient to meet our working capital requirements over the next 12 months. However, when needed to compensate for any temporary fluctuations in our working capital needs, compared to our operating cash flows, we may obtain occasional additional financing through the issuance of equity securities and secured and unsecured debt, including borrowings under convertible notes and short-term financing arrangements. Please see ITEM 1A - "RISK FACTORS" - "Our ability to generate sustained positive cash flows from operations or to obtain additional financing, if needed, with which to fund our working capital needs, including servicing or refinancing our debt, now and in the future." Historical Cash Flows Historically, our primary sources of cash have been capital transactions involving the issuance of equity securities and secured and unsecured debt (See "Recent Issuances of Equity Securities" and "Short-term Borrowings and Convertible Notes" below) and cash flows from operating activities; and our primary uses of cash have been for operating activities, capital expenditures, acquisitions, net cash advances to related parties, and debt repayments in the ordinary course of our business.
The following table presents our treasury activities for the year ended
Fiscal Year Ended March 31 Increase 2022 2021 (Decrease) Net cash used in operating activities
$ (15,226,654 ) $ (1,566,970 ) $ 13,659,684Net cash used in investing activities (12,843,757 ) (1,195,639 ) 11,648,118 Net cash provided by financing activities 32,978,607 3,164,290
Impact of currency rate changes in cash (29,339 ) -
Net increase (decrease) in cash and cash equivalents
$ 4,878,857 $ 401,681 $ 4,477,176
Net cash used in operating activities increased by
$13.7 million, to $15.2 million, for the fiscal year ended March 31, 2022, compared to the fiscal year ended March 31, 2021. The $13.7 millionincrease was due to an increase in our operating loss of $9.6 million, excluding non-cash items, such as depreciation and amortization, stock-based compensation expense, provision for obsolete inventory losses, amortization of debt discount, gains (losses) on investments in unconsolidated entities and losses on impairment of notes receivable and other assets, and deferred income taxes and net changes in operating assets
and liabilities of
Net cash used in investing activities increased by
$11.6 million, to $12.8 million, for the fiscal year ended March 31, 2022, compared to the fiscal year ended March 31, 2021. The $11.6 millionincrease was primarily due to higher capital expenditures (including the impact of the December 2021purchase of our Lindon, Utahbuilding) and capitalizable costs related to ongoing upgrades to our information technology systems, in the aggregate, of $8.4 million, higher payments for investments in unconsolidated entities of $2.9 millionand higher net payments for notes receivable of $483,638. This increase was partially offset by lower payments for intangible assets of $190,151.
Net cash provided by financing activities
Net cash provided by financing activities increased by
$29.8 million, to $33.0 millionfor the fiscal year ended March 31, 2022, compared to the fiscal year ended March 31, 2021. The $29.8 millionincrease was mainly due to higher net proceeds ( $29.0 million) from borrowings under short-term financing arrangements and/or convertible promissory notes (including borrowings of $30.0 millionfrom DSSI in the fiscal year ended March 31, 2022) and lower repurchases of common stock of $899,500. This increase was partially offset by repayment of a convertible note of $100,000. 24
Impact of exchange rate variations on cash
April 1, 2021, substantially all consolidated net sales were denominated in U.S.dollars. Effective April 1, 2021, the Company's consolidated financial statements reflect the operation of our wholly owned subsidiaries operating in the Asia Pacificregion. See Note 2 - "SIGNIFICANT ACCOUNTING POLICIES" of the Notes to Consolidated Financial Statements contained elsewhere in this Annual Report for information about our translation of foreign currency financial statements.
Potential future acquisitions
The Company intends to further grow its business by pursuing a multipronged growth strategy, which includes increasing the number of product offerings in the
U.S.and Canada, expanding its geographic footprint primarily in the Asia Pacificregion, and developing and launching a line of consumer travel services. This growth strategy may also include the use of strategic acquisitions, subject to the approval of the Company's Board of Directors, of businesses that augment the Company's product and services portfolio, business competencies and geographic reach. Such potential acquisitions and purchases of equity interests are expected to be funded with cash and cash equivalents, cash provided by operations, and issuance of equity securities and debt, including convertible debt. See "Short-term Borrowings and Convertible Notes" below.
