Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our results of operations and financial condition should be read together with our consolidated financial statements and the notes thereto and other financial information, which are included elsewhere in this Report.
This discussion contains forward-looking statements that involve risks and uncertainties. Factors that could cause or contribute to such differences include those identified below and those discussed in other sections of this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.
Our financial statements have been prepared in accordance with U.S. GAAP. In addition, our financial statements and the financial information included in this Report reflect our organizational transactions and have been prepared as if our current corporate structure had been in place throughout the relevant periods.
Overview
Treasure Global Inc. (“TGI”, “we”, “our”, or the “Company”) is a holding company incorporated on March 20, 2020, under the laws of the State of Delaware. TGI has no substantive operations other than holding all of the outstanding shares of Gem Reward Sdn. Bhd. (“GEM”), which was established under the laws of the Malaysia on June 6, 2017, through a reverse recapitalization.
Prior to March 11, 2021, TGI and GEM were separate companies under the common control of
Kok Pin “Darren” Tan, which resulted from Mr. Tan’s prior 100% ownership of TGI and his prior 100% voting and investment control over GEM pursuant to the Beneficial Shareholding Agreements. For a more detailed description of the Beneficial Shareholding Agreements and Mr. Tan’s common control over TGI and GEM see
“Prospectus Summary—Corporate Structure.
On March 11, 2021, TGI and GEM were reorganized into a parent subsidiary structure pursuant to the Share Swap Agreement in which TGI exchanged the Swap Shares for all equity of GEM. Pursuant to the Share Swap Agreement, the purchase and sale of the Swap Shares was completed on March 11, 2021, but the issuance of the Swap Shares did not occur until October 27, 2021 when TGI amended its certificate of incorporation to increase the number of its authorized common stock to a number that was sufficient to issue the Swap Shares. As a result of the Share Swap Agreement, (i) GEM became the 100% subsidiary of TGI and Kok Pin “Darren” Tan no longer had any control over the GEM ordinary shares and (ii) Kok Pin “Darren” Tan, the Initial GEM Shareholders and Chong Chan “Sam” Teo owned 100% of the shares of TGI common stock (Kok Pin “Darren” Tan owning approximately 97%). Subsequent to the date of the Share Swap Agreement, Kok Pin “Darren” Tan transferred 9,529,002 of his 10,000,000 shares of TGI common stock to 16 individuals and entities and currently owns less than 5% of our common stock.
On August 15, 2022, we had closed our initial underwritten public offering of 2,300,000 shares of common stock, par value $0.00001 per share, at $4.00 per share. Meanwhile we received net proceeds of approximately $8.2 million, net of underwriting discounts and commissions and fees, and other estimated offering expenses amounted to approximately $1.0 million.
We have created an innovative O2O e-commerce platform business model offering consumers and merchants instant rebates and affiliate cashback programs, while providing a seamless e-payment solution with rebates in both e-commerce (i.e., online) and physical retailers/merchant (i.e., offline) settings.
Our proprietary product is an App branded “ZCITY App”, which was developed through GEM. The ZCITY App was successfully launched in Malaysia June 2020. GEM is equipped with the know-how and expertise to develop additional/add-on technology-based products and services to complement the ZCITY App, thereby growing its reach and user base.
Through simplifying a user’s e-payment gateway experience, as well as by providing great deals, rewards and promotions with every use, we aim to make the ZCITY App Malaysia’s top reward and loyalty platform. Our longer-term goal is for the ZCITY App and its ever-developing technology to become one of the most well-known commercialized applications more broadly in Southeast Asia and Japan.
As of December 5, 2022, we had over 2,312,114registered users and over 1,998 registered merchants.
SEA consumers have access to a plethora of smart ordering, delivery and “loyalty” websites and apps, but in our experience, SEA consumers very rarely receive personalized deals based on their purchases and behavior.
The ZCITY App targets consumer through the provision of personalized deals based on consumers’ purchase history, location and preferences. Our technology platform allows us to identify the spending trends of our customers (the when, where, why, and how much). We are able to offer these personalized deals through the application of our proprietary artificial intelligence (or “AI”) technology that scours the available database to identify and create opportunities to extrapolate the greatest value from the data, analyze consumer behavior and roll out attractive rewards-based campaigns for targeted audiences. We believe this AI technology is currently a unique market differentiator for the ZCITY App.
We operate our ZCITY App on the hashtag: “#RewardsOnRewards”. We believe this branding demonstrates to users the ability to spend ZCITY App-based Reward Points (or “RP”) and “ZCITY Cash Vouchers” with discount benefits at checkout. Additionally, users can earn rewards from selected e-Wallet or other payment methods.
ZCITY App users do not require any on-going credit top-up or need to provide bank card number with their binding obligations. We have partnered with Malaysia’s leading payment gateway, IPAY88, for secure and convenient transactions. Users can use our secure platform and enjoy cashless shopping experiences with rebates when they shop with e-commerce and retail merchants through trusted and leading e-wallet providers such as Touch’n Go eWallet, Boost eWallet, GrabPay eWallet and credit card/online banking like the “FPX” (the Malaysian Financial Process Exchange) as well as more traditional providers such as Visa and Mastercard.
Key Factors that Affect Operating Results
We believe the key factors affecting our financial condition and results of operations include the following:
Our Ability to Create Value for Our Users and Generate Revenue
Our ability to create value for our users and generate our revenues from merchants is driven by the factors described below:
Our Investment in User Base, Technology, People and Infrastructure
We have made, and will continue to make, significant investments in our platform to attract consumers and merchants, enhance user experience and expand the capabilities and scope of our platform. We expect to continue to invest in our research and development team as well as in our technology capabilities and infrastructure, which will lower our margins but deliver overall long-term growth.
Impact of the COVID-19 Pandemic
The current outbreak of COVID-19 has globally resulted in the loss of life, business closures, restrictions on travel, and widespread cancellation of social gatherings. The extent to which the COVID-19 pandemic impacts our business will depend on future developments, which are highly uncertain and cannot be predicted at this time, including:
· the duration and spread of the outbreak;
· other business disruptions that affect our workforce;
· the impact on capital and financial markets; and
In addition, the current outbreak of COVID-19 has resulted in a widespread global health crisis and adversely affected global economies and financial markets, and similar public health threats could do so in the future. Such events have impacted, and could in the future impact, demand for merchants and consumer purchase patterns, which in turn, could adversely affect our revenue and results of operations.
Since the onset of the COVID-19 pandemic in March 2020, all our merchant clients have been affected by COVID-19 measures for Food and Beverage (“F&B”) as these measures temporarily stopped restaurant dine-ins.
· We may face continuing challenges to onboard new merchant clients.
With the ongoing COVID-19 pandemic, we also face challenges in our operation as follows:
· disruptions of operations in SEA where staff have had to work from home;
· marketing events being delayed.
The pandemic, however, has also created more advantages for us as follows:
In this regard, ZCITY has acted as an aggregator payment gateway, but not a digital wallet itself. We believe the business model has further enhanced user experience and reliance and developed user loyalty to our platform. We have experienced a slow-down in hiring new personnel. We believe this is due to a downturn in the available human capital in the employment market generally in Malaysia. However, with the existing talents in the organization, everyone is playing their role to fulfil the business needs while waiting for the vacancies to be filled. We have a detailed plan to attract suitable talents to join us.
The spread of COVID-19 has caused us to modify our business practices, including employee travel, employee work locations in certain cases, and cancellation of physical participation in certain meetings, events and conferences and further actions may be taken as required or recommended by government authorities or as we determine are in the best interests of our employees, customers and other business partners. The pandemic period is challenging, yet ZCITY is able to generate more sales revenue through virtual meetings and training to our business partners and potential markets. We are monitoring the global outbreak of the pandemic in SEA.
Because of the uncertainty surrounding the COVID-19 outbreak, the financial impact related to the outbreak of and response to the COVID-19 cannot be reasonably estimated at this time.
Inflation
Although Malaysia is experiencing a high inflation rate, we do not believe that inflation has had a material adverse effect on our business as of June 30, 2022, but we will continue to monitor the effects of inflation on our business in future periods.
Supply Chain Disruptions
Although there have been global supply chain disruptions as a result of the COVID-19 pandemic or Russia’s recent invasion of Ukraine that may have affected the operations of some of our online or offline merchants, these disruptions have not had a material adverse effect on our business as of June 30, 2022, but we will continue to monitor the effects of supply chain disruptions on our business in future periods.,
Key Operating Metrics
Our management regularly reviews a number of metrics to evaluate our business, measures our performance, identifies trends, formulates financial projections and makes strategic decisions. The main metrics we consider, and our results for each quarter during the years ended June 30, 2021 and 2022, are set forth in the table below:
For the quarters ended
December 31, March 31, June 30, September 30, December 31, March 31, June 30,
(1) Registered are persons who have registered on the ZCITY App.
(2) Active users are users who have logged into the ZCITY App at least once.
As of As of As of As of As of As of As of
December 31, March 31, June 30, September 30, December 31, March 31, June 30,
We have experienced substantial growth in registered users and active users since we launched ZCITY platform in June 2020. As of June 30, 2022, we recorded 1,967,996 registered users and 443,430 active users from ZCITY platform. Our average percentage of growth of register and active users throughout the quarter ended June 30, 2022 since the establishment of the ZCITY platform was approximately 143.4% and 283.8%, respectively. However, the average percentage of growth of registered and active users decreased in the last five quarters from June 30, 2022
which was a result of the resurgence of the COVID-19 outbreak and the imposition by the Malaysian Government of a Movement Control Order (“MCO”)
in May and June of 2021 as the majority of our participating merchants are restaurant owners or service providers and required the spending from our participating members to be in person. Despite the negative impact of the COVID-19 resurgence, we expect our product and loyalty program revenue to continue to grow in 2022 and beyond as a growing proportion of the Malaysian population
have been fully vaccinated
and we expect to continue to attract more people to engage with our platform.
We continuously monitor the development and participation of active users as a proportion of its total registered user base to ensure the effectiveness of our marketing and feature implantation strategies. Accordingly, the proportion of total registered users that we consider active users at the end of each quarter is as follows:
We continuously monitor the development of the churn and retention rates of the active user base. Active users churn rate is the percentage of customers who had stop subscribing in our platform while retention rate is the percentage of customers who is retained in our platform. Accordingly, our churn and retention rates of the active user base at the end of each quarter is as follows:
The retention rate and churn rate for our active users are calculated as follows:
Retention rate of active users for any quarter = Existing active users
Total active users in the past quarter
Total active users in the past quarter
Over the last 21 months, we have used different strategies to build and maintain our users and increase their engagement. Initially, we focused on mass marketing strategies to attract registered users. Subsequently, we have shifted to a more targeted approach focused on increasing user engagement and user spending.
Results of Operation
For the years ended June 30, 2022 and 2021
Revenue
Our breakdown of revenues by categories for the years ended June 30, 2022 and 2021, respectively, is summarized below:
For the Years Ended June 30, Change
Total revenues increased by approximately $ 65.7 million or 468.3% to approximately $79.7 million for the year ended June 30, 2022 from approximately $14.0 million for the year ended June 30, 2021. The increase was mainly attributable to the exponential growth of the registered user from our O2O e-commerce platform known as “ZCITY” platforms as we had acquired 1,364,874 new registered users for year ended June 30, 2022 compared to 603,122 new registered users for the same period in 2021. The increase of registered users enhanced the traffic of our platform and allowed us to monetize our revenue streams including product revenue, loyalty program revenue, transaction revenue and member subscription revenue. The change for each revenue stream was as follows:
Product and loyalty program revenue
Product revenue was generated through sales of our e-voucher, health care products, and other products through our ZCITY platform while loyalty program revenue was recognized when our customers redeem their previously earned reward points from our loyalty program or upon expiration of the reward point. We have experienced significant growth in register users and active users since we launched our ZCITY platform in June 2020. As of June 30, 2022, we recorded 1,967,996 registered users and 443,430 active users from ZCITY platform. Our average percentage of growth of registered and active users throughout the quarter ended June 30, 2022 since the establishment of ZCITY platform was approximately 143.4% and 283.8%, respectively. However, the average percentage of growth of register and active user was decreased in last five quarters as of June 30, 2022
which was resulted from the resurgence of COVID-19 outbreak and MCO
in May and June of 2021 as majority of our participated merchants are restaurant owners or service providers and required the spending from our participated members to be in person. Despite the negative impact of COVID-19 resurgence, we expect our product and loyalty program revenue continued to grow for 2022 and beyond as more population in the Malaysia
have been fully vaccinated
and we will continue to attract more people to engage with our platform.
Transaction revenue
The transactions revenue primarily consists of fees charged to merchants for participating in our ZCITY platform upon successful sales transaction and payment service taken place between the merchants and their customers online. Our transaction revenue increased by approximately $23,000 or 75.6% to approximately $54,000 for the year ended June 30, 2022 from approximately $31,000 for the year ended June 30, 2021. The increase was mainly attributable to the fact that we engaged with 1,985 local merchants to connect them with their customers through our ZCITY platform as of June 30, 2022 compared to 1,905 as of June 30, 2021. Our average percentage of growth of new merchants was approximately 36.0% throughout the quarters as of June 30, 2022 since the establishment of ZCITY platform. Even though we experienced slowdown in adding new merchants to our platform during the last five quarters ended June 30, 2022, as a result of resurgence of COVID-19.
Agent subscription revenue
Agent subscription revenue primarily consists of fees charged to the agents in exchange for rights by introducing merchants to join our merchant network and to earn a future fixed percentage of commission fees upon completion of each sales transaction between the referred merchants and their customers. Agent subscription revenue decreased by $100,406 or 99.9% to $15 for the year ended June 30, 2022 from $100,421 for the year ended June 30, 2021. The decrease was mainly due to our shift of business strategies to Zmember subscription revenue which is a member oriented program designated to attract more customer to engage with our ZCITY platform.
Member subscription revenue
Member subscription revenue primarily consists of fees charged to customers who signed up for Zmember, a membership program that
includes exclusive saving, bonus, and referral rewards.
Member subscription revenue increased by 100.0% to $211,441 for the year ended June 30, 2022 as we launch the Zmember program for the year end June 30, 2022 to enhance our customer engagement with our ZCITY platform. As of June 30, 2022 we had 9,370 customers who subscribed to our Zmember program.
Cost of Revenue
Our breakdown of cost of revenues by categories for the years ended June 30, 2022 and 2021, respectively, is summarized below:
For the Years EndedJune 30, Change
Cost of revenues mainly consist of the purchases of the gift card or “E-voucher” pin code, and health care product which is directly attributable to our product revenue. Total cost of revenue increased by approximately $65.3 million or 470.6% for the year ended June 30, 2022 compared with the same period in 2021. The increase was in line with our increase revenue.
Gross Profit
Our gross profit from our major revenue categories is summarized as follows:
Product and loyalty program revenue
Transaction revenue
Agent subscription revenue
Member subscription revenue
Total
Gross margin 0.6 % 1.0 % (0.4 )%
Gross profit for the year ended June 30, 2022 amounted to approximately $0.5 million as compared to approximately $0.1 million for the year ended June 30, 2021. Gross margin was approximately 0.6% and 1.0% for the years ended June 30, 2022 and 2021, respectively. The increase in gross profit was mainly due to increase of revenue in product and loyalty revenue and transaction revenue as result of exponential growth of registered users and active users for the year ended June 30, 2022. The decrease in gross margin was mainly due to the increase of product and loyalty program revenue which brought up the denominator of our gross profit and resulted in lower overall gross margin for the year ended June 30, 2022. In the year ended June 30, 2021, our agent subscription revenue had 100% gross margin and with lower denominator of our gross profit and resulted in higher overall gross margin for the year ended June 30, 2021. Our product and loyalty program gross margin increased from 0.1% for the year ended June 30, 2021 to 0.3% for the year ended June 30, 2022. As we had more member signed up our platform, we had slightly reducing our discount to attract users to sign up with our platform and resulted in higher product and loyalty program gross margin for the year ended June 30, 2022.
Operating Expenses
Our operating expenses consist of selling expenses, general and administrative expenses, research and development expenses, and stock-based compensation.
Selling expenses
Selling expenses amounted to approximately $6.3 million and $3.0 million for the years ended June 30, 2022 and 2021, respectively. Representing an increase of approximately $3.2 million or 107.1%. The increase was mainly due to increase in marketing and promotion expense of approximately $3.4 million related to promoting our ZCITY platform and eventually attracting more people to sign up as members. Marketing and promotion expense also consists of redemptions of reward points which is generated from non-spending related activities (registration as a new user, referral of a new user and Spin & Win eligibility to receive reward points) in exchange for discounted credit of purchasing our products upon conversion of using the reward points. For the years ended June 30, 2022 and 2021, we incurred approximately $2.8 million and $0.4 million, respectively, in marketing and promotion expense, and recognized the same amount of product revenue at the time of redemption of the non-spending related activities reward points by our customers.
General and administrative expense
General and administrative expenses amounted to approximately $2.8 million and $4.2 million for the years ended June 30, 2022 and 2021, respectively. Representing a decrease of approximately $1.5 million or 34.9%. The decrease was mainly due to decrease of approximately $2.4 million in professional/ consulting fees (including related parties) as we incurred less consulting fees related to early preparation of our initial public offering in the United States for the year ended June 30, 2022 as compared to the same period in 2021. The decrease was offset by an increase of approximately $0.6 million in salaries expenses as a result of expansion of our business operation after the launch of our ZCITY platform.
Research and development expenses
Research and development expense amounted to approximately $0.3 million and $0.4 million for the years ended June 30, 2022 and 2021, respectively, representing a decrease of approximately $0.1 million or 38.8%. The decrease was mainly due to our ZCITY platform becoming more sophisticated as less maintenance was required for the year ended June 30, 2022.
Stock-Based Compensation expenses
Stock-based compensation expenses amounted to approximately $1.3 million and $0 for the years ended June 30, 2022 and 2021, respectively, representing increase of approximately $1.3 million. The increase was mainly due to we engaged with Exchange Listing, LLC, to provide advisory service in capital market advisory, corporate governance, and organizational meeting related to our initial public offering in the United States.
Other Expense, net
Other expense, net amounted to approximately $1.5 million and $0.3 million for the years ended June 30, 2022 and 2021, respectively. Representing an increase of approximately $1.2 million or 374.3%. The increase was mainly attributable to the interest expense incurred as well as amortization of debt discount from convertible notes. For the year ended June 30, 2022, we incurred interest expense of approximately $0.3 million and amortization of debt discount of approximately $1.3 million. For the year ended June 30, 2021, we incurred interest expense of approximately $0.2 million and amortization of debt discount of approximately $0.2 million.
Provision for Income Taxes
Provision for income tax were amount to $15,600 and $2,000 for the years ended June 30, 2022 and 2021. The amount was attributable to tax imposed on Treasure Global Inc from the State of Delaware, as we are required to remit franchise tax to the State of Delaware on an annual basis.
We also were subject to controlled foreign corporations Subpart F income (“Subpart F”) tax, which is a tax primarily on passive income from controlled foreign corporations with a tax rate of 35%. In addition, the Tax Cuts and Jobs Act imposed a global intangible low-taxed income (“GILTI”) tax, which is a tax on certain off-shore earnings at an effective rate of 10.5% for tax years (50% deduction of the current enacted tax rate of 21%) with a partial offset for 80% foreign tax credits. If the foreign tax rate is 13.125% or higher, there will be no U.S. corporate tax after the 80% foreign tax credits are applied.
For the years ended June 30, 2022 and 2021, our foreign subsidiary did not generate any income that are subject to Subpart F tax and GILTI tax.
Net Loss
Our net loss increased by approximately $3.8 million from approximately $8.0 million for the year ended June 30, 2021 to approximately $11.7 million for the year ended June 30, 2022, predominately due to reasons as discussed above.
Liquidity and Capital Resources
In assessing liquidity, we monitor and analyze cash on-hand and operating expenditure commitments. Our liquidity needs are to meet working capital requirements and operating expense obligations. To date, we financed our operations primarily through cash flows from contribution from shareholders, issuance of convertible notes, related party loans, and our completion of initial underwritten public offering.
As of June 30, 2022 and 2021, we had approximately $1.8 million and $2.8 million, respectively, in cash and cash equivalent which primarily consists of bank deposits, which are unrestricted as to withdrawal and use. We have a working capital deficit of approximately $15.9 million and $1.6 million at June 30, 2022 and June 30, 2021, respectively.
Subsequent to June 30, 2022, we have additionally borrowed approximately $2.7 million under Tophill Loan Agreement 2 on terms identical to the Tophill Loan Agreement 1 which all principal and accrued and unpaid interest outstanding will automatically be converted into shares of our common stock at a conversion price that is equal to 80% of the initial public offering price.
On August 15, 2022, we had
closed our initial underwritten public offering of 2,300,000 shares of common stock, par value $0.00001 per share, at $4.00 per share. We had received aggregate net proceeds from the closing of approximately $8.2 million, after deducting underwriting discounts and commissions and fees, and other estimated offering expenses which amounted to approximately $1.0 million.
After the completion of the underwritten initial public offering, following the conversion of convertible notes payable, net of unamortized discounts to equity, we expect our working capital to change from a deficit of approximately $15.9 million to a positive working capital of approximately $5.6 million.
Despite of receiving the net proceeds from our initial underwritten public offering,
the management is of the opinion that we will not have sufficient funds to meet the working capital requirements and debt obligations as they become due starting from one year from the date of this report due to our recurring loss. Therefore, the
management has determined there is substantial doubt about its ability to continue as a going concern. If we are unable to generate significant revenue, we may be required to curtail or cease its operations. Management is trying to alleviate the going concern risk through the following sources:
● Equity financing to support its working capital;
The following summarizes the key components of our cash flows for the years ended June 30, 2022 and 2021:
For the Years Ended
Net cash used in investing activities (311,739 ) (84,850 )
Effect of exchange rate on cash and cash equivalents (186,419 ) (71,381 )
Operating Activities
Net cash used in operating activities for the year ended June 30, 2022 was approximately $8.7 million and were mainly comprised of the net loss of approximately $11.7 million, decrease of account payable (including related parties) of approximately $0.2 million as we had pay out some of the account payable balance to the third parties or related parties vendors timely, decrease of customer deposits, related parties of approximately $0.2 million as we had returned the deposit related to I.T professional service back to the related parties due to projects abandoned, and decrease of other payables, related parties as we paid out the remaining balance of professional fee incurred from two related parties of approximately $0.1 million. The net cash used in operating activities was mainly offset by amortization of debt discount of approximately $1.3 million, stock-based compensation of approximately $1.3 million, decrease of inventories of approximately $0.2 million as we improved our inventories turnover rate due to demand of our product, and the increase in other payables and accrued liability of approximately $0.7 million mainly related to the accrued professional expenses.
Net cash used in operating activities for the year ended June 30, 2021 was approximately $6.8 million and were mainly comprised of the net loss of approximately $7.9 million, increase of inventories of approximately $0.4 million as we need to stock up the gift card or “E-voucher” after the launch of our ZCITY platform for resale and the increase in prepayments of approximately $0.2 million as our vendors required us to make more deposits to secure our E-voucher purchases. The net cash used in operating activities was mainly offset by the amortization of debt discount of approximately $0.2 million, the decrease in other receivable and other current assets of approximately $0.5 million as we collected back our security deposits during the period, the increase in accounts payable (including related parties) of approximately $0.2 million as we make more purchase on account, the increase in customer deposits (including related parties) of approximately $0.3 million as we collected customer deposit from third parties and related parties related to our I.T professional service, and the increase in other payables and accrued liabilities (including related party)
of approximately $0.5 million mainly related to the accrued professional expenses
Investing Activities
Net cash used in investing activities for the year ended June 30, 2022 was approximately $0.3 million, which was in respect of purchase of equipment for our operations.
Net cash used in investing activities for the year ended June 30, 2021 was approximately $85,000, which was in respect of purchase of equipment for our operations.
Financing Activities
Net cash provided by financing activities for the year ended June 30, 2022 was approximately $8.2 million, which were mainly comprised of proceeds received from the issuance of convertible note from third parties and related parties of approximately $8.6 million, and proceeds received from third parties loans of approximately $1.5 million, offset by repayment to related parties loan of approximately $1.8 million, and approximately $0.1 million payment of deferred offering costs.
Net cash provided by financing activities for the year ended June 30, 2021 was approximately $9.8 million, which were mainly comprised of capital contributions received from the shareholders of approximately $0.2 million, proceeds received from the issuance of convertible note from third parties and related parties and senior note of approximately $5.5 million and proceeds borrowed from our related parties of approximately $4.0 million.
Off-Balance Sheet Arrangements
As of June 30, 2022, we have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders.
Critical Accounting Estimate
Our financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these financial statements and accompanying notes requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We have identified certain accounting estimates that are significant to the preparation of our financial statements. These estimates are important for an understanding of our financial condition and results of operation. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believe the following critical accounting estimates involve the most significant estimates and judgments used in the preparation of our financial statements.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Significant accounting estimates reflected in our consolidated financial statements include the estimated retail price per point and estimated breakage to calculate the revenue recognized in our loyalty program revenue, the useful lives of property and equipment, impairment of long-lived assets, allowance for doubtful accounts, realization of deferred tax assets and uncertain tax position, and fair value of our stock price to determine the
beneficial conversion feature ("BCF") within the convertible note
. Actual results could differ from these estimates.
Accounts receivable, net
Accounts receivable are recorded at the invoiced amount less an allowance for any uncollectible accounts and do not bear interest, which are due after 30 days. Accounts receivable include money due from agent subscription revenue and sales of health care product on its Z-city platform. Management reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical collection trends and aging of receivables. Management also periodically evaluates individual customer’s financial condition, credit history, and the current economic conditions to make adjustments in the allowance when it is considered necessary. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Our management continues to evaluate the reasonableness of the valuation allowance policy and update it if necessary.
Our allowance for accounts receivables were $227 and $25,690, as of June 30, 2022 and 2021, respectively,
Inventories
Inventories are stated at the lower of cost or net realizable value, cost being determined on a first-in-first-out method. Costs include gift card or “E-voucher” pin code which are purchased from our suppliers as merchandized goods or store credit, and healthcare products. Management compares the cost of inventories with the net realizable value and if applicable, an allowance is made for writing down the inventory to its net realizable value, if lower than cost. On an ongoing basis, inventories are reviewed for potential write-down for estimated obsolescence or unmarketable inventories which equals the difference between the costs of inventories and the estimated net realizable value based upon forecasts for future demand and market conditions. When inventories are written-down to the lower of cost or net realizable value, it is not marked up subsequently based on changes in underlying facts and circumstances. As of June 30, 2022 and 2021, impairments of inventories amounted to $8,805 and $0, respectively, were provided for E-vouchers.
Other receivables and other current assets, net
Other receivables and other current assets primarily include refundable advance to third party service provider and other deposits. Management regularly reviews the aging of receivables and changes in payment trends and records allowances when management believes collection of amounts due are at risk. Accounts considered uncollectable are written off against allowances after exhaustive efforts at collection are made. No allowance of other receivable and other current assets were recorded as of June 30, 2022 and 2021.
Prepayments
Prepayments and deposits are mainly cash deposited or advanced to suppliers for future inventory purchases. This amount is refundable and bears no interest. For any prepayments determined by management that such advances will not be in receipts of inventories, services, or refundable, we will recognize an allowance account to reserve such balances. Management reviews its prepayments on a regular basis to determine if the allowance is adequate, and adjusts the allowance when necessary. Delinquent account balances are written-off against allowance for doubtful accounts after management has determined that the likelihood of collection is not probable. Our management continues to evaluate the reasonableness of the valuation allowance policy and update it if necessary. No allowance of prepayments were recorded as of June 30, 2022 and 2021.
Impairment for long-lived assets
Long-lived assets, including property and equipment with finite lives are reviewed for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying value of an asset may not be recoverable. We assessed the recoverability of the assets based on the undiscounted future cash flows the assets are expected to generate and recognize an impairment loss when estimated undiscounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. If an impairment is identified, we would reduce the carrying amount of the asset to its estimated fair value based on a discounted cash flows approach or, when available and appropriate, to comparable market values. No impairment for long-lived assets were recorded as of June 30, 2022 and 2021.
Revenue recognition
Loyalty program
- Performance obligations satisfied over time
Our Z-City reward loyalty program allows members to earn points on purchases that can be redeemed for rewards that include discounts on future purchases. When members purchase our product or make purchase with our participated vendor through Z-City, we allocate the transaction price between the product or service, and the reward points earned based on the relative stand-alone selling prices and expected point redemption. The portion allocated to the reward points is initially recorded as contract liability and subsequently recognized as revenue upon redemption or expiration.
The two primary estimates utilized to record the contract liability for reward points earned by members are the estimated retail price per point and estimated breakage. The estimated retail price per point is based on the actual historical retail prices of product purchased or service obtained through the redemption of reward points. We estimate breakage of reward points based on historical redemption rates. We continually evaluate its methodology and assumptions based on developments in retail price per point redeemed, redemption patterns and other factors. Changes in the retail price per point and redemption rates have the effect of either increasing or decreasing the contract liability through current period revenue by an amount estimated to represent the retail value of all points previously earned but not yet redeemed by loyalty program members as of the end of the reporting period.
Income taxes
Deferred taxes are accounted for using the asset and liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the consolidated financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized. Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.
An uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
Convertible notes
We evaluate our convertible notes to determine if those contracts or embedded components of those contracts qualify as derivatives. The result of this accounting treatment is that the fair value of the embedded derivative is recorded at fair value each reporting period and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statements of operations as other income or expense.
In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.
If the conversion features of conventional convertible debt provide for a rate of conversion that is below market value at issuance, this feature is characterized as a beneficial conversion feature (“BCF”). A BCF is recorded by us as a debt discount pursuant to ASC Topic 470-20 “Debt with Conversion and Other Options.” In those circumstances, the convertible debt is recorded net of the discount related to the BCF, and we amortize the discount to interest expense, over the life of the debt.
Recent Accounting Pronouncements
See Note 2 of the notes to the consolidated financial statements included elsewhere in this report for a discussion of recently issued accounting standards.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.
Item 8. Financial Statements and Supplementary Data.
TREASURE GLOBAL INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID: 711) F-1
Consolidated Balance Sheets as of June 30, 2022 and 2021 F-2
Notes to Consolidated Financial Statements F-6 - F-28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Treasure Global Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Treasure Global Inc.
(the “Company”) as of
June 30, 2022 and 2021, and the related consolidated statements of operations and comprehensive loss, changes in stock
holders’
(deficiency) equity and cash flows for each of the years in the two-year period ended June 30, 2022, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the two-year period ended June 30, 2022, in conformity with accounting principles generally accepted in the United States of America.
Correction of Previously Issued Financial Statements
As discussed in note 2, the accompanying consolidated financial statements as of June 30, 2021 and for the year ended June 30, 2021
have been revised to correct the errors.
Explanatory Paragraph - Going Concern
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has incurred recurring losses from operations, a working capital deficit and accumulated deficit at June 30, 2022
. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note
3. These consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. If the Company is unable to successfully obtain the necessary additional financial support as specified in Note 3, there could be a material adverse effect on the Company.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express
an
opinion on the Company’s consolidated financial statements
based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly
, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Friedman LLP
We have served as
the Company’s auditor since 202
1
New York, New York
December 5, 2022
TREASURE GLOBAL INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(As Revised)
ASSETS
CURRENT ASSETS
Accounts receivable, net - 83,917
Accounts receivable, a related party - 10,317
Amount due from related parties - 60,910
Other receivable and other current assets 8,780 14,812
OTHER ASSETS
Deferred offering costs 93,536 -
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
CURRENT LIABILITIES
Related party loan, current portion $ 4,505 $ 5,011
Convertible notes payable, related parties 2,437,574 -
Loans from third parties 1,417,647 -
Customer deposits, related parties - 195,511
Other payables, related parties - 113,402
NON-CURRENT LIABILITIES
Related party loan, non-current portion 13,883 20,070
Convertible notes payable, a related party - 1,400,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Accumulated other comprehensive income (loss) 98,524 (55,580 )
The accompanying notes are an integral part of these consolidated financial statements.
TREASURE GLOBAL INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATION AND COMPREHENSIVE LOSS
For the Years Ended June 30,
STOCK-BASED COMPENSATION (1,283,994 ) -
OTHER (EXPENSE) INCOME
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustment 154,104 (43,145 )
LOSS PER SHARE
Basic and diluted $ (1.12 ) $ (0.77 )
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
The accompanying notes are an integral part of these consolidated financial statements.
TREASURE GLOBAL INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGE IN STOCKHOLDERS' (DEFICIENCY) EQUITY
ACCUMULATED TOTAL
ADDITIONAL OTHER STOCKHOLDERS'
COMMON STOCK PAID IN ACCUMULATED COMPREHENSIVE (DEFICIENCY)
Number of shares Par value CAPITAL DEFICIT (LOSS) INCOME EQUITY
Foreign currency translation adjustment - - - - (43,145 ) (43,145 )
Foreign currency translation adjustment - - - - 154,104 154,104
The accompanying notes are an integral part of these consolidated financial statements.
TREASURE GLOBAL INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
(As Revised)
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net loss to net cash used in operating activities:
(Recovery of) provision for doubtful accounts, net (24,953 ) 28,216
Inventories impairment 8,805 -
Stock-based compensation 1,283,994 -
Change in operating assets and liabilities
Accounts receivables, a related party 10,116 (10,372 )
Other receivable and other current assets 5,376 468,313
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment 619 -
Net cash used in investing activities (311,739 ) (84,850 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of deferred offering costs (93,536 ) -
Capital contributions - 240,754
Payments of related party loan (5,434 ) (2,416 )
Proceeds from issuance of senior note - 65,000
Proceeds from issuance of convertible notes, related parties 1,037,574 1,400,000
Repayments from related parties 59,722 -
Proceeds from third party loan 1,476,995 -
EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS (186,419 ) (71,381 )
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (998,166 ) 2,843,026
CASH AND CASH EQUIVALENTS, beginning of year 2,843,398 372
SUPPLEMENTAL CASH FLOWS INFORMATION
SUPPLEMENTAL NON-CASH FLOWS INFORMATION
Purchase of equipment through financing with related party $ - $ 27,632
The accompanying notes are an integral part of these consolidated financial statements.
TREASURE GLOBAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Nature of business and organization
Treasure Global Inc. (“TGI” or the “Company”) is a holding company incorporated on March 20, 2020, under the laws of the State of Delaware. The Company has no substantive operations other than holding all of the outstanding shares of Gem Reward Sdn. Bhd. (“GEM”), which was established under the laws of the Malaysia on June 6, 2017, through a reverse recapitalization.
On March 11, 2021, TGI completed a reverse recapitalization (“Reorganization”) under common control of its then existing shareholders, who collectively owned all of the equity interests of GEM prior to the Reorganization through a Share Swap Agreement. GEM is under common control of the same shareholders of TGI through a beneficial ownership agreement, which results in the consolidation of GEM and has been accounted for as a Reorganization of entities under common control at carrying value. Before and after the Reorganization, the Company, together with its sole subsidiary is effectively controlled by the same shareholders, and therefore the Reorganization is considered as a recapitalization of entities under common control in accordance with Accounting Standards Codification (“ASC”) 805-50-25. The consolidation of the Company and its sole subsidiary have been accounted for at historical cost and prepared on the basis as if the aforementioned transactions had become effective as of the beginning of the first period presented in the accompanying consolidated financial statements in accordance with ASC 805-50-45-5.
The Company, through its wholly owned subsidiary, GEM, engages in the payment processing industry and operate an online-to-offline (“O2O”) e-commerce platform known as “ZCITY”. The Company has extensive business interests in creating an innovative O2O e-commerce platform with an instant rebate and affiliate cashback program business model, focusing on providing a seamless payment solution and capitalizing on big data using artificial intelligence technology. The Company’s proprietary product is an internet application (or “app”) called “ZCITY App”. Z
CITY App drives user app download and transactions by providing
instant rebate and cashback. The Company aims to transform and simplify a user’s e-payment gateway experience by providing great deals, rewards and promotions with every use in an effort to make it Malaysia’s top reward and payment gateway platform.
The accompanying consolidated financial statements reflect the activities of TGI and its wholly owned subsidiary, GEM.
Note 2 – Revision of previously issued financial statements
Misclassification of convertible notes payable, related parties
In May and June 2021, the Company issue
d
various tranches of convertible notes payable (“CNP”) to 5 accredited investors which included
4
third parties and
1
related parties as of June 30, 2021.
The purpose of the CNP offering was to raise funding for the Company to support its working capital and growth requirements prior to receipt of the initial public offering (“IPO”) proceeds. While the relationship between certain CNP holders and the Company was disclosed within the relevant Form S-1 filings, the Company unintentionally
misclassified
the related part
y
balances from the balances with third parties and the related
disclosure from the consolidated financial statements and associated notes for the year ended June 30, 2021, which also formed an integral part of the Company’s Form S-1 filings. As a result, the Company unintentionally misclassified related parties CNPs together with third parties CNPs under non-current liabilities and the related disclosure as of and for the year ended June 30, 2021.
Misclassification of other payable and accrued liability, related parties
As of and for the year ended June 30, 2021, due to the fact that the Company was a private company who did not possess adequate experience or qualification to establish an internal control function
to properly identify its completed related party list.
As a result, the Company unintentionally misclassified other payable and accrued liability, related parties together with third party other payables and accrued liabilities, and third party account payable under current liabilities and the related disclosure as of and for the year ended June 30, 2021. As of June 30, 2021, the balance outstanding from other payable and accrued liability, related parties
was
related to the consulting fee incurred from two related parties during the year ended June 30, 2021. Furthermore, the Company also identified additional related parties’ transactions in regards to consulting fees for the year ended June 30, 2021, and provided proper disclosure on Note 11.
The following tables summarize the effect of the revision on each financial statement line item as of the dates, and for the period, indicated:
As Previously Reported Adjustments As Revised
Consolidate balance sheet as of June 30, 2021
Current liabilities:
Non-current liabilities:
As Previously Reported Adjustments As Revised
Consolidated statement of cash flow for the year ended June 30, 2021
Cash flows from operating activities:
Cash flows from financing activities:
Note
3
– Summary of significant accounting policies
Going concern
In assessing the Company’s liquidity and substantial doubt about its ability to continue as a going concern, the Company monitors and analyzes cash on-hand and operating expenditure commitments. The Company’s liquidity needs are to meet working capital requirements and operating expense obligations. To date, the Company financed its operations primarily through cash flows from contribution from shareholders, issuance of convertible note and related parties loans and its initial underwritten public offering.
The Company’s management has considered whether there is substantial doubt about its ability to continue as a going concern due to (1) loss from operations of approximately $10.2 million for the year ended June 30, 2022, (2) accumulated deficit of approximately $19.7 million as of June 30, 2022; (3) the working capital deficit of approximately $15.9 million as of June 30, 2022; and (4) net operating cash outflow of approximately $8.7 million for the year ended June 30, 2022.
Subsequent to June 30, 2022,
t
he Company has drawn additional approximately $2.7
million from Tophill Loan Agreement 2 (as defined in Note 1
6
) on terms identical to the Tophill Loan Agreement 1 (as defined in Note
9
) which all principal and accrued and unpaid interest outstanding will automatically be converted into shares of the Company’s common stock at a conversion price that is equal to 80% of the initial underwritten public offering price. On August 15, 2022, 2,756,879 shares of the Company’s common stock w
ere
converted from the principal and the accumulated interest balance of the Tophill Loan Agreement 1 and Agreement 2.
On August 15, 2022, the Company
closed its initial underwritten public offering of 2,300,000 shares of common stock, par value $0.00001 per share, at $4.00 per share. The Company received aggregate net proceeds from the closing of approximately $8.2 million, after deducting underwriting discounts and commissions and fees, and other estimated offering expenses.
TREASURE GLOBAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
After the completion of the initial underwritten public offering, as well as conversion of convertible note payable, net of unamortized discount amounted to approximately $13.4 million as of June 30, 2022, the Company expects its working capital to change from a deficit of approximately $15.9 million to a positive working capital of approximately $5.6 million.
Despite of receiving the net proceeds from its initial underwritten public offering,
the Company’s management is of the opinion that it will not have sufficient funds to meet the Company’s working capital requirements and debt obligations as they become due starting from one year from the date of this report due to the recurring loss. Therefore, the
management has determined there is substantial doubt about its ability to continue as a going concern. If the Company is unable to generate significant revenue, the Company may be required to curtail or cease its operations. Management is trying to alleviate the going concern risk through the following sources:
● Equity financing to support its working capital;
Basis of presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Principles of consolidation
The consolidated financial statements include the financial statements of the Company and its sole subsidiary. All transactions and balances among the Company and its subsidiary have been eliminated upon consolidation.
Subsidiary is entity in which the Company, directly or indirectly, controls more than one half of the voting power; or has the power to govern the financial and operating policies, to appoint or remove the majority of the members of the board of directors, or to cast a majority of votes at the meeting of directors.
Enterprise wide disclosure
The Company’s chief operating decision-makers (i.e., chief executive officer and his direct reports) review financial information presented on a consolidated basis, accompanied by disaggregated information about revenues by different revenues streams for purposes of allocating resources and evaluating financial performance. There are no segment managers who are held accountable for operations, operating results and plans for levels or components below the consolidated unit level. Based on qualitative and quantitative criteria established by ASC 280, “Segment Reporting”, the Company considers itself to be operating within one reportable segment.
Use of estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Significant accounting estimates reflected in the Company’s consolidated financial statements include allowance for doubtful accounts, allowance for inventories obsolescence, useful lives of property and equipment, impairment of long-lived assets, allowance for deferred tax assets, fair value of convertible note, fair value or valuation of warrants and uncertain tax position. Actual results could differ from these estimates.
Foreign currency translation and transaction
Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the Consolidated Statements of Operations and Comprehensive Loss.
The reporting currency of the Company is United States Dollars (“US$”) and the accompanying consolidated financial statements have been expressed in US$. The Company’s subsidiary in Malaysia conducts its businesses and maintains its books and record in the local currency, Malaysian Ringgit (“MYR” or “RM”), as its functional currency.
TREASURE GLOBAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In general, for consolidation purposes, assets and liabilities of its subsidiary whose functional currency is not US$ are translated into US$, in accordance with ASC Topic 830-30, “Translation of Financial Statement
”
, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiary are recorded as a separate component of accumulated other comprehensive gain or loss within the consolidated statements of changes in stockholders’ equity. Cash flows are also translated at average translation rates for the periods, therefore, amounts reported on the consolidated statement of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.
Translation of foreign currencies into US$1 have been made at the following exchange rates for the respective periods:
As of
Period-end MYR: US$1 exchange rate 4.41 4.15
For the years ended
Period-average MYR: US$1 exchange rate 4.23 4.13
Cash and cash equivalents
Cash is carried at cost and represent cash on hand, time deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less. Cash equivalents consist of funds received from customer, which funds were held at the third party platform’s fund account and which are unrestricted and immediately available for withdrawal and use.
Accounts receivable, net
Accounts receivable are recorded at the invoiced amount less an allowance for any uncollectible accounts and do not bear interest, which are due after 30 days. Accounts receivable include money due from agent subscription and sales of health care product on its Z-city platform. Management reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical collection trends and aging of receivables. Management also periodically evaluates individual customer’s financial condition, credit history, and the current economic conditions to make adjustments in the allowance when it is considered necessary. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company’s management continues to evaluate the reasonableness of the valuation allowance policy and update it if necessary. As of June 30, 2022 and 2021, the Company recorded $227 and $25,690 of allowance for doubtful account, respectively. For the years ended June 30, 2022 and 2021, the Company recovered doubtful account from account receivable amounted to $24,953 and $0, respectively.
Inventories
Inventories are stated at the lower of cost or net realizable value, cost being determined on a first-in-first-out method. Costs include gift card or “E-voucher” pin code which are purchased from the Company’s suppliers as merchandized goods or store credit. Costs also included health care products which are purchased from the Company’s suppliers as merchandized goods. Management compares the cost of inventories with the net realizable value and if applicable, an allowance is made for writing down the inventory to its net realizable value, if lower than cost. On an ongoing basis, inventories are reviewed for potential write-down for estimated obsolescence or unmarketable inventories which equals the difference between the costs of inventories and the estimated net realizable value based upon forecasts for future demand and market conditions. When inventories are written-down to the lower of cost or net realizable value, it is not marked up subsequently based on changes in underlying facts and circumstances.
As of June 30, 2022 and 2021, impairments of inventories amounted to $8,805 and $0, respectively, were provided for E-vouchers.
TREASURE GLOBAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other receivables and other current assets, net
Other receivables and other current assets primarily include refundable advance to third party service provider and other deposits. Management regularly reviews the aging of receivables and changes in payment trends and records allowances when management believes collection of amounts due are at risk. Accounts considered uncollectable are written off against allowances after exhaustive efforts at collection are made. As of June 30, 2022 and 2021, no allowance for doubtful account was recorded.
Prepayments
Prepayments and deposits are mainly cash deposited or advanced to suppliers for future inventory purchases. This amount is refundable and bears no interest. For any prepayments determined by management that such advances will not be in receipts of inventories, services, or refundable, the Company will recognize an allowance account to reserve such balances. Management reviews its prepayments on a regular basis to determine if the allowance is adequate, and adjusts the allowance when necessary. Delinquent account balances are written-off against allowance for doubtful accounts after management has determined that the likelihood of collection is not probable. The Company’s management continues to evaluate the reasonableness of the valuation allowance policy and update it if necessary. As of June 30, 2022 and 2021, there was no allowance for the doubtful accounts.
Property and equipment, net
Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets with no residual value. The estimated useful lives are as follows:
Expected useful lives
Computer and office equipment 5 years
Furniture and fixtures 3-5 years
Motor vehicles 5 years
Leasehold improvement 3 years
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the consolidated statements of operations and comprehensive loss. Expenditures for maintenance and repairs are charged to earnings as incurred, while additions, renewals and betterments, which are expected to extend the useful life of assets, are capitalized. The Company also re-evaluates the periods of depreciation to determine whether subsequent events and circumstances warrant revised estimates of useful lives.
Impairment for long-lived assets
Long-lived assets, including property and equipment with finite lives are reviewed for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying value of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the undiscounted future cash flows the assets are expected to generate and recognize an impairment loss when estimated undiscounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. If an impairment is identified, the Company would reduce the carrying amount of the asset to its estimated fair value based on a discounted cash flows approach or, when available and appropriate, to comparable market values.
As of June 30, 2022 and 2021, no impairment of long-lived assets was recognized.
TREASURE GLOBAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred offering costs
Deferred offering costs represents costs associated with the Company’s initial underwritten public offering on August 15, 2022. The Deferred offering costs would be netted against the proceeds received from the initial underwritten public offering.
Customer deposits
Customer deposits represent amounts advanced by customers on service order. Customer deposits are reduced when the related sale is recognized in accordance with the Company’s revenue recognition policy.
Revenue recognition
The Company adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (ASC Topic 606) for all periods presented. The core principle underlying the revenue recognition of this ASU allows the Company to recognize - revenue that represents the transfer of goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. This will require the Company to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a customer.
To achieve that core principle, the Company applies five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation.
The Company accounts for a contract with a customer when the contract is committed in writing, the rights of the parties, including payment terms, are identified, the contract has commercial substance and consideration is probable of substantially collection.
Revenue recognition policies for each type of revenue stream are as follows:
Product Revenues
- Performance obligations satisfied at a point in time
The Company primarily sells discounted gift cards (or E-vouchers) from retailers, health care products and computer products through individual order directly through the Company’s online marketplace platform and its mobile application (“Z-City”). The Company accounts for the revenue generated from its sales of E-vouchers, health care products and computer products on a gross basis as the Company is acting as a principal in these transactions and is responsible for fulfilling the promise to provide the specified goods, which the Company has control of the goods and has the ability to direct the use of goods to obtain substantially all the benefits. In making this determination, the Company assesses whether it is primarily obligated in these transactions, is subject to inventory risk, has latitude in establishing prices, or has met several but not all of these indicators in accordance with ASC 606-10-55-36 through 40. The Company determined that it is primarily responsible for fulfilling the promise to provide the specified good as the Company directly purchases and pays for in full the applicable E-voucher, health care products and computer products from the vendors prior to posting of such products for sale on its online marketplace platform and prior to taking any orders for sales of such products. Meanwhile, the Company maintained an average daily inventory of approximately $0.5 million to support an average 2.4 days of sales during the year ended June 30, 2022, which demonstrate the Company had control over the products prior to selling it to the customers as the ownership of the products did not transferred momentarily to the customer after the Company purchased the products from vendors. In addition, the Company cannot return the products to the vendors due to lack of sales which demonstrated that the company is subject to inventory risk, and it has discretion in establishing the price of the products which has demonstrated that the Company has the ability to direct the use of that good or service and obtain substantially all of the remaining benefits. The Company also recognized a portion of the product revenues from health care products on a net basis as the product was dropped shipped from the vendors to customers directly which demonstrated that the Company did not had control of the products or bear any inventory risks.
TREASURE GLOBAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company recognizes the sales of E-vouchers, health care products, and computer products revenue when the control of the specified goods is transferred to its customer. No refund or return policy is provided to the customer. For the years ended June 30, 2022 and 2021, approximately $2.8 million and $0.4 million of product revenues are related to non-spending related activities with the same amount recorded as selling expenses, respectively.
Loyalty Program
- Performance obligations satisfied at a point in time
The Company’s Z-City reward loyalty program allows members to earn points on purchases that can be redeemed for rewards that include discounts on future purchases. When members purchase the Company’s product or make purchase with the Company’s participated vendor through Z-City, the Company allocate the transaction price between the product and service, and the reward points earned based on the relative stand-alone selling prices and expected point redemption. The portion allocated to the reward points is initially recorded as contract liability and subsequently recognized as revenue upon redemption or expiration.
The two primary estimates utilized to record the contract liability for reward points earned by members are the estimated retail price per point and estimated breakage. The estimated retail price per point is based on the actual historical retail prices of product purchased or service obtained through the redemption of reward points. The Company estimate breakage of reward points based on historical redemption rates. The Company continually evaluates its methodology and assumptions based on developments in retail price per point redeemed, redemption patterns and other factors. Changes in the retail price per point and redemption rates have the effect of either increasing or decreasing the contract liability through current period revenue by an amount estimated to represent the retail value of all points previously earned but not yet redeemed by loyalty program members as of the end of the reporting period.
Transactions Revenue
- Performance obligations satisfied at a point in time
The transactions revenues primarily consist of fees charged to merchants for participating in Z-City upon successful sales transaction and payment service taken place between the merchants and their customers online.
The Company earns transaction revenue from merchants when transactions are completed on certain retail marketplaces. Such revenue is generally determined as a percentage based on the value of merchandise or services being sold by the merchants. In connection with the transaction revenue, the Company offers to share the profit of the transaction (“agent commission”) to the agents who has referred merchants to participating in Company’s online marketplace platform and in Z-City. Transaction revenue is recognized, net of agent commission, in the consolidated statements of operations at the time when the underlying transaction is completed.
Agent Subscription Revenue
- Performance obligations satisfied at a point in time
In order to attract more merchants to join the Company’s online marketplace and in Z-City, the Company provides a right to the agent, an individual or a merchant, to join the Zagent program and assist the Company to develop more merchants to join its merchant network. The agent subscription revenues primarily consist of fees charged to the agents in exchange for the right by introducing merchants to join the Company’s merchant network and to earn a future fixed percentage of commission fee upon completion of each sales transaction. As the agent subscription fee is non-refundable, agent subscription revenue is recognized in the consolidated statements of operations at the time when an agent completed the Zagent program training and the remittance of payment of the subscription fee.
Member Subscription Revenue
- Performance obligations satisfied over time
TREASURE GLOBAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In order to attract more customer to engage with the Company’s online marketplace and in Z-City, the Company provides membership subscription to the customers to join the Zmember program, a membership program that
provides member with benefits which included exclusive saving, bonus, and referral rewards.
Member subscription revenue primarily consist of fees charge to customers who sign up for Zmember. As the Company provided customers with 6 months member subscription service in general, member subscription revenue is recognized in the consolidated statement of operation over the time across the subscription period.
Disaggregated information of revenues by products/services are as follows:
For the years ended June 30,
Health care products and computer products revenue (1) 49,524 350,455
Member subscription revenue (2) 211,441 -
(1) Revenue recognized at a point in time.
(2) Revenue recognized over time.
Cost of revenues
Cost of revenues sold mainly consists of the purchases of the gift card or “E-voucher” pin code, and health care products which is directly attributable to the sales of product on the Company’s online marketplace platform.
Advertising costs
Advertising costs amounted to $4,224,710 and $1,855,000 for the years ended June 30, 2022 and 2021, respectively.
Operating leases
A lease for which substantially all the benefits and risks incidental to ownership remain with the lessor is classified by the lessee as an operating lease. All leases of the Company are currently classified as operating leases. The Company records the total expenses on a straight-line basis over the lease term.
Research and development
Research and development expenses include salaries and other compensation-related expenses to the Company’s research and product development personnel, and related expenses for the Company’s research and product development team. Research and development expenses amounted to $266,716 and
$
435,471 for the years ended June 30, 2022 and 2021, respectively.
Defined contribution plan
The full-time employees of the Company are entitled to the government mandated defined contribution plan. The Company is required to accrue and pay for these benefits based on certain percentages of the employees’ respective salaries, subject to certain ceilings, in accordance with the relevant government regulations, and make cash contributions to the government mandated defined contribution plan. Total expenses for the plans were $139,595 and $65,025 for the years ended June 30, 2022 and 2021, respectively.
TREASURE GLOBAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The related contribution plans include:
- Employees Provident Fund (“EPF”) – 12% based on employee’s monthly salary;
Income taxes
The Company accounts for income taxes in accordance with U.S. GAAP for income taxes. The charge for taxation is based on the results for the fiscal year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred taxes are accounted for using the asset and liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the consolidated financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized. Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.
An uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. No penalties and interest incurred related to underpayment of income tax for years ended June 30, 2022 and 2021.
The Company is incorporated in the State of Delaware and is required to pay franchise taxes to the State of Delaware on an annual basis.
The Company conducts much of its business activities in Malaysia and is subject to tax in its jurisdiction. As a result of its business activities, the Company will file separate tax returns that are subject to examination by the foreign tax authorities.
Stock-Based Compensation
The Company recognizes compensation costs resulting from the issuance of stock-based awards to non-employee as an expense in the statements of operations over the requisite service period based on a measurement of fair value for each stock-based award. The fair value of each warrants and common stock granted are estimated as of the date of grant using the Black-Scholes-Merton option-pricing model. The fair value is amortized as compensation cost on a straight-line basis over the requisite service period of the awards. The Black-Scholes-Merton option-pricing model includes various assumptions, including the fair market value of the common stock of the Company, expected life of stock options, the expected volatility and the expected risk-free interest rate, among others. These assumptions reflect the Company’s best estimates, but they involve inherent uncertainties based on market conditions generally outside the control of the Company.
As a result, if other assumptions had been used, stock-based compensation expense, as determined in accordance with authoritative guidance, could have been materially impacted. Furthermore, if the Company uses different assumptions on future grants, stock-based compensation expense could be materially affected in future periods.
Comprehensive income (loss)
Comprehensive income (loss) consists of two components, net loss and other comprehensive income (loss). Other comprehensive income (loss) refers to revenue, expenses, gains and losses that under GAAP are recorded as an element of stockholders’ equity but are excluded from net income. Other comprehensive income (loss) consists of a foreign currency translation adjustment resulting from the Company not using the U.S. dollar as its functional currencies.
Loss per share
The Company computes earnings (loss) per share (“EPS”) in accordance with ASC 260, “Earnings per Share”. ASC 260 requires companies to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average ordinary share outstanding for the period. Diluted EPS presents the dilutive effect on a per share basis of the potential ordinary shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential ordinary shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.
TREASURE GLOBAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended June 30, 2022, and 2021 a total of 3,282,887 and 1,063,560 contingent shares to be issued to the convertible note holders are excluded in the diluted EPS calculation due to its anti-diluted effect, respectively.
Convertible notes
The Company evaluates its convertible notes to determine if those contracts or embedded components of those contracts qualify as derivatives. The result of this accounting treatment is that the fair value of the embedded derivative is recorded at fair value each reporting period and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statements of operations as other income or expense.
In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.
If the conversion features of conventional convertible debt provide for a rate of conversion that is below market value at issuance, this feature is characterized as a beneficial conversion feature ("BCF"). A BCF is recorded by the Company as a debt discount pursuant to ASC Topic 470-20 "Debt with Conversion and Other Options." In those circumstances, the convertible debt is recorded net of the discount related to the BCF, and the Company amortizes the discount to interest expense, over the life of the debt.
Fair value measurements
Fair value is defined as the price that would be received for an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. Valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. When determining the fair value measurements for assets and liabilities, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability. The following summarizes the three levels of inputs required to measure fair value, of which the first two are considered observable and the third is considered unobservable:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The fair value for certain assets and liabilities such as cash, accounts receivable, inventories, other receivables and other current assets, prepayments, accounts payable, customers deposits, other payables and accrued liabilities have been determined to approximate carrying amounts due to the short maturities of these instruments. The Company believes that its bank loans and convertible notes approximates fair value based on current yields for debt instruments with similar terms.
Related parties
Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Companies are also considered to be related if they are subject to common control or common significant influence.
Reclassification
Certain items of current and non-current liabilities
in the consolidated balance sheet and certain items of cash flows from financing activities in the consolidated statements of cash flows have been reclassified to conform to the consolidated financial statements for the current period. The reclassification has no impact on the Company’s total current and non-current liabilities on its consolidated balance sheet, and net cash provided by financing activities on its consolidated statements of cash flows.
Recent accounting pronouncements
The Company considers the applicability and impact of all accounting standards updates (“ASUs”). Management periodically reviews new accounting standards that are issued. Under the Jumpstart Our Business Startups Act of 2012, as amended (the “JOBS Act”), the Company meets the definition of an emerging growth company and has elected the extended transition period for complying with new or revised accounting standards, which delays the adoption of these accounting standards until they would apply to private companies.
TREASURE GLOBAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to increase the transparency and comparability about leases among entities. The new guidance requires lessees to recognize a lease liability and a corresponding lease asset for virtually all lease contracts. It also requires additional disclosures about leasing arrangements. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018, and requires a modified retrospective approach to adoption assuming the Company will remain an emerging growth company at that date. Early adoption is permitted. In September 2017, the FASB issued ASU No. 2017-13, which to clarify effective dates that public business entities and other entities were required to adopt ASC Topic 842 for annual reporting. A public business entity that otherwise would not meet the definition of a public business entity except for a requirement to include or the inclusion of its financial statements or financial information in another entity’s filing with the SEC adopting ASC Topic 842 for annual reporting periods beginning after December 15, 2020, and interim reporting periods within annual reporting periods beginning after December 15, 2021. ASU No. 2017-13 also amended that all components of a leveraged lease be recalculated from inception of the lease based on the revised after-tax cash flows arising from the change in the tax law, including revised tax rates. The difference between the amounts originally recorded and the recalculated amounts must be included in income of the year in which the tax law is enacted. The Company has not early adopted this update and it became effective on July 1, 2022 after FASB delayed the effective date for emerging growth companies with ASU 2020-05.
Upon adoption of this new standard on July 1, 2022, it resulted in the recording of right-of-use assets and lease liabilities of approximately $0.1 million.
In May 2019, the FASB issued ASU 2019-05, which is an update to ASU Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced the expected credit losses methodology for the measurement of credit losses on financial assets measured at amortized cost basis, replacing the previous incurred loss methodology. The amendments in Update 2016-13 added Topic 326, Financial Instruments—Credit Losses, and made several consequential amendments to the Codification. Update 2016-13 also modified the accounting for available-for-sale debt securities, which must be individually assessed for credit losses when fair value is less than the amortized cost basis, in accordance with Subtopic 326-30, Financial Instruments— Credit Losses—Available-for-Sale Debt Securities. The amendments in this Update address those stakeholders’ concerns by providing an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For those entities, the targeted transition relief will increase comparability of financial statement information by providing an option to align measurement methodologies for similar financial assets. Furthermore, the targeted transition relief also may reduce the costs for some entities to comply with the amendments in Update 2016-13 while still providing financial statement users with decision-useful information. In November 2019, the FASB issued ASU No. 2019-10, which to update the effective date of ASU No. 2016-13 for private companies, not-for-profit organizations and certain smaller reporting companies applying for credit losses, leases, and hedging standard. The new effective date for these preparers is for fiscal years beginning after December 15, 2022. ASU 2019-05 is effective for the Company for annual and interim reporting periods beginning July 1, 2023 as the Company is qualified as an emerging growth company. The Company is currently evaluating the impact ASU 2019-05 may have on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”. The amendments in this Update simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption of the amendments is permitted, including adoption in any interim period for (1) public business entities for periods for which financial statements have not yet been issued and (2) all other entities for periods for which financial statements have not yet been made available for issuance. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that elects early adoption must adopt all the amendments in the same period. ASU 2019-12 is effective for the Company for annual and interim reporting periods beginning July 1, 2022 as the Company is qualified as an emerging growth company. The Company is currently evaluating the impact of this new standard on Company’s consolidated financial statements and related disclosures.
TREASURE GLOBAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August 2020, the FASB issued ASU 2020-06, “Debt – Debt Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40)”. The amendment in this Update is to address issues identified as a result of the complexity associated with applying generally accepted accounting principles (GAAP) for certain financial instruments with characteristics of liabilities and equity. For convertible instruments, the Board decided to reduce the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models results in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. The amendments in this Update are effective for public business entities that meet the definition of a Securities and Exchange Commission (SEC) filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Board specified that an entity should adopt the guidance as of the beginning of its annual fiscal year. The Company has not early adopted this update and it will become effective on July 1, 2024 as the Company is qualified as an emerging growth company. The Company believes the adoption of this ASU would have a material effect on the Company’s consolidated financial statements and related disclosures.
In October 2020, the FASB issued ASU 2020-08, “Codification Improvements to Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs”. The amendments in this Update represent changes to clarify the Codification. The amendments make the Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. ASU 2020-08 is effective for the Company for annual and interim reporting periods beginning January 1, 2021. Early adoption was permitted, including adoption in an interim period. All entities should apply the amendments in this Update on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. These amendments do not change the effective dates for Update 2017-08. The adoption of this standard on July 1, 2021 did not have a material impact on its consolidated financial statements.
In October 2020, the FASB issued ASU 2020-10, “Codification Improvements to Subtopic 205-10, presentation of financial statements”. The amendments in this Update improve the codification by ensuring that all guidance that requires or provides an option for an entity to provide information in the notes to financial statements is codified in the disclosure section of the codification. That reduce the likelihood that the disclosure requirement would be missed. The amendments also clarify guidance so that an entity can apply the guidance more consistently. ASU 2020-10 is effective for the Company for annual and interim reporting periods beginning January 1, 2022. Early application of the amendments is permitted for any annual or interim period for which financial statements are available to be issued. The amendments in this Update should be applied retrospectively. An entity should apply the amendments at the beginning of the period that includes the adoption date. The adoption of this standard on July 1, 2021 did not have a material impact on its consolidated financial statements.
Except as mentioned above, the Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the Company’s consolidated balance sheets, statements of operations and comprehensive loss and statements of cash flows.
Note
4
–
Accounts receivable, net
Allowance for doubtful accounts (227 ) (25,690 )
Total accounts receivable, net $ - $ 83,917
TREASURE GLOBAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Movements of allowance for doubtful accounts are as follows:
Beginning balance $ 25,690 $ -
Exchange rate effect (510 ) (138 )
Note
5
–
Inventories
Inventories consist of the following:
Nutrition products 28,798 -
Note
6
–
Other receivable and other current assets, net
Total other receivable and other current assets $ 8,780 $ 14,812
Allowance for doubtful account - -
Total other receivable and other current assets, net $ 8,780 $ 14,812
(1) The balance of deposits mainly represented deposit made by the Company to third party service provider, and security deposit consist of rent and utilities. As of June 30, 2022 and 2021, the Company did not record any allowance against doubtful receivables.
Note
7
–
Prepayments
Note
8
–
Property and equipment, net
Property and equipment, net consist of the following:
TREASURE GLOBAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Leasehold improvement 89,425 -
Less: accumulated depreciation (67,178 ) (9,577 )
Depreciation expense for the June 30, 2022 and 2021 amounted to $60,605 and $9,627, respectively.
Note
9
– Loans and notes
Loans from third parties
The Company entered into a loan agreement with Aqtiq Solutions Sdn Bhd, a third party (the “Agtiq Loan Agreement”) dated June 27, 2022, pursuant to which Aqtiq Solutions Sdn Bhd provided the Company with a revolving loan facility to borrow up to RM 3,000,000 (approximately $0.7 million) bearing interest at 3.5% per annum, which is payable on demand. As of June 30, 2022, the Company had balance outstanding from this facility amounted to $668,923. On July 12, 2022, the Company has repaid the
remaining
balance in full.
The Company entered into a loan agreement with Technovative Hub Sdn Bhd, a third party (the “Technovative Loan Agreement”) date June 27, 2022, pursuant to which Technovative Hub Sdn Bhd provided the Company with a revolving loan facility to borrow up to RM 4,000,000 (approximately $1.0 million) bearing interest at 3.5% per annum, which is payable on demand. As of June 30, 2022, the Company had balance outstanding form this facility amounted to $748,724. Subsequent to June 30, 2022, the Company had withdrew additional $567,215
from this facility under the Technovative Loan Agreement and repaid the remaining balance in full on July 18, 2022.
Senior Note
On June 30, 2021, the Company issued a 12% Redeemable Senior Note in the principal amount of $65,000 to Yong Kim Fong, a Malaysian citizen (the “Fong Note”). The Fong Note bears interest at 12.00% per annum and is due on the earlier of (x) the date on which our common stock is listed on Nasdaq and (y) July 1, 2024. The Fong Note is pre-payable in full, but not in part. As of June 30, 2022, the balance of the Fong Note is amounted to $65,000. On September 1, 2022, the Company has fully repaid the balance.
Convertible Notes
The Company evaluated the convertible notes agreement under ASC 815 Derivatives and Hedging (“ASC 815”). ASC 815 generally requires the analysis embedded terms and features that have characteristics of derivatives to be evaluated for bifurcation and separate accounting in instances where their economic risks and characteristics are not clearly and closely related to the risks of the host contract. None of the embedded terms required bifurcation and liability classification.
On November 13, 2020, the Company issue a convertible note, to an accredited investor, in the aggregate principal amount of $2,123,600. Pursuant to the agreement, the note bear an interest rate of 13.33% per annum, payable (i) on December 31, 2020; (ii) during calendar year 2021, monthly on the last day of each month and (iii) during calendar years 2022 and 2023 until the Maturity Date, semiannually on each June 30 and December 31; provided that for calendar year 2023 the final interest payment date shall be the Maturity Date. The Company evaluated the convertible notes agreement under ASC 815, which generally requires the analysis embedded terms and features that have characteristics of derivatives to be evaluated for bifurcation and separate accounting in instances where their economic risks and characteristics are not clearly and closely related to the risks of the host contract. None of the embedded terms in the convertible notes required bifurcation and liability classification. However, the Company was required to determine if the debt contained a beneficial conversion feature (“BCF”), which is based on the intrinsic value on the date of issuance. The Company evaluated the convertible notes for a beneficial conversion feature in accordance with ASC 470-20 “Debt with Conversion and Other Options”. The Company determined that the conversion price ($4.00) was below the market price ($5.48) as per an enterprise per share value appraised from an independent third party, and the convertible notes contained a beneficial conversion feature. The Company recognized the intrinsic value of embedded conversion feature of $0 and $785,065 in the convertible notes as additional paid-in capital and reduced the carrying value of the convertible notes as a debt discount for the years ended June 30, 2022 and 2021, respectively.
TREASURE GLOBAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, notes issuance costs in connection with this note amounted $212,360 and
reduced
the carrying value of the convertible notes as a debt discount. The carrying value, net of debt discount, will be accreted over the term of the convertible notes from date of issuance to date of maturity using effective interest rate method. For the years ended June 30, 2022 and 2021, amortization of debt discount amounted to $466,232 and $238,917, respectively. As of June 30, 2022, convertible note balance from this accredited investor, net of unamortized discounts of $292,276 was amounted to $1,831,324.
As of June 30, 2021, convertible note balance from this accredited investor, net of unamortized discounts of $758,508 was amounted to $1,365,092.
Upon completion of the Company’s initial underwritten public offering on August 15, 2022, the above mentioned convertible note balance was converted into 530,900 shares of common stock. Meanwhile, additional 15,927 shares of common stock w
ere
issued to this accredited investor as success fees.
On January 3, 2022, the Company had entered into a loan agreement (the “Tophill Loan Agreement 1”) with a third party to borrow up to approximately $4.8 million with up to 3.5% per annum interest rate. The loan is due on demand together with interest accrued thereon. On March 14, 2022, the Company and above mentioned third party had made amendment to the Tophill Loan Agreement 1. Pursuant to the amendment, the aggregate outstanding principal amount of all Loans plus any accrued and unpaid interest (“Loan balance”) thereon as of the closing date of the IPO shall automatically converted into a number of shares of the Company’s common stock equal to the Loan balance divided by 80% of the public offering price of the Company’s common stock in the IPO; and the loan agreement shall terminate and no additional amounts under the loan agreement will be available to the Company and after taking into consideration the conversion of the Loan balance, no amount under any loan shall be outstanding. In addition, the Company entered into another Loan Agreement (the “Tophill Loan Agreement 2”) dated May 13, 2022 with Tophill, pursuant to which Tophill provided the company with a revolving loan facility to borrow up to RM 50,000,000 (approximately $11.9 million) bearing interest at 3.5% per annum, which is payable on demand. Meanwhile, the agreement provide that (i) all principal and accrued and unpaid interest outstanding under the Tophill Loan Agreement 2 on the closing of the Company’s initial public offering will automatically be converted into shares of the Company’s common stock at a conversion price that is equal to 80% of the initial public offering price and (ii) the Tophill Loan Agreement 2 terminates on the closing date of the Company’s initial public offering. The Company evaluated the loan agreement under ASC 815, which generally requires the analysis embedded terms and features that have characteristics of derivatives to be evaluated for bifurcation and separate accounting in instances where their economic risks and characteristics are not clearly and closely related to the risks of the host contract. None of the embedded terms in the loan required bifurcation and liability classification. However, the Company was required to determine if the debt contained a beneficial conversion feature (“BCF”), which is based on the intrinsic value on the date of issuance. The Company evaluated the loan for a beneficial conversion feature in accordance with ASC 470-20 “Debt with Conversion and Other Options”. The Company determined that the conversion price ($4.38) was below the market price ($5.48) as per an enterprise per share value appraised from an independent third party, and the loan contained a beneficial conversion feature. The Company recognized the intrinsic value of embedded conversion feature of $1,231,610 and nil in the loan additional paid-in capital and reduced the carrying value of the loan as a debt discount for the years ended June 30, 2022 and 2021, respectively. The carrying value, net of debt discount, will be accreted over the term of the term of the loan from date of issuance to date of maturity using effective interest rate method, recorded as current liabilities. For the years ended June 30, 2022 and 2021, amortization of debt discount for the loan amounted to $800,629 and nil, respectively. As of June 30, 2022, the convertible note balance from Tophill Loan Agreement 1 and Agreement 2, net of unamortized discounts of $424,984, was amounted to $5,542,231. Subsequent to June 30, 2022, the Company has withdrew additional amount of approximately $2.7 million from this facility under the Tophill Loan Agreement 2. Upon completion of the Company’s initial underwritten public offering on August 15, 2022, the remaining principal and accrued interest balance related to Tophill Loan Agreement 1 and Agreement 2 amounted to approximately $8.6 million was converted into 2,756,879 shares of common stock.
In May, and June 2021, the Company issue various batches of convertible notes to 5 accredited investors which included
4
third parties in the aggregate principal amount of $2,210,361 and
1
related parties in the aggregate principal amount of $ 1,400,000 (see note 11). In July, September, October, and December 2021, the Company issue various batches of convertible notes to 7 accredited investors which included
3
third parties in the aggregate principal amount of $1,370,126 and
4
related parties in the aggregate principal amount of $1,037,574
.
As of June 30, 2022
, the Company
accumulatively
issue various batches of convertible notes to
10
accredited investors
which included
5
third parties in the aggregate principal amount of $3,580,488 and
5
related parties in the aggregate principal amount of $2,437,574 (see Note 1
1
).
Pursuant to the agreement, the maturity date is 36 months after the issuance, provided that if an IPO listing is not successful, the accredited investors should be entitled to require the Company to redeem the convertible notes at the subscription/conversion of $6.90 per share along with interest payable at the rate of 12% per annum. The Company also evaluated the convertible notes agreement under ASC 815 and determined none of the embedded terms in the convertible notes required bifurcation and liability classification. However, the Company was required to determine if the debt contained a BCF and determined that the conversion price ($6.90) was above the market price ($5.48) as per an enterprise per share value appraised from an independent third party, and the convertible notes do not contain a beneficial conversion feature. As a result, the Company record the proceeds received from these convertible notes as a liability in its entirely. As of June 30, 2022, the convertible note balance from
third parties and related parties
accredited investors was amounted to $3,580,488
a
nd
$
2,437,574, respectively
.
Upon completion of the Company’s initial underwritten public offering on August 15, 2022, the balance of these convertible notes as mentioned above was converted into 872,183 shares of common stock.
TREASURE GLOBAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has convertible notes payable, net of unamortized discounts as follows:
June 30, 2020 balance $ - $ - $ - $ - $ -
For the years ended June 30, 2022 and 2021, interest expenses related to the aforementioned convertible notes amounted to $340,277 and $163,158 respectively.