Item 7. Management’s Discussion and Analysis
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 (“TGL,” “we,”
“our” or the “Company”) is a holding company incorporated on March 20, 2020, under the laws of the State of Delaware.
TGL 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, TGL and GEM were separate companies under the common control of Kok Pin
“Darren,” which resulted from Mr. Tan’s prior 100% ownership of TGL 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 TGL and GEM see Part
I, Item 1. “Business – Corporate Structure.”
On March 11, 2021, TGL and GEM were reorganized
into a parent subsidiary structure pursuant to the Share Swap Agreement in which TGL exchanged the swap shares for all of the issued and
outstanding 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 TGL 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 TGL and Kok Pin “Darren” no longer had any control over the GEM ordinary shares and
(ii) Kok Pin “Darren,” the Initial GEM Stockholders and Chong Chan “Sam” Teo owned 100% of the shares of
TGL common stock (Kok Pin “Darren” owning approximately 97%). Subsequent to the date of the Share Swap Agreement, Kok Pin
“Darren” transferred 9,529,002 of his 10,000,000 shares of TGL 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 online-to-offline
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 application branded
“ZCITY App,” which was developed through GEM. The ZCITY App was successfully launched in Malaysia on 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 September 13, 2023, we had 2,642,404 registered users and 2,025 registered merchants.
Southeast Asia (“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.
41
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.
On May 1, 2023, we entered into a worldwide master
license agreement (“License Agreement 1”) with Morganfield’s Holdings Sdn Bhd (“Licensor 1”), an unrelated
third party. Pursuant to the License Agreement 1, the Licensor 1 agreed to grant us the exclusive worldwide license for the right to use
the Morganfield’s Trademark (“Trademark 2”) for a period of five years. During the five-year license period, we agree
to pay Licensor 1 for monthly license fee throughout the license period, with minimum aggregate payments of approximately $1.5 million
or 40% of the total monthly collections from our sub-licensees, whichever is higher.
On June 6, 2023, we entered into a worldwide master
license agreement (“License Agreement 2”) with Sigma Muhibah Sdn Bhd (“Licensor 2”), an unrelated third party.
Pursuant to the License Agreement 2, Licensor 2 agreed to grant the AY Food Ventures Sdn Bhd with the exclusive worldwide license for
right of use in Abe Yus’s Trademark (“Trademark 2”) for a period of five years. During the five years license period,
we agree to pay the licensor 2 for monthly license fee throughout the license period, with minimum aggregate payments of approximately
$1.2 million or 40% of the total monthly collection from our sub-licensees, whichever is higher.
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:
Number and volume of transactions completed
by our consumers .
Consumers are attracted to ZCITY by the breadth
of personalized deals/rewards and the interactive user experience our platform offers. The number and volume of transaction completed
by our member consumers is affected by our ability to continue to enhance and expand our product and service offerings and improve the
user experience.
Empowering data and technology.
Our ability to engage our member consumers and
empower our merchants and their brands is affected by the breadth and depth of our data insights, such as the accuracy of our members’
shopping preferences, and our technology capabilities and infrastructure, and our continued ability to develop scalable services and upgrade
our platform user experience to adapt to the quickly evolving industry trends and consumer preferences.
42
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.
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 June 30, 2023, 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 and Russia’s February 2022 invasion of Ukraine that may have affected the operations of some
of our online and offline merchants, these disruptions have not had a material adverse effect on our business as of June 30, 2023, 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 since we launched ZCITY platform, are set forth in the table below:
For
the quarters ended
June 30,
September 30,
December 31,
March 31,
June 30,
September 30,
December 31,
March 31,
June 30,
2021
2021
2021
2022
2022
2022
2022
2023
2023
Number
of new registered user (1)
262,784
245,582
288,540
364,218
466,534
234,179
143,654
98,248
98,087
Number
of active
users (2)
347,596
362,805
421,287
448,247
443,430
488,358
458,177
449,435
378,414
Number
of new participating merchants
270
44
15
14
7
13
-
10
2
(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
As
of
As
of
June 30,
September 30,
December 31,
March 31,
June 30,
September 30,
December 31,
March 31,
June 30,
2021
2021
2021
2022
2022
2022
2022
2023
2023
Accumulated
registered users
603,122
848,704
1,137,244
1,501,462
1,967,996
2,202,175
2,345,829
2,444,077
2,542,164
Accumulated
Participating merchants
1,905
1,949
1,964
1,978
1,985
1,998
1,998
2,008
2,010
We have experienced substantial growth in registered
users and active users since we launched ZCITY platform in June 2020. As of June 30, 2023, we recorded 2,542,164 registered users and
378,414 active users from ZCITY platform. Our average percentage of growth of register and active users from the establishment of
the ZCITY platform to the year ended June 30, 2023 was approximately 93.7% and 179.3%, respectively.