Recent issues of
During the year ended
? Sharing Services issued to DSSI 27,000,000 Class A common shares,
including 15,000,000 shares in payment of an origination fee
million and 12,000,000 shares in early redemption of
link with the
? DSSI has invested
shares of its Class A common stock and a warrant to purchase up to 50,000,000
Class A common stock.
? Sharing Services issued 50,000,000 Class A common shares to DSS on
exercise of the BSA granted to DSS as part of an advisory mission
agreement concluded in
TRANSACTIONS” of the notes to the consolidated financial statements in HEADING 8 –
“Financial Statements and Supplementary Data” contained elsewhere in this
Annual Report for more details.
Short-term borrowings and convertible notes
Borrowing under financing agreements (note payable)
May 2020, the Company applied for and was granted a loan (the "PPP Loan") by a commercial bank in the amount of $1,040,400, pursuant to the Paycheck Protection Program features of the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the "CARES Act"). The Company's borrowings under the PPP Loan were eligible for loan forgiveness under the provisions of the CARES Act. In June 2021, the Company was formally notified by the lender that the Company's obligations under the loan were forgiven effective May 25, 2021. In May 2022, Linden Real Estate Holdings, LLC, a wholly owned subsidiary of the Company, American Pacific Bancorp, Inc.("APB"), and the Company entered a term sheet pursuant to which APB agree to extend a loan to the Company for approximately $5.7 million. The loan would bear interest at 8%, mature on June 1, 2024, and be secured by a first mortgage interest on the Company's Lindon, Utahoffice building. APB is a subsidiary of Alset eHome International Inc (NASDAQ:AEI). Heng Fai Ambrose Chan, and Frank D. Heuszel, each a Director of the Company, also serve on the Board of Directors of APB, and Mr. Chanalso serves on the Board of Directors of Alset eHome International. Convertible Notes Payable In the fiscal year ended March 31, 2022, the Company repaid convertible notes payable in the aggregate amount of $100,000. As of March 31, 2022, Convertible Notes Payable consist of a Convertible Promissory Note in the principal amount of $30.0 millionin favor of DSSI, and a Convertible Promissory Note in the principal amount of $50,000, before unamortized discount of $5,244, held by HWH International, as further discussed below. On April 5, 2021, the Company and Decentralized Sharing Systems, Inc.("DSSI") who, together with its parent, DSS, Inc. (formerly Document Security Systems, Inc.), is currently a majority shareholder of the Company, entered into a Securities Purchase Agreement pursuant to which the Company issued: (a) a Convertible Promissory Note in the principal amount of $30.0 million(the "Note") in favor of DSSI, and (b) a detachable Warrant to purchase up to 150,000,000 shares of the Company's Class A Common Stock, at $0.22per share. The Note bears interest at the annual rate of 8% and matures on April 5, 2024. Under the terms of the loan, the Company agreed to pay to DSSI a loan Origination Fee of $3.0 million, payable in shares of the Company's Class A Common Stock, at the rate of $0.20per share. Interest on the Note is pre-payable annually in cash or in shares of the Company's Class A Common Stock, at the option of the Company, except that interest for the first year was pre-payable in shares of the Company's Class A Common Stock. Borrowings under the Note may be prepaid without penalty, in full or in part, at the option of the Company, at any time after the first anniversary of the Note. At any time during the term of the Note, all or part of the Note, including principal, less unamortized prepaid interest, if any, plus any accrued interest and other fees can be converted into shares of the Company's Class A Common Stock at the rate of $0.20per share, at the option of the holder. In April 2021, the Company issued to DSSI 27,000,000 shares of its Class A Common Stock, including 15,000,000 shares in payment of the loan Origination Fee discussed above and 12,000,000 shares in prepayment of interest for the first year. 25 In October 2017, the Company issued a Convertible Promissory Note in the principal amount of $50,000(the "Note") to HWH International, Inc("HWH" or the "Holder"). HWH is affiliated with Heng Fai Ambrose Chan, who in April 2020became a Director of the Company. The Note is convertible into 333,333 shares of the Company's Common Stock. Concurrent with issuance of the Note, the Company issued to HWH a detachable warrant to purchase up to an additional 333,333 shares of the Company's Common Stock, at an exercise price of $0.15per share. Under the terms of the Note and the detachable stock warrant, the Holder is entitled to certain financing rights. If the Company enters into more favorable transactions with a third-party investor, it must notify the Holder and may have to amend and restate the Note and the detachable stock warrant to be identical. HWH has informed the Company that it believes that during the term of the Note, the Company has granted more favorable financing terms to third-party lenders. As of the date of this Annual Report, the Company and HWH are evaluating alternative options to settle this Note in the foreseeable future. Capital Resources
