UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended:December 31, 20192020

 

[  ]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)

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

(888) 982-1628

(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading Symbol(s)Name of each exchange on which registered
N/AN/AN/A

 

Indicate by check mark whether the issuerregistrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the pastpreceding 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 [X] 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 [X] 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[X]Smaller reporting company[X]
  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 [X] 

 

At February 17, 2020,19, 2021, there were 713,207,8114,137,094,799 shares of common 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, 20192020

 

TABLE OF CONTENTS

 

PART I: Financial Information 
    
Item 1 Financial Statements1
  Condensed Consolidated Balance Sheets as of December 31, 20192020 (unaudited) and June 30, 20192020 (audited)1
  Condensed Consolidated Statements of Operations for three and six months ended December 31, 2020 and 2019 and 2018 (unaudited)2
  Condensed Consolidated Statements of Equity for the three and six months ended December 31, 2020 and 2019 and 2018 (unaudited)3
  Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2020 and 2019 and 2018 (unaudited)4
  Notes to Condensed Consolidated Financial Statements (unaudited)5
Item 2 5
Item 2Management’s Discussion and Analysis of Financial Condition and Results of Operations30
Item 3 25
Item 3Quantitative and Qualitative Disclosures about Market Risk39
Item 4 28
Item 4Controls and Procedures2839
    
PART II: Other Information 
    
Item 1 Legal Proceedings40
Item 1ARisk Factors40
Item 2 29
Item 2Unregistered Sales of Equity Securities and Use of Proceeds40
Item 3 29
Item 3Defaults upon Senior Securities40
Item 4 29
Item 4Mine Safety Disclosures40
Item 5 29Other Information40
Item 56 Other Information29
Item 6Exhibits3041
    
Signatures3142

 

 

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. OurThese factors, risks and uncertainties can be found in Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2020, as the same may be updated from time to time, including in Part II, Item 1A, “Risk Factors,” of this Quarterly Report on Form 10-Q. Although we believe the expectations reflected in our forward-looking statements are based upon reasonable assumptions, it is not possible to foresee or identify all factors that could have a material effect on the information currently available to usfuture financial performance of the Company. The forward-looking statements in this report are made on the basis of management’s assumptions and speak onlyanalyses, as of the datetime the statements are made, in light of their experience and perception of historical conditions, expected future developments and other factors believed to be appropriate under the circumstances. Except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this Quarterly Report on Form 10-Q and the cover of this quarterly report, or, in the case of forward-looking statements in documentsinformation 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 statementsin this report to reflect new informationany change in our expectations with regard thereto or futureany change in events, conditions 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,circumstances on which you should review carefully. Please consider our forward-looking statements in light of those risks as you read this quarterly report.any statement is based.

 

 

PART 1: Financial Information

Item 1 Financial Statements

Sugarmade, Inc. and Subsidiary
Condensed Consolidated Balance Sheets

 

  December 31, 2019 June 30, 2019
Assets (Unaudited)  
Current assets:    
Cash $103,002  $34,371 
Accounts receivable, net  158,000   218,145 
Inventory, net  495,086   356,285 
Loan receivables  10,500   85,533 
Other current assets  2,458,692   2,719,875 
         
Total current assets  3,225,281   3,414,209 
         
Equipment, net  430,396   476,585 
Intangible assets, net  10,500   11,200 
Other assets  58,970   23,970 
Right of Use Assets – Non-Current  416,421   —   
Advanced to Investments      18,000,000 
         
Total assets $4,141,568  $21,925,965 
         
Liabilities and Stockholders’ Equity (Deficiency)        
Current liabilities:        
Note payable due to bank $25,982  $25,982 
Bank overdraft  5,907   —   
Accounts payable and accrued liabilities  1,427,098   1,431,379 
Customer deposits  222,284   287,789 
Customer Overpayment  —     42,307 
Unearned revenue  87,420   61,672 
Other payable  458,412   420,450 
Accrued interest  637,389   507,218 
Accrued compensation and personnel related payables  24,528   24,528 
Note Payable  20,000   20,000 
Notes payable – related parties  18,000   18,000 
Loans payable  192,030   214,585 
Loans payable – related parties  135,000   30,000 
Convertible notes payable, net  1,378,221   1,046,909 
Derivative liabilities  3,259,345   2,991,953 
Warrants liabilities  15,663   24,658 
Shares to be issued  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  8,598,185   7,247,431 
         
Stockholders’ equity (deficiency):        
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  83,472,375   61,038,875 
Shares to be cancelled, common shares  (21,566,046)  —   
Shares to be cancelled, preferred shares  (10,725,014)  —   
Shares to be issued, common shares  100,000   29,000 
Accumulated deficiency  (56,871,025)  (47,088,950)
         
Total stockholders’ equity (deficiency)  (4,456,617)  14,678,534 
         
Total liabilities and stockholders’ equity (deficiency) $4,141,568  $21,925,965 
  For the Period Ended 
  December 31, 2020  June 30, 2020 
  (Unaudited)   
Assets      
Current assets:        
Cash 360,550  441,004 
Accounts receivable, net  11,546   134,517 
Inventory, net  617,855   679,471 
Loan receivables, current     1,365 
Loan receivables - related party, current  15,276   122,535 
Other current assets  963,261   263,404 
Right of use asset, current  231,685   270,363 
Total current assets  2,200,173   1,912,659 
Noncurrent assets:        
Equipment, net  360,345   499,047 
Intangible asset, net  9,100   9,800 
Other assets  54,163   54,163 
Loan receivables - related party, noncurrent  196,000   196,000 
Right of use asset, noncurrent  610,864   835,393 
Investment to Indigo Dye  

564,818

    
Total noncurrent assets  1,795,290   1,594,403 
Total assets  3,995,463   3,507,062 
         
Liabilities and Stockholders’ Deficiency        
Current liabilities:        
Note payable due to bank  25,982   25,982 
Accounts payable and accrued liabilities  1,390,289   1,583,228 
Customer deposits  589,654   466,337 
Customer overpayment  61,886   47,890 
Unearned revenue  57,157   53,248 
Other payables  950,187   691,801 
Accrued interest  500,281   494,740 
Accrued compensation and personnel related payables  27,028   35,361 
Notes payable - Current  20,000   20,000 
Notes payable - Related Parties, Current  15,427   15,427 
Lease liability - Current  236,527   372,285 
Loans payable - Current  450,589   319,314 
Loan payable - Related Parties, Current  576,225   35,943 
Convertible notes payable, Net, Current  1,651,430   1,740,122 
Derivative liabilities, net  1,595,186   5,597,095 
Warrants liabilities  9,521   79,910 
Shares to be issued  167,577   101,577 
Total current liabilities  8,324,947   11,680,260 
Non-Current liabilities:        
Loans payable  269,900   197,946 
Lease liability  641,687   767,729 
Total liabilities  9,236,534   12,645,935 
         
Stockholders’ deficiency:        
Preferred stock, $0.001 par value, 10,000,000 shares authorized 1,541,500 and 3,541,500 shares issued outstanding at December 31, 2020 and June 30, 2020  1,542   3,542 
Common stock, $0.001 par value, 10,000,000,000 shares authorized, 3,616,507,670 and 1,763,277,230 shares issued and outstanding at December 31, 2020 and June 30, 2020, respectively  3,616,509   1,763,278 
Additional paid-in capital  59,718,392   57,307,767 
Common Stock Subscribed  236,008   236,008 
Accumulated deficit  (68,813,520)  (68,438,332)
Total stockholders’ deficiency  (5,241,070)  (9,127,737)
Non-Controlling Interest     (11,136)
Total stockholders’ deficiency  (5,241,070)  (9,138,873)
Total liabilities and stockholders’ deficiency  3,995,463   3,507,062 

 

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

 

-1-

 -1-

Sugarmade, Inc. and Subsidiary


Condensed Consolidated Statements of Operations

(Unaudited)

 