43
However, the average percentage of growth of registered
and active users decreased in the last ten quarters up to June 30, 2023 which was a result of decrease in purchasing of E-voucher from
our vendor, eventually reduce the E-voucher available for sales, and attract less new registered and active user to join our ZCITY platform.
Since our product and loyalty program revenue mainly consist of sales of E-voucher which bear a low profit margin, reduce in purchasing
of E-voucher will allow us to reserve more working capital in developing our TAZTE Smart F&B system (“TAZTE”), which is
a system that provides a one stop solution and digitalization transformation for all registered food and beverage (“F&B”)
outlets located in Malaysia. As TAZTE is a merchant-oriented program, we intend to utilize our user data to help our merchant customers
to achieve higher business growth as well as increase our transaction revenue while we launch TAZTE in late December 2022. As we provided
extended 365 days free trial for merchant participate in TAZTE, we have not generated any revenue from TAZTE for the year ended June 30,
2023. For 2023 and beyond, we do not expect to experience exponential growth rate in our registered and active users as we intend to maintain
our E-voucher for sales in a steady level and increase our user’s retention rate.
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:
Starting
Ending
Total
registered
users
Total active
users
Total active
users
to total
registered
users
July 1, 2020
September 30, 2020
14,336
2,945
20.5 %
October 1, 2020
December 31, 2020
58,868
42,225
71.7 %
January 1, 2021
March 31, 2021
340,338
300,270
88.2 %
April 1, 2021
June 30, 2021
603,122
347,596
57.6 %
July 1, 2021
September 30, 2021
848,704
362,805
42.7 %
October 1, 2021
December 31, 2021
1,137,244
421,287
37.0 %
January 1, 2022
March 31, 2022
1,501,462
448,247
29.8 %
April 1, 2022
June 30, 2022
1,967,996
443,430
22.5 %
July 1, 2022
September 30, 2022
2,202,175
488,358
22.2 %
October 1, 2022
December 31, 2022
2,345,829
458,177
19.5 %
January 1, 2023
March 31, 2023
2,444,077
449,435
18.4 %
April 1, 2023
June 30, 2023
2,542,164
378,414
14.9 %
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:
Starting
Ending
Total
active
users
New active
users
(registered
within the
quarter)
Existing
active
users
Active
users
churn
rate
Active
users
retention
rate
July 1, 2020
September 30, 2020
2,945
2,879
66
N/A
N/A
October 1, 2020
December 31, 2020
42,225
41,142
1,083
63.3 %
36.7 %
January 1, 2021
March 31, 2021
300,270
281,432
18,838
55.4 %
44.6 %
April 1, 2021
June 30, 2021
347,596
262,780
84,816
71.8 %
28.2 %
July 1, 2021
September 30, 2021
362,805
245,580
117,225
66.3 %
33.7 %
October 1, 2021
December 31, 2021
421,287
288,536
132,751
63.4 %
36.6 %
January 1, 2022
March 31, 2022
448,247
361,143
87,104
78.5 %
21.5 %
April 1, 2022
June 30, 2022
443,430
368,390
75,040
83.3 %
16.7 %
July 1,2022
September 30, 2022
448,358
146,036
342,322
22.8 %
77.2 %
October 1, 2022
December 31, 2022
458,177
104,191
353,986
27.5 %
72.5 %
January 1, 2023
March 31, 2023
449,435
81,921
367,514
19.8 %
80.2 %
April 1, 2023
June 30, 2023
378,414
93,516
284,898
36.6 %
63.4 %
44
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
Churn rate of active users for any quarter
=
Total active users from past quarter minus current quarter existing active users
Total active users in the past quarter
Over the last 24 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, 2023 and 2022
Revenue
Our breakdown of revenues by categories for the
years ended June 30, 2023 and 2022, respectively, is summarized below:
For the Years Ended June 30,
Change
2023
%
2022
%
%
Product and loyalty program revenue
$ 68,899,687
99.3 %
$ 79,409,756
99.7 %
(13.2 )%
Transaction revenue
75,274
0.1 %
53,667
0.1 %
40.3 %
Agent subscription revenue
-
0.0 %
15
0.0 %
(100.0 )%
Member subscription revenue
383,538
0.6 %
211,441
0.2 %
81.4 %
Sublicence revenue
49,820
0.1 %
-
0.0 %
100.0 %
Total revenues
$ 69,408,319
100.0 %
$ 79,674,879
100.0 %
(12.9 )%
Total revenues decreased by approximately $10.3 million
or 12.9% to approximately $69.4 million for the year ended June 30, 2023 from approximately $79.7 million for the year ended June
30, 2022. The decrease was mainly attributable to decrease in product and loyalty program revenue.
45
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. In addition, we
also engage in sales of food and beverage products through our newly acquired subsidiaries, Morgan Global Sdn. Bhd (“Morgan”)
and AY Food Ventures Sdn. Bhd. (“AY Food”). The product and loyalty program revenue decrease by approximately $10.5 million
or 13.2% to approximately $68.9 million for the year ended June 30, 2023 from approximately $79.4 million for the same period in 2022.
The decrease was mainly attributable to decrease in E-voucher purchasing which resulted in less E-voucher available for sales during the
year ended June 30, 2023. Such decrease in purchasing activities was due to our management’s decision to reserve more working capital
for developing TAZTE within the ZCITY platform as discussed in the key operating metrics section above.
Transaction revenue
The transaction 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 40.3% to approximately $75,000 for the year ended June 30, 2023 from approximately
$54,000 for the same period in 2022. The increase was mainly attributable to the fact that we engaged with 2,010 local merchants to connect
them with their customers through our ZCITY platform as of June 30, 2023 compared to 1,985 as of June 30, 2022. Our average percentage
of growth of new merchants was approximately 25.3% throughout the quarters as of June 30, 2023 since the establishment of ZCITY platform.
Despite of the slowdown in adding new merchants to our platform during the last eight quarters ended as of June 30, 2023, we expect our
transaction revenue to increase as soon as the free trial period from TAZTE expires in December 2023.
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. We did not
recognize any agent subscription revenue for the year end June 30, 2023 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. As we abandoned the
agent subscription program, we will not generate any agent subscription revenue going forward.
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 81.4% to approximately $0.4 million for the year end June 30, 2023 as compared
to approximately $0.2 million for the same period in 2022 as we launched the Zmember program for the quarter ended in March 31, 2022
to enhance our customer engagement with our ZCITY platform. As of June 30, 2023, we had 22,861 customers who subscribed to our Zmember
program.
Sublicense revenue
As we acquired exclusive worldwide license for
right of use in Morganfield’s Trademark on May 1, 2023 for a period of five years, we have generated sublicense revenue consist
of fee charged to the customers who sublicensed the right of use of the Trademark from us. For the year ended June 30, 2023, sublicense
revenue was amounted to approximately $50,000 while as of June 30, 2023 we engaged 7 customers as sublicensees who operated their restaurant
under Morganfield’s Trademark in Singapore, Malaysia, and China.
46
Cost of revenue
Our breakdown of cost of revenue by categories for the years ended
June 30, 2023 and 2022, respectively, is summarized below:
For the Years Ended
June 30,
Change
2023
2022
%
Product and loyalty program revenue
$ 68,857,916
$ 79,198,691
(13.1 )%
Sublicense revenue
27,119
-
100.0 %
Total cost of revenue
$ 68,885,035
$ 79,198,691
(13.0 )%
Cost of revenue mainly consists of the purchases
of the gift card or “E-voucher” pin code, health care product, and food and beverage products which is directly attributable
to our product revenue. Cost of revenue also consists of monthly license payment made to our licensor to maintain our good standing for
the right of use in Trademark which is attributable to our sublicense revenue. Total cost of revenue decreased by approximately $10.3
million or 13.0% for the year ended June 30, 2023 compared with the same period in 2022. The decrease was in line with our decreased of
revenue.
Gross profit
Our gross profit from our major revenue categories
is summarized as follows:
For the year
Ended
June 30,
2023
For the year
Ended
June 30,
2022
Change
Percentage
Change
Product and loyalty program revenue
Gross profit
$ 41,771
$ 211,065
$ (169,294 )
(80.2 )%
Gross margin
0.1 %
0.3 %
(0.2 )%
Transaction revenue
Gross profit
$ 75,274
$ 53,667
$ 21,607
40.3 %
Gross margin
100.0 %
100.0 %
— %
Agent subscription revenue
Gross profit
$ —
$ 15
$ (15 )
(100.0 )%
Gross margin
— %
100.0 %
(100.0 )%
Member subscription revenue
Gross profit
$ 383,538
$ 211,441
$ 172,097
81.4 %
Gross margin
100.0 %
100.0 %
— %
Sublicense revenue
Gross profit
$ 22,701
$ —
$ 22,701
100.0 %
Gross margin
45.6 %
— %
45.6 %
Total
Gross profit
$ 523,284
$ 476,188
$ 47,096
9.9 %
Gross margin
0.8 %
0.6 %
0.2 %
Our gross profit for the year ended June 30, 2023 amounted to approximately
$523,000 as compared to approximately $476,000 for the year ended June 30, 2022 which represents an increase of approximately $47,000
or 9.9%. The increase in gross profit was primarily due to the growth in member subscription revenue, as we had more customers subscribed
to our Zmember program as of June 30, 2023
The gross margin was approximately 0.8% and 0.6% for the years ended
June 30, 2023, and 2022, respectively. The 0.2% increase in gross margin attributed to the rise in gross profit from Member subscription
revenue, which has a higher gross margin compared to our other revenue streams.
47
Operating expenses
Our operating expenses consist of selling expenses,
general and administrative expenses, research and development expenses, and stock-based compensation expenses.
Selling expenses
Selling expenses amounted to approximately $4.7
million and $6.3 million for the years ended June 30, 2023 and 2022, respectively. Representing a decrease of approximately $1.6 million
or 24.8%. The decrease was mainly attributable to decrease in marketing and promotion expense of approximately $1.4 million related to
promoting our ZCITY platform. Marketing and promotion expense 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 end June 30, 2023 and 2022,
we incurred approximately $1.8 million and $2.8 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. The decrease in marketing
and promotion expense was mainly due to decrease of new registered user, and eventually resulted in less redemption in non-spending related
activities reward points by our customers.
General and administrative expenses
General and administrative expenses amounted to approximately $4.7
million and $2.8 million for the years ended June 30, 2023 and 2022, respectively. Representing an increase of approximately $1.9 million
or 65.6%. The increase was mainly due to increase in salary expense of approximately $0.5 million, director & officer liability insurance
expense of approximately $0.1 million, and professional fee of approximately $1.0 million as a result of expansion of management and administration
team to support our business operation.
Research and development expenses
Research and development expense amounted to approximately $0.5 million
and $0.3 million for the years ended June 30, 2023 and 2022, respectively, representing 105.9% increase as we increase spending to maintain
and enhance our mobile application or website to ensure our customers to have exceptional user experience while navigating within the
ZCITY platform.
Stock-based compensation expenses
Stock-based compensation expenses amounted to approximately $0.8 million and $1.3 million for the years ended June 30, 2023 and 2022
respectively, representing decrease of approximately $0.5 million. The stock-based compensation incurred for the year ended June 30, 2022
are from Exchange Listing LLC (the “Consultant”). The decreased was mainly due to the Consultant completed its service
during the quarter ended December 31, 2022. The decrease was offset by additional stock-based compensation issued to Voon Him “Victor”
Hoo for his service as our former director amounted to approximately $0.4 million for the year ended June 30, 2023.
Other expenses, net
Other expenses, net amounted to approximately
$1.4 million and $1.6 million for the years ended June 30, 2023 and 2022, respectively. Representing a decrease of approximately $0.2 million
or 10.4%. The decrease was mainly attributable to decrease of interest expenses of approximately $0.3 million as we have less interest-bearing
convertible note outstanding as of June 30, 2023.
48
Provision for income taxes
Provision for income taxes amounted to approximately
$98,000 and $16,000 for the years ended June 30, 2023 and 2022, respectively. 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, 2023 and 2022,
our foreign subsidiaries did not generate any income that are subject to Subpart F tax and GILTI tax.
Net losses
Our net losses decreased by approximately $18,000
predominately due to the 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 stockholders, issuance of convertible
notes, related party loans, and our completion of initial underwritten public offering.
As of June 30, 2023 and 2022, we had approximately
$4.6 million and $1.8 million, respectively, in cash and cash equivalent which primarily consists of bank deposits, which are unrestricted
as to withdrawal and use.
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.
From February to June 2023, we issued two convertible notes to a third
party in an aggregate principal amount of $5,500,000. We received $5,060,000 in proceeds from the third-party net of discount. The convertible
notes accrue or will accrue interest at 4% per annum and has a 12-months term.
Despite receiving the proceeds from our initial
underwritten public offering and issuance of two convertible notes, 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, management has determined there is substantial doubt about our ability to continue as a going concern.
If we are unable to generate significant revenue, we may be required to curtail or cease our operations. Management is trying to alleviate
the going concern risk through the following sources:
● Equity
financing to support our working capital;
● Other
available sources of financing (including debt) from Malaysian banks and other financial institutions; and
● Financial
support and credit guarantee commitments from our related parties.
However, there is no guarantee that the substantial doubt about our
ability to continue as a going concern will be alleviated.
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The following summarizes the key components of
our cash flows for the years ended June 30, 2023 and 2022:
For the Years Ended
June 30,
2023
June 30,
2022
Net cash used in operating activities
$ (9,560,285 )
$ (8,663,901 )
Net cash used in investing activities
(61,244 )
(311,739 )
Net cash provided by financing activities
12,659,188
8,163,893
Effect of exchange rate on cash and cash equivalents
(289,257 )
(186,419 )
Net change in cash and cash equivalents
$ 2,748,402
$ (998,166 )
Operating Activities
Net cash used in operating activities for the years ended June 30,
2023 was approximately $9.6 million and were mainly comprised of the net loss of approximately $11.7 million, increase of prepayments
of approximately $0.1 million as our vendors required us to make deposit to secure the purchase, increase of accounts receivable of approximately
$0.2 million as a result of offering credit terms to our corporate customers engaged in the sales of nutrition products, and food and
beverage products, increase in inventory of approximately $0.2 million as we increase our inventory level on June 30, 2023 to meet with
the demand of our product, and increase of approximately $0.4 million in other receivables and other current assets as we prepaid IT maintenance
fee to a third party service provider, offset by amortization of debt discount of approximately $1.3 million, stock-based compensation
of approximately $0.8 million, increase of approximately $0.1 million in customer deposits as we incurred deferred revenue related to
member subscription revenue for the remaining subscribed period as of June 30, 2023, increase of
approximately $0.1 million in contract liability as we deferred more revenue due to increase of our customer’s redemption rate in
spending related reward point, and increase of approximately $0.5 million in other payables and accrued liabilities mainly
related to the accrued professional expenses.
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 accounts payable (including related parties) of approximately $0.2 million as we had pay out some of the accounts 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, increase 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.
Investing Activities
Net cash used in investing activities for the year ended June 30, 2023
was approximately $61,000, which mainly due to purchase of equipment of approximately $87,000 for our operations used, and offset with
proceeds of approximately $26,000 received from disposal of our office equipment.
Net cash used in investing activities for the
year ended June 30, 2022 was approximately $0.3 million, mainly due to purchase of equipment for our operations.
Financing Activities
Net cash provided by financing activities for the year ended June 30,
2023 was approximately $12.7 million, which mainly comprised of proceeds received from the issuance of convertible notes to third parties
of approximately $7.7 million, proceeds received from our initial public offering of approximately $8.2 million, and proceeds received
from third parties loans of approximately $0.6 million, offset by repayment to related parties, third parties loans, and insurance
loan of approximately $3.8 million, repayment of senior note of $65,000, and $15,000 payment of deferred offering costs.
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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.
Off-Balance Sheet Arrangements
As of the date of this Annual Report, we have
the following off-balance sheet arrangements that are likely to have a future effect on our financial condition, revenues or expenses,
results of operations and liquidity:
Commitment
On May 1, 2023, our subsidiary Morgan enter into a worldwide master
license agreement (“License Agreement”) with Morganfield’s Holdings Sdn Bhd (“Licensor”), an unrelated third
party. Pursuant to the License agreement, the Licensor agreed to grant Morgan with the exclusive worldwide license for right of use in
Morganfield’s Trademark (“Trademark”) for a period of five years. During the five years license period, Morgan is obligated
to pay the licensor for license fee on monthly basis in an aggregate total of minimum payment of approximately $1.5 million or 40% of
the total monthly collection from Morgan’s sub-licensees, whichever is higher.
On June 6, 2023, we entered into a worldwide master license agreement
(“License Agreement 2”) with Sigma Muhibah Sdn Bhd (“Licensor 2”), an unrelated third party. Pursuant to the License
Agreement 2, the Licensor 2 agreed to grant the AY Food Ventures Sdn Bhd with the exclusive worldwide license for right of use in Abe
Yus’s Trademark (“Trademark 2”) for a period of five years. During the five years license period, we agree to pay the
licensor 2 for license fee on monthly basis in an aggregate total of minimum payment of approximately $1.2 million or 40% of the total
monthly collection from our sub-licensees, whichever is higher.
Critical Accounting Estimate
Our consolidated financial statements and accompanying
notes have been prepared in accordance with U.S. GAAP. The preparation of these consolidated 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 these 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, write-down
for estimated obsolescence or unmarketable inventories, realization of deferred tax assets and uncertain tax position, fair value of our
stock price to determine the beneficial conversion feature (“BCF”) within the convertible note, fair value of the stock-based
compensation, and fair value of the warrants issued. Actual results could differ from these estimates.
Accounts receivable, net
Accounts receivable are recorded at the invoiced amount, net of an
allowance for uncollectible accounts, and do not accrue interest. We offer various payments terms to customers from cash due on delivery
to 90 days based on their credit history. Accounts receivable encompass amounts due from agent subscription revenue, sales of healthcare
products on our ZCITY platform, sublicensing revenue, and sales of food and beverage products. Management regularly assesses the adequacy
of the allowance for doubtful accounts by considering historical collection trends and aging of receivables. Additionally, management
periodically evaluates individual customer financial conditions, credit histories, and current economic conditions to make necessary adjustments
to the allowance. Account balances are charged off against the allowance when all collection efforts have been exhausted, and recovery
potential is deemed remote. Our management reviews historical accounts receivable collection rates across all aging brackets and has made
100% provision for customer balances aged above 120 days for sales of healthcare products on our ZCITY platform and 100% provision for
customer balances aged above 60 days for sublicensing revenue and sales of food and beverage products. Our management continuously assesses
the reasonableness of the valuation allowance policy and updates it as needed. As of June 30, 2023, and 2022, our allowance for accounts
receivable was $214 and $227, respectively.
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Inventories
Our inventories are recorded at the lower of
cost or net realizable value, with cost determined using the first-in-first-out (FIFO) method. These costs encompass gift cards or ‘E-voucher’
pin codes, which are acquired from our suppliers as merchandise goods or store credit, as well as healthcare products. Management conducts
regular comparisons between the cost of inventories and their net realizable value. If the net realizable value is lower than the cost,
an allowance is made for inventory write-down. Ongoing assessments of inventories are carried out to identify potential write-downs due
to estimated obsolescence or unmarketability. This determination is based on the difference between the inventory costs and the estimated
net realizable value, considering forecasts for future demand and market conditions. Once inventories are written down to the lower of
cost or net realizable value, they are not subsequently marked up based on changes in underlying facts and circumstances. Our management
has reviewed the aforementioned factors and has applied a 100% write-down for inventories aged above 180 days related to our E-voucher
and health care products. For the years ended June 30, 2023 and 2022, $0, and $8,805 write-downs for estimated obsolescence or unmarketable
inventories were recorded, respectively.
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 receivables and other current assets were
recorded as of June 30, 2023 and 2022.
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 receipt of inventories, services, or refundable, we will recognize an allowance account
to reserve such balances. Management reviews our 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 updates it if necessary. No allowance of prepayments were recorded as of June 30, 2023 and 2022.
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, 2023 and 2022.
Revenue recognition
Loyalty program
- Performance obligations satisfied over time
Our ZCITY 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 ZCITY, 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.
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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 our 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.
Stock-based compensation
We recognize compensation costs resulting from the issuance of stock-based
awards to third party consultant and former director 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 granted are estimated as of the grant date
using the Black-Scholes-Merton option-pricing model while the fair value of each common stock granted are estimated using the Company’s
closing stock price on the grant date. 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. The fair value of the stock-based compensation which included warrants and common stock issued were
estimated to be $819,332 and $1,283,994 for the years ended June 30, 2023 and 2022, respectively.
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.
Warrants
We account for warrants as equity-classified instruments in accordance
with ASC 480 and ASC 815. The fair value of each warrant granted is 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 our common stock, expected
life of stock options, the expected volatility and the expected risk-free interest rate, among others. These assumptions reflect our best
estimates, but they involve inherent uncertainties based on market conditions generally outside our control. Based on the above assumption,
the fair value of the warrants issued were estimated to be $175,349 for the year ended June 30, 2023.
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.
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