During the two fiscal years in the period ended
March 31, 2022, the Company did not have material commitments for capital expenditures. During the fiscal year ended March 31, 2022(a 12-month period) and March 31, 2021(an 11-month period), our consolidated capital expenditures were $364,589and $751,230, respectively, primarily consisting of the purchase of furniture and fixtures, computer equipment and software, and leasehold improvements in the ordinary course of our business. In addition, in the fiscal year ended March 31, 2022, our consolidated capital expenditures include our purchase, through one of our subsidiaries, of an office building in Lindon, Utahfor $8,942,640. Further, in the fiscal year ended March 31, 2021, the Company capitalized costs related to ongoing upgrades to its information technology systems and office renovations, in the aggregate, of $163,106. These capitalized costs were carried in other assets in our Consolidated Balance Sheets until the related assets were placed in service in the fiscal year ended March 31, 2022.
Cash requirements arising from known contractual and other obligations
March 31, 2022, the Company's contractual obligations consist of (a) future principal and interest payments in the aggregate amount of $34.9 millionin connection with the Company's convertible debt and (b) obligations associated with Type B leases (as defined by Accounting Standards Codification ("ASC") Topic 842, Leases) of $816,016. See Note 13 - "LEASES" of the Notes to Consolidated Financial Statements contained in Item 8 - "Financial Statements and Supplementary Data" of this Annual Report for more details about the Company's leases. As discussed above, on April 5, 2021, the Company and Decentralized Sharing Systems, Inc.("DSSI") who, together with its parent, DSS, Inc., is currently a majority shareholder of the Company, entered into a Securities Purchase Agreement pursuant to which the Company issued: (a) a Convertible Promissory Note in the principal amount of $30.0 million(the "Note") in favor of DSSI, and (b) a detachable Warrant to purchase up to 150,000,000 shares of the Company's Class A Common Stock, at $0.22per share. The Note bears interest at the annual rate of 8% and matures on April 5, 2024. In May 2022, the parties to the Securities Purchase Agreement entered into a term sheet pursuant to which the Company agreed to issue to DSSI (a) a two-year Convertible, Advancing Promissory Note in the principal amount of $27.0 million(the "2022 Note") in favor of DSSI and (b) a detachable Warrant to purchase up to 818,181,819 shares of the Company's Class A Common Stock at the exercise price of $0.033per share. The 2022 Note bears interest at the annual rate of 8% and is due and payable on demand or, if no demand, on May 1, 2024. At any time during the term of the 2022 Note, all or part of the Note may be converted into up to 818,181,819 shares of the Company's Class A Common Stock, at the option of the holder. Under the terms of the term sheet, the Company agreed to pay to DSSI a loan origination fee of $270,000, payable in shares of the Company's Class A Common Stock or in cash, at the Company option. In addition, pursuant to the letter of intent, DSSI agreed to surrender to the Company all DSSI's rights pursuant to (a) a certain Convertible Promissory Note in the principal amount of $30.0 millionissued in April 2021in favor of DSSI, and (b) a certain detachable Warrant to purchase up to 150,000,000 shares of the Company's Class A Common Stock, at $0.22per share issued concurrently with such $30.0 millionnote. The Company will recognize the exchange of the 2022 Note and detachable warrant for the April 2021note and detachable warrant as a modification of debt upon closing of the transaction, expected in the first quarter of its fiscal year ending March 31, 2023. 26
Critical accounting estimates
The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at each balance sheet date, reported amount of revenues and expenses for each reporting period presented, and related disclosures of contingent liabilities. Actual results may differ from these estimates. We believe the Company's estimates and assumptions are reasonable.
