UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended:December 31, ~~2018~~2019

☐

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from N/A to N/A

Commission file number: 000-23446

SUGARMADE, INC.

(Exact name of registrant as specified in its charter)

Delaware		94-3008888
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

750 Royal Oaks Dr., Suite 108, Monrovia, CA		91016
(Address of principal executive offices)		(Zip Code)

(888) 982-1628

(Registrant’s telephone number, including area code)

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒No☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes☒No☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐

~~Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes~~☐No☒

At February ~~14, 2019,~~17, 2020, there were ~~649,252,384~~713,207,811 shares ~~outstanding of the issuer’s common, the only class~~ of common ~~equity.~~stock and 2,415,000 shares of preferred stock issued and outstanding.

Transitional Small Business Disclosure Format (Check one): Yes☐No☒

SUGARMADE, INC.

FORM 10-Q

FOR THE PERIOD ENDED DECEMBER 31, ~~2018~~2019

TABLE OF CONTENTS

PART I:	Financial Information

Item 1	Financial Statements	1
	Condensed Consolidated Balance Sheets as of December 31, ~~2018~~2019 (unaudited) and June 30, ~~2018 (audited)~~2019	1
	Condensed Consolidated Statements of Operations for three and six months ended December 31, 2019 and 2018 ~~and 2017~~ (unaudited)	2
	Condensed Consolidated Statements of Equity for the three and six months ended December 31, 2019 and 2018 (unaudited)	3
	Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2019 and 2018 ~~and 2017~~ (unaudited)	34
	Notes to Condensed Consolidated Financial Statements (unaudited)	45
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2725
Item 3	Quantitative and Qualitative Disclosures about Market Risk	3228
Item 4	Controls and Procedures	3228

PART II:	Other Information

Item 1	Risk Factors	3429
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	3429
Item 3	Defaults upon Senior Securities	3429
Item 4	Mine Safety Disclosures	3429
Item 5	Other Information	3429
Item 6	Exhibits	3530

Signatures		3631

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q includes forward-looking statements. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words “believe,” “expect,” “will,” “anticipate,” “intend,” “estimate,” “project,” “plan,” “assume” or other similar expressions, or negatives of those expressions, although not all forward-looking statements contain these identifying words. All statements contained or incorporated by reference in this quarterly report regarding our future strategy, future operations, projected financial position, estimated future revenues, projected costs, future prospects, the future of our industry and results that might be obtained by pursuing management’s current plans and objectives are forward-looking statements.

You should not place undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Our forward-looking statements are based on the information currently available to us and speak only as of the date on the cover of this quarterly report, or, in the case of forward-looking statements in documents incorporated by reference, as of the date of the date of the filing of the document that includes the statement. New risks and uncertainties arise from time to time, and it is impossible for us to predict these matters or how they may affect us. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such difference might be significant and materially adverse to our security holders. We do not undertake and specifically decline any obligation to update any forward- looking statements or to publicly announce the results of any revisions to any statements to reflect new information or future events or developments.

We have identified some of the important factors that could cause future events to differ from our current expectations and they are described in this quarterly report under the caption “Risk Factors,” below, and elsewhere in this quarterly report, which you should review carefully. Please consider our forward-looking statements in light of those risks as you read this quarterly report.

~~PART 1: Financial Information~~

~~Item I~~

~~Sugarmade, Inc. and Subsidiary~~
~~Condensed Consolidated Balance Sheets~~

PART 1: Financial Information

Item 1 Financial Statements

Sugarmade, Inc. and Subsidiary
Condensed Consolidated Balance Sheets

	December 31, 2018			June 30, 2018			December 31, 2019			June 30, 2019
Assets	(Unaudited)			(Audited)			(Unaudited)
Current assets:
Cash	$	159,671		$	42,121		$	103,002		$	34,371
Accounts receivable, net		340,444			453,623			158,000			218,145
Inventory, net		580,475			531,249			495,086			356,285
Loan receivables		171,023			157,872			10,500			85,533
Other current assets		1,986,443			756,565			2,458,692			2,719,875

Total current assets		3,238,056			1,941,432			3,225,281			3,414,209

Equipment, net		255,755			195,180			430,396			476,585
Intangible assets, net		11,900			12,600			10,500			11,200
Other assets		38,751			38,751			58,970			23,970
Right of Use Assets – Non-Current								416,421			—
Advanced to Investments											18,000,000

Total assets	$	3,544,462		$	2,187,963		$	4,141,568		$	21,925,965

Liabilities and Stockholders’ Equity (Deficiency)
Current liabilities:
Note payable due to bank	$	25,982		$	25,982		$	25,982		$	25,982
Bank overdraft								5,907			—
Accounts payable and accrued liabilities		1,565,006			1,707,641			1,427,098			1,431,379
Customer deposits		210,535			329,509			222,284			287,789
Customer Overpayment								—			42,307
Unearned revenue		20,798			110,142			87,420			61,672
Other payable		298,743			241,771			458,412			420,450
Accrued interest		567,209			493,365			637,389			507,218
Accrued compensation and personnel related payables		24,528			869,673			24,528			24,528
Note Payable		20,000			20,000			20,000			20,000
Notes payable – related parties		23,000			23,000			18,000			18,000
Loans payable		172,948			329,029			192,030			214,585
Loans payable – related parties		55,634			30,000			135,000			30,000
Convertible notes payable, net		876,386			2,399,941			1,378,221			1,046,909
Derivative liabilities		1,734,338			3,069,616			3,259,345			2,991,953
Warrants liabilities		14,480			40,400			15,663			24,658
Shares to be issued		50,000			2,691,000			262,000			100,000
Lease Liability - Current								110,824			—
Total Current Liabilities								8,280,102			7,247,431

Lease Liability – Non-Current								318,083			—
Total liabilities		5,659,587			12,381,069			8,598,185			7,247,431

Stockholders’ equity (deficiency):
Preferred stock ($0.001 par value, 10,000,000 shares authorized, 2,000,000 and 0 issued and outstanding at December 31, 2018 and June 30, 2018, respectively)		2,000			—
Common stock ($0.001 par value, 1,990,000,000 shares authorized, 637,860,318 and 246,135,203 shares issued and outstanding at December 31, 2018 and June 30, 2018, respectively)		637,861			246,136
Preferred stock ($0.001 par value, 10,000,000 shares authorized, 3,165,001 and 2,000,000 issued and outstanding at December 31, 2019 and June 30, 2019, respectively)								3,165			2,000
Common stock ($0.001 par value, 1,990,000,000 shares authorized, 1,129,926,122 and 697,608,570 shares issued and outstanding at December 31, 2019 and June 30, 2019, respectively)								1,129,927			697,610
Additional paid-in capital		58,747,248			21,952,560			83,472,375			61,038,875
Shares issued advance for Investment		(18,000,000	)		—
Shares to be issued, preferred shares		—			2,000,000
Shares to be cancelled, common shares								(21,566,046	)		—
Shares to be cancelled, preferred shares								(10,725,014	)		—
Shares to be issued, common shares		—			467,996			100,000			29,000
Accumulated deficiency		(43,502,231	)		(34,859,799	)		(56,871,025	)		(47,088,950	)

Total stockholders’ equity (deficiency)		(2,115,125	)		(10,193,106	)		(4,456,617	)		14,678,534

Total liabilities and stockholders’ equity (deficiency)	$	3,544,462		$	2,187,963		$	4,141,568		$	21,925,965

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements

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Table of Contents

Sugarmade, Inc. and Subsidiary

Condensed Consolidated Statements of Operations

~~For the three and six months ended December 31, 2018 and 2017~~

For the Three Months Ended
December 31, 2018 For the Three Months Ended
December 31, 2017 For the Six Months Ended
December 31, 2018 For the Six Months Ended
December 31, 2017

Revenues, net $ 1,445,269 $ 938,754 $ 2,886,885 $ 2,115,968

  Cost of goods sold: 1,071,033 657,249 2,130,452 1,510,199

Gross Profit 374,236 281,505 756,433 605,769

Operating expenses:
   Selling, general and administrative expense $ 3,823,085 $ 1,033,316 $ 4,736,957 $ 2,052,304
Operating loss (3,448,849 ) (751,811 ) (3,980,524 ) (1,446,535 )

Non-operating income (expense):
   Other income (expense) 1,451 (229,457 ) 5,101 (351,830 )
   Interest Expense (460,102 ) (74,744 ) (741,480 ) (206,329 )
   Change in fair value of derivative liabilities (2,019,927 ) (4,924,302 ) (3,661,383 ) (5,064,955 )
   Warrant Expense 3,195 —   25,920 —
   Loss on debt conversion —   —   8,763 —
   Loss on debt settlement (94,207 ) —   (255,882 ) —
   Amortization of debt discount (31,591 ) —   (59,597 ) —
   Loss on debt forgiveness 16,649 —   16,649 —

Total non-operating expenses, net (2,584,531 ) (5,223,504 ) (4,661,909 ) (5,618,114 )

Net loss $ (6,033,380 ) $ (5,975,315 ) $ (8,642,432 ) $ (7,064,649 )

Weighted average shares basic and diluted 393,670,334 244,474,615 330,029,294 237,925,753
Weighted average basic and diluted loss per common share $ (0.02 ) $ (0.02 ) $ (0.03 ) $ (0.03 )
For the Three Months Ended December  31 For the Six Months Ended December  31
2019 2018 2019 2018

Revenues, net $ 720,810 $ 1,445,269 $ 1,474,784 $ 2,886,885

Cost of goods sold 435,690 1,071,033 927,858 2,130,452

Gross profit 285,120 374,236 546,925 756,433

Selling, general and administrative expenses 7,215,933 3,823,085 8,419,563 4,736,957

Loss from operations (6,930,814 ) (3,448,849 ) (7,872,637 ) (3,980,524 )

Non-operating income (expense):
Other income 1,867 1,451 3,098 5,101
Interest expense (735,196 ) (460,102 ) (1,319,800 ) (741,480 )
Change in fair value of derivative liabilities 1,291,168 (2,019,927 ) 2,314,046 (3,661,383 )
Warrant Expense —   3,195 (55,278 ) 25,920
Loss on notes conversion (184,626 ) —   (184,626 ) 8,763
Loss on settlement (232,776 ) (94,207 ) (382,635 ) (255,882 )
Gain on asset disposal —   —   7,000 —
Amortization of debt discount (963,407 ) (31,591 ) (2,118,407 ) (59,597 )
Debt forgiveness 16,649 (172,096 ) 16,649
Miscellaneous (740 ) —   (740 ) —

Total non-operating expenses, net (823,710 ) (2,584,531 ) (1,909,438 ) (4,661,909 )

Net loss $ (7,754,524 ) $ (6,033,380 ) $ (9,782,075 ) $ (8,642,433 )

Basic net income (loss) per share $ (0.04 ) $ (0.02 ) $ (0.01 ) $ (0.03 )
Diluted net income (loss) per share $ (0.04 ) $ (0.02 ) $ (0.01 ) $ (0.03 )

Basic and diluted weighted average common shares outstanding * 191,886,785 393,670,334 880,355,944 330,029,294

* Shares issuable upon conversion of convertible debts and exercising of warrants were excluded in calculating diluted loss per share

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

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Table of Contents
Sugarmade, Inc. and Subsidiary
Condensed Consolidated Statements of ~~Cash Flows For~~Equity
~~the six months ended December 31, 2018 and 2017~~
(Unaudited)

For the six months
ended December 31,
2018 2017
Cash flows from operating activities:
Net loss $ (8,642,432 ) $ (7,064,649 )
Adjustments to reconcile net loss to cash flows from operating activities:
Initial valuation of debt discount 149,143 125,642
Loss on settlement 255,882 —
Gain on debt forgiveness (16,649 ) —
Derivative Expense and amortization of debt discount 565,978 249,322
Stock based compensation 5,097,206 728,729
Change in fair value of derivative liability 3,661,418 5,064,954
Amortization of Intangible Assets 700 —
Change in exercise of warrant (25,920 ) —
Depreciation and amortization 26,578 26,954

Changes in assets and liabilities:
Accounts receivable 113,179 (121,244 )
Inventory (49,226 ) 50,626
Prepayment, deposits and other receivables (54,876 ) —
Other assets —   (61,157 )
Bank overdraft —   51,554
Accounts payable and accrued liabilities (40,876 ) (166,510 )
Customer deposits (118,974 ) (47,150 )
Unearned revenue (89,344 ) (14,263 )
Interest Payable 172,221 —
Accrued interest and Other payables 56,972 65,830

Net cash used in operating activities 1,060,981 (1,111,362 )

Cash flows from investing activities:
Acquisition of intangible assets —   (11,775 )
Acquisition of property and equipment (87,154 ) (133,131 )

Net cash used in investing activities (87,154 ) (144,906 )

Cash flows from financing activities:
Proceeds from shares to be issued —   361,478
Proceeds from shares issuance 235,000 —
Proceeds from convertible notes 1,022,500 702,653
Payment to Note payable-related parties —   (16,666 )
Proceeds (Repayment) from(to) loans (5,261 ) 63,587
Proceeds from loan payable-related parties 25,634 (27,941 )
Proceeds from advance share issuance (2,121,000 ) 104,690
Loan receivable (13,151 ) —

Net cash provided by financing activities (856,278 ) 1,187,801

Net increase (decrease) in cash 117,550 (68,467 )

Cash paid during the period for:
Cash, beginning of period 42,121 101,880
Cash, end of period $ 159,671 $ 33,413

Supplemental disclosure of non-cash financing activities
Shares issued for conversion of convertible debt 516,391 —
Reduction in derivative liability due to conversion 6,289,241 —
Debt discount related to convertible debt 1,888,248 —
Debts settled through shares issuance 1,292,544 564,415
Three and Six Month 12/31/2019 Equity Statements
Preferred Stock Common Stock Additional paid-in Shares to be cancelled, preferred Shares to be cancelled, common Shares to be issued, common Accumulated
Shares Amount Shares Amount capital shares shares shares deficit Total

Balance at June 30, 2019 2,000,000 2,000 697,608,570 697,610 61,038,875 —   —   29,000 (47,088,950 ) 14,678,534
Shares issued for debts settlement —   —   1,000,000 1,000 28,000 —   —   (29,000 ) —   —
Reclass Derivative liability from conversion —   —   659,526 —   —   —   —   659,526
Shares issued for conversions —   —   71,915,557 71,906 475,926 —   —   —   —   547,833
Share issued for Cash —   —   11,348,591 11,349 88,651 —   —   —   —   100,000
Shares issued for Warrant Exercise —   —   28,381,818 28,382 (14,249 ) —   —   —   —   14,132
Net Loss —   —   —   —   —   —   —   —   (2,027,551 ) (2,027,551 )
Balance at September 30, 2019 2,000,000 2,000 810,254,536 810,257 62,276,720 —   —   —   (49,116,501 ) 13,972,474
Share issued for Cash —   —   26,621,610 26,622 213,378 —   —   100,000 —   340,000
Option for services —   —   —   —   73,500 —   —   —   —   73,500
Share issued for services compensation 415,000 415 500,000 500 5,941,135 —   —   —   —   5,942,050
Reclass Derivative liability from conversion —   —   —   —   297,962 —   —   —   —   297,962
Shares issued for conversions —   —   24,994,341 24,994 117,170 —   —   —   —   142,164
Shares issued for debt settlement —   —   18,181,818 18,182 272,273 —   —   —   —   290,455
Shares issued for Award - Bizright 750,001 750 249,373,817 249,374 14,040,936 (10,725,014 ) (21,566,046 ) —   —   (18,000,000 )
Initial valuation of BCF —   —   —   —   239,301 —   —   —   —   239,301
Net loss —   —   —   —   —   —   —   —   (7,754,524 ) (7,754,524 )
Balance at December 31, 2019 3,165,001 3,165 1,129,926,122 1,129,927 83,472,375 (10,725,014 ) (21,566,046 ) 100,000 (56,871,025 ) (4,456,617 )

Three and Six Month 12/31/2018 Equity Statements
Preferred Stock Common Stock Additional paid-in Shares to be issued, preferred Shares to be issued, common Accumulated
Shares Amount Shares Amount capital Investment shares shares deficit Total

Balance at June 30, 2018 —   —   246,135,203 246,136 21,952,560 —   2,000,000 467,996
(34,859,799
) (10,193,106 )
Shares issued for debts settlement —   —   —   —   —   —   174,450 —   174,450
Reclass Derivative liability from conversion —   —   —   —   2,715,433 —   —   —   2,714,433
Shares issued for conversions —   —   27,301,360 27,301 845,558 —   —   —   872,859
Share issued for Cash —   —   3,700,000 3,700 181,300 —   —   —   185,000
Shares issued for service compensation —   —   2,971,154 2,971 194,529 —   —   —   197,500
Shares to be issued for service compensation —   —   —   —   —   —   137,000 —   137,000
Shares to be issued for cash —   —   —   —   —   —   95,000 —   95,000
Net Loss —   —   —   —   —   —   —   (2,609,055 ) (2,607,053 )
Balance at September 30, 2018 —   —   280,107,717 280,109 25,888,378 2,000,000 874,446 (37,468,851 ) (8,425,919 )
Shares issued for debts settlement —   —   6,632,605 6,633 603,965 —   —   (263,616 ) —   346,982
Reclass Derivative liability to equity from conversion —   —   —   —   3,574,808 —   —   —   —   3,574,808
Shares issued for conversions —   —   47,865,888 47,866 967,525 —   —   —   —   1,015,391
Initial valuation of BCF —   —   —   —   149,143 —   —   —   —   149,143
Share issued for Cash —   —   4,142,857 4,143 215,857 —   —   (220,000 ) —   —
Shares issued for service compensation —   —   89,111,251 89,111 6,384,569 —   —   (390,830 ) —   6,082,851
Shares issued for LOI —   —   10,000,000 10,000 1,165,000 —   —   —   —   1,175,000
Shares issued for Award - Bizright —   —   200,000,000 200,000 17,800,000 (18,000,000 ) —   —   —   —
Shares issued for EB-5 2,000,000 2,000 —   —   1,998,000 —   (2,000,000 ) —   —   —
Net Loss —   —   —   —   —   —   —   —   (6,033,380 ) (6,033,380 )
Balance at December 31, 2018 2,000,000 2,000 637,860,318 637,861 58,747,248 (18,000,000 ) —   —   (43,502,231 ) (2,115,125 )
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
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Table of Contents
Sugarmade, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
(Unaudited)