 For the Three Months Ended December  31 For the Six Months Ended December  31
 2019 2018 2019 2018 For the Three Months Ended, For the Six Months Ended, 
         December 31, 2020  December 31, 2019  December 31, 2020  December 31, 2019 
Revenues, net $720,810  $1,445,269  $1,474,784  $2,886,885  $300,652  $720,810  $2,446,979  $1,474,784 
                
Cost of goods sold  435,690   1,071,033   927,858   2,130,452   242,531   435,690   1,272,429   927,858 
                
Gross profit  285,120   374,236   546,925   756,433   58,122   285,120   1,174,550   546,926 
                                
Selling, general and administrative expenses  7,215,933   3,823,085   8,419,563   4,736,957   271,549   523,890   875,358   859,720 
                
Advertising and Promotion Expense  682   16,127   278,587   57,483 
Marketing and Research Expense  93,908   74,475   316,256   79,446 
Professional Expense  115,615   467,170   619,045   1,147,266 
Salaries and Wages  105,700   104,722   464,474   234,098 
Stock Compensation Expense  47,250   6,029,550   66,000   6,041,550 
Loss from operations  (6,930,814)  (3,448,849)  (7,872,637)  (3,980,524)  (576,581)  (6,930,814)  (1,445,170)  (7,872,637)
                                
Non-operating income (expense):                                
Other income  1,867   1,451   3,098   5,101   3,142   1,867   3,142   3,098 
Gain in loss of control of VIE  313,928   -   313,928   - 
Interest expense  (735,196)  (460,102)  (1,319,800)  (741,480)  (728,197)  (735,196)  (1,194,972)  (1,319,800)
Bad debts  (130,467)  -   (132,979)  - 
Change in fair value of derivative liabilities  1,291,168   (2,019,927)  2,314,046   (3,661,383)  496,961   1,291,168   3,992,108   2,314,046 
Warrant Expense  —     3,195   (55,278)  25,920   4,174   -   70,389   (55,278)
Loss on notes conversion  (184,626)  —     (184,626)  8,763   -   (184,626)  -   (184,626)
Loss on settlement  (232,776)  (94,207)  (382,635)  (255,882)  (5,000)  (232,776)  (80,000)  (382,635)
Gain on asset disposal  —     —     7,000   —     -   -   -   7,000 
Amortization of debt discount  (963,407)  (31,591)  (2,118,407)  (59,597)  (1,031,379)  (963,407)  (1,845,925)  (2,118,407)
Debt forgiveness      16,649   (172,096)  16,649   -   -   -   (172,096)
Miscellaneous  (740)  —     (740)  —   
Other expenses  (862)  (740)  (53,595)  (740)
Total non-operating expenses, net  (1,077,702)  (823,710)  1,072,095   (1,909,438)
Equity Method Investment Loss  (2,114)      (2,114)    
Net loss $(1,656,397) $(7,754,524) $(375,189) $(9,782,075)
                                
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)
Less: net loss attributable to the noncontrolling interest $-  $-  $-  $- 
Net loss attributable to SugarMade Inc. $(1,656,397) $(7,754,524) $(375,189) $(9,782,075)
                                
Basic net income (loss) per share $(0.04) $(0.02) $(0.01) $(0.03) $(0.00) $(0.04) $(0.00) $(0.01)
Diluted net income (loss) per share $(0.04) $(0.02) $(0.01) $(0.03) $(0.00) $(0.04) $(0.00) $(0.01)
                                
Basic and diluted weighted average common shares outstanding *  191,886,785   393,670,334   880,355,944   330,029,294   3,233,135,446   191,886,785   2,864,951,348   880,355,944 

 

* 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 unaudited condensed unaudited consolidated financial statements.

 

 -2-

-2-

Sugarmade, Inc. and Subsidiary

Condensed Consolidated Statements of Equity

(Unaudited)

 

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)

  Preferred Stock  Common stock  

Additional

paid-in

  

Shares to be

cancelled,

preferred

  

Shares to be

cancelled,

common

  

Common

Shares

  Accumulated  

Total

Shareholders’

 
  Shares  Amount  Shares  Amount  capital  shares  shares  Subscribed  deficit  Equity 
                               
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   71,916   475,917   -   -   -   -   547,833 
Share issued for Cash  -   -   11,348,591   11,349   88,651   -   -   -   -   100,000 
Shares issued for Warrant Exercise  -   -   28,371,818   28,382   (14,249)  -   -   -   -   14,133 
Net Loss  -   -   -   -   -   -   -   -   (2,027,551)  (2,027,551)
Balance at September 30, 2019  2,000,000   2,000   810,244,536   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     1,129,916,122     1,129,927   83,472,375     (10,725,014)    (21,566,046)  100,000   (56,871,025)  (4,456,617)

 

  Preferred Stock  Common stock  

Additional

paid-in

  

Shares to

be

cancelled,

common

  

Common

Shares

  Accumulated  

Non

Controlling

  

Total

Shareholders’

 
  Shares  Amount  Shares  Amount  capital  shares  Subscribed  deficit  Interest  Equity 
                               
Balance at June 30, 2020    3,541,500   3,542     1,763,277,230     1,763,278     57,307,767         -   236,008     (68,438,331)  (11,136)         (9,138,871)
Reclass Derivative liability to equity from conversion  -   -   -   -   1,805,188   -   -   -   -   1,805,188 
Shares issued for conversions  -   -   1,081,411,606   1,081,412   192,048   -   -   -   -   1,273,459 
Repayment of capital to noncontrolling minority  -   -   -   -   -   -   -   -   (24,000)  (24,000)
Net Loss  -   -   -   -   -   -   -   1,278,812   1,165   1,279,976 
Balance at September 30, 2020  3,541,500   3,542   2,844,688,836   2,844,690   59,305,003   -   236,008   (67,159,519)  (33,971)  (4,804,248)
Reclass Derivative liability to equity from conversion  -   -   -      531,591   -   -   -   -   531,591 
Shares issued for conversions  -   -   411,171,815   411,172   (90,293)  -   -   -   -   320,879 
Preferred stock conversions  (2,000,000)  (2,000)  360,647,019   360,647   141,353   -   -   -   -   500,000 
Reclassification due to deconsolidation of VIE  -   -   -   -   (169,262)  -   -   2,396   33,971   (132,895)
Net Loss  -   -   -   -   -   -   -   (1,656,397)  -   (1,656,397)
Balance at December 31, 2020  1,541,500   1,542   3,616,507,670   3,616,509   59,718,392   -   236,008   (68,813,520)  -   (5,241,070)

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

 

-3-

 -3-

Sugarmade, Inc. and Subsidiary

Condensed Consolidated Statements of Cash Flows For

The Six Months Ended December 31, 2020 and 2019

(Unaudited)

 

 For The Six Months Ended 
 

For the six months ended

December 31,

 December 31, 
 2019 2018 2020  2019 
Cash flows from operating activities:                
Net loss $(9,782,075) $(8,642,432) $(375,189) $(9,782,075)
Non-controlling interest       
Adjustments to reconcile net loss to cash flows from operating activities:                
Initial valuation of debt discount  239,300   149,143 
Iniatial valuation of debt discount     239,300 
Loss on settlement  382,635   255,882   80,000   382,635 
Gain on debt forgiveness  —     (16,649)
Gain on loss of control of VIE  (313,928)   
Return on EB5 Investment  500,000    
Amortization of debt discount  330,192   565,978   1,845,925   330,192 
Stock based compensation  6,041,550   5,097,206   66,000   6,041,550 
Change in fair value of derivative liability  273,299   3,661,418   (3,992,108)  273,299 
Amortization of Intangible Assets  700   700 
Change in exercise of warrant  67,387   (25,920)  (70,389)  67,387 
Depreciation and amortization  46,189   26,578 
Depreciation  44,684   46,189 
Amortization of intangible assets  700   700 
Change in financing cost  316,261    
                