Our critical accounting estimates relate to the valuation of inventory, the valuation of long-lived assets for impairment, the valuation of stock-based compensation awards, the valuation of contingent losses, and income taxes.
Valuation of Inventory - Our inventory is stated at the lower of cost, determined using the first-in, first-out ("FIFO") method, or net realizable value. Determining the net realizable value of inventory involves the use of judgment. In assessing the net realizable value of inventory, we consider factors including estimates of the future demand for our products, historical turn-over rates, and the age and sales history of the inventory. When necessary, we adjust the carrying value of inventory for estimated inventory shrinkage and damage. We estimate inventory shrinkage between physical counts and product damage based upon our historical experience. Actual results differing from these estimates could significantly affect our inventory and cost of products sold. We take physical counts of inventory on hand, at least annually and adjust our financial statements to match actual quantities counted. Assessment of Long-Lived Assets for Impairment - Long-lived assets, such as office furniture, fixtures and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. The recoverability of long-lived assets is assessed by comparing the net carrying amount of each asset to its total estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds the sum of its undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. Valuation of Share-Based Compensation Awards - The Company uses the Black Scholes option pricing model to calculate the fair value of share-based compensation awards (such as stock options and warrants). The Black Scholes pricing model requires six data inputs: (1) the contractual exercise or strike price, (2) the expected life (in years), (3) the risk-free interest rate, (4) the current stock price, (5) the expected volatility for the Company's Common Stock, and (6) the expected dividend yield. Changes to these data inputs could result in a significantly higher or lower fair value measurement. Loss Contingencies - From time to time, we are involved in legal proceedings. We record a contingent liability when it is probable that a loss has been incurred and the amount is reasonably estimable. We also perform an assessment of the materiality of loss contingencies where a loss is either not probable or it is reasonably possible that a loss could be incurred in excess of amounts accrued. If a loss or an additional loss has at least a reasonable possibility of occurring and the impact on the financial statements would be material, we provide disclosure of the loss contingency in the notes to our consolidated financial statements. We review all contingencies at least quarterly to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or the range of the loss can be made. An adverse judgment or negotiated resolution in any of these matters could have a material adverse effect on our business, financial position, results of operations or cash flows.
Income Taxes - Income taxes have a significant effect on our net earnings. As of
March 31, 2022, we are subject to income taxes primarily in the U.S.The determination of our provision for income taxes requires judgment, the use of estimates in certain cases and the interpretation and application of complex tax laws and regulations. Our effective income tax rate is affected by many factors, including changes in our assessment of certain tax contingencies, increases and decreases in valuation allowances, changes in tax law, outcomes of administrative audits, the impact of discrete items, and may fluctuate as a result. The benefits of uncertain tax positions are recorded in our financial statements only after determining a more likely than not probability that the uncertain tax positions will withstand challenge, if any, from taxing authorities. When facts and circumstances change, we reassess these probabilities and record any changes in the financial statements as appropriate. We account for uncertain tax positions by determining the minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. This determination requires the use of judgment in evaluating our tax positions and assessing the timing and amounts of deductible and taxable items. Deferred tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carryforwards. Deferred tax assets are evaluated for future realization and reduced by a valuation allowance to the extent that a portion is not more likely than not to be realized. Many factors are considered when assessing whether it is more likely than not that the deferred tax assets will be realized, including recent cumulative earnings, expectations of future taxable income, carryforward periods and other relevant quantitative and qualitative factors. The recoverability of the deferred tax assets is evaluated by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. This evaluation relies on estimates.
Recent accounting pronouncements and accounting changes
The information contained in Note 2 of the Notes to Consolidated Financial Statements, under the sub-headings: "Recently Issued Accounting Standards - Pending Adoption" and "Recently Issued Accounting Standards - Recently Adopted," in ITEM 8 - "Financial Statements and Supplementary Data" below, is incorporated herein by reference.
© Edgar Online, source