For the six months ended
December 31,
2019 2018
Cash flows from operating activities:
Net loss $ (9,782,075 ) $ (8,642,432 )
Adjustments to reconcile net loss to cash flows from operating activities:
Initial valuation of debt discount 239,300 149,143
Loss on settlement 382,635 255,882
Gain on debt forgiveness —   (16,649 )
Amortization of debt discount 330,192 565,978
Stock based compensation 6,041,550 5,097,206
Change in fair value of derivative liability 273,299 3,661,418
Amortization of Intangible Assets 700 700
Change in exercise of warrant 67,387 (25,920 )
Depreciation and amortization 46,189 26,578

Changes in assets and liabilities:
Accounts receivable 60,145 113,179
Inventory (138,801 ) (49,226 )
Prepayment, deposits and other receivables 261,183 (54,876 )
Lease liability (36,919 ) —
Accounts payable and accrued liabilities 5,955 (40,876 )
Customer deposits (62,174 ) (118,974 )
Other assets (35,000 ) —
Unearned revenue (19,890 ) (89,344 )
Interest Payable 166,753 172,221
Right of use assets 39,169 —
Accrued interest and other payables 37,962 56,972

Net cash provided by (used in) operating activities (2,122,441 ) 1,060,980

Cash flows from investing activities:
Payment for property and equipment —   (87,154 )

Net cash used in investing activities —   (87,154 )

Cash flows from financing activities:
Proceeds from shares issuance 340,000 235,000
Proceeds from convertible debt 1,451,687 1,022,500
Proceeds (Repayment) from(to) loans (22,555 ) (5,261 )
Payment to loan payable-related parties 105,000 25,634
Proceeds from advance share issuance 236,000 (2,121,000 )
Bank overdraft 5,907 —
Loan receivable 75,033 (13,151 )
Net cash provided by (used in) financing activities 2,191,072 (856,278 )

Net increase (decrease) in cash 68,631 117,550

Cash paid during the period for:
Cash, beginning of period 34,371 42,121
Cash, end of period $ 103,002 $ 159,671

Supplemental disclosure of non-cash financing activities —
Shares issued for conversion of convertible debt 689,997 516,391
Reclassification from derivative liabilities to APIC 957,488 6,289,241
Debt discount related to convertible debt 951,581 1,888,248
Debts settled through shares issuance 229,000 1,292,544
Shares issued for award to Bizright and to be cancelled in future (32,291,060 ) —
Shares issued for warrant exercise 28,381 —
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements

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Table of Contents
Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019

1. Nature of Business

Sugarmade, Inc. (hereinafter referred to ~~as ''we''~~as’‘we’’, ~~''us"~~’‘us” or ~~"the/~~“the/our ~~Company''~~Company’’) is a publicly traded company incorporated in the state of Delaware. Our previous legal name was Diversified Opportunities, Inc. Our Company, Sugarmade, Inc. operates much of its business activities through our subsidiary, ~~Sugarmade,~~SWC Group, Inc., a California corporation ~~("SWC Group, Inc., - CA''~~(“SWC’’).

Sugarmade, Inc. was founded in 2010. In 2014, CarryOutSupplies.com was acquired by Sugarmade, Inc., creating the Company as it is today. As of the end of the reporting period, ~~December 31, 2018,~~September 30, 2019, we were involved in ~~several~~two businesses including the supply of products to the quick service restaurant sub-sector of the restaurant industry and as an importer, distributor and marketer of hydroponic supplies to various agricultural sectors. We had previously been a marketer of culinary seasoning products Seasoning Stix and Sriracha Seasoning Stix and a marketer of tree-free paper products. These products were discontinued during 2018 in order to focus the majority of our corporate resources on the marketing of hydroponic supplies.

The marketplace in which we plan to be mainly engaged is generally referred to as hydroponic agricultural supplies. While some of our customers are engaged in the legal cultivation, processing and/or distribution of cannabis or cannabis containing products, our Company neither sells any products containing cannabis nor do we handle, process, or distribute any products containing cannabis.

Our Board of Directors believes the legal cannabis-related agricultural supply sector could be highly lucrative for the Company, and thus we plan to pursue a strategy of expanding operations. According to a January 2019 report issued by Arcview Market Research, the worldwide consumer market for cannabis during 2018 was valued at approximately $12.8 billion, up significantly from the 2017 estimated value of $9.5 billion. The market is expected to grow at approximately 27% compounded annually through the year 2022.
While our business is rapidly expanding across most of the United States and across the west coast, California remains an important marketplace due both the sheer size of the State’s economy and due to the rapid embrace of legalization. As of the end of the reporting period, there still remains a significant bottleneck in licensing of California cultivation operations. We are expecting increased business activity as California regulators begin to issue cultivation licenses in mass, although there can be no assurances that any such increased business activity from the state will actually occur.
We also believe the Company has strong revenue expansion opportunities within several sub sectors of the hydroponic agricultural sector, where we are not currently engaged. Many of these businesses would be complementary to our current business operations. We are currently in process of analyzing several acquisitions for expansion in this area.
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Our legacy business operation, CarryOutSupplies.com, is a producer and wholesaler of custom printed and generic supplies servicing more than 2,000 quick service restaurants. Our products include double poly paper cups for cold beverage; disposable, clear, plastic cold cups, paper coffee cups, yogurt cups, ice cream cups, cup lids, cup sleeves, food containers, soup containers, plastic spoons and many other similar products for this market sector. CarryOutSupplies.com was founded in 2009 when the founders gained first-hand experience within the restaurant industry of the difficulty for restaurant owners to acquire custom printed supplies at a reasonable cost. Many quick service restaurants wish to acquire custom printed products, such as those embossed with logos, but the minimum order size for such customization had been cost prohibitive. With that in mind, carry out supplies was founded to provide products to this underserved section of the market. Since that time, the company has become a key supplier to many popular U.S. franchises, particularly in the frozen dessert segments. ~~The company estimates it holds at least a 20% market share of generic and printed products within the take-out frozen yogurt and ice cream industries.~~
In December of 2017, we announced a Master Marketing Agreement with BizRight, LLC where the Company would market BizRight’s products. The Company also gained an option to acquire all of BizRight’s operations. We began recognizing revenues under this marketing agreement during late calendar 2018 and expect to begin recognizing an increasing amount of revenue under the Master Marketing Agreement as we move further into calendar 2019.
Also during 2017, Sugarmade announced the signing of an exclusive distribution agreement for California, Oregon and Washington with privately held Plantation Corp. for its BudLife preservation technology based on integration of specialized gases and natural agents that dramatically extends the useful life of medical marijuana up to six (6) months by actively monitoring the internal containers environment and automatically adjusting its atmosphere as needed. Sugarmade has conducted initial product prototype testing of the BudLife product, realizing positive results. Sugarmade plans to move forward as Plantation’s distribution partner upon availability of the BudLife product line. As of the end of the reporting period, the Company is awaiting final product availability in order to begin marketing the products under the Agreement.

During ~~October 2018,~~December 2017, the Company ~~signed~~entered into a Letter of Intent to acquire Sky Unlimited, LLC doing business as Athena United, a Southern California-based, supplier of hydroponic cultivation supplies to the wholesale sector and to large commercial cultivators. Athena United operates its ecommerce website at www.AthenaUnited.com. Under the terms of the Agreement, which contains both binding and non-binding elements, Sugarmade will acquire all of the outstanding capital stock and the business operations for a combination of cash and common shares of Sugarmade. Athena United, and its associated operations, is believed to be one of the larger operators in this market sector and is producing revenues of approximately $40 million per year, is profitable, and cash flow positive. Should the Company be successful in its acquisition efforts, the operation would be integrated under the Sugarmade corporate umbrella with Sugarmade assuming all operations and recognizing all revenues and profits.
During January of 2019, the Company announced its intention to acquire a retail location of Washington State-based Hydro4Less. The operation is expected to produce approximately $5 million in revenues and to be profitable during calendar 2019. Additionally, via the pending transaction, Sugarmade will gain an option to purchase two additional Hydro4Less retail operations, which are currently producing in excess of $20 million annually. Should all three Hydro4Less acquisitions close, Sugarmade will increase its annual revenues by approximately $25 million per year.
~~Via the~~master marketing agreement with BizRight, LLC, a leading marketer and manufacturer of hydroponic growth supplies, which offers a range of hydroponics-related products including: HPS grow lights, electronic ballasts, HPS Bulbs, nutrient mixes, environmental control products, pH measurement and calibration solutions and other grow and storage products. BizRight operates the ZenHydro.com website and other e-commerce properties, and sells various products to distributors and retailers. On April 11, 2018, the same rights under the master marketing agreement were assigned to BZRTH Inc. On February 5, 2019, the Company exercised its option to acquire BZRTH and the ~~acquisitions of Athena United and Hydro4Less,~~transaction had been closed on October 30, 2019. On January 15, 2020, the Company ~~believes it could become one~~entered into a Rescission and Mutual Release Agreement (“Agreement”) with each of the ~~largest~~parties agreeing to rescind the transaction and ~~fast growing market participants in~~return all consideration exchanged pursuant to the ~~cannabis~~Stock Exchange Agreement.
In October 2018 and ~~other agricultural supply/~~January 2019, the Company had intents to acquire two suppliers or retailers of hydroponic ~~industries.~~equipment. As ~~has been also outlined and disclosed in other corporate filings, there can be~~of the date of this report, the Company is no ~~assurances~~longer pursuing these ~~acquisitions will close and that such revenues will be realized by the Company.~~acquisitions.

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Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019
2. Summary of Significant Accounting

Policies Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the United States Securities and Exchange Commission for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. It is management’s opinion however, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair financial statement presentation.

These interim condensed consolidated financial statements should be read in conjunction with our Company’s Annual Report on Form 10-K for the year ended June 30, ~~2018,~~2019, which contains our audited consolidated financial statements and notes thereto, together with the Management’s Discussion and Analysis of Financial Condition and Results of Operation, for the year ended June 30, ~~2018.~~2019. The interim results for the period ended December 31, ~~2018~~2019 are not necessarily indicative of the results for the full fiscal year.

Principles of consolidation

The condensed consolidated unaudited financial statements include the accounts of our Company and its wholly-owned subsidiaries, ~~Sugarmade-CA and SWC.~~SWC Group Inc. All significant intercompany transactions and balances have been eliminated in consolidation.

Going concern

The Company sustained continued losses from operations during the six months ended December 31, ~~2018~~2019 and for the fiscal year ended June 30, ~~2018.~~2019. The Company’s continuation as a going concern is dependent on its ability to generate sufficient cash flows from operations to meet its obligations, in which it has not been successful, and/or obtaining additional financing from its shareholders or other sources, as may be required.

Our condensed consolidated financial statements have been prepared assuming that we will continue as a going concern. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. These condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.

Management is endeavoring to increase revenue-generating operations. While priority is on generating cash from operations through the sale of the Company’s products, management is also seeking to raise additional working capital through various financing sources, including the sale of the Company’s equity and/or debt securities, which may not be available on commercially reasonable terms to our Company, or which may not be available at all. If such financing is not available on satisfactory terms, we may be unable to continue our business as desired and our operating results will be adversely affected. In addition, any financing arrangement may have potentially adverse effects on us and/or our stockholders. Debt financing (if available and undertaken) will increase expenses, must be repaid regardless of operating results and may involve restrictions limiting our operating flexibility. If we issue equity securities to raise additional funds, the percentage ownership of our existing stockholders will be reduced and the new equity securities may have rights, preferences or privileges senior to those of the current holders of our common stock.

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Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019
2. Summary of Significant Accounting (continued)
Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.

Revenue recognition

We recognize revenue in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC’’) No. 606, Revenue Recognition. Sugarmade ~~applies~~applied a five-step approach in determining the amount and timing of revenue to be recognized: (1) identifying the contract with a customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations in the contract and (5) recognizing revenue when the performance obligation is satisfied.

Substantially all of ~~Sugarmade’s~~the Company’s revenue is recognized at the time control of the products transfers to the customer.

Cash

Cash and cash equivalents consist of amounts held as bank deposits and highly liquid debt instruments purchased with an original maturity of three months or less.

From time to time, we may maintain bank balances in interest bearing accounts in excess of the $250,000 currently insured by the Federal Deposit Insurance Corporation for interest bearing accounts (there is currently no insurance limit for deposits in noninterest bearing accounts). We have not experienced any losses with respect to cash. Management believes our Company is not exposed to any significant credit risk with respect to its cash.

Accounts receivable

Accounts receivable are carried at their estimated collectible amounts, net of any estimated allowances for doubtful accounts. We grant unsecured credit to our customer’s deemed credit worthy. Ongoing credit evaluations are performed and potential credit losses estimated by management are charged to operations on a regular basis. At the time any particular account receivable is deemed uncollectible, the balance is charged to the allowance for doubtful accounts. The Company had accounts receivable net of allowances of ~~$126,262~~$158,000 as of December 31, ~~2018~~2019 and of ~~$453,623~~$218,145 as of June 30, ~~2018.~~2019.

Inventory

Inventory consists of finished goods paper and paper-based products such as paper cups and food containers ready for sale and is stated at the lower of cost or market. We value our inventory using the weighted average costing method. Our Company’s policy is to include as a part of inventory any freight incurred to ship the product from our contract manufacturers to our warehouses. Outbound freights costs related to shipping costs to our customers are considered period costs and reflected in selling, general and administrative expenses. We regularly review inventory and consider forecasts of future demand, market conditions and product obsolescence.

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Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019
2. Summary of Significant Accounting (continued)
If the estimated realizable value of our inventory is less than cost, we make provisions in order to reduce its carrying value to its estimated market value. On a consolidated basis, as of December 31, ~~2018~~2019 and June 30, ~~2018,~~2019, the balance for the inventory totaled ~~$580,475~~$495,086 and ~~$531,249,~~$356,285, respectively. Obsolescence reserve at December 31, ~~2018~~2019 and June 30, ~~2018~~2019 were ~~$16,177~~$10,580 and $120,486, respectively.

Property and equipment
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Property and equipment is stated at the historical cost, less accumulated depreciation. Depreciation on property and equipment is provided using the straight-line method over the estimated useful lives of the assets for both financial and income tax reporting purposes as follows:
~~Table~~
Machinery equipment 5 years
Furniture and equipment 7 years
Vehicles 7 years
Expenditures for renewals and betterments are capitalized while repairs and maintenance costs are normally charged to the statement of ~~Contents~~operations in the year in which they are incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the asset, the expenditure is capitalized as an additional cost of the asset.
Upon sale or disposal of an asset, the historical cost and related accumulated depreciation or amortization of such asset were removed from their respective accounts and any gain or loss is recorded in the statements of income.
The Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, no impairment expenses for property, plant, and equipment was recorded in operating expenses during the six months ended December 31, 2019 and 2018.
Impairment of Long-Lived Assets

Long-lived assets, which include property, plant and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.

Recoverability of long-lived assets to be held and used is measured by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the assets. Fair value is generally determined using the asset's expected future discounted cash flows or market value, if readily determinable. Based on its review, the Company, as of June 30, ~~2018,~~2019, performed an impairment test of all of its intangible assets. Based on the company’s analysis, the company had an ~~impairment~~amortization of ~~$65,625.~~intangible assets of $700 for the six months ended December 31, 2019 and 2018, respectively.
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Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019
2. Summary of Significant Accounting (continued)

Leases
In February 2016, the FASB established Topic 842, Leases, by issuing ASU No. 2016-02, which requires lessees to recognize the rights and obligations created by leases on the balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-11, Targeted Improvements, ASU No. 2018-10, Codification Improvements to Topic 842, and ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations.
The new standard became effective April 1, 2019. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. The Company adopted the new standard on July 1, 2019 using the modified retrospective transition approach as of the effective date of the initial application. The new standard provides a number of optional practical expedients in transition. The Company elected the “package of practical expedients”, which permits entities not to reassess under the new lease standard prior conclusions about lease identification, lease classification and initial direct costs. The Company does not expect to elect the use-of-hindsight or the practical expedient pertaining to land easements.
The most significant effects of the adoption of the new standard relate to the recognition of new ROU assets and lease labilities on our balance sheet for office operating leases and providing significant new disclosures about our leasing activities.
The new standard also provides practical expedients for an entity’s ongoing accounting. The Company has also elected the short-term leases recognition exemption for all leases that qualify. This means that the Company will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets and lease liabilities, for existing short-term leases of those assets in transition. The Company also currently expects to elect the practical expedient to not separate lease and non-lease components for its leases. All existing leases are reported under this rule. After the adoption, $455,590 of operating lease right-of-use asset and $465,826 of operating lease liabilities were not retroactively reflected to June 30, 2019 financial statements, and $416,421 of operating lease right-of-use asset and $428,907 of operating lease liabilities were reflected to December 31, 2019 financial statements.
Income taxes

We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their perspective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded, when necessary, to reduce deferred tax assets to the amount expected to be realized.

As a result of the implementation of certain provisions of ASC 740, Income Taxes (“ASC 740”), which clarifies the accounting and disclosure for uncertainty in tax position, as defined, ASC 740 seeks to reduce the diversity in practice associated with certain aspect of the recognition and measurement related to accounting for income taxes. We adopted the provisions of ASC 740 as of October 2, 2008, and have analyzed filing positions in each of the federal and state
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Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019
2. Summary of Significant Accounting (continued)
jurisdictions where we are required to file income tax returns, as well as open tax years in these jurisdictions. We have identified the U.S. federal and California as our “major” tax jurisdictions and generally, we remain subject to Internal Revenue Service examination of our 2013 U.S. federal income tax returns. However, we have certain tax attribute carryforwards, which will remain subject to review and adjustment by the relevant tax authorities until the statute of limitations closes with respect to the year in which such attributes are utilized.

We believe that our income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material change to our financial position. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740. In addition, we did not record a cumulative effect adjustment related to the adoption of ASC 740. Our policy for recording interest and penalties associated with income-based tax audits is to record such items as a component of income taxes. We have no interest or penalties as of December 31, ~~2018.~~2019.

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Stock based compensation

Stock based compensation cost to employees is measured at the date of grant, based on the calculated fair value of the stock-based award, and will be recognized as expense over the employee’s requisite service period (generally the vesting period of the award). We estimate the fair value of employee stock options granted using the Binomial Option Pricing Model. Key assumptions used to estimate the fair value of stock options will include the exercise price of the award, the fair value of our common stock on the date of grant, the expected option term, the risk free interest rate at the date of grant, the expected volatility and the expected annual dividend yield on our common stock. We use our company’s own data among other information to estimate the expected price volatility and the expected forfeiture rate. Share-based compensation awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable.

Loss per share

We calculate basic earnings per share (“EPS”) by dividing our net loss by the weighted average number of common shares outstanding for the period, without considering common stock equivalents. Diluted EPS is computed by dividing net income or net loss by the weighted average number of common shares outstanding for the period and the weighted average number of dilutive common stock equivalents, such as options and warrants. Options and warrants are only included in the calculation of diluted EPS when their effect is dilutive.

Fair value of financial instruments

ASC Topic 820 defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

Level 1 - observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - include other inputs that are directly or indirectly observable in the marketplace.
Level 3 - unobservable inputs which are supported by little or no market activity.

The Company used Level 23 inputs for its valuation methodology for the derivative liabilities in determining the fair value using the Binomial option-pricing model for the six months ended December 31, ~~2018.~~2019.

Carrying Value Fair Value Measurements at
As of December 31, 2018
December 31, Using Fair Value Hierarchy
2018 Level 1 Level 2 Level 3
Liabilities
Derivative liabilities $ 1,734,338 $ —   $ — $ 1,734,338
Total $ 1,734,338 $ —   $ — $ 1,734,338
June 30, 2018 December 31, 2018
Expected life (years) 0.5 0.5
Risk-free interest rate 2.06 %              2.56 %
Expected volatility 151 % 154 %
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Sugarmade, Inc. and Subsidiary
Carrying Value Fair Value Measurements at
As of June 30, 2018
June 30, Using Fair Value Hierarchy
2018 Level 1 Level 2 Level 3
Liabilities
Derivative liabilities $ 3,069,616 $ —   $ — $ 3,069,616
Total $ 3,069,616 $ —   $ — $ 3,069,616
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019

2. Summary of Significant Accounting (continued)
Derivative instruments

The fair value of derivative instruments is recorded and shown separately under current liabilities. Changes in the fair value of derivatives liability are recorded in the consolidated statement of operations under non-operating income (expense).

Our Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. For stock-based derivative financial instruments, the Company uses a weighted average Binomial option-pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

Segment Reporting

FASB ASC Topic 280, “Segment Reporting”, requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the Company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.

FASB ASC Topic 280 has no effect on the Company’s financial statements as substantially all of its operations are conducted in one industry segment – paper and paper-based products such as paper cups, cup lids, food containers, etc.

New accounting pronouncements ~~not yet adopted~~

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company ~~is in the process of evaluating the impact of adoption of~~adopted this ASU on the consolidated financial ~~statements.~~
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~~In January 2017,~~statements in the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The standard is effective for fiscal years beginning afterquarter ended December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The standard should be applied prospectively on or after the effective date. The Company will evaluate the impact of adopting this standard prospectively upon any transactions of acquisitions or disposals of assets or businesses.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance should be adopted on a prospective basis for the annual or any interim goodwill impairment tests beginning after December 15,31, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvement to Employee Share-Based Payment Accounting. The new standard contains several amendments that will simplify the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.
ASC 606, Revenue from Contracts with Customers, was issued jointly by the FASB and IASB on May 28, 2014. It was originally effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016, for public entities. Early application was not permitted (however, early adoption was optional for entities reporting under IFRSs). On August 12, 2015, the FASB issued an ASU, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred for one year the effective date of the new revenue standard for public and nonpublic entities reporting under U.S. GAAP.  The Company is currently evaluating the impact of this guidance on its financial statements and related disclosures.

3. Concentration

Customers

For the six months ended December 31, ~~2018~~2019 and ~~2017,~~2018, our Company earned net revenues of ~~$2,886,885~~$1,474,784 and ~~$2,115,968~~$2,886,885 respectively. The vast majority of these revenues for the period ending December 31, ~~2018~~2019 were derived from a large number of customers, whereas the vast majority of these revenues for the period ending December 31, ~~2017~~2018 were derived from a limited number of customers. No customers accounted for over 10% of the Company’s total revenues for the period ended December 31, ~~2018.~~2019.
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Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019
3. Concentration (continued)

Suppliers

For the six months ended December 31, 2019 and 2018, we purchased products for sale from several contract manufacturers located in Asia and the U.S. A substantial portion of the Company's inventory is purchased from two (2) suppliers. The two (2) suppliers accounted as follows: Two suppliers accounted for ~~26.19%~~38.63% and ~~25.96%~~38.38% of the Company's total inventory purchase for the six months ended December 31, 2019 and 2018, respectively.

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4. Equity Transaction - Exclusive License Rights and Acquisition

On December 13, 2017, we entered into a Master Marketing Agreement with BizRight, ~~Hydroponic, Inc.~~LLC (“BizRight”), a leading marketer and ~~supplier~~manufacturer of hydroponic growth supplies, which offers a range of hydroponics-related products including: HPS grow lights, electronic ballasts, HPS Bulbs, nutrient mixes, environmental control products, pH measurement and calibration solutions and other ~~cannabis-related~~ grow and storage products. BizRight operates the ZenHydro.com website and other e-commerce properties, and sells various products to distributors and retailers.

Under the terms of the Master Marketing Agreement, all products procured, developed and imported by BizRight will be sold by the Company. The expected term of the exclusive license rights is 20 years. BizRight and its owners will be compensated via a combination of cash and common shares in Sugarmade. Effective the contract date, Bizright will be compensated Two hundred million (200,000,000) common shares. Sugarmade will compensate BizRight and its owners six million dollars ($6,000,000) in cash. The amount due will be divided over 3 payments equally and are contingent upon the filing of the S-1 and significant funding.

We began recognizing revenues under this marketing agreement during April 2018 and stopped recognizing the revenue early 2019 upon exercise of the purchase option under the agreement. As of ~~December 31, 2018,~~June 30, 2019, BizRight had assigned the marketing agreement to its operating entity, BZRTH and the Company had exercised the option to purchase 100% equity ownership of BZRTH.
As of June 30, 2019, cash of $870,000 and 200 million shares ~~to be~~of the Company’s common stock had been paid and issued in connection with the acquisition.
On October 30, 2019, SGMD closed the previously announced acquisition of ~~exclusive license rights has been issued and~~BZRTH, Inc., a Nevada corporation (“BZRTH”) pursuant to a Stock Exchange Agreement. The total consideration to be paid by the ~~transaction has not been fully completed. $550,000~~Company to acquire BZRTH was 650,000,000 shares of SGMD’s common stock, 3,500,000 shares of Series B convertible preferred stock, $870,000 in cash, ~~has~~and 5% promissory notes in the sum of $7,130,000.00 due on or before October 31, 2021 to the BZRTH shareholders. $870,000 of cash had been paid along with 449,373,817 common shares and 750,000 Series B Convertible Preferred shares.
As of December 31, 2019, cash of $870,000 and 249 million shares of the Company’s common stock had been paid and ~~reflected~~issued in connection with the acquisition.
On January 15, 2020, the Company entered into a Rescission and Mutual Release Agreement (“Agreement”) with each of the parties agreeing to return all consideration exchanged pursuant to the Stock Exchange Agreement.
The shareholders of BZRTH have agreed to surrender for cancellation, 449,373,817 common shares and 750,000 Series B Convertible Preferred shares. On an as converted to common basis the returns to Sugarmade’s treasury equal 449,373,817 relating to the common shares to be surrendered and 750,000,000 million common shares equivalents due to each Series B Convertible Preferred share converting to common shares on a ~~prepaid deposit~~1 for 1,000 basis. Thus, on a common share equivalent basis, the surrender equals 1,199,373,817 common shares, if all Preferred Series B were converted. As part of the Agreement, the Company will retain or will receive 102,248 shares in ~~other current assets on our balance sheet.~~BZRTH.
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Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019

5. Legal Proceedings

From time to time and in the course of business, we may become involved in various legal proceedings seeking monetary damages and other relief. The amount of the ultimate liability, if any, from such claims cannot be determined. As of date of this filing, there were no legal claims currently pending or, to our knowledge, threatened against our Company that, in the opinion of our management, would be likely to have a material adverse effect on our financial position, results of operations or cash flows, except as follows:
The Company has filed a lawsuit in Contra Costa County, California, alleging breach of fiduciary duty, conspiracy to commit breach of fiduciary duty, fraud, conspiracy to commit fraud, conversion, breach of contract, and interference with contractual relations against, Diversified Products Group Inc. (DPG), Stephen Pinto, Lewis Cohen and Heidi Estiva, who were former sales agents for the Company. Stephen Pinto is the Company's former Chairman. The defendants have filed a counterclaim alleging that they were induced to make a series of investments in the Company by material misrepresentations and/or omissions made by the Company. As of the date of this filing, the parties have settled all issues.
On December 11, 2013, the Company was served with a complaint from two Convertible Note Holders and investors in the Company, Lovitt & Hannan, Inc. Salary Deferral Plan FBO J. Thomas Hannan, Attorney at Law 401K Plan and Trust, and Kevin M. Kearney. The Company's former CEO, Scott Lantz, was also named in the suit. On February 21, 2017, the Company signed a settlement agreement with the plaintiffs. Under the terms of the settlement agreement, the Company agreed to pay the plaintiffs ~~$227,000~~$307,000 to settle all claims against the Company, which included the payoff of the two notes outstanding within one (1) week. Upon receipt of all payments, plaintiffs will surrender for cancellation 230,000 of the Company's shares within ten (10) days. The parties agreed that all claims against the Company would be satisfied through such payments and that the matter would be fully resolved. As of June 30, 2018, third-parties had purchased two (2) notes of approximately $80,000, reducing the Company's exposure by $80,000. As of the date of this filing the balance for accrued legal settlement for Hannan vs Sugarmade has been reduced to $227,000, plus interest until the date of complete payoff.
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On ~~May 24, 2014, the Labor Commissioner, State of California issued an Order, Decision or Award of the Labor Commissioner~~August 13, 2019, a lawsuit was filed against the Company for unpaid legal fees of $50,000.00, which originates from the Company’s former chairman and CEO. The Company was served in or around September 2019. The Company has filed a response to the ~~amount of $56,365. On October 28, 2014,~~underlying complaint to preserve its rights to defend the lawsuit should it become necessary. However, the Company ~~entered into a settlement agreement, which was effective October 28, 2014,~~plans to amicably resolve ~~a judgment against the Company via the issuance of 502,533 restricted shares~~this matter and ~~a $30,000 cash payment. As of December 31, 2018, the shares have not been issued yet.~~anticipates that it will be settled and dismissed.
There can be no assurances the ultimate liability relative to these ~~law suits~~lawsuits will not exceed what is outlined above.

6. Other Current Assets

As of December 31, ~~2018~~2019 and June 30, ~~2018,~~2019, other current assets consisted of the following:

For the periods ended For the periods ended
December 31, 2018 June 30, 2018 December 31, 2019 June 30, 2019
Prepaid Deposit $ 1,725,000 $ 355,500 $ 2,314,498 $ 2,145,000
Prepaid Inventory 103,213 92,737 44,308 172,045
Employees Advance 46,303 41,303 —   16,052
Prepaid Expenses 89,726 246,260 97,768 358,702
Other 22,201 20,765 2,118 28,075
Total: $ 1,986,443 $ 756,565 $ 2,458,692 $ 2,719,875
Our 2,314,498 in prepaid deposit as of December 31, 2019 was mainly related to the following investments to other companies:
a. $1,175,000 related to investment in Sky Unlimited;
b. $196,000 related to investment in Hempistry Inc.;
c. $870,000 paid for BZRTH acquisition.

7. Intangible Asset

On August 21, 2017, the Company entered into an intellectual property assignment agreement with Sound Decisions to revamp the company’s shoplifty website to generate and attract more traffic from potential customers. The Company made a payment of $14,000 for the website (intellectual property). The Company amortized this use right as intangible asset over ten years, and recorded amortization expense of $700 ~~and $1,400 as of~~for the periods ended December 31, ~~2018~~2019 and June 30, ~~2018,~~2019, respectively.
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Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019

8. Property and Equipment, net
As of December 31, 2019 and June 30, 2019, the property, plant and equipment, net of accumulated depreciation expenses were $430,396 and $476,585, respectively.
For the six months ended December 31, 2019 and 2018, depreciation expenses amounted to $46,189 and $26,578, respectively.
The Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, no impairment expenses for property, plant, and equipment was recorded in operating expenses during the six months ended December 31, 2019 and 2018.
9. Convertible Notes

As of December 31, ~~2018~~2019 and June 30, ~~2018,~~2019, the balance owing on convertible notes, net of debt discount, with terms as described below was ~~$876,386~~$1,378,221 and ~~$2,399,941,~~$1,046,909, respectively.

Convertible notes issued ~~prior the year ended June~~as of September 30, ~~2017~~2019 were as follows:

Convertible note 1: On August 24, 2012, the Company entered into a convertible promissory note with an accredited investor for $25,000. The note has a term of six (6) months with an interest rate of 10% and is convertible to common shares at a 25% discount of the average of 30 days prior to the conversion date. As of December 31, ~~2018,~~2019, the note is in default.

Convertible note 2: On September 18, 2012, the Company entered into a convertible promissory note with an accredited investor for $25,000. The note has a term of six (6) months with an interest rate of 10% and is convertible to common shares at a 25% discount of the average of 30 days prior to the conversion date. As of December 31, ~~2018,~~2019, the note is in default.

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Convertible note 3: On December 21, 2012, the Company entered into a convertible promissory note with an accredited investor for $100,000. The note has a term of six (6) months with an interest rate of 10% and is convertible to common shares at a 25% discount of the average of 30 days prior to the conversion date. As of December 31, ~~2018,~~2019, the note is in default.

Convertible note 4: On December 19, 2016, the Company entered into a convertible promissory note with an accredited investor for $20,000. The note has a term of six (6) months with an interest rate of 8% and is convertible to common shares at a 40% discount. As of December 31, 2018, the note has been fully converted.
Convertible note 5: On January 17, 2017, the Company entered into a convertible promissory note with an accredited investor for $25,000. The note has a term of six (6) months with an interest rate of 8% and is convertible to common shares at a 40% discount to the then current market price of our shares. As of December 31, 2018, the note has been fully converted.
Convertible note 6: On January 20, 2017, the Company entered into a convertible promissory note with an accredited investor for $80,000. The note has a term of seven (6) months with an interest rate of 8% and is convertible to common shares at a 40% discount to the then current market price of our shares. As of December 31, 2018, the note has been fully converted.
Convertible note 7: On February 8, 2017, the Company entered into a convertible promissory note with an accredited investor for $50,000. The note has a term of six (6) months with an interest rate of 8% and is convertible to common shares at a 40% discount to the then current market price of our shares. As of December 31, 2018, the note has been fully converted.
Convertible note 8: On February 24, 2017, the Company entered into a convertible promissory note with an accredited investor for $66,023. The note has a term of six (6) months with an interest rate of 8% and is convertible to common shares at a 40% discount to the then current market price of our shares. As of December 31, 2018, the note has been fully converted.
Convertible note 9: On February 9, 2017, the Company entered into a convertible promissory note with an accredited investor for $50,000. The note has a term of six (6) months with an interest rate of 8% and is convertible to common shares at a 40% discount to the then current market price of our shares. As of December 31, 2018, the note has been fully converted.
Convertible note 10: On February 28, 2017, the Company entered into a convertible promissory note with an accredited investor for $75,000. The note has a term of six (6) months with an interest rate of 8% and is convertible to common shares at a 40% discount. As of December 31, 2018, the note has been fully converted.
~~Convertible note 11:~~ On March 1, 2017, the Company entered into a convertible promissory note with an accredited investor for $100,000. The note has been purchased by other investor in total amount of $156,067 with a term of nine (9) months with an interest rate of 10% and is convertible to common shares at a 45% discount to the then current market price of our shares. As of September 30, 2018, there were $92,500 has been converted into the Company’s common stock and the Company incurred two conversion default penalties in total of $60,751. As of June 30, 2018, the remaining principal balance was $124,318. As of December 31, ~~2018, the Company converted $63,567 and~~2019, the remaining balance of note was $60,751.

Convertible note 12: On March 23, 2017, the Company entered into a convertible promissory note with an accredited investor for $70,000. The note has a term of six (6) months with an interest rate of 8% and is convertible to common shares at a 40% discount to the then current market price of our shares. As of December 31, 2018, the note has been fully converted.
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Convertible note 13: On February 16, 2017, the Company entered into a convertible promissory note with an accredited investor for $30,000. The note has a term of six (6) months with an interest rate of 8% and is convertible to common shares at a 40% discount to the then current market price of our shares. As of December 31, 2018, the note has been fully converted.
Convertible note 14: On March 31, 2017, the Company entered into a convertible promissory note with an accredited investor for $200,000. The note has a term of six (6) months with an interest rate of 8% and is convertible to common shares at a 40% discount to the then current market price of our shares. As of December 31, 2018, the note has been fully converted.
~~Convertible note 15 & 16:~~5: On May 17, 2017, the Company entered a convertible promissory note with an investor for a total amount of $1,375,000 (after $10,000 legal and due diligence fee) with an OID of $125,000, the note will be fulfilled through a series of funding. The note is due 12 months after each funding date and ~~bear~~bears an interest rate of 10%. The conversion price for the note is 55% of the lowest closing bid for the 20 consecutive trading days prior to the conversion date. In connection with the note, the investor will also receive warrants and is calculated based on 15% of the maturity amount. The warrants have a life of four years with exercise price of $0.15 per share and have cashless exercise option. ~~The Company had outstanding balance of $921,004 as of the year ended June 30, 2018. The fair value of the warrants were $40,400 as of June 30, 2018.~~ During the ~~six~~three months ended ~~December 31, 2018,~~September 30, 2019, the ~~Company converted $525,000~~holder exercised 1,766,544 cashless warrant shares into 28,381,818 shares of the Company’s common ~~stock,~~stock. On September 23, 2019, the remaining warrant shares were settled by exchange $200,000 convertible note with interest of 10% per annum, due on September 23, 2020, with conversion price of 55% of the lowest closing bid for the 20 consecutive trading days prior to the conversion date. As of December 31, 2019, the original principal balance has been fully converted, the remaining default charge balance of the note was ~~$396,004 as of December 31, 2018~~$250,000, and the ~~fair value of the warrant liability~~new convertible note balance was ~~$14,480. As of December 31, 2018, the note is in default and bears a default interest rate of 22% per annum.~~
~~Convertible notes issued during the year ended June 30, 2018 were as follows:~~
Convertible note 17: On July 17, 2017, the Company entered into a convertible promissory note with an accredited investor for $164,900. The note has a term of one year with an interest rate of 8% and is convertible to common shares at a fixed conversion price of $0.025. As of December 31, 2018, the note has been fully converted.
Convertible note 18: On August 3, 2017, the Company entered into a convertible promissory note with an accredited investor for $150,000. The note has a term of six (6) months with an interest rate of 10% and is convertible to common shares at a 45% discount to average of 3 lowest trading price during last 20 trading days. As of December 31, 2018, the note has been fully converted.
Convertible note 19: On August 22, 2017, the Company entered into a convertible promissory note with an accredited investor for $35,000. The note has a term of six (6) months with an interest rate of 8% and is convertible to common shares at a 40% discount of average two lowest price of last 20 trading days prices. As of December 31, 2018, the note has been fully converted.
Convertible note 20: On September 15, 2017, the Company entered into a convertible promissory note with an accredited investor for $150,000. The note has a term of six (6) months with an interest rate of 10% and is convertible to common shares at a 45% discount to average of 3 lowest trading price during last 20 trading days. As of December 31, 2018, the note has been fully converted.
Convertible note 21: On September 26, 2017, the Company entered into a convertible promissory note with an accredited investor for $15,000. The note has a term of six (6) months with an interest rate of 8% and is convertible to common shares at a 40% discount of average two lowest price of last 20 trading days prices. As of December 31, 2018, the note has been fully converted.$200,000.

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~~Convertible note 22: On December 7, 2017, the Company entered into a convertible promissory note with an accredited investor for $50,000. The note has a term of one year with an interest rate of 8%~~Sugarmade, Inc. and ~~is convertible~~Subsidiary
Notes to ~~common shares at a fixed conversion price of $0.05. As of~~ Unaudited Condensed Consolidated Financial Statements
December 31, ~~2018, the note has been fully converted.~~2019

9. Convertible Notes (continued)
~~Convertible notes issued during the six months ended December 31, 2018 were as follows:~~
Convertible note ~~23:~~6: On September 20, 2018, the Company entered a convertible promissory note with an accredited investor for a total amount of $267,500 (includes $5,000 legal fee and an OID of $12,500). The note is due 360 days and ~~bear~~bears an interest rate of 8%. The conversion price for the note is 55% of the lowest closing bid for the 20 consecutive trading days prior to the conversion date. As of December 31, 2019, the principal balance of 245,000 has been fully converted into the Company’s common stock.

Convertible note ~~24:~~7: On ~~October 5,~~November 1, 2018, the Company entered into a convertible promissory note with an accredited investor for $100,000. The note has a term of one year with an interest rate of 8% and is convertible to common shares at a fixed conversion price of $0.07.
Convertible note 8: On November 16, 2018, the Company entered into a convertible promissory note with an accredited investor for $80,000. The note has a term of one year with an interest rate of 8% and is convertible to common shares at a fixed conversion price of $0.07.
Convertible note 9: On November 16, 2018, the Company entered into a convertible promissory note with an accredited investor for $40,000. The note has a term of one year with an interest rate of 8% and is convertible to common shares at a fixed conversion price of $0.07.
Convertible note 10: On December 3, 2018, the Company entered into a convertible promissory note with an accredited investor for $35,000. The note has a term of one year with an interest rate of 8% and is convertible to common shares at a fixed conversion price of $0.07.
Convertible note 11: On December 26, 2018, the Company entered a convertible promissory note with an accredited investor for a total amount of $250,000 (includes $5,000 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 45% of average three lowest closing bid for the 20 consecutive trading days prior to the conversion date. As of December 31, 2019, the note has been fully converted.

Convertible note ~~25:~~12: On ~~November 1, 2018,~~January 8, 2019, the Company entered ~~into~~ a convertible promissory note with an accredited investor for ~~$100,000.~~a total amount of $105,000. The note ~~has a term of one year with~~is due 360 days and bear an interest rate of 8% ~~and is convertible to common shares at a fixed~~. The conversion price for the note is 35% of ~~$0.07.~~average two lowest closing bid for the 20 consecutive trading days prior to the conversion date. As of December 31, 2019, the note has been fully converted.

Convertible note ~~26:~~13: On ~~November 16, 2018,~~January 22, 2019, the Company entered ~~into~~ a convertible promissory note with an accredited investor for ~~$80,000.~~a total amount of $100,000. The note ~~has a term of one year with~~is due 360 days and bear an interest rate of 8% ~~and is convertible to common shares at a fixed~~. The conversion price for the note is 42% of ~~$0.07.~~average three lowest closing bid for the 20 consecutive trading days prior to the conversion date. As of December 31, the note has been fully converted.

Convertible note ~~27:~~14: On ~~November 16, 2018,~~January 24, 2019, the Company entered ~~into~~ a convertible promissory note with an accredited investor for ~~$40,000.~~a total amount of $53,000. The note ~~has a term of one year with~~is due 360 days and bear an interest rate of 8% ~~and is convertible to common shares at a fixed~~. The conversion price for the note is 35% of ~~$0.07.~~average two lowest closing bid for the 20 consecutive trading days prior to the conversion date. As of December 31, the note has been fully converted.

Convertible note ~~28:~~15: On ~~December 3, 2018,~~February 26, 2019, the Company entered ~~into~~ a convertible promissory note with an accredited investor for ~~$35,000.~~a total amount of $100,000. The note ~~has a term of one year with~~is due 360 days and bear an interest rate of 8% ~~and is convertible to common shares at a fixed~~. The conversion price for the note is 42% of ~~$0.07.~~average three lowest closing bid for the 20 consecutive trading days prior to the conversion date. As of December 31, the note has been fully converted.
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Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019
9. Convertible Notes (continued)

Convertible note ~~29:~~16: On ~~December 26, 2018,~~March 4, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of $250,000 (includes ~~$5,000~~$7,000 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is ~~45%~~58% of average two lowest closing bid for the 20 consecutive trading days prior to the conversion date. As of December 31, 2019, the note has been fully converted.
Convertible note 17: On April 2, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of $100,000 (includes $2,000 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 40% of average three lowest closing bid for the 10 consecutive trading days prior to the conversion date. As of December 31, 2019, the note has been fully repaid by cash.
Convertible note 18: On April 4, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of $100,000 (includes $2,000 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 58% of average two lowest closing bid for the 20 consecutive trading days prior to the conversion date. As of December 31, 2019, the note has been fully converted.
Convertible note 19: On May 2, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of $125,000 (includes $2,000 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 40% of average three lowest closing bid for the 10 consecutive trading days prior to the conversion date. As of December 31, 2019, the note has been fully repaid by cash.
Convertible note 20: On May 7, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of $125,000 (includes $2,500 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 58% of average two lowest closing bid for the 20 consecutive trading days prior to the conversion date. As of December 31, 2019, the note has been fully repaid by cash.
Convertible note 21: On May 29, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of $125,000 (includes $2,000 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 40% of average three lowest closing bid for the 10 consecutive trading days prior to the conversion date. As of December 31, 2019, the note has been fully repaid by cash.
Convertible note 22: On June 12, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of $125,000 (includes $2,500 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 58% of average two lowest closing bid for the 20 consecutive trading days prior to the conversion date. As of December 31, 2019, the note has been fully repaid by cash.
Convertible note 23: On July 3, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of $125,000 (includes $2,000 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 40% discount of average three lowest closing bid for the 10 consecutive trading days prior to the conversion date.
Convertible note 24: On July 30, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of $162,000 (includes $7,000 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 40% discount of the lowest closing bid for the 20 consecutive trading days prior to the conversion date.
Convertible note 25: On August 14, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of $153,000 (includes $3,000 OID). The note is due 360 days and bear an interest rate of 10%. The conversion price for the note is 65% of the average of lowest two closing bid for the 20 consecutive trading days prior to the conversion date.

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Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019
9. Convertible Notes (continued)
Convertible note 26: On August 29, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of $275,000 (includes $37,500 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 60% of the lowest closing bid for the 20 consecutive trading days prior to the conversion date.
Convertible note 27: On August 29, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of $275,000 (includes $25,000 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 60% of the lowest closing bid for the 20 consecutive trading days prior to the conversion date.
Convertible note 28: On September 23, 2019, the Company entered a warrant settlement agreement to exchange convertible promissory note for a total amount of $200,000. The note is due 360 days and bear an interest rate of 10%. The conversion price for the note is 55% of the lowest closing bid for the 20 consecutive trading days prior to the conversion date. As of ~~the period ended~~ December 31, ~~2018,~~2019, the ~~Company’s convertible notes consisted~~note has been fully settled by $127,321 of ~~following:~~cash and 18,181,818 shares of common stock.

Balance Conversion Balance
as of Default Addition/ in # of as of Interest Conversion
06.30.2018 Penalty (Repayment) principal shares 12.31.2018 Due Date Rate Price
25,000 — — — — 25,000 2/24/2013 14 % 75% of the average of 30 days prior to the conversion date.
25,000 — — — — 25,000 3/18/2013 14 % 75% of the average of 30 days prior to the conversion date.
100,000 — — — — 100,000 6/21/2013 14 % 75% of the average of 30 days prior to the conversion date.
20,000 — — 20,000 1,160,391 — 7/17/2017 10 % 40% discount of average price of last 20 trading days prices
25,000 — — 25,000 1,426,674 — 7/17/2017 8 % 40% discount of average two lowest price of last 20 trading days prices
50,000 — — 50,000 2,931,188 — 8/8/2017 8 % 40% discount of average two lowest price of last 20 trading days prices
80,000 — — 80,000 4,530,846 — 7/20/2017 8 % 40% discount of average two lowest price of last 20 trading days prices
66,023 — — 66,023 3,712,324 — 8/24/2017 8 % 40% discount of average two lowest price of last 20 trading days prices
50,000 — — 50,000 2,390,805 — 8/9/2017 8 % 40% discount of average two lowest price of last 20 trading days prices
Convertible note 29: On September 27, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of $165,000 (includes $16,250 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 60% of the lowest closing bid for the 20 consecutive trading days prior to the conversion date.
Convertible note 30: On September 27, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of $165,000 (includes $16,250 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 55% of the lowest closing bid for the 20 consecutive trading days prior to the conversion date.
Convertible note 31: On October 28, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of $225,500 (includes $23,000 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 60% of the lowest closing bid for the 20 consecutive trading days prior to the conversion date.
Convertible note 32: On October 28, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of $225,500 (includes $23,000 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 60% of the lowest closing bid for the 20 consecutive trading days prior to the conversion date.
Convertible note 33: On November 14, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of $125,000 (includes $3,000 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 60% of the average three lowest closing bid for the 10 consecutive trading days prior to the conversion date.
Convertible note 34: On November 29, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of $106,150 (includes $11,150 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 60% of the lowest closing bid for the 20 consecutive trading days prior to the conversion date.
Convertible note 35: On November 29, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of $106,150 (includes $11,150 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 60% of the lowest closing bid for the 20 consecutive trading days prior to the conversion date.
Convertible note 36: On December 10, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of $106,700 (includes $11,700 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 60% of the lowest closing bid for the 20 consecutive trading days prior to the conversion date.
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Sugarmade, Inc. and Subsidiary
75,000 — — 75,000 4,378,547 — 7/31/2017 8 % 40% discount of average two lowest price of last 20 trading days prices
124,318 — — 63,567 3,919,404 60,751 12/1/2017 10 % 45% discount of lowest price of last 20 trading days prices
70,000 — — 70,000 4,067,072 — 9/23/2017 8 % 40% discount of average two lowest price of last 20 trading days prices
30,000 — — 30,000 1,500,010 — 8/16/2017 8 % Greater of 40% discount to average of 3 lowest trading price during last 20 trading days or $.05
200,000 — — 200,000 11,557,652 — 9/30/2017 8 % 40% discount of average two lowest price of last 20 trading days prices
921,004 — — 525,000 17,521,702 396,004 5/12/2018 22 % 45% discount of lowest price of last 20 trading days prices
150,000 — — 150,000 3,745,330 — 5/3/2018 10 % 45% discount to average of 3 lowest trading price during last 20 trading days
164,900 — — 164,900 6,596,000 — 7/17/2018 8 % The conversion price shall be $0.025 per share
35,000 — — 35,000 691,184 — 8/22/2018 8 % 40% discount of average two lowest price of last 20 trading days prices
~~-18-~~Notes to Unaudited Condensed Consolidated Financial Statements
~~Table of Contents~~December 31, 2019

15,000 — — 15,000 294,114 — 9/26/2018 8 % 40% discount of average two lowest price of last 20 trading days prices
50,000 — — 50,000 1,000,000 — 12/7/2018 8 % The conversion price shall be $0.05 per share
— — 267,500 — — 267,500 9/15/2019 8 % 55% discount of lowest price of last 20 trading days prices
— — 250,000 — — 250,000 10/5/2019 8 % 45% discount of average three lowest price of last 20 trading days prices
— — 100,000 — — 100,000 10/31/2019 8 % The conversion price shall be $0.07 per share
— — 80,000 — — 80,000 11/15/2019 8 % The conversion price shall be $0.07 per share
— — 40,000 — — 40,000 11/15/2019 8 % The conversion price shall be $0.07 per share
— — 35,000 — — 35,000 12/2/2019 8 % The conversion price shall be $0.07 per share
— — 250,000 — — 250,000 12/26/2019 8 % 45% discount of average three lowest price of last 20 trading days prices
2,426,245 1,022,500 1,819,490 75,167,248 1,629,255
9. Convertible Notes (continued)
Convertible note 37: On December 10, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of $106,700 (includes $11,700 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 60% of the lowest closing bid for the 20 consecutive trading days prior to the conversion date.
Convertible note 38: On December 27, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of $112,200 (includes $12,200 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 60% of the lowest closing bid for the 20 consecutive trading days prior to the conversion date.
Convertible note 39: On October 31, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of $139,301. The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is $0.008 per share.
Convertible note 40: On November 1, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of $100,000. The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is $0.008 per share.

In connection with the convertible debt, debt discount balance as of December 31, ~~2018~~2019 and June 30, ~~2018~~2019 were ~~$752,869~~$2,015,634 and ~~$26,303~~$1,189,341, respectively, and were being amortized and recorded as interest expenses over the term of the convertible debt.

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~~As of the period ended December 31, 2018, the Company’s debt discount consisted of following:~~
Note Date Due Date OID Amortization in FY 2018 Debt Discount Balance at 6/30/2018 Amortization in 6 months ended 12/31/2018 Debt Discount Balance at 12/31/2018
8/22/2017 8/22/2018 $35,000 $29,918 $5,082 $5,082 $—
9/26/2017 9/26/2018 15,000 11,384 3,616 3,616 —
7/17/2017 7/17/2018 164,900 160,445 4,455 4,455 —
12/7/2017 12/7/2018 50,000 36,849 13,151 13,151 —
9/20/2018 9/15/2019 12,500 — — 3,542 8,958
9/20/2018 9/15/2019 250,000 — — 70,833 179,167
10/5/2018 10/5/2019 5,000 — — 1,192 3,808
10/5/2018 10/5/2019 245,000 — — 58,397 186,603
11/1/2018 11/1/2019 84,286 — — 13,855 70,431
11/16/2018 11/16/2019 36,571 — — 4,509 32,063
11/16/2018 11/16/2019 18,286 — — 2,254 16,031
12/3/2018 12/3/2019 10,000 — — 767 9,233
12/26/2018 12/26/2019 5,000 — — 68 4,932
12/26/2018 12/26/2019 245,000 — — 3,356 241,644
Total: $41,302 $26,303 $185,077 $752,869
9.10. Derivative liabilities

The derivative liability is derived from the conversion features in note 89 and stock warrant in note ~~10.~~11. All were valued using the Binomial option pricing model using the assumptions detailed below. As of December 31, ~~2018~~2019 and June 30, ~~2018,~~2019, the derivative liability was ~~$1,734,338~~$3,259,345 and ~~$3,069,616,~~$2,991,953, respectively. The Company recorded ~~$2,019,927 loss~~$2,314,046 gain and ~~$140,653~~$3,661,383 loss from changes in derivative liability during the ~~three~~six months ended ~~September 30,~~December 31, 2019 and 2018, ~~and 2017,~~ respectively. The Binomial Option Price Model with the following assumption inputs:
December 31, 2019
Annual dividend yield —
Expected life (years) 0.5-1.00
Risk-free interest rate 1.51-2.09 %
Expected volatility 121-153 %

December 31, 2018
Annual dividend yield —
Expected life (years) 0.5-1.00
Risk-free interest rate 2.49-2.72 %
Expected volatility ~~118-175~~ %
~~September 30, 2018~~
~~Annual dividend yield~~ —
~~Expected life (years)~~ ~~0.5-1.00~~
~~Risk-free interest rate~~ ~~2.15-2.37~~ %
~~Expected volatility~~ 87-123 %

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~~Table of Contents~~
~~June 30, 2018~~
~~Annual dividend yield~~ —
~~Expected life (years)~~ ~~0.15-1.00~~
~~Risk-free interest rate~~ ~~1.08-2.12~~ %
~~Expected volatility~~ ~~103-202~~ %
Fair value of the derivative is summarized as below:

Beginning Balance, June 30, ~~2018~~2019 $~~3,069,616~~2,991,953
Additions ~~427,076~~3,538,927
Mark to Market ~~1,641,457~~2,314,089
Reclassification to APIC due to conversions ~~(2,714,433)~~
~~Balance, September 30, 2018~~ ~~$2,423,716~~
~~Additions~~ ~~865,503~~
~~Mark to Market~~ ~~2,019,927~~
~~Reclassification to APIC due to conversions~~ ~~(3,574,808)~~(957,488)
Balance, December 31, ~~2018~~2019 $~~1,734,338~~3,259,345

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Table of Contents
Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019
~~10.~~11. Stock warrants
In connection with the issuance of the promissory notes in 2012, the investors in the aggregate received two-year warrants to purchase up to a total of 50,000 shares of common stock at an exercise price of $0.50 per share, and two-year warrants purchasing up to a total of 81,250 shares of common stock at an exercise price of $0.01 per share. For purposes of accounting for the detachable warrants issued in connection with the convertible notes, the fair value of the warrants was estimated using the Binomial option pricing formula. The value of all warrants granted at the date of issuance totaled $508,413 and was recorded as a discount to the notes payable. The amount was amortized over the nine (9) month term of the respective convertible note as additional interest expense.
On various dates during June 2014 and December 2014 the Company and holders of certain convertible notes agreed to cancel warrants to purchase common shares in the Company and to extend the due dates on the Notes to July 1, 2016. $0.50 warrants and “Bonus Warrants” priced at $0.01, as defined in the original Convertible Note Purchase Agreements we cancelled pertaining to the Note and warrants acquired on the following dates for the following Convertible Notes and amounts. These warrants were expired on July 1, 2016.

On May 17, 2017, the Company entered a promissory note with an accredited investor for a total amount of $1,375,000 (after $10,000 legal and due diligence fee) with an OID of $125,000, the note will be fulfilled through a series of funding. In connection with the note, the investor will also receive warrants and is calculated based on 15% of the maturity amount. The warrants have a life of four years with an exercise price of $0.15 per share and have cashless exercise option. The fair value of the warrants at the grant date was $40,400. During the three months ended September 30, 2019, the holder exercised 1,766,544 cashless warrant shares into 28,381,818 shares of the Company’s common stock. On September 23, 2019, the remaining warrant shares were settled by exchange $200,000 convertible note with interest of 10% per annum, due on September 23, 2020, with conversion price of 55% of the lowest closing bid for the 20 consecutive trading days prior to the conversion date.
On September 7, 2018, the Company entered a settlement agreement with several investors to settle all disputes by issues additional unrestricted shares. In connection with the note each individual investor will also receive warrants equal to the number of the shares the investors own as of the effective date of the settlement agreement. The warrants have a life of five years with an exercise price as of the date of exchange. The fair value of the warrants at the grant date was $56,730. As of December 31, ~~2018~~2019 and June 30, ~~2018,~~2019, the fair value of the warrant liability was ~~$14,480~~$15,663 and ~~$40,400,~~$19,103, respectively. ~~The Binomial Option Price Model with the following assumption inputs:~~

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~~Table~~As of ~~Contents~~
~~Warrants liability~~ ~~December 31, 2018~~
~~Annual dividend yield~~ —
~~Expected life (years)~~ ~~0.5~~
~~Risk-free interest rate~~ ~~2.45~~ %
~~Expected volatility~~ ~~138~~ %
~~Warrants issued in May 2017~~ ~~June 30, 2018~~
~~Annual dividend yield~~ —
~~Expected life (years)~~ ~~0.5~~
~~Risk-free interest rate~~ ~~2.06~~ %
~~Expected volatility~~ ~~151~~ %
~~Below is the movement of warrants for the period ending~~ December 31, ~~2018:~~2019 and June 30, 2019, the total fair value of the warrant liability was $15,663 and $24,658, respectively.

Number of
Shares Weighted Average
Exercise Price Weighted Average Remaining
contractual life
Outstanding at June 30, 2016 131,250 $ 0.20
Expired 131,250 0.20 4
Granted 505,000 $ 0.15 3.86
Outstanding at June 30, 2017 505,000 0.20
Exercised — —
Granted — $ —
Outstanding at June 30, 2018 505,000 $ 0.15 0.5
Granted — —
Exercised — —
Outstanding at December 31, 2018 505,000 $ 0.15 0.5
~~Note pa~~y~~able due to bank~~
12. Note payable due to bank

During October 2011, we entered into a revolving demand note (line of credit) arrangement with HSBC Bank USA, with a revolving borrowing limit of $150,000. The line of credit bears a variable interest rate of one quarter percent (0.25%) above the prime rate ~~(3.25%~~(5.5% as of December ~~31, 2013)~~20, 2018). In the event the deposit account is not established or minimum balance maintained, HSBC can charge a higher rate of interest of up to 4.0% above prime rate. As of December 31, ~~2018~~2019 and June 30, ~~2018,~~2019, the loan principal balance was $25,982. As of December 31, ~~2018,~~2019, the note is in default.

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~~Table of Contents~~
~~Note pa~~y~~able due to related party~~
13. Related party transactions

On January 23, 2013, the Company entered into a promissory note with its former employee ~~of the Company~~ who owns less than 5% of the Company’s stock. The original principal amount was $40,000 and the note bore no interest. The note was payable upon demand. As of December 31, ~~2018~~2019 and June 30, ~~2018,~~2019, this note had a balance of $18,000.

On January 14, 2015, the Company entered into a promissory note with Richard Ko (an employee of the Company, who owns less than 5% of the Company’s stock). The principle amount was $30,000 and the note bore no interest. The note had a term of one (1) year and was due on January 14, 2016, and became payable upon demand after January 14, 2016. As of December 31, ~~2018~~2019 and June 30, ~~2018,~~2019, this note had a balance of ~~$5,000~~$0 and $20,000, respectively.

As of December 31, ~~2018~~2019 and June 30, ~~2018,~~2019, the Company ~~has~~had an outstanding balance of notes payable due to related parties of ~~$23,000,~~$18,000 and $38,000, respectively.
On July 7, 2016, SWC received a loan in total amount of $30,000 from an employee. During the three months ended December 31, 2019, SWC received additional loan in total amount of 105,000 from a related party. The amount of the loan bear no interest and due on demand. As of December 31, 2019 and June 30, 2019, the balance of the loan due to related party were $135,000 and $30,000, respectively.
From time to time, SWC would receive short-term loans from company former director for its working capital needs.
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Table of Contents
Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019

~~11.~~14. ~~Stockholder’s Deficiency~~Loans payable
~~The Company is authorized to issue 1,990,000,000 shares~~On October 1, 2017, SGMD entered a straight promissory note with Greater Asia Technology Limited (Greater Asia) for borrowing $100,000 with maturity date on June 30, 2018; the note bears an interest rate of ~~$.001 par value common stock~~33.33%. As of December 31, 2019 and ~~10,000,000 shares of $.001 par value preferred stock.~~June 30, 2019, the note was in default and the outstanding balance under this note was $63,924 and $63,924, respectively.

During the year ended June 30, ~~2018, the Company issued 1,171,429 shares of common stock for cash in total amount of $82,000.~~
~~During the year ended June 30, 2018, the Company issued 4,736,842 shares of common stock for services in total amount of $180,000.~~
~~During the year ended June 30, 2018, the Company issued 13,492,560 shares of common stock to settle the old debt in total amount of $306,810.~~
~~During the three months ended September 30, 2018, the Company issued 27,301,360 shares of common stock to settle debt in total amount of $872,859.~~
~~During the three months ended September 30, 2018, the Company issued 2,971,154 shares of common stock for services in total amount of $197,500.~~
~~During the three months ended September 30, 2018, the Company issued 3,700,000 shares of common stock for cash in total amount of $185,000.~~
During the three months ended December 31, 2018, the Company issued 6,632,605 shares of common stock to settle the old debt in total amount of $346,982, net with $263,616 share to be issued, common stock.
~~During the three months ended December 31, 2018, the Company issued 47,865,888 shares of common stock for debt conversions in total amount of $1,015,391.~~
~~During the three months ended December 31, 2018, the Company issued 4,142,857 shares of common stock for cash in total amount of $220,000.~~
~~During the three months ended December 31, 2018, the Company issued 89,111,251 shares of common stock for service in total amount of $6,082,851, net with $390,830 share to be issued, common stock.~~
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~~Table of Contents~~
~~During the three months ended December 31, 2018, the Company issued 10,000,000 shares of common stock for a LOI deposit in total amount of $11,175,000.~~
During the three months ended December 31, 2018, the Company issued 200,000,000 shares of common stock for award to the certain master purchase agreement in total amount of $18,000,000. The acquisition has not been fully completed as of December 31, 2018.
~~As of December 31, 2018 and June 30, 2018, the Company had 637,860,318 and 246,135,203 shares of its common stock issued and outstanding.~~
~~12.~~ ~~Related party transactions~~
~~As of December 31, 2018 and June 30, 2018, the Company had outstanding balance of $23,000 owed to various related parties.~~
~~13.~~ ~~Loans payable~~
On June 26, 2017, SGMD entered a straight promissory note with a company (whose major shareholder is the former director of the Company) for borrowing $150,820 with maturity date on March 31, 2018; the note bears an interest rate of 12%, commencing on October 31, 2017, and on the last day of each moth thereafter until the notes is paid in full, the Company shall make an interest payment. As of October 2017, they are no long a related party. As of June 30, 2018, the outstanding balance under this note was $150,820. As of December 31, 2018, the note has been fully settled into 1,508,200 shares of the Company’s common stock.
~~During the year ended June 30, 2017,~~2019, the Company entered a series of short-term loan agreements with Greater Asia Technology Limited (Greater Asia) for borrowing $375,000, with interest rate at 40% - 50% of the principal balance. As of December 31, ~~2018~~2019 and June 30, ~~2018,~~2019, the outstanding balance with Greater Asia loans were ~~$168,008~~$100,000 and ~~$140,125,~~$100,000, respectively.
On January 6, 2015, the Company entered into repayment agreement with its former employee for a loan of $9,500 at no interest. As of December 31, ~~2018.~~2019 and June 30, 2019, the ~~note was in default.~~Company has an outstanding balance of $0 and $3,584.

On ~~July 1, 2016,~~December 17, 2018, the Company entered into a repayment agreement with ~~its employee~~an individual for ~~$20,280~~$100,000 at no interest. As of December 31, ~~2018~~2019 and June 30, ~~2018,~~2019, the Company has an outstanding balance of ~~$4,084~~$2,740 and ~~$4,285.~~ $17,834, respectively.

On ~~January 30, 2018, SGMD~~July 1, 2012, CarryOutSupplies entered an equipment loan agreement with a ~~straight promissory note with an individual with one or more on demand loan~~bank with maturity ~~date~~ on ~~January 30, 2019 and no interest shall be charged to the Company.~~June 21, 2024. The monthly payment is $648. As of December 31, ~~2018,~~2019 and June 30, 2019, the outstanding balance under this ~~note was $10,000.~~loan were $0 and $29,243, respectively.

As of December 31, ~~2018~~2019 and June 30, ~~2018,~~2019, the Company had an outstanding loan balance of ~~$172,948~~$192,030 and ~~$329,029,~~$214,585, respectively.
15. Stockholder’s Equity
The Company is authorized to issue 1,990,000,000 shares of $.001 par value common stock and 10,000,000 shares of $.001 par value preferred stock.
Share issuance during the three months ended September 30, 2019 -
During the three months ended September 30, 2019, the Company issued 1,000,000 shares of common stock to settle the old liability to be issued in total amount of $29,000.
During the three months ended September 30, 2019, the Company issued 71,915,557 shares of common stock for debt conversions in total amount of $547,833.
During the three months ended September 30, 2019, the Company issued 11,348,591 shares of common stock for cash in total amount of $100,000.
During the three months ended September 30, 2019, the Company issued 28,381,818 shares of common stock for warrant exercise in total amount of $14,132.
As of September 30, 2019 and June 30, 2019, the Company had 2,000,000 share of its preferred stock, 810,254,536 and 697,608,570 shares of its common stock, respectively, issued and outstanding.
Share issuance during the three months ended December 31, 2019 -
During the three months ended December 31, 2019, the Company issued 18,181,818 shares of common stock to settle the old liability to be issued in total amount of $290,455.

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Table of Contents
Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019
~~14.~~15. ~~Loan payable – related parties~~Stockholder’s Equity (continued)

~~On July 7, 2016, SWC received a loan from an employee. The~~During the three months ended December 31, 2019, the Company issued 24,994,341 shares of common stock for convertible debt principal with interest conversions in total amount of $142,165.
During the ~~loan bore no interest and amortized on a monthly basis over the life of the loan. As of~~three months ended December 31, ~~2018 and June 30, 2018,~~2019, the ~~balance~~Company issued 26,621,610 shares of ~~the loan were $30,000 and $30,000, respectively.~~common stock for cash in total amount of $240,000.

~~From time to time, SWC would receive short-term loans from company former director~~During the three months ended December 31, 2019, the Company issued 500,000 shares of common stock for ~~its working capital needs.~~employee bonus in total fair value of $7,550.

~~As of~~During the three months ended December 31,~~, 2018 and June 30, 2018,~~ 2019, the Company ~~had outstanding balance~~issued 249,373,817 shares of ~~$25,634 and $0, respectively.~~common stock for acquisition of BZRTH in total fair value of $3,566,046. The shares are to be cancelled in subsequent period pursuant to the rescission on January 15, 2020.
During the three months ended December 31, 2019, the Company issued 750,001 shares of preferred stock for acquisition of BZRTH in total fair value of $10,725,014. The shares of preferred stock are to be cancelled in subsequent period pursuant to the rescission on January 15, 2020.
During the three months ended December 31, 2019, the Company issued 415,000 shares of series B preferred stock for award to employee bonus in total fair value of $5,934,500.

As of December 31, ~~2018~~2019 and June 30, ~~2018,~~2019, the ~~total loan payable to related party was $55,634~~Company had 3,165,001 share of its preferred stock, 1,129,926,122 and ~~$30,000, respectively.~~697,608,570 shares of its common stock, respectively, issued and outstanding.
~~15.~~16. Shares to be issued – liability

During the year ended June 30, ~~2018,~~2019, the Company had entered into multiple private placement agreements and had ~~increased potential~~ shares to be issued under liability in total amount of ~~$1,798,000.~~$100,000.

During the three months ended September 30, ~~2018,~~2019, the Company had entered into a private placement agreement and had increased shares to be issued ~~3,700,000 shares of the Company’s common stock~~ for ~~cash in~~ total amount of ~~$185,000. Share to be issued is reduced by $185,000 due to such issuance.~~$96,000.

During the three months ended September 30, ~~2018,~~2019, the Company had entered into ~~a multiple private placement agreement~~an employee compensation plan and had increased ~~potential~~ shares ~~under liability by 1,000,000 shares,~~to be issued for total amount of ~~$50,000.~~$12,000.

During the three months ended December 31, ~~2018,~~2019, the Company had entered into a private placement agreement and had increased shares to be issued ~~45,307,142 shares of the Company’s common stock~~ for ~~cash & services in~~ total amount of ~~$2,506,000. Share~~$40,000.
During the three months ended December 31, 2019, the Company had entered into an employee compensation plan and had increased shares to be issued ~~is reduced by $2,506,000 due to such issuance.~~for total amount of $14,000.

As of December 31, ~~2018~~2019 and June 30, ~~2018,~~2019, the Company had balance of ~~$50,000~~$262,000 and ~~$2,691,000~~$100,000 share to be issued.

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Table of Contents
Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019
~~16.~~17. Shares to be issued –equity

As of the year ended June 30, ~~2018,~~2019, the Company had ~~entered into multiple private placement agreements and had increased~~ potential shares to be issued under common stock in total amount of ~~$467,996.~~$29,000.

During the three months ended September 30, ~~2018,~~2019, the Company ~~had entered into multiple private placement agreements and had increased potential shares~~issued the $29,000 share to be issued ~~under~~– equity by 1,000,000 shares of the Company’s common ~~stock in total amount of $95,000. The shares have been issued as of December 31, 2018.~~stock.

During the three months ended ~~September 30, 2018,~~December 31, 2019, the Company ~~had entered into multiple service agreements and had increased potential shares to be issued for service compensation~~recorded in total amount of ~~$137,000. The shares have been issued as of December 31, 2018.~~
~~During the three months ended September 30, 2018, the Company had entered into debt settlement and had increased~~$100,000 potential ~~shares~~share to be issued ~~for debt settlement under common stock in total amount of $174,450. The shares have been issued as of December 31, 2018.~~
As of the three months ended September 30, 2018 and year ended June 30, 2018, the Company had entered into multiple private placement agreements and had increased potential shares to be issued under preferred stock in total amount of $2,000,000, respectively. The shares have been issued as of December 31, 2018.– equity.

As of December 31, ~~2018,~~2019 and June 30, 2019, the Company had total potential shares to be issued under common stock and preferred stock in total amount of ~~$0.~~$100,000 and $29,000, respectively.

~~17.~~18. Shares to be cancelled – equity
On October 30, 2019, SGMD closed the previously announced acquisition of BZRTH, Inc., a Nevada corporation (“BZRTH”) pursuant to a Stock Exchange Agreement. BZRTH is headquartered in Irwindale, California and is a marketer and manufacturer of hydroponic growth supplies and related products to distributors and retailers. The total consideration to be paid by the Company to acquire BZRTH was 650,000,000 shares of SGMD’s common stock, 3,500,000 shares of Series B convertible preferred stock, $870,000 in cash, and 5% promissory notes in the sum of $7,130,000.00 due on or before October 31, 2021 to the BZRTH shareholders. $870,000 of cash had been paid along with 449,373,817 common shares and 750,000 Series B Convertible Preferred shares.
On January 15, 2020, the Company entered into a Rescission and Mutual Release Agreement (“Agreement”) with each of the parties agreeing to return all consideration exchanged pursuant to the Stock Exchange Agreement. The Agreement provided for mutual releases and indemnities.
The shareholders of BZRTH have agreed to surrender for cancellation, 449,373,817 common shares and 750,000 Series B Convertible Preferred shares. On an as converted to common basis the returns to Sugarmade’s treasury equal 449,373,817 relating to the common shares to be surrendered and 750,000,000 million common shares equivalents due to each Series B Convertible Preferred share converting to common shares on a 1 for 1,000 basis. Thus, on a common share equivalent basis, the surrender equals 1,199,373,817 common shares, if all Preferred Series B were converted. As of December 31, 2019, the Company recorded share to be cancelled – common stock and preferred stock in total amount of $38,225,560.
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Table of Contents
Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019
19. Commitments and contingencies

On February 23, 2018 the Company entered into lease agreement for a new office space as part of the plan to expand operation, the lease is set to commence Commencing March 1, 2018. The term of the lease is for a (5) Five Years with 1 month free on the 1^st year of the term. The monthly rent on the 1^st year will be $11,770 with a 3% increase for each subsequent year. Total commitment for the full term of the lease will be $737,367. As of the date of this filing, this property became the headquarter of the company.

Six Months Ended
December 31, 2019
Lease Cost
Operating lease cost (included in general and administration in the Company’s unaudited condensed statement of operations) $ 74,988

Other Information
Cash paid for amounts included in the measurement of lease liabilities for the six months ended December 31, 2019 $ 72,738
Remaining lease term – operating leases (in years)                                  3.17
Average discount rate – operating leases 10%
The supplemental balance sheet information related to leases for the periods are as follows:
Operating leases
Right-of-use assets $ 416,421
Total operating lease assets $ 416,421

Short-term operating lease liabilities $ 110,824
Long-term operating lease liabilities $ 318,083
Total operating lease liabilities $ 428,907

Maturities of the Company’s lease liabilities are as follows:

Period ending June 30, Operating
Lease
2020 $                        146,932
2021 151,344
2022 155,888
2023 105,984
Total lease payments 560,148

Less: Imputed interest/present value discount 104,558
Present value of lease liabilities $                        455,590
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Table of Contents
Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019
~~18.~~20. Subsequent events

On ~~January 8,~~December 27, 2019, the Company ~~issued~~entered a convertible promissory note towith an accredited investor for ~~proceeds~~a total amount of $112,200 (includes $12,200 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 60% of the lowest closing bid for the 20 consecutive trading days prior to the ~~Company~~conversion date. The principal amount was received in ~~the amount of $105,000.~~January 2020.

On January ~~22, 2019,~~30, 2020, the Company issued ~~a convertible note to an accredited investor for proceeds to the Company in the amount of $100,000.~~
~~On January 23, 2019, the Company issued 2,364,066~~6,684,843 shares of the Company’s common stock for debt conversions in total amount of ~~$75,000.~~$33,291.

On January ~~24, 2019,~~15, 2020, the Company ~~issued~~entered into a ~~convertible note~~Rescission and Mutual Release Agreement (“Agreement”) with each of the parties agreeing to ~~an accredited investor for proceeds~~return all consideration exchanged pursuant to the Stock Exchange Agreement. The Agreement provided for mutual releases and indemnities.
The shareholders of BZRTH have agreed to surrender for cancellation, 449,373,817 common shares and 750,000 Series B Convertible Preferred shares. On an as converted to common basis the returns to Sugarmade’s treasury equal 449,373,817 relating to the common shares to be surrendered and 750,000,000 million common shares equivalents due to each Series B Convertible Preferred share converting to common shares on a 1 for 1,000 basis. Thus, on a common share equivalent basis, the surrender equals 1,199,373,817 common shares, if all Preferred Series B were converted. As part of the Agreement, the Company will retain or will receive 102,248 shares in BZRTH.
On January 21, 2020, the ~~amount~~Company directed the creation of ~~$53,000.~~SugarRush, Inc., a California Corporation, as a wholly owned subsidiary. The new company will be utilized for the holding of acquired assets and as a primary commercial business unit.

On February ~~6, 2019,~~7, 2020, the Company ~~issued 4,995,084 shares~~signed a definitive agreement (the “Agreement”) with Indigo Dye Group Corp. (“Indigo”) with a mailing address of 5600 Warehouse Way, Sacramento, CA 95826, the operator of BudCars Cannabis Delivery Service (“Budcars”), which provides services in the Sacramento metropolitan area. Under the terms of the ~~Company’s common stock~~Agreement, the Company will purchase a 40% stake in the Budcars operation for ~~debt conversions in total~~a cash amount of ~~$127,000.~~
~~On February 21, 2019,~~$700,000, and will receive an option to acquire an additional 30%, which upon exercise will provide a controlling stake in the ~~Company entered into an acknowledgement and representation letter with BizRight LLC under~~operation for the terms and consideration of the master marketing agreement dated December 13, 2017. BizRight LLC has executed an asset purchase agreement with BZRCH, Inc., a Nevada corporation to retain all or part of BizRight’s assets.
Company.

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Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

As reported on Form 8-K filed on April 10, 2018 with the Securities and Exchange Commission, or SEC, BF Borgers CPA (“Borgers”) was dismissed as the independent registered public accounting firm for the Company effective as of March 21, 2018. The dismissal of Borgers was approved by the Company’s Board of Directors. Other than an explanatory paragraph included in Borgers’ audit report for the Company's fiscal year ended December 31, 2017, 2016 and 2015 relating to the uncertainty of the Company's ability to continue as a “going concern”, the audit report of Borgers on the Company's financial statements for the last three fiscal years ended December 31, 2017, 2016 and 2015, did not contain an adverse opinion or a disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles. During the Company's 2017, 2016 and 2015 fiscal years and through March 21, 2018, (1) there were no disagreements with Borgers on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of Borgers, would have caused Borgers to make reference to the subject matter of the disagreements in connection with their report, and (2) there were no “reportable events” as that term is defined in Item 304(a)(1)(v) of Regulation S-K.N/A
As a result of the dismissal of Borgers as the independent registered public accounting firm for the Company, on April 2, 2018, the Company engaged L&L CPAS, PA, a PCAOB and CPAB registered firm (“L&L”). Neither we, nor anyone on our behalf, has consulted with L&L regarding (i) the type of final audit opinion that might be rendered on the Company’s financial statements and neither a written report nor oral advice was provided to the Company that L&L concluded was an important factor considered by the Company in reaching a decision as to any accounting, auditing, or financial reporting issue, (ii) any matter that was the subject of a disagreement within the meaning of Item 304(a)(1)(iv) of Regulation S-K, or (iii) any reportable event within the meaning of Item 304(a)(1)(v) of Regulation S-K.

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis may include statements regarding our expectations with respect to our future performance, liquidity, and capital resources. Such statements, along with any other non-historical statements in the discussion, are forward-looking. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, factors listed in other documents we file with the Securities and Exchange Commission (SEC). We do not assume an obligation to update any forward- looking statement. Our actual results may differ materially from those contained in or implied by any of the forward-looking statements in this Form 10-Q. See “SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS” above.

Sugarmade, Inc. (hereinafter referred to as “we”, “us” or “the/our Company”) is a publicly traded company incorporated in the state of Delaware. Our previous legal name was Diversified Opportunities, Inc.  Our Company primarily operates through our subsidiary, Sugarmade, Inc., a California corporation (“SWC Group, Inc., - CA”). We are headquartered in Monrovia, California, a suburb of Los Angeles, with an additional warehouse location in Southern California. As of date of this filing, we employ 21 full and part-time workers and contractors.
As of the end of the reporting period, December 31, 2018, we were involved in several businesses including, the supply of products to the quick service restaurant sub-sector of the restaurant industry and as an importer, distributor and marketer of hydroponic supplies to various agricultural sectors. We had previously been a marketer of culinary seasoning products Seasoning Stix and Sriracha Seasoning Stix and a marketer of tree-free paper products. These products were discontinued during 2018 in order to focus the majority of our corporate resources on the marketing of hydroponic supplies.
As of the date of this filing and moving into the future, our primary focus we be on supplying the hydroponic and indoor/outdoor cultivation agricultural market sectors, including the cannabis cultivation, processing and distribution sectors. While our entrance into this business sector was announced during late November 2017, we did not begin to recognize revenues from these operation until later in calendar 2018.
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Our board of directors believes the Company has a significant market opportunity to act as a supplier to the legal cannabis cultivation, processing and distribution market sectors. We approach these markets as a supplier of products to legal market participants and do not engage in the business of cultivating, processing or distributing cannabis or any products that contain cannabis. While our primary focus has been on companies engaged in such business operations on the west coast of the United States, our business has significantly expanded as legal medical and recreational cannabis business activities have proliferated into many other states.
While our business is rapidly expanding across most of the United States and across the west coast, California remains an important marketplace due both the sheer size of the State’s economy and due to the rapid embrace of legalization. We also believe the Company has strong revenue expansion opportunities within the retail hydroponic agricultural sector as these businesses are complementary to our current business. We are currently in process of analyzing several acquisitions for expansion in this area.
In December of 2017, we announced a Master Marketing Agreement with BizRight, LLC where the Company would market BizRight’s products. The Company also gained an option to acquire all of BizRight’s operations. We began recognizing revenues under this marketing agreement during late calendar 2018 and expect to begin recognizing an increasing amount of revenue under the Master Marketing Agreement as we move further into calendar 2019.
Also during 2017, Sugarmade announced the signing of an exclusive distribution agreement for California, Oregon and Washington with privately held Plantation Corp. for its BudLife preservation technology based on integration of specialized gases and natural agents that dramatically extends the useful life of medical marijuana up to six (6) months by actively monitoring the internal containers environment and automatically adjusting its atmosphere as needed. Sugarmade has conducted initial product prototype testing of the BudLife product, realizing positive results. Sugarmade plans to move forward as Plantation’s distribution partner upon availability of the BudLife product line. As of the end of the reporting period, the Company is awaiting final product availability in order to begin marketing the products under the Agreement.
During October 2018, the Company signed a Letter of Intent to acquire Sky Unlimited, LLC doing business as Athena United, a Southern California-based, supplier of hydroponic cultivation supplies to the wholesale sector and to large commercial cultivators. Athena United operates its ecommerce website at www.AthenaUnited.com. Under the terms of the Agreement, which contains both binding and non-binding elements, Sugarmade will acquire all of the outstanding capital stock and the business operations for a combination of cash and common shares of Sugarmade. Athena United, and its associated operations, is believed to be one of the larger operators in this market sector and is producing revenues of approximately $40 million per year, is profitable, and cash flow positive. Should the Company be successful in its acquisition efforts, the operation would be integrated under the Sugarmade corporate umbrella with Sugarmade assuming all operations and recognizing all revenues and profits.
During January of 2019, the Company announced its intention to acquire a retail location of Washington State-based Hydro4Less. The operation is expected to produce approximately $5 million in revenues and to be profitable during calendar 2019. Additionally, via the pending transaction, Sugarmade will gain an option to purchase two additional Hydro4Less retail operations, which are currently producing in excess of $20 million annually. Should all three Hydro4Less acquisitions close, Sugarmade will increase its annual revenues by approximately $25 million per year.
Via the marketing agreement with BizRight, LLC and the acquisitions of Athena United and Hydro4Less, the Company believes it could become one of the largest and fast growing market participants in the cannabis and other agricultural supply/hydroponic industries. As has been also outlined and disclosed in other corporate filings, there can be no assurances these acquisitions will close and that such revenues will be realized by the Company.
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We plan to continue our business pursuits relative to our CarryOutSuppies.com business, which is a producer and wholesaler of custom printed and generic supplies servicing more than 2,000 quick service restaurants. Our products include double poly paper cups for cold beverage; disposable, clear, plastic cold cups, paper coffee cups, yogurt cups, ice cream cups, cup lids, cup sleeves, food containers, soup containers, plastic spoons and many other similar products for this market sector. CarryOutSupplies.com was founded in 2009. Carryoutsupplies management estimates it holds and approximately 20% to 30% market share of generic and printed products within the take out frozen yogurt and ice cream industries.
~~Employees and consultants~~
The company employees approximately 15 full-time and part-time workers, and consultants, most of whom work within the City of Monrovia, California headquarters location, while small numbers are in our distribution warehouse located in Duarte, California.
Overview and Financial Condition

Discussions with respect to our Company’s operations included herein refer to our operating subsidiary, ~~Sugarmade-CA. Our Company purchased Sugarmade-CA on May 9, 2011.~~SWC. As of the date of this filing, we had no other operations other than those of ~~Sugarmade-CA. Information with respect to our Company’s nominal operations prior to the Sugarmade Acquisition is not included herein.~~SWC.

Results of Operations

The following table sets forth the results of our operations for the three months ended December 31, ~~2018~~2019 and ~~2017.~~2018.

For the three months ended For the three months ended
December 31, December 31,
2018 2017 2019 2018

Net Sales 1,445,269 938,754 720,810 1,445,269
Cost of Goods Sold: 1,071,033 657,249 435,690 1,071,033
Gross profit 374,236 281,505 285,120 374,236
Operating Expenses 3,823,085 1,033,316 7,215,933 3,823,085
Loss From Operations (3,448,849 ) (751,811 ) (6,930,814 ) (3,448,849 )
Other non-operating Income (Expense): (2,584,531 ) (5,223,504 ) (823,710 ) (2,584,531 )
Net Income (Loss) (6,033,380 ) (5,975,315 ) (7,754,524 ) (6,033,380 )

Revenues

For the ~~three-months~~three months ended December 31, ~~2018~~2019 and ~~2017,~~2018, revenues were ~~$1,445,269~~$720,810 and ~~$938,754,~~$1,445,269, respectively. The ~~increase~~decrease was primarily due to ~~seasonality changes~~business loss within the ~~yogurt and restaurant~~stick supply industry.

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Cost of goods sold

For the ~~three-month~~three month ended December 31, ~~2018~~2019 and ~~2017,~~2018, costs of goods sold were ~~$1,071,033~~$435,690 and ~~$657,249~~$1,071,033 respectively. The ~~increase~~decrease was primarily due to the ~~frozen yogurt sector expanding and preparing for~~business loss within the ~~industry’s pick-up in its seasonal trend.~~stick supply industry.

Gross profit

For the ~~three-month~~three month ended December 31, ~~2018~~2019 and ~~2017,~~2018, gross profit was ~~$374,236~~$285,120 and ~~$281,505,~~$374,236, respectively. The ~~increase~~decrease was primarily due to ~~a combination of refocus on~~ the ~~types of products sold by~~business loss within the ~~Company and pivot and expansion into a new~~stick supply industry.

Operating expenses

For the ~~three-month~~three month ended December 31, ~~2018~~2019 and ~~2017,~~2018, operating expenses were ~~$3,823,085~~$7,215,933 and ~~$1,033,316,~~$3,823,085, respectively. The increase was ~~attributable~~due to ~~issuing all~~the increase of ~~the~~employee stock ~~compensation expenses for employees, legal, and consulting fees.~~compensation.

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Other non-operating income (expense)

The Company had total other non-operating expense of ~~$2,584,531~~$823,710 and ~~expense of $5,223,504~~$2,584,531 for the three months ended December 31, ~~2018~~2019 and ~~2017,~~2018, respectively. The decrease in non-operating income is related to the accounting for derivative liabilities.

Net income (loss)

Net loss totaled ~~$6,033,380~~$7,754,524 for the three month ended December 31, ~~2018,~~2019, compared to a net loss totaling ~~$5,975,315~~$6,033,380 for the three-month ended December 31, ~~2017.~~2018. The increase was ~~attributable~~mainly due to ~~issuing all~~the increase of ~~the~~employee stock ~~compensation expenses for employees, legal, and consulting fees.~~compensation.

The following table sets forth the results of our operations for the six months ended December 31, ~~2018~~2019 and ~~2017.~~2018.

For the six months ended For the six months ended
December 31, December 31,
2018 2017 2019 2018

Net Sales $2,886,885 2,115,968 1,474,784 2,886,885
Cost of Goods Sold: 2,130,452 1,510,199 927,858 2,130,452
Gross profit 756,433 605,769 546,925 756,433
Operating Expenses 4,736,957 2,052,304 8,419,563 4,736,957
Loss From Operations (3,980,524 ) (1,446,535 ) (7,872,637 ) (3,980,524 )
Other non-operating Income (Expense): (4,661,909 ) (5,618,114 ) (1,909,438 ) (4,661,909 )
Net Income (Loss) (8,642,433 ) (7,064,649 ) (9,782,075 ) (8,642,433 )

Revenues

For the ~~six-months~~six months ended December 31, ~~2018~~2019 and ~~2017,~~2018, revenues were ~~$2,886,885~~$1,474,784 and ~~$2,115,968,~~$2,886,885, respectively. The ~~increase~~decrease was primarily due to ~~seasonality changes~~business loss within the ~~yogurt and restaurant~~stick supply industry.

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Cost of goods sold

For the ~~six-month~~six month ended December 31, ~~2018~~2019 and ~~2017,~~2018, costs of goods sold were ~~$2,130,452~~$927,858 and ~~$1,510,199~~$2,130,452 respectively. The ~~increase~~decrease was primarily due to the ~~frozen yogurt sector expanding and preparing for~~business loss within the ~~industry’s pick-up in its seasonal trend.~~stick supply industry.

Gross profit

For the ~~six-month~~six month ended December 31, ~~2018~~2019 and ~~2017,~~2018, gross profit was ~~$756,433~~$546,925 and ~~$605,769,~~$756,433, respectively. The ~~increase~~decrease was primarily due to ~~a combination of refocus on~~ the ~~types of products sold by~~business loss within the ~~Company and pivot and expansion into a new~~stick supply industry.

Operating expenses

For the ~~six-month~~six month ended December 31, ~~2018~~2019 and ~~2017,~~2018, operating expenses were ~~$4,736,957~~$8,419,563 and ~~$2,052,304,~~$4,736,957, respectively. The increase was ~~attributable~~due to ~~issuing all~~the increase of ~~the~~employee stock ~~compensation expenses for employees, legal, and consulting fees.~~compensation.

Other non-operating income (expense)

The Company had total other non-operating expense of ~~$4,661,909~~$1,909,438 and ~~expense of $5,618,114~~$4,661,909 for the six months ended December 31, ~~2018~~2019 and ~~2017,~~2018, respectively. The decrease in non-operating income is related to the accounting for derivative liabilities.

Net income (loss)

Net loss totaled ~~$8,642,433~~$9,782,075 for the six month ended December 31, ~~2018,~~2019, compared to a net loss totaling ~~$7,064,649~~$8,642,433 for the six-month ended December 31, ~~2017.~~2018. The increase was ~~attributable~~mainly due to ~~issuing all~~the increase of ~~the~~employee stock ~~compensation expenses for employees, legal, and consulting fees.~~compensation.

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Liquidity and Capital Resources

We have primarily financed our operations through the sale of unregistered equity and convertible notes payable. As of December 31, ~~2018,~~2019, our Company had cash balance of ~~$159,671~~$103,002, current assets totaling ~~$3,238,056~~$3,225,281 and total assets of ~~$3,544,462.~~$4,141,568. We had current and total liabilities totaling ~~$5,659,587.~~$8,280,102 and $8,598,185, respectively. Stockholders’ equity reflected a deficiency of ~~$2,115,125.~~$4,456,617.

The following is a summary of cash provided by or used in each of the indicated types of activities during the ~~six-months~~six months ended December 31, ~~2018~~2019 and ~~2017:~~2018:

2018 2017 2019 2018
Cash (used in) provided by:
Operating activities $ (1,060,982) $ (1,111,362 ) $ (2,122,441 ) $ 1,060,980
Investing activities 87,154 (144,906 ) —   (87,154 )
Financing activities 856,278 1,187,801 2,191,072 (856,278 )

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Net cash ~~used in~~(used in) provided by operating activities was ~~$1,060,982~~$(2,122,441) for the six months ended December 31, ~~2018,~~2019, and ~~$1,111,362~~$1,060,980 for the six months ended December 31, ~~2017.~~2018.

There were $nil and $87,154 fixed assets and intangible assets purchased during the six months ended December 31, ~~2017~~2019 and 2018 relating to investing ~~activities.~~activities, respectively.

Net cash (used in) provided by financing activities was ~~$856,278~~$2,191,072 for the six months ended December 31, ~~2018~~2019 and ~~$1,187,801~~$(856,278) for the six months ended December 31, ~~2017.~~2018.

Our capital requirements going forward will consist of financing our operations until we are able to reach a level of revenues and gross margins adequate to equal or exceed our ongoing operating expenses. Other than the notes payable discussed above, borrowings from our bank and the production credit facility with our suppliers, we do not have any credit agreement or source of liquidity immediately available to us.

Given estimates of our Company’s future operating results and our credit arrangements with our suppliers, we are currently forecasting that we will need to secure additional financing to obtain adequate financial resources to reach profitability. As of the date of this report, we estimate that the cash necessary to implement our current business plan for the next twelve months is approximately $2,000,000.

Based on our need to raise additional funds to implement our business plans for the next twelve months, we have included a discussion concerning the presentation of our financial statements on a going concern basis in the notes to our financial statements and our independent public accountants have included a similar discussion in their opinion on our financial statements through June 30, ~~2018.~~2019. We will be required in the near future to issue debt or sell our Company’s equity securities in order to raise additional cash, although there are no firm arrangements in place for any such financing at this time. We cannot provide any assurances as to whether we will be able to secure the necessary financing, or the terms of any such financing transaction if one were to occur. The failure to secure such financing could severely curtail our plans for future growth or in more severe scenarios, the continued operations of our Company.

Capital Expenditures

Our current plans do not call for our Company to expend significant amounts for capital expenditures for the foreseeable future beyond relatively insignificant expenditures for office furniture and information technology related equipment as we add employees to our Company. We are however continually evaluating the production processes of our third party contract manufacturers to determine if there are investments we could make in their processes to achieve manufacturing improvements and significant cost savings. Any such desired investments would require additional cash above our current forecast requirements.

Critical Accounting Policies Involving Management Estimates and Assumptions

Please see the notes to our financial statements.
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ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Intentionally omitted pursuant to Item 305(e) of Regulation S-K.

ITEM 4 – CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

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We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives.

As required by the Securities and Exchange Commission Rule 13a-15(e) and Rule 15d-15(e), we carried out an evaluation, under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that as of ~~December 31, 2018,~~September 30, 2019, our disclosure controls and procedures were ineffective due to the Company is relatively inexperienced with certain complexities within USGAAP and SEC reporting.

We have taken, and are continuing to take, certain actions to remediate the material weakness related to our lack of U.S. GAAP experience. We plan to hire additional credentialed professional staff and consulting professionals with greater knowledge and experience of U.S. GAAP and related regulatory requirements to oversee our financial reporting process in order to ensure our compliance with U.S. GAAP and other relevant securities laws. In addition, we plan to provide additional training to our accounting personnel on U.S. GAAP, and other regulatory requirements regarding the preparation of financial statements.

Notwithstanding the above identified material weakness, the Company’s management believes that its condensed consolidated financial statements included in this report fairly present in all material respects the Company’s financial condition, results of operations and cash flows for the periods presented and that this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.

Changes in Internal Controls over Financial Reporting

There have not been any changes in our internal controls over financial reporting during the quarter ended ~~December 31, 2018~~September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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PART II: Other Information

ITEM 1 – RISK FACTORS

Investment in our common stock involves a high degree of risk. You should carefully consider the risks described below together with all of the other information included in this herein before making an investment decision. If any of the following risks actually occur, our business, financial condition or results of operations could suffer. In that case, the market price of our common stock could decline, and you may lose all or part of your investment. You should also read the section entitled “Special Notes Regarding Forward-Looking Statements” below for a discussion of what types of statements are forward-looking statements as well as the significance of such statements in the context of this report.

Investment in our common stock involves a high degree of risk. You should carefully consider the risks described below together with all of the other information included in this herein before making an investment decision. If any of the following risks actually occur, our business, financial condition or results of operations could suffer. In that case, the market price of our common stock could decline, and you may lose all or part of your investment.

The Company, as of the end of the ~~2018~~2019 fiscal year (June) was at a stage where it requires external capital to continue with its business. It must obtain additional significant capital in the future to continue its operations. There can be no certainty that the Company can obtain these funds.

ITEM 2 –UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS

~~There~~During the three months ended December 31, 2019, the Company issued shares as followings:
· 18,181,818 shares of common stock for settlement of debts in total fair value of $290,455
· 24,994,341 shares of common stock upon conversion of convertible notes of $135,290
· 500,000 shares of common stock as Employee bonus in total fair value of $7,550
· 249,373,817 shares of common stock for acquisition of BZRTH in total fair value of $3,566,046
· 26,621,610 shares of common stock for cash of $240,000
Subsequent to December 31, 2019, the Company issued shares as followings:
· 6,684,843 shares of common stock upon conversion of convertible notes of $33,291
All of the aforementioned securities were ~~no sales~~issued pursuant to Section 4(a)(2) of ~~unregistered securities during~~ the ~~period.~~Securities Act of 1933, as amended, and Rule 506 thereunder.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4 – MINE SAFETY DISCLOSURES

None.

ITEM 5 – OTHER INFORMATION

~~None~~None.

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ITEM 6 – EXHIBITS

Exhibit No. Description
31.1 (1) Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 (1) Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1 (1) Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS* (1) XBRL Instance Document

101.SCH* (1) XBRL Taxonomy Extension Schema

101.CAL* (1) XBRL Taxonomy Extension Calculation Linkbase

101.DEF* (1) XBRL Taxonomy Extension Definition Linkbase

101.LAB* (1) XBRL Taxonomy Extension Label Linkbase

101.PRE* (1) XBRL Taxonomy Extension Presentation Linkbase

(1)       Filed as an exhibit to this Report.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Sugarmade, Inc., a Delaware corporation

February ~~21, 2019~~19, 2020 By: /s/ Jimmy Chan
Jimmy Chan
CEO, CFO, and Director

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	For the Three Months Ended December 31, 2018			For the Three Months Ended December 31, 2017			For the Six Months Ended December 31, 2018			For the Six Months Ended December 31, 2017

Revenues, net	$	1,445,269		$	938,754		$	2,886,885		$	2,115,968

Cost of goods sold:		1,071,033			657,249			2,130,452			1,510,199

Gross Profit		374,236			281,505			756,433			605,769

Operating expenses:
Selling, general and administrative expense	$	3,823,085		$	1,033,316		$	4,736,957		$	2,052,304
Operating loss		(3,448,849	)		(751,811	)		(3,980,524	)		(1,446,535	)

Non-operating income (expense):
Other income (expense)		1,451			(229,457	)		5,101			(351,830	)
Interest Expense		(460,102	)		(74,744	)		(741,480	)		(206,329	)
Change in fair value of derivative liabilities		(2,019,927	)		(4,924,302	)		(3,661,383	)		(5,064,955	)
Warrant Expense		3,195			—			25,920			—
Loss on debt conversion		—			—			8,763			—
Loss on debt settlement		(94,207	)		—			(255,882	)		—
Amortization of debt discount		(31,591	)		—			(59,597	)		—
Loss on debt forgiveness		16,649			—			16,649			—

Total non-operating expenses, net		(2,584,531	)		(5,223,504	)		(4,661,909	)		(5,618,114	)

Net loss	$	(6,033,380	)	$	(5,975,315	)	$	(8,642,432	)	$	(7,064,649	)

Weighted average shares basic and diluted		393,670,334			244,474,615			330,029,294			237,925,753
Weighted average basic and diluted loss per common share	$	(0.02	)	$	(0.02	)	$	(0.03	)	$	(0.03	)

	For the Three Months Ended December 31						For the Six Months Ended December 31
	2019			2018			2019			2018

Revenues, net	$	720,810		$	1,445,269		$	1,474,784		$	2,886,885

Cost of goods sold		435,690			1,071,033			927,858			2,130,452

Gross profit		285,120			374,236			546,925			756,433

Selling, general and administrative expenses		7,215,933			3,823,085			8,419,563			4,736,957

Loss from operations		(6,930,814	)		(3,448,849	)		(7,872,637	)		(3,980,524	)

Non-operating income (expense):
Other income		1,867			1,451			3,098			5,101
Interest expense		(735,196	)		(460,102	)		(1,319,800	)		(741,480	)
Change in fair value of derivative liabilities		1,291,168			(2,019,927	)		2,314,046			(3,661,383	)
Warrant Expense		—			3,195			(55,278	)		25,920
Loss on notes conversion		(184,626	)		—			(184,626	)		8,763
Loss on settlement		(232,776	)		(94,207	)		(382,635	)		(255,882	)
Gain on asset disposal		—			—			7,000			—
Amortization of debt discount		(963,407	)		(31,591	)		(2,118,407	)		(59,597	)
Debt forgiveness					16,649			(172,096	)		16,649
Miscellaneous		(740	)		—			(740	)		—

Total non-operating expenses, net		(823,710	)		(2,584,531	)		(1,909,438	)		(4,661,909	)

Net loss	$	(7,754,524	)	$	(6,033,380	)	$	(9,782,075	)	$	(8,642,433	)

Basic net income (loss) per share	$	(0.04	)	$	(0.02	)	$	(0.01	)	$	(0.03	)
Diluted net income (loss) per share	$	(0.04	)	$	(0.02	)	$	(0.01	)	$	(0.03	)

Basic and diluted weighted average common shares outstanding *		191,886,785			393,670,334			880,355,944			330,029,294

	For the six months ended December 31,
	2018			2017
Cash flows from operating activities:
Net loss	$	(8,642,432	)	$	(7,064,649	)
Adjustments to reconcile net loss to cash flows from operating activities: Initial valuation of debt discount		149,143			125,642
Loss on settlement		255,882			—
Gain on debt forgiveness		(16,649	)		—
Derivative Expense and amortization of debt discount		565,978			249,322
Stock based compensation		5,097,206			728,729
Change in fair value of derivative liability		3,661,418			5,064,954
Amortization of Intangible Assets		700			—
Change in exercise of warrant		(25,920	)		—
Depreciation and amortization		26,578			26,954

Changes in assets and liabilities:
Accounts receivable		113,179			(121,244	)
Inventory		(49,226	)		50,626
Prepayment, deposits and other receivables		(54,876	)		—
Other assets		—			(61,157	)
Bank overdraft		—			51,554
Accounts payable and accrued liabilities		(40,876	)		(166,510	)
Customer deposits		(118,974	)		(47,150	)
Unearned revenue		(89,344	)		(14,263	)
Interest Payable		172,221			—
Accrued interest and Other payables		56,972			65,830

Net cash used in operating activities		1,060,981			(1,111,362	)

Cash flows from investing activities:
Acquisition of intangible assets		—			(11,775	)
Acquisition of property and equipment		(87,154	)		(133,131	)

Net cash used in investing activities		(87,154	)		(144,906	)

Cash flows from financing activities:
Proceeds from shares to be issued		—			361,478
Proceeds from shares issuance		235,000			—
Proceeds from convertible notes		1,022,500			702,653
Payment to Note payable-related parties		—			(16,666	)
Proceeds (Repayment) from(to) loans		(5,261	)		63,587
Proceeds from loan payable-related parties		25,634			(27,941	)
Proceeds from advance share issuance		(2,121,000	)		104,690
Loan receivable		(13,151	)		—

Net cash provided by financing activities		(856,278	)		1,187,801

Net increase (decrease) in cash		117,550			(68,467	)

Cash paid during the period for:
Cash, beginning of period		42,121			101,880
Cash, end of period	$	159,671		$	33,413

Supplemental disclosure of non-cash financing activities
Shares issued for conversion of convertible debt		516,391			—
Reduction in derivative liability due to conversion		6,289,241			—
Debt discount related to convertible debt		1,888,248			—
Debts settled through shares issuance		1,292,544			564,415

Three and Six Month 12/31/2019 Equity Statements
	Preferred Stock				Common Stock				Additional paid-in			Shares to be cancelled, preferred			Shares to be cancelled, common			Shares to be issued, common			Accumulated
	Shares		Amount		Shares		Amount		capital			shares			shares			shares			deficit			Total

Balance at June 30, 2019		2,000,000		2,000		697,608,570		697,610		61,038,875			—			—			29,000			(47,088,950	)		14,678,534
Shares issued for debts settlement		—		—		1,000,000		1,000		28,000			—			—			(29,000	)		—			—
Reclass Derivative liability from conversion		—		—						659,526			—			—			—			—			659,526
Shares issued for conversions		—		—		71,915,557		71,906		475,926			—			—			—			—			547,833
Share issued for Cash		—		—		11,348,591		11,349		88,651			—			—			—			—			100,000
Shares issued for Warrant Exercise		—		—		28,381,818		28,382		(14,249	)		—			—			—			—			14,132
Net Loss		—		—		—		—		—			—			—			—			(2,027,551	)		(2,027,551	)
Balance at September 30, 2019		2,000,000		2,000		810,254,536		810,257		62,276,720			—			—			—			(49,116,501	)		13,972,474
Share issued for Cash		—		—		26,621,610		26,622		213,378			—			—			100,000			—			340,000
Option for services		—		—		—		—		73,500			—			—			—			—			73,500
Share issued for services compensation		415,000		415		500,000		500		5,941,135			—			—			—			—			5,942,050
Reclass Derivative liability from conversion		—		—		—		—		297,962			—			—			—			—			297,962
Shares issued for conversions		—		—		24,994,341		24,994		117,170			—			—			—			—			142,164
Shares issued for debt settlement		—		—		18,181,818		18,182		272,273			—			—			—			—			290,455
Shares issued for Award - Bizright		750,001		750		249,373,817		249,374		14,040,936			(10,725,014	)		(21,566,046	)		—			—			(18,000,000	)
Initial valuation of BCF		—		—		—		—		239,301			—			—			—			—			239,301
Net loss		—		—		—		—		—			—			—			—			(7,754,524	)		(7,754,524	)
Balance at December 31, 2019		3,165,001		3,165		1,129,926,122		1,129,927		83,472,375			(10,725,014	)		(21,566,046	)		100,000			(56,871,025	)		(4,456,617	)

Three and Six Month 12/31/2018 Equity Statements
	Preferred Stock				Common Stock					Additional paid-in						Shares to be issued, preferred			Shares to be issued, common			Accumulated
		Shares		Amount		Shares		Amount		capital			Investment			shares			shares			deficit			Total

Balance at June 30, 2018		—		—		246,135,203		246,136		21,952,560			—			2,000,000			467,996			(34,859,799	)		(10,193,106	)
Shares issued for debts settlement		—		—		—		—		—						—			174,450			—			174,450
Reclass Derivative liability from conversion		—		—		—		—		2,715,433						—			—			—			2,714,433
Shares issued for conversions		—		—		27,301,360		27,301		845,558						—			—			—			872,859
Share issued for Cash		—		—		3,700,000		3,700		181,300						—			—			—			185,000
Shares issued for service compensation		—		—		2,971,154		2,971		194,529						—			—			—			197,500
Shares to be issued for service compensation		—		—		—		—		—						—			137,000			—			137,000
Shares to be issued for cash		—		—		—		—		—						—			95,000			—			95,000
Net Loss		—		—		—		—		—						—			—			(2,609,055	)		(2,607,053	)
Balance at September 30, 2018		—		—		280,107,717		280,109		25,888,378						2,000,000			874,446			(37,468,851	)		(8,425,919	)
Shares issued for debts settlement		—		—		6,632,605		6,633		603,965			—			—			(263,616	)		—			346,982
Reclass Derivative liability to equity from conversion		—		—		—		—		3,574,808			—			—			—			—			3,574,808
Shares issued for conversions		—		—		47,865,888		47,866		967,525			—			—			—			—			1,015,391
Initial valuation of BCF		—		—		—		—		149,143			—			—			—			—			149,143
Share issued for Cash		—		—		4,142,857		4,143		215,857			—			—			(220,000	)		—			—
Shares issued for service compensation		—		—		89,111,251		89,111		6,384,569			—			—			(390,830	)		—			6,082,851
Shares issued for LOI		—		—		10,000,000		10,000		1,165,000			—			—			—			—			1,175,000
Shares issued for Award - Bizright		—		—		200,000,000		200,000		17,800,000			(18,000,000	)		—			—			—			—
Shares issued for EB-5		2,000,000		2,000		—		—		1,998,000			—			(2,000,000	)		—			—			—
Net Loss		—		—		—		—		—			—			—			—			(6,033,380	)		(6,033,380	)
Balance at December 31, 2018		2,000,000		2,000		637,860,318		637,861		58,747,248			(18,000,000	)		—			—			(43,502,231	)		(2,115,125	)

	For the six months ended December 31,
	2019			2018
Cash flows from operating activities:
Net loss	$	(9,782,075	)	$	(8,642,432	)
Adjustments to reconcile net loss to cash flows from operating activities:
Initial valuation of debt discount		239,300			149,143
Loss on settlement		382,635			255,882
Gain on debt forgiveness		—			(16,649	)
Amortization of debt discount		330,192			565,978
Stock based compensation		6,041,550			5,097,206
Change in fair value of derivative liability		273,299			3,661,418
Amortization of Intangible Assets		700			700
Change in exercise of warrant		67,387			(25,920	)
Depreciation and amortization		46,189			26,578

Changes in assets and liabilities:
Accounts receivable		60,145			113,179
Inventory		(138,801	)		(49,226	)
Prepayment, deposits and other receivables		261,183			(54,876	)
Lease liability		(36,919	)		—
Accounts payable and accrued liabilities		5,955			(40,876	)
Customer deposits		(62,174	)		(118,974	)
Other assets		(35,000	)		—
Unearned revenue		(19,890	)		(89,344	)
Interest Payable		166,753			172,221
Right of use assets		39,169			—
Accrued interest and other payables		37,962			56,972

Net cash provided by (used in) operating activities		(2,122,441	)		1,060,980

Cash flows from investing activities:
Payment for property and equipment		—			(87,154	)

Net cash used in investing activities		—			(87,154	)

Cash flows from financing activities:
Proceeds from shares issuance		340,000			235,000
Proceeds from convertible debt		1,451,687			1,022,500
Proceeds (Repayment) from(to) loans		(22,555	)		(5,261	)
Payment to loan payable-related parties		105,000			25,634
Proceeds from advance share issuance		236,000			(2,121,000	)
Bank overdraft		5,907			—
Loan receivable		75,033			(13,151	)
Net cash provided by (used in) financing activities		2,191,072			(856,278	)

Net increase (decrease) in cash		68,631			117,550

Cash paid during the period for:
Cash, beginning of period		34,371			42,121
Cash, end of period	$	103,002		$	159,671

Supplemental disclosure of non-cash financing activities —
Shares issued for conversion of convertible debt		689,997			516,391
Reclassification from derivative liabilities to APIC		957,488			6,289,241
Debt discount related to convertible debt		951,581			1,888,248
Debts settled through shares issuance		229,000			1,292,544
Shares issued for award to Bizright and to be cancelled in future		(32,291,060	)		—
Shares issued for warrant exercise		28,381			—

Machinery equipment		5 years
Furniture and equipment		7 years
Vehicles		7 years

	Carrying Value		Fair Value Measurements at
	As of		December 31, 2018
	December 31,		Using Fair Value Hierarchy
	2018		Level 1		Level 2		Level 3
Liabilities
Derivative liabilities	$	1,734,338	$	—	$	—	$	1,734,338
Total	$	1,734,338	$	—	$	—	$	1,734,338

	June 30, 2018			December 31, 2018
Expected life (years)		0.5			0.5
Risk-free interest rate		2.06	%		2.56	%
Expected volatility		151	%		154	%

	For the periods ended				For the periods ended
	December 31, 2018		June 30, 2018		December 31, 2019		June 30, 2019
Prepaid Deposit	$	1,725,000	$	355,500	$	2,314,498	$	2,145,000
Prepaid Inventory		103,213		92,737		44,308		172,045
Employees Advance		46,303		41,303		—		16,052
Prepaid Expenses		89,726		246,260		97,768		358,702
Other		22,201		20,765		2,118		28,075
Total:	$	1,986,443	$	756,565	$	2,458,692	$	2,719,875

Balance						Conversion				Balance
as of		Default		Addition/		in		# of		as of			Interest			Conversion
06.30.2018		Penalty		(Repayment)		principal		shares		12.31.2018		Due Date	Rate			Price
	25,000		—		—		—		—		25,000	2/24/2013		14	%	75% of the average of 30 days prior to the conversion date.
	25,000		—		—		—		—		25,000	3/18/2013		14	%	75% of the average of 30 days prior to the conversion date.
	100,000		—		—		—		—		100,000	6/21/2013		14	%	75% of the average of 30 days prior to the conversion date.
	20,000		—		—		20,000		1,160,391		—	7/17/2017		10	%	40% discount of average price of last 20 trading days prices
	25,000		—		—		25,000		1,426,674		—	7/17/2017		8	%	40% discount of average two lowest price of last 20 trading days prices
	50,000		—		—		50,000		2,931,188		—	8/8/2017		8	%	40% discount of average two lowest price of last 20 trading days prices
	80,000		—		—		80,000		4,530,846		—	7/20/2017		8	%	40% discount of average two lowest price of last 20 trading days prices
	66,023		—		—		66,023		3,712,324		—	8/24/2017		8	%	40% discount of average two lowest price of last 20 trading days prices
	50,000		—		—		50,000		2,390,805		—	8/9/2017		8	%	40% discount of average two lowest price of last 20 trading days prices

75,000	—	—	75,000	4,378,547	—	7/31/2017	8	%	40% discount of average two lowest price of last 20 trading days prices
124,318	—	—	63,567	3,919,404	60,751	12/1/2017	10	%	45% discount of lowest price of last 20 trading days prices
70,000	—	—	70,000	4,067,072	—	9/23/2017	8	%	40% discount of average two lowest price of last 20 trading days prices
30,000	—	—	30,000	1,500,010	—	8/16/2017	8	%	Greater of 40% discount to average of 3 lowest trading price during last 20 trading days or $.05
200,000	—	—	200,000	11,557,652	—	9/30/2017	8	%	40% discount of average two lowest price of last 20 trading days prices
921,004	—	—	525,000	17,521,702	396,004	5/12/2018	22	%	45% discount of lowest price of last 20 trading days prices
150,000	—	—	150,000	3,745,330	—	5/3/2018	10	%	45% discount to average of 3 lowest trading price during last 20 trading days
164,900	—	—	164,900	6,596,000	—	7/17/2018	8	%	The conversion price shall be $0.025 per share
35,000	—	—	35,000	691,184	—	8/22/2018	8	%	40% discount of average two lowest price of last 20 trading days prices

15,000	—	—	15,000	294,114	—	9/26/2018	8	%	40% discount of average two lowest price of last 20 trading days prices
50,000	—	—	50,000	1,000,000	—	12/7/2018	8	%	The conversion price shall be $0.05 per share
—	—	267,500	—	—	267,500	9/15/2019	8	%	55% discount of lowest price of last 20 trading days prices
—	—	250,000	—	—	250,000	10/5/2019	8	%	45% discount of average three lowest price of last 20 trading days prices
—	—	100,000	—	—	100,000	10/31/2019	8	%	The conversion price shall be $0.07 per share
—	—	80,000	—	—	80,000	11/15/2019	8	%	The conversion price shall be $0.07 per share
—	—	40,000	—	—	40,000	11/15/2019	8	%	The conversion price shall be $0.07 per share
—	—	35,000	—	—	35,000	12/2/2019	8	%	The conversion price shall be $0.07 per share
—	—	250,000	—	—	250,000	12/26/2019	8	%	45% discount of average three lowest price of last 20 trading days prices
2,426,245		1,022,500	1,819,490	75,167,248	1,629,255

Note Date	Due Date	OID	Amortization in FY 2018	Debt Discount Balance at 6/30/2018	Amortization in 6 months ended 12/31/2018	Debt Discount Balance at 12/31/2018
8/22/2017	8/22/2018	$35,000	$29,918	$5,082	$5,082	$—
9/26/2017	9/26/2018	15,000	11,384	3,616	3,616	—
7/17/2017	7/17/2018	164,900	160,445	4,455	4,455	—
12/7/2017	12/7/2018	50,000	36,849	13,151	13,151	—
9/20/2018	9/15/2019	12,500	—	—	3,542	8,958
9/20/2018	9/15/2019	250,000	—	—	70,833	179,167
10/5/2018	10/5/2019	5,000	—	—	1,192	3,808
10/5/2018	10/5/2019	245,000	—	—	58,397	186,603
11/1/2018	11/1/2019	84,286	—	—	13,855	70,431
11/16/2018	11/16/2019	36,571	—	—	4,509	32,063
11/16/2018	11/16/2019	18,286	—	—	2,254	16,031
12/3/2018	12/3/2019	10,000	—	—	767	9,233
12/26/2018	12/26/2019	5,000	—	—	68	4,932
12/26/2018	12/26/2019	245,000	—	—	3,356	241,644
Total:			$41,302	$26,303	$185,077	$752,869

	December 31, 2019
Annual dividend yield		—
Expected life (years)		0.5-1.00
Risk-free interest rate		1.51-2.09	%
Expected volatility		121-153	%

	~~September 30, 2018~~
~~Annual dividend yield~~		—
~~Expected life (years)~~		~~0.5-1.00~~
~~Risk-free interest rate~~		~~2.15-2.37~~	%
~~Expected volatility~~		87-123	%

	~~June 30, 2018~~
~~Annual dividend yield~~	—
~~Expected life (years)~~	~~0.15-1.00~~
~~Risk-free interest rate~~	~~1.08-2.12~~	%
~~Expected volatility~~	~~103-202~~	%

Beginning Balance, June 30, ~~2018~~2019	$~~3,069,616~~2,991,953
Additions	~~427,076~~3,538,927
Mark to Market	~~1,641,457~~2,314,089
Reclassification to APIC due to conversions	~~(2,714,433)~~
~~Balance, September 30, 2018~~	~~$2,423,716~~
~~Additions~~	~~865,503~~
~~Mark to Market~~	~~2,019,927~~
~~Reclassification to APIC due to conversions~~	~~(3,574,808)~~(957,488)
Balance, December 31, ~~2018~~2019	$~~1,734,338~~3,259,345

~~Warrants liability~~	~~December 31, 2018~~
~~Annual dividend yield~~		—
~~Expected life (years)~~		~~0.5~~
~~Risk-free interest rate~~		~~2.45~~	%
~~Expected volatility~~		~~138~~	%

~~Warrants issued in May 2017~~		~~June 30, 2018~~
~~Annual dividend yield~~		—
~~Expected life (years)~~		~~0.5~~
~~Risk-free interest rate~~		~~2.06~~	%
~~Expected volatility~~		~~151~~	%

	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining contractual life
Outstanding at June 30, 2016		131,250	$	0.20
Expired		131,250		0.20		4
Granted		505,000	$	0.15		3.86
Outstanding at June 30, 2017		505,000		0.20
Exercised		—		—
Granted		—	$	—
Outstanding at June 30, 2018		505,000	$	0.15		0.5
Granted		—		—
Exercised		—		—
Outstanding at December 31, 2018		505,000	$	0.15		0.5

Six Months Ended
December 31, 2019
Lease Cost
Operating lease cost (included in general and administration in the Company’s unaudited condensed statement of operations)	$	74,988

Other Information
Cash paid for amounts included in the measurement of lease liabilities for the six months ended December 31, 2019	$	72,738
Remaining lease term – operating leases (in years)		3.17
Average discount rate – operating leases		10%
The supplemental balance sheet information related to leases for the periods are as follows:
Operating leases
Right-of-use assets	$	416,421
Total operating lease assets	$	416,421

Short-term operating lease liabilities	$	110,824
Long-term operating lease liabilities	$	318,083
Total operating lease liabilities	$	428,907

Maturities of the Company’s lease liabilities are as follows:

Period ending June 30,	Operating
Period ending June 30,	Lease
2020		$ 146,932
2021		151,344
2022		155,888
2023		105,984
Total lease payments		560,148

Less: Imputed interest/present value discount		104,558
Present value of lease liabilities		$ 455,590

	For the three months ended						For the three months ended
	December 31,						December 31,
	2018			2017			2019			2018

Net Sales		1,445,269			938,754			720,810			1,445,269
Cost of Goods Sold:		1,071,033			657,249			435,690			1,071,033
Gross profit		374,236			281,505			285,120			374,236
Operating Expenses		3,823,085			1,033,316			7,215,933			3,823,085
Loss From Operations		(3,448,849	)		(751,811	)		(6,930,814	)		(3,448,849	)
Other non-operating Income (Expense):		(2,584,531	)		(5,223,504	)		(823,710	)		(2,584,531	)
Net Income (Loss)		(6,033,380	)		(5,975,315	)		(7,754,524	)		(6,033,380	)

	For the six months ended						For the six months ended
	December 31,						December 31,
	2018			2017			2019			2018

Net Sales		$2,886,885			2,115,968			1,474,784			2,886,885
Cost of Goods Sold:		2,130,452			1,510,199			927,858			2,130,452
Gross profit		756,433			605,769			546,925			756,433
Operating Expenses		4,736,957			2,052,304			8,419,563			4,736,957
Loss From Operations		(3,980,524	)		(1,446,535	)		(7,872,637	)		(3,980,524	)
Other non-operating Income (Expense):		(4,661,909	)		(5,618,114	)		(1,909,438	)		(4,661,909	)
Net Income (Loss)		(8,642,433	)		(7,064,649	)		(9,782,075	)		(8,642,433	)

Exhibit No.		Description
31.1	(1)	Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	(1)	Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1	(1)	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS*	(1)	XBRL Instance Document

101.SCH*	(1)	XBRL Taxonomy Extension Schema

101.CAL*	(1)	XBRL Taxonomy Extension Calculation Linkbase

101.DEF*	(1)	XBRL Taxonomy Extension Definition Linkbase

101.LAB*	(1)	XBRL Taxonomy Extension Label Linkbase

101.PRE*	(1)	XBRL Taxonomy Extension Presentation Linkbase

	Sugarmade, Inc., a Delaware corporation

February ~~21, 2019~~19, 2020	By:	/s/ Jimmy Chan
		Jimmy Chan
		CEO, CFO, and Director