Changes in assets and liabilities:                
Accounts receivable  60,145   113,179   122,971   60,145 
Inventory  (138,801)  (49,226)  (83,253)  (138,801)
Prepayment, deposits and other receivables  261,183   (54,876)  (855,878)  261,183 
Lease liability  (36,919)  —   
Other assets     (35,000)
Other payables  404,993   37,962 
Accounts payable and accrued liabilities  5,955   (40,876)  465,435   5,955 
Customer deposits  (62,174)  (118,974)  137,313   (62,174)
Other assets  (35,000)  —   
Unearned revenue  (19,890)  (89,344)  3,909   (19,890)
Right of use assets  119,483   39,169 
Lease liability  (118,078)  (36,919)
Investment to Indigo Dye  

(564,818

)  

 
Interest Payable  166,753   172,221   98,780   166,753 
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 
Net cash used in operating activities  (2,167,187)  (2,122,441)
                
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      340,000 
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   —        5,907 
Loan receivable  75,033   (13,151)  (13,911)  75,033 
Net cash provided by (used in) financing activities  2,191,072   (856,278)
Loan receivable - related parties  38,044    
Proceeds from advanced shares issuance     236,000 
Proceeds (Repayment) from(to) loans payable - related parties  540,281   105,000 
Proceeds from convertible notes  1,804,900   1,451,687 
Repayment of convertible notes  (227,700)   
Reduction of cash due to Indigo Dye deconsolidation  

(326,811

)  

 
Proceeds (Repayment) from(to) loans  271,929   (22,555)
        
Net cash provided by financing activities  2,086,732   2,191,072 
                
Net increase (decrease) in cash  68,631   117,550   (80,455)  68,631 
                
Cash paid during the period for:                
Cash, beginning of period  34,371   42,121   441,004   34,371 
Cash, end of period $103,002  $159,671  $360,550  $103,002 
                
Supplemental disclosure of non-cash financing activities —                
Shares issued for conversion of convertible debt  689,997   516,391   1,594,338   689,997 
Reclassification from derivative liabilities to APIC  957,488   6,289,241 
Reduction in derivative liability due to conversion  2,336,779   957,488 
Debt discount related to convertible debt  951,581   1,888,248   2,010,717   951,581 
Debts settled through shares issuance  229,000   1,292,544      229,000 
Shares issued for award to Bizright and to be cancelled in future  (32,291,060)  —        (32,291,060)
Shares issued for warrant exercise  28,381   —        28,381 

 

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

 

-4-

 -4-

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 20192020

 

1.Nature of Business

 

Sugarmade, Inc. (hereinafter referred to as’‘we’’, ’‘us”as “we,” “us” or “the/our Company’’“Company”) is a publicly tradedpublicly-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, SWC Group, Inc., a California corporation (“SWC’’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 December 31, 2020, we operated our business in the following three segments:

1)Paper and paper-based products: The supply of consumable products to the quick-service restaurant sub-sector of the restaurant industry, and as an importer and distributor of non-medical personal protection equipment to business and consumers, via our CarryOutSupplies.com subsidiary (“Carryout Supplies”). Carryout Supplies is a producer and wholesaler of custom printed and generic supplies, servicing more than 2,000 quick-service restaurants. The primary products are plastic cold cups, paper coffee cups, yogurt cups, ice cream cups, cup lids, cup sleeves, edible packaging, food containers, soup containers, plastic spoons, and similar products for this market sector. This subsidiary, which was formed in 2009, was recently expanded to also offer non-medical personal protective equipment.
2)Non-medical supplies: Beginning in 2020, we sell non-medical personal protective equipment through Carryout Supplies.
3)Cannabis products delivery service and sales: As a joint owner in the Budcars licensed cannabis delivery service brand (“Budcars” or the “Budcars Brand”). Budcars operates a licensed cannabis delivery service in the Sacramento, California area. During early 2020, the Company gained a 40% stake in the Budcars Brand and in the Sacramento delivery operations via acquiring a 40% stake in Indigo Dye Group (“Indigo”). Under the terms of the agreement with Indigo, Sugarmade acquired an option to purchase an additional 30% interest in Budcars. Upon exercise of this option, the Company would acquire a controlling interest in Indigo. As of December 31, 2020, the option has not yet been exercised and the Company’s stake in Budcars was at 40%. Starting on October 1, 2020, the Company plans to open new locations via purchasing equity in other Brand/Franchises to cover delivery for the entire California. Therefore, the Company is not likely at this time to exercise its option to acquire the additional 30% interest in Indigo. In addition, the Company is no longer involved in day-to-day operations of Indigo and going forward, the Company intends to pursue cannabis delivery independent of Indigo. As of October 1, 2020, the Company ceased to have control over the day-to-day business of Indigo and it was deconsolidated and recorded as an investment in nonconsolidated affiliate at its $505,449 estimated fair value and changed to equity method of accounting. Pursuant to the terms of the Indigo agreement, if the Company determines, in its discretion not to continue to make monthly payments, its 40% ownership interest in Indigo will be decreased according to the payment then made. During the quarter ended December 31 ,2020, if the Company makes no additional payments, it will hold approximately 33% of the ownership of Indigo. See Note 5 and Note 6.

Subsequent to the end of the December reporting period, September 30, 2019, we were involved in two businesses includingSugarmade became a joint owner of Nug Avenue, Inc., a California corporation (“Nug Avenue”), which operates a licensed and regulated cannabis delivery service out of Lynwood, California, serving the supplygreater Los Angeles Metropolitan area (the “Lynwood Operations”). The Company currently owns a majority stake of productsseventy percent (70%) of Nug Avenue’s Lynwood Operations and holds first rights of refusal on Nug Avenue’s business expansion relative 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 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.

During December 2017, the Company entered into a 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 transaction had been closed on October 30, 2019. On January 15, 2020, the Company entered into a Rescission and Mutual Release Agreement (“Agreement”) with each of the parties agreeing to rescind the transaction and return all consideration exchanged pursuant to the Stock Exchange Agreement.

In October 2018 and January 2019, the Company had intents to acquire two suppliers or retailers of hydroponic equipment. As of the date of this report, the Company is no longer pursuing these acquisitions.marketplace.

 

-5-

 -5-

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 20192020

 

2.Summary of Significant Accounting Policies

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 (“GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) 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, 2019,2020, 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 fiscal year ended June 30, 2019.2020. The interim results for the period ended December 31, 20192020 are not necessarily indicative of the results for the full fiscal year.

 

Principles of consolidation

The unaudited condensed consolidated unaudited financial statements include the accounts of our Company and itsSWC, the Company’s wholly-owned subsidiaries, SWC Group Inc.subsidiary. 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, 2019 and for the fiscal year ended June 30, 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 unaudited 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 unaudited 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 endeavoringendeavors to increase revenue-generating operations. While the Company’s priority is on generating cash from operations, through the sale of the Company’s products, management is also seekingseek 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.

 

-6-

 -6-

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 20192020

 

2.Summary of Significant Accounting Policies (continued)

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of AmericaGAAP 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 (“FASB”) Accounting Standards Codification (“FASB ASC’’) No. 606, Revenue Recognition. Sugarmade 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 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 $158,000 as of December 31, 2019 and of $218,145 as of June 30, 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.

 -7-

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, 2019 and June 30, 2019, the balance for the inventory totaled $495,086 and $356,285, respectively. Obsolescence reserve at December 31, 2019 and June 30, 2019 were $10,580 and $120,486, respectively.

Property and equipment

 

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:

 

Machinery and equipment 53-5 years
Furniture and equipment 7 years
Vehicles 75 years
Leasehold improvements5 years

 

Expenditures for renewals and betterments are capitalized while repairs and maintenance costs are normally charged to the statement of 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, 20192020 and 2018.2019.

 

-7-

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2020

2.Summary of Significant Accounting Policies (continued)

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'sasset’s expected future discounted cash flows or market value, if readily determinable. Based on its review, the Company, as of June 30, 2019,2020, performed an impairment test of all of its intangible assets. Based on the company’sCompany’s analysis, the company had an amortization of intangible assets of $700 for the six months ended December 31, 20192020 and 2018,2019, respectively.

 

-8-

 -8-

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 20192020

 

2.Summary of Significant Accounting Policies (continued)

Leases

 

In February 2016, the FASB established Topic 842, Leases, by issuing ASUAccounting Standards Update (“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)(“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.

Under ASC 840, leases were classified as either capital or operating, and the classification significantly impacted the effect the contract had on the company’s financial statements. Capital lease classification resulted in a liability that was recorded on a company’s balance sheet, whereas operating leases did not impact the balance sheet. After the new adoption, $455,590$1,105,755 of operating lease right-of-use asset and $465,826$1,140,041 of operating lease liabilities were not retroactively reflected toon the Company’s June 30, 20192020 financial statements and $416,421$842,549 of operating lease right-of-use asset and $428,907$878,214 of operating lease liabilities were reflected toon the Company’s December 31, 20192020 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.

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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

 -9-

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 20192020

 

2.Summary of Significant Accounting Policies (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, 2019.

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 freerisk-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.

 

Earnings (LossLoss) per share

We calculate basic earnings (loss) per share (“EPS”) by dividing our net lossincome (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 3 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, 2019.2020.

 

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 -10-

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 20192020

 

2.Summary of Significant Accounting Policies (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 asAs of December 31, 2020 substantially all of itsthe Company’s operations arewere conducted in onethree industry segmentsegments (1) paper and paper-based products such as paper cups, cup lids, food containers, etc., which accounted for approximately 24% of the Company’s revenues as of December 31, 2020; (2) non-medical supplies such as non-medical fascial masks, which accounted for approximately 3% of the Company’s total revenues as of December 31, 2020; (3) cannabis products delivery service and sales, which accounted for approximately 73% of the Company’s total revenues as of December 31, 2020.

 

New accounting pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (“ROU”)an 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 have adopted this ASU on the consolidated financial statements in the quarter ended September 30, 2019.

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes”. The pronouncement simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740, “Income Taxes”. The pronouncement also improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 will be effective for us beginning in the first quarter of fiscal 2021, with early adoption permitted. We are still evaluating the impact this guidance will have on our consolidated financial statements.

In January 2020, the FASB issued ASU No. 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivative and Hedging (Topic 815), which clarifies the interaction of rules for equity securities, the equity method of accounting, and forward contracts and purchase options on certain types of securities. The guidance clarifies how to account for the transition into and out of the equity method of accounting when considering observable transactions under the measurement alternative. The ASU is effective for annual reporting periods beginning after December 15, 2020, including interim reporting periods within those annual periods, with early adoption permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements.

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Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2019. 2020

 

3.Concentration

Customers

For the six months ended December 31, 20192020 and 2018,2019, our Company earned net revenues of $1,474,784$2,446,979 and $2,886,885$1,474,784 respectively. The vast majority of these revenues for the period endingended December 31, 20192020 were derived from a large number of customers, whereas the vast majority of these revenues for the period endingended December 31, 20182019 were derived from a limited number of customers. No customersThere was one customer that accounted for over 10%approximately 13.9% of the Company’s total revenues for the period ended December 31, 2019.2020.

 

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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 monthsperiod ended December 31, 2019 and 2018,2020, we purchased products for sale by the Company’s subsidiary from several contract manufacturers located in Asia and the U.S. A substantial portion of the Company'sCompany’s inventory was purchased from two (2) suppliers. The two suppliers accounted for 25.5% and 16.20%, respectively, of the Company’s total inventory purchase for the period ended December 31, 2020.

For the period ended December 31, 2019, we purchased products for sale by the company’s subsidiaries 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 38.63%31.21% and 38.38%17.80% of the Company'sCompany’s total inventory purchase for the six monthsperiod ended December 31, 2019, and 2018, respectively.

 

4.Equity Transaction - Exclusive License Rights and AcquisitionVIE

 

On December 13, 2017, we entered into a Master Marketing Agreement with BizRight, LLC (“BizRight”), 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.

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 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 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 BZRTH, Inc., a Nevada corporation (“BZRTH”) pursuant to a Stock Exchange Agreement. 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.

As of December 31, 2019, cash of $870,000 and 249 million shares of the Company’s common stock had been paid and issued in connection with the acquisition.

On January 15,February 7, 2020, the Company entered into a Rescissionshare sale and Mutual Release Agreement (“purchase agreement (the “Indigo Agreement”) with eachIndigo Dye Group Corp. (“Indigo”), a corporation located in Sacramento, California. Indigo carries on business as a cannabis seller and delivery business under the name BudCars. The major Cannabis Products include Flower, Edibles, Vape Cartridges, Pre-Rolls, & Concentrates, etc. All the products are finished goods. In addition, Indigo is operating a non-store front retail delivery business (Type-9 License# C9-0000286) in California.

Pursuant to the terms 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 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 theIndigo Agreement, the Company agree to invest $700,000 (the “Investment”) into Indigo for inventory, equipment, and marketing expenses. The Investment shall be made in twelve monthly equal installments of $58,333 with the acceleration of the payment schedule possible depending on business growth, cash flow needs and capital availability.

In exchange, the Company received 40% of Indigo’s issued shares. upon execution of the final agreement. The value used for this transaction is $1,750,000 and each percentage (1%) of the company is worth $17,500. In the event that the Company is not able to make a payment of $58,333 in any month, it will retainhave 90 days to cure the default. On the 91st day the investment plan will cease and the amount of invested capital will be calculated based on an enterprise value of $1,750,000 or will receive 102,248 shares$17,500 per 1% of owned equity.

In addition, subject to the terms and conditions of the Indigo Agreement, the Company has the option to acquire an additional 30% interest in BZRTH.Indigo. Upon exercise of the option, the Company would obtain control over Indigo.

 

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 -12-

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 20192020

 

5.VIE (continued)

From late May 2020 until September 30, 2020, the Company was actively involved in development of Indigo’s operations with power to direct the activities and significantly impact Indigo’s economic performance. The Company also has obligations to absorb losses and right to receive benefits from Indigo. As such, in accordance with ASC 810-10-25-38A through 25-38J, Indigo is consolidated as an VIE of the Company.

Starting on October 1, 2020, the Company plans to open new locations via purchasing equity into other Brand/Franchises to cover delivery for the entire California. Therefore, the Company likely not to proceeds the option to acquire the additional 30% interest in Indigo at the moment. In addition, the Company is no longer involve in day-to-day operations and the Company will be pursuing cannabis delivery moving forward, independently of Indigo Dye Group. Sugarmade is no longer involve in day-to-day operations. As of October 1, 2020, the Company continues to hold approximately 29% of the ownership of Indigo but ceased to have a controlling interest in the partnership and it was deconsolidated and recorded as an investment in nonconsolidated affiliate at its $505,449 estimated fair value and changed to equity method of accounting. See footnote #6 Noncontrolling interest and deconsolidation of VIE for details.

6.Noncontrolling Interest and Deconsolidation of VIE

Starting in fiscal year ended June 30, 2020, the Company had a variable interest entity, Indigo Dye Group, for accounting purposes. The Company owned approximately 29% of Indigo’s outstanding equity and as of September 30, 2020, involved its day-to-day operations, which gave the Company the power to direct the activities of Indigo that most significantly impact its economic performance. Accordingly, the Company recognized the carrying value of the noncontrolling interest as a component of total shareholders’ equity, and the consolidated financial statements included the financial position and results of operations of Indigo as of and for the periods ended June 30, 2020 and September 30, 2020.

Starting on October 1, 2020, the Company plans to open new locations via purchasing equity in other Brand/Franchises to cover delivery for the entire California. Therefore, the Company is not likely at this time to exercise its option to acquire the additional 30% interest in Indigo. In addition, the Company is no longer involved in day-to-day operations of Indigo and going forward, the Company intends to pursue cannabis delivery independent of Indigo. As of October 1, 2020, the Company ceased to have control over the day-to-day business of Indigo and it was deconsolidated and recorded as an investment in nonconsolidated affiliate at its $505,449 estimated fair value and changed to equity method of accounting. Pursuant to the terms of the Indigo agreement, if the Company determines, in its discretion not to continue to make monthly payments, its 40% ownership interest in Indigo will be decreased according to the payment then made. During the quarter ended December 31 ,2020, if the Company makes no additional payments, it will hold approximately 33% of the ownership of Indigo. See Note 5 and Note 6.

The net asset value of the Company’s variable interest in Indigo Dye Group was approximately $326,812 as of October 1, 2020, the date of deconsolidation. The value of the Company’s variable interest on the date of deconsolidation was based on management’s estimate of the fair value of Indigo at that time. The Company concluded that the market approach was the most appropriate method to determine the fair value of the entity on the date of deconsolidation, given that Indigo raised equity funding from third-party investors around the same period (i.e., level 2 inputs). The Company recognized a gain on deconsolidation of approximately $313,928 with no related tax impact, which is included in other income, net on the consolidated statement of operations. As the Company is not obligated to fund future losses of Indigo, the carrying amount is the Company’s maximum risk of loss.

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Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2020

7.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,December 31, 2020, there were no legal claims currently pending or to our knowledge, threatened against ourthe 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, exceptflows. However, as follows:

  • Onof December 11, 2013, the Company was served with a complaint from two Convertible Note Holders and investors31, 2020, we were involved 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 $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 accruedfollowing legal settlement for Hannan vs Sugarmade has been reduced to $227,000, plus interest until the date of complete payoff.
proceedings:

 

  • On 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 underlying complaint to preserve its rights to defend the lawsuit should it become necessary. However, the Company plans to amicably resolve this matter and anticipates that it will be settled and dismissed.
On December 11, 2013, the Company was served with a complaint from two convertible note holders and investors in the Company. On February 21, 2017, the Company signed a settlement agreement with the plaintiffs in the matter of Hannan vs. Sugarmade. Under the terms of the settlement agreement, the company agreed to pay the plaintiffs an aggregate of $227,000 to settle all claims against the Company, which included the payoff of two notes outstanding. The parties had estimated the value of the notes at approximately $80,000. As of June 30, 2020, third parties had purchased two (2) notes of approximately $80,000. As of December 31, 2020, there remains a balance, plus accrued interest on the $227,000 and on the $80,000 due under the notes.

 

There can be no assurances the ultimate liability relative to these lawsuits will not exceed what is outlined above.

 

6.8.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.

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Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2020

9.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 $11,546 as of December 31, 2020 and of $134,517 as of June 30, 2020.

10.Loans Receivable

Loans receivable amounted $0 and $1,365 as of December 31, 2020 and June 30, 2020, respectively. Loan receivables are mainly advanced payments to the other companies.

11.Loans Receivable – Related Parties

Loan receivables – related parties amounted $211,276 and $318,535 as of December 31, 2020 and June 30, 2020, respectively. Loan receivables – related parties are mainly advanced payments to the related party companies for business expense.

12.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 are reflected in selling, general and administrative expenses. We regularly review inventory and consider forecasts of future demand, market conditions and product obsolescence.

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, 2020 and June 30, 2020, the balance for the inventory totaled $617,855 and $679,471, respectively. Obsolescence reserve at December 31, 2020 and June 30, 2020 were $185,312 and $15,445, respectively.

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Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2020

13.Other Current Assets

 

As of December 31, 20192020 and June 30, 2019,2020, other current assets consisted of the following:

 

  For the periods ended
  December 31, 2019 June 30, 2019
Prepaid Deposit $2,314,498  $2,145,000 
Prepaid Inventory  44,308   172,045 
Employees Advance  —     16,052 
Prepaid Expenses  97,768   358,702 
Other  2,118   28,075 
Total: $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.
  For the periods ended 
  December 31, 2020  June 30, 2020 
Prepaid Deposit $8,483  $48,483 
Prepaid Inventory  938,422   65,449 
Employees Advance  1,786   324 
Prepaid Expenses  2,859   35,157 
Undeposited Funds  11,711   71,550 
Other     42,441 
Total: $963,261  $263,404 

 

7.14.Intangible Asset

 

On August 21, 2017, the Company entered into an intellectual property assignment agreement with Sound Decisions to revamp the company’sCompany’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 for the periodssix months ended December 31, 20192020 and June 30, 2019, respectively.

 

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 -13-

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 20192020

 

8.15.Property and Equipment, net

 

As of December 31, 20192020 and June 30, 2019, the2020, property, plant and equipment netconsisted of accumulated depreciation expenses were $430,396 and $476,585, respectively.the following:

Fixed Assets December 31, 2020  June 30, 2020 
Office and equipment $732,062  $739,447 
Motor vehicles  63,954   164,244 
Leasehold Improvement  21,970   24,470 
Total  817,986   928,161 
Less: accumulated depreciation  (457,641)  (429,116)
Plant and Equipment, net $360,345  $499,045 

 

For the six monthsperiods ended December 31, 20192020 and 2018,June 30, 2020, depreciation expenses amounted to $46,189$44,684 and $26,578,$110,032, 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 monthsperiods ended December 31, 20192020 and 2018.June 30, 2020.

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Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2020

 

9.16.Unearned Revenues

Unearned revenue amounted to $57,157 and $53,248 as of December 31, 2020 and June 30, 2020, respectively. Unearned revenues are mainly due to contracts with extended payment terms, acceptance provisions and future delivery obligation.

17.Other Payables

Other payable amounted to $950,187 and $691,801 as of December 31, 2020 and June 30, 2020, respectively. Other payables are mainly credit card payables and taxes payables. As of December 31, 2020, the Company had 8 credit cards, one American Express is a charge card with no limit and zero interest. The remaining 7 cards had total credit limit of $85,000, and APR from 11.24% to 29.99%.

18.Convertible Notes

As of December 31, 20192020 and June 30, 2019,2020, the balance owing on convertible notes, net of debt discount, with terms as described below was $1,378,221$1,651,430 and $1,046,909,$1,740,122, respectively.

Convertible notes issued as of September 30, 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, 2019,2020, 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, 2019,2020, the note is in default.

 

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, 2019,2020, the note is in default.

 

Convertible note 4: 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 December 31, 2019, the remaining balance of note was $60,751.

Convertible note 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 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. 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. As of December 31, 2019, the original principal balance has been fully converted, the remaining default charge balance of the note was $250,000, and the new convertible note balance was $200,000.

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 -14-

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 20192020

 

9.18.Convertible Notes (continued)

Convertible note 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 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 7:4: On 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. As of December 31, 2020, the note is in default.

 

Convertible note 8:5: 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. As of December 31, 2020, the note is in default.

 

Convertible note 9:6: 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. As of December 31, 2020, the note is in default.

 

Convertible note 10:7: 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. As of December 31, 2020, the note is in default.

 

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 12: On January 8, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of $105,000. The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 35% 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 13: On January 22, 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 42% of 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 14: On January 24, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of $53,000. The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 35% of 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 15: On February 26, 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 42% of 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.

 -15-

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2019

9.Convertible Notes (continued)

Convertible note 16: On March 4, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of $250,000 (includes $7,000 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 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.

 -16-

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 December 31, 2019, the note has been fully settled by $127,321 of cash and 18,181,818 shares of common stock.

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 30:8: 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. During the year ended June 30, 2020, the note holder converted $50,000 principal with $2,992 interest expense into 56,007,062 shares of the Company’s common stock. As of December 31, 2020, the note has been fully converted.

 

Convertible note 31:9: 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. As of December 31, 2020, the note has been fully converted.

 

Convertible note 32:10: 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. As of December 31, 2020, the note has been fully converted.

 

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 34:11: 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. As of December 31, 2020, the note has been fully converted

 

Convertible note 35:12: 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. As of December 31, 2020, the note has been fully converted.

-19-

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2020

18.Convertible Notes (continued)

 

Convertible note 36:13: 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.

 -17-

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 20192020, the note has been fully converted.

9.Convertible Notes (continued)

 

Convertible note 37:14: 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. As of December 31, 2020, the note has been fully converted.

 

Convertible note 38:15: 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. As of December 31, 2020, the note has been fully converted.

 

Convertible note 39:16: 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 40:17: 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.

 

Convertible note 18: On January 3, 2020, 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. As of December 31, 2020, the note has been fully converted.

Convertible note 19: On January 14, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of $150,000 (includes $3,000 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 38% discount to average of three lowest closing prices for the 10 consecutive trading days prior to the conversion date. During the three months ended September 30, 2020, the note holder converted $50,000 principal into 29,868,578 shares of the Company’s common stock. As of December 31, 2020, the remaining principal and unpaid interest has been fully repaid by cash.

Convertible note 20: On January 22, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of $128,000 (includes $3,000 OID). The note is due 360 days and bear an interest rate of 10%. The conversion price for the note is 35% discount to average of two lowest closing prices for the 20 consecutive trading days prior to the conversion date. As of December 31, 2020, the note principal and unpaid interest has been fully repaid by cash.

-20-

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2020

18.Convertible Notes (continued)

Convertible note 21: On February 4, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of $110,000 (includes $10,000 OID). The note is due 360 days and bear an interest rate of 12%. The conversion price for the note is $0.001 per share. As of December 31, 2020, the note has been fully converted.

Convertible note 22: On February 18, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of $100,000 (includes $10,000 OID). The note is due 360 days and bear an interest rate of 12%. The conversion price for the note is $0.001 per share.

Convertible note 23: On March 5, 2020, 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 38% discount to average of three lowest closing prices for the 10 consecutive trading days prior to the conversion date. As of December 31, 2020, the note has been fully converted.

Convertible note 24: On April 24, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of $75,000 (includes $2,000 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 38% discount to average of three lowest trading prices for the 10 consecutive trading days prior to the conversion date.

Convertible note 25: On June 10, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of $36,300 (includes $3,300 OID and $3,000 legal expense). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 60% of the lowest trading bid for the 20 consecutive trading days prior to the conversion date.

Convertible note 26: On June 18, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of $36,300 (includes $3,300 OID and $3,000 legal expense). 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 July 6, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of $77,000 (includes $2,000 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 38% discount to average of three lowest trading prices for the 10 consecutive trading days prior to the conversion date.

-21-

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2020

18.Convertible Notes (continued)

Convertible note 28: On July 7, 2020, 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 35% discount to average of two lowest trading prices for the 20 consecutive trading days prior to the conversion date.

Convertible note 29: On July 16, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of $260,700 (includes $23,700 OID and $12,000 legal expense). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 60% of the lowest trading bid for the 20 consecutive trading days prior to the conversion date.

Convertible note 30: On July 21, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of $200,200 (includes $18,200 OID and $7,000 legal expense). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 60% of the lowest trading bid for the 20 consecutive trading days prior to the conversion date.

Convertible note 31: On September 8, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of $110,000 (includes $10,000 OID). The note is due 180 days and bear an interest rate of 12%. The conversion price for the note is $0.01 per share. After the six months anniversary of this note, the conversion price shall be equal to the lower of the fixed price of $0.01 or 65% of the lowest trading price of the common stock for the 20 prior trading days including the day upon which a conversion notice is received by the Company or its transfer agent.

Convertible note 32: On September 10, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of $227,700 (includes $20,700 OID and $7,000 legal expense). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 60% of the lowest trading bid for the 20 consecutive trading days prior to the conversion date.

Convertible note 33: On September 24, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of $212,300 (includes $19,300 OID). The note is due 180 days and bear an interest rate of 12%. The conversion price for the note is $0.01 per share. After the six months anniversary of this note, the conversion price shall be equal to the lower of the fixed price of $0.01 or 65% of the lowest trading price of the common stock for the 20 prior trading days including the day upon which a conversion notice is received by the Company or its transfer agent.

Convertible note 34: On October 8, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of $231,000 (includes $21,000 OID). The note is due 180 days and bear an interest rate of 12%. The conversion price for the note is $0.01 per share. After the six months anniversary of this note, the conversion price shall be equal to the lower of the fixed price of $0.01 or 65% of the lowest trading price of the common stock for the 20 prior trading days including the day upon which a conversion notice is received by the Company or its transfer agent.

Convertible note 35: On October 13, 2020, 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 180 days and bear an interest rate of 12%. The conversion price for the note is $0.01 per share. After the six months anniversary of this note, the conversion price shall be equal to the lower of the fixed price of $0.01 or 65% of the lowest trading price of the common stock for the 20 prior trading days including the day upon which a conversion notice is received by the Company or its transfer agent.

Convertible note 36: On November 10, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of $58,300 (includes $5,300 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 trading bid for the 20 consecutive trading days prior to the conversion date.

In connection with the convertible debt, debt discount balance as of December 31, 20192020 and June 30, 20192020 were $2,015,634$1,045,671 and $1,189,341,$880,879, respectively, and were being amortized and recorded as interest expenses over the term of the convertible debt.

 

-22-

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2020

10.19.Derivative liabilities

 

The derivative liability is derived from the conversion features in note 98 and stock warrant in note 11.10. All were valued using the weighted-average Binomial option pricing model using the assumptions detailed below. As of December 31, 20192020 and June 30, 2019,2020, the derivative liability was $3,259,345$1,595,186 and $2,991,953,$5,597,095, respectively. The Company recorded $2,314,046 gain$3,992,108 and $3,661,383$1,442,295 loss from changes in derivative liability during the six monthsperiod ended December 31, 20192020 and 2018,June 30, 2020, respectively. The Binomial Option Price Modelmodel with the following assumption inputs:

 

  December 31, 20192020
Annual dividend yield   
Expected life (years)  0.2-1.00
Risk-free interest rate0.09-0.16%
Expected volatility89-187%

June 30, 2020
Annual dividend yield
Expected life (years)0.5-1.00 
Risk-free interest rate  1.51-2.090.16-2.10%
Expected volatility  121-153113-175%

 

December 31, 2018

Annual dividend yield—  
Expected life (years)0.5-1.00
Risk-free interest rate2.49-2.72%
Expected volatility87-123%

Fair value of the derivative is summarized as below:

 

Beginning Balance, June 30, 2019$2,991,953
Additions3,538,927
Mark to Market2,314,089
Reclassification to APIC due to conversions(957,488)
Balance, December 31, 2019$3,259,345
Beginning Balance, June 30, 2020 $5,597,095 
Additions  2,326,977 
Cancellation of Derivative Liabilities Due to Cash Repayment  (228,489)
Cancellation of Derivative liabilities Due to Share Reservation  (214,757)
Mark to Market  (3,763,618)
Reclassification to APIC due to conversions  (2,122,022)
Ending Balance, December 31, 2020 $1,595,186 

Beginning Balance, June 30, 2019 $2,991,953 
Additions  3,538,927 
Mark to Market  2,314,089 
Reclassification to APIC due to conversions  (957,488)
Ending Balance, December 31, 2019 $3,259,345 

 

-23-

 -18-

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 20192020

 

11.20.Stock warrants

 

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 into 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, 20192020 and June 30, 2019,2020, the fair value of the warrant liability was $15,663$521 and $19,103,$1,910, respectively.

On February 4, 2020, the Company entered into a warrant agreement with an accredited investor up to 10,000,000 shares of common stock of the Company at exercise price of $0.008 per share, subject to adjustment. 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 $80,000. As of December 31, 2020 and June 30, 2020, the fair value of the warrant liability was $9,000 and $78,000, respectively.

 

As of December 31, 20192020 and June 30, 2019,2020, the total fair value of the warrant liability was $15,663$9,521 and $24,658,$79,910, respectively.

 

12.21.Note payable due to bank

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 (5.5% as of December 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, 20192020 and June 30, 2019,2020, the loan principal balance was $25,982. As of December 31, 2019,2020, the note is in default.

 

13.Related party transactions

Notes Payable Due to Non-related parties

On June 15, 2018, the Company entered into a promissory note with one of the accredited investors. The original principal amount was $20,000 and the note bears 8% interest per annum. The note was payable upon demand. As of December 31, 2020 and June 30, 2020, this note had a balance of $20,000 and $20,000, respectively.

Notes Payable Due to Related Parties

 

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 borebears no interest. The note was payable upon demand. As of December 31, 20192020 and June 30, 2019,2020, 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$15,427 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, 2019 and June 30, 2019, this note had a balance of $0 and $20,000,$15,427, respectively.

 

As of December 31, 2019 and June 30, 2019, the Company had an outstanding balance of notes payable due to related parties of $18,000 and $38,000, respectively.

-24-

 

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.

 -19-

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 20192020

 

14.22.Loans payable

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 33.33%. As of December 31, 20192020 and June 30, 2019,2020, the note was in default and the outstanding balance under this note was $63,924$73,844 and $63,924,$96,401, respectively.

 

During the year ended June 30, 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, 20192020 and June 30, 2019,2020, the outstanding balance with Greater Asia loans were $100,000 and $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, 20192020 and June 30, 2019,2020, the Company has an outstanding balance of $0$4,423 and $3,584.

On December 17, 2018, the Company entered into a repayment agreement with an individual for $100,000 at no interest. As of December 31, 2019 and June 30, 2019, the Company has an outstanding balance of $2,740 and $17,834, respectively.

 

On July 1, 2012, CarryOutSupplies entered an equipment loan agreement with a bank with maturity on June 21, 2024. The monthly payment is $648. As of December 31, 20192020 and June 30, 2019,2020, the outstanding balance under this loan were $0$20,665 and $29,243,$24,524, respectively.

On March 18, 2020, the Company entered into a loan agreement for $150,000 with Celtic Bank with maturity date on March 18, 2020. As of December 31, 2020 and June 30, 2020, the outstanding balance under this loan were $1,815 and $117,635, respectively.

On June 26, 2020, the Company entered into a government loan agreement for $8,000 with maturity date on December 26, 2020. As of December 31, 2020 and June 30, 2020, the outstanding balance under this loan were $8,000.

-25-

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2020

22.Loans payable (Continued)

On April 27, 2020, we entered into a loan borrowed $110,000 from Bank of America (“Lender”), pursuant to a Promissory Note issued by Company to Lender (the “PPP Note”). The loan was made pursuant to the Payroll Protection Program established as part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP Note bears interest at 1.00% per annum and may be repaid at any time without penalty. The PPP Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, or provisions of the promissory note. The occurrence of an event of default may result in a claim for the immediate repayment of all amounts outstanding under the PPP Note.

On July 28, 2020, we entered into a loan borrowed $159,900 from Bank of America (“Lender”), pursuant to a Promissory Note issued by Company to Lender (the “PPP Note”). The loan was made pursuant to the Payroll Protection Program established as part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP Note bears interest at 1.00% per annum and may be repaid at any time without penalty. The PPP Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, or provisions of the promissory note. The occurrence of an event of default may result in a claim for the immediate repayment of all amounts outstanding under the PPP Note.

The Company accounting for the PPP loan under Topic 470: (a). Initially record the cash inflow from the PPP loan as a financial liability and would accrue interest in accordance with the interest method under ASC Subtopic 835-30; (b). Not impute additional interest at a market rate; (c). Continue to record the proceeds from the loan as a liability until either (1) the loan is partly or wholly forgiven and the debtor has been legally released or (2) the debtor pays off the loan; (d). Would reduce the liability by the amount forgiven and record a gain on extinguishment once the loan is partly or wholly forgiven and legal release is received.

 

As of December 31, 20192020 and June 30, 2019,2020, the Company had an outstanding loan balance of $192,030$720,489 and $214,585,$517,260, respectively.

 

15.23.Loans Payable – Related Parties

On July 7, 2016, SWC received a loan from an employee. The amount of the loan bears no interest and amortized on a monthly basis over the life of the loan. As of December 31, 2020 and June 30, 2020, the balance of the loan was $48,143 and $35,943, respectively.

During the three months ended September 30, 2020, the Company received loans from related parties. The amount of the loan bears no interest. As of December 31, 2020 and June 30, 2020, the balance of the loan was $528,082 and $0, respectively.

As of December 31, 2020 and June 30, 2020, the Company had an outstanding loan balance – related parties of $576,225 and $35,943, respectively.

24.Shares to Be Issued

During the year ended June 30, 2020, the Company had entered into one consulting service agreement and one employment agreement, which had potential shares to be issued in total amount of $101,577.

During the six months ended December 31, 2020, the Company had potential shares to be issued to one employment agreement of $35,000.

During the six months ended December 31, 2020, the Company had potential shares to be issued to one consulting agreement of $31,000.

As of December 31, 2020 and June 30, 2020, the Company had balance of $167,577 and $101,577 share to be issued, respectively.

-26-

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2020

25.Stockholder’s Equity

 

The Company is authorized to issue 1,990,000,00010,000,000,000 shares of $.001 par value common stock and 10,000,000 shares of $.001 par value preferred stock. On April 22, 2020, the Company filed an amendment to increase the total authorized shares to 10,010,000,000 – 10,000,000,000 of which are designated as common stock, par $0.001 per share and 10,000,000 of which are designated as preferred stock, par value $0.001 per share.

 

Share issuance during the three months ended September 30, 20192020 -

 

During the three months ended September 30, 2019,2020, 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 71,915,5571,081,411,606 shares of common stock for debt conversions in total amount of $547,833.$1,273,459.

Share issuance during the three months ended December 31, 2020 -

 

During the three months ended September 30, 2019,December 31, 2020, the Company issued 11,348,591411,171,815 shares of common stock for cashdebt conversions in total amount of $100,000.$320,879.

During the periods from December 14, 2014 through March 31, 2015, the Company issued 2,000,000 Series A preferred shares from an EB5 Program Investment. Five years from the date of issue (the “Conversion Date”), assuming Investor is approved for l-526, and each Preferred Share will automatically convert into that number of Common Shares having a “fair market value” of the Initial Investment plus a five (5) percent annualized return on Initial Investment, Fair market value will be determined by averaging the closing sale price of a Common Share for the 40 trading days immediately preceding the date of conversion on the U.S. stock exchange on which Common Shares are publicly traded. Should the Investor be unsuccessful in liquidating the Common Shares within 90 days after the Conversion Date, the Company shall buy back total Common Shares owned by Investor at a fixed amount of $500,000.00 plus 5% ROI per annum.

 

During the three months ended September 30, 2019, the Company issued 28,381,818December 31, 2020, those shares were automatically converted into 360,647,019 of common stock for warrant exercise inshares with a fair market value of $2,000,000 of initial investment plus a five percent annualized return on initial investment (“ROI”), or total amountROI of $14,132. $500,000.

 

As of September 30, 2019December 31, 2020 and June 30, 2019,2020, the Company had 2,000,000 share1,541,500 shares of its preferred stock 810,254,536issued and 697,608,570outstanding, and 3,616,507,670 and 1,763,277,230 shares of its common stock, respectively, issued and outstanding.

 

Share issuance during the three months ended December 31, 2019 -

-27-

 

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.

 -20-

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 20192020

 

15.Stockholder’s Equity (continued)

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 three months ended December 31, 2019, the Company issued 26,621,610 shares of common stock for cash in total amount of $240,000.

During the three months ended December 31, 2019, the Company issued 500,000 shares of common stock for employee bonus in total fair value of $7,550. 

During the three months ended December 31, 2019, the Company issued 249,373,817 shares of 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, 2019 and June 30, 2019, the Company had 3,165,001 share of its preferred stock, 1,129,926,122 and 697,608,570 shares of its common stock, respectively, issued and outstanding.

16.Shares to be issued – liability

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

During the three months ended September 30, 2019, the Company had entered into a private placement agreement and had increased shares to be issued for total amount of $96,000.

During the three months ended September 30, 2019, the Company had entered into an employee compensation plan and had increased shares to be issued for total amount of $12,000.

During the three months ended December 31, 2019, the Company had entered into a private placement agreement and had increased shares to be issued for total amount of $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 for total amount of $14,000.

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

 -21-

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2019

17.Shares to be issued –equity

As of the year ended June 30, 2019, the Company had potential shares to be issued under common stock in total amount of $29,000.

During the three months ended September 30, 2019, the Company issued the $29,000 share to be issued – equity by 1,000,000 shares of the Company’s common stock.

During the three months ended December 31, 2019, the Company recorded in total amount of $100,000 potential share to be issued – equity.

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

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.

 -22-

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2019

19.26.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 Commencingcommencing March 1, 2018. The term of the lease is for a (5) Five Years with 1 month free on the 1st1st year of the term. The monthly rent on the 1st1st 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

Our warehouse along with some office space is located at 20529 East Walnut Drive North, Diamond Bar, California, where we lease approximately 11,627 square feet of combined space. The lease term is for five years and two months ending on April 30, 2025. The current monthly rental payment for the facility is $13,022.

Six Months Ended   
December 31, 2020   
Lease Cost    
Operating lease cost (included in general and administration in the Company’s unaudited condensed statement of operations) $154,463 
     
Other Information    
Cash paid for amounts included in the measurement of lease liabilities for the six months ended December 31, 2020 $107,438 
Remaining lease term – operating leases (in years)  3.25 
Average discount rate – operating leases  10%
The supplemental balance sheet information related to leases for the periods are as follows:    
     
Operating leases    
Short-term right-of-use assets $231,685 
Long-term right-of-use assets $610,864 
Total operating lease assets $842,549 
     
Short-term operating lease liabilities $236,528 
Long-term operating lease liabilities $641,687 
Total operating lease liabilities $878,214 

Maturities of the date of this filing, this property became the headquarter of the company.Company’s lease liabilities are as follows:

 

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
 Operating 
Period ending June 30, Lease 
2021 $156,118 
2022  305,040 
2023  273,425 
2024  172,465 
2025  147,446 
Total lease payments  1,054,494 
     
Less: Imputed interest/present value discount  (176,279)
Present value of lease liabilities $878,214 

 

-28-

 -23-

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 20192020

 

20.27.Subsequent events

 

Shares issued for cash

On December 27, 2019,February 9, 2021, the Company entered into a stock subscription agreement to issue 150,000,000 shares of the Company’s common stock for cash in total amount of $225,000.

Convertible Notes

On February 9, 2021, the Company entered a convertible promissory note with an accredited investor for a total amount of $112,200$69,300 (includes $12,200$6,300 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 closingtrading bid for the 20 consecutive trading days prior to the conversion date. The principal amount was received in January 2020.

 

On January 30, 2020,Conversions

Subsequent to February 16, 2021, there were multiple accredited investors converted approx. $258,300 of the Company issued 6,684,843convertible notes into 389,256,291 shares of the Company’s common stock for debt conversions in total amount of $33,291.

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 part of the Agreement, the Company will retain or will receive 102,248 shares in BZRTH.

On January 21, 2020, the Company directed the creation of 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.stocks.

 

On February 7, 2020,8, 2021, Sugar Rush, Inc., a Nevada corporation and wholly owned subsidiary of Sugarmade, Inc., a Delaware corporation entered into a Common Share Purchase Agreement with Nug Avenue, Inc., a California corporation (the “Seller”). The Seller provides services pertaining to the licensed and regulated delivery of cannabis out of Lynwood, California, serving primarily the greater Los Angeles Metropolitan area (the “Lynwood Operations”).

Pursuant to the Agreement, and subject to the satisfaction of the conditions as set forth therein, the Company signedagreed to purchase a definitive agreement (the “Agreement”seventy percent (70%) 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 servicesstake in the Sacramento metropolitan area.Seller’s Lynwood Operations for a purchase price of five hundred sixty thousand dollars ($560,000) (the “Stake Purchase”). Pursuant to the Agreement, the parties agreed that the Stake Purchase will entitle the Company to receive 70% of the revenues and profits generated by the Seller from its Lynwood Operations starting from February 8, 2021 (the “Effective Date”). Under the terms of the Agreement, the Company willagreed to make periodic payments to the Seller to satisfy the $560,000 purchase price over a 40%twelve (12) month period beginning on the Effective Date. Pursuant to the Agreement, the parties agreed that the $560,000 resulting from the Stake Purchase is to be used by the Seller for the expansion of business opportunities for the Lynwood Operations.

Further, pursuant to the Agreement, the Seller agreed to grant the Company an option to invest in all future business opportunities of the Seller pertaining to any and all legal and regulated cannabis business operations. The Seller and the Company agreed to negotiate a formal agreement for this option within ninety (90) days of the Effective Date. Further, pursuant to the Agreement, Seller agreed to grant the Company unlimited participation rights in any future financings of the Seller, and to negotiate a formal agreement for such participation rights to be entered into by the Seller and the Company within ninety (90) days of the Effective Date.

On February 9, 2021 (the “Closing Date”), the Closing occurred, and the Company acquired a 70% stake in the Budcars operation for a cash amountSeller’s Lynwood Operations pursuant to the terms of $700,000, and will receive an option to acquire an additional 30%, which upon exercise will provide a controlling stake in the operation for the Company.Agreement.

 

 -24-

-29-

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

N/A

 

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)(“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 Quarterly Report on Form 10-Q. See “SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS” above.

 

Overview and Financial Condition

Sugarmade, Inc. (hereinafter referred to as “we,” “us” or “Company”) operates much of its business activities through our subsidiary, SWC Group, Inc., a California corporation (“SWC”). Sugarmade, Inc. was founded in 2010. In 2014, CarryOutSupplies.com was acquired by Sugarmade, Inc., creating the Company as it is today.

Shares of our common stock are quoted on the OTC Market, which is a quotation system for early-stage and developing companies under the trading symbol “SGMD”.

As of December 31, 2020, we operated our business in the following three segments:

1)Paper and paper-based products: The supply of consumable products to the quick-service restaurant sub-sector of the restaurant industry, and as an importer and distributor of non-medical personal protection equipment to business and consumers, via our CarryOutSupplies.com subsidiary (“Carryout Supplies”). Carryout Supplies is a producer and wholesaler of custom printed and generic supplies, servicing more than 2,000 quick-service restaurants. The primary products are plastic cold cups, paper coffee cups, yogurt cups, ice cream cups, cup lids, cup sleeves, edible packaging, food containers, soup containers, plastic spoons, and similar products for this market sector. This subsidiary, which was formed in 2009, was recently expanded to also offer non-medical personal protective equipment.
2)Non-medical supplies: Beginning in 2020, we sell non-medical personal protective equipment through Carryout Supplies.
3)

Cannabis products delivery service and sales: As a joint owner in the Budcars licensed cannabis delivery service brand (“Budcars” or the “Budcars Brand”). Budcars operates a licensed cannabis delivery service in the Sacramento, California area. During early 2020, the Company gained a 40% stake in the Budcars Brand and in the Sacramento delivery operations via acquiring a 40% stake in Indigo Dye Group (“Indigo”). Under the terms of the agreement with Indigo, Sugarmade acquired an option to purchase an additional 30% interest in Budcars. Upon exercise of this option, the Company would acquire a controlling interest in Indigo. As of December 31, 2020, the option has not yet been exercised and the Company’s stake in Budcars was at 40%. Starting on October 1, 2020, the Company plans to open new locations via purchasing equity in other Brand/Franchises to cover delivery for the entire California. Therefore, the Company is not likely at this time to exercise its option to acquire the additional 30% interest in Indigo. In addition, the Company is no longer involved in day-to-day operations of Indigo and going forward, the Company intends to pursue cannabis delivery independent of Indigo.

Starting on October 1, 2020, the Company plans to open new locations via purchasing equity in other Brand/Franchises to cover delivery for the entire California. Therefore, the Company is not likely at this time to exercise its option to acquire the additional 30% interest in Indigo. In addition, the Company is no longer involved in day-to-day operations of Indigo and going forward, the Company intends to pursue cannabis delivery independent of Indigo. As of October 1, 2020, the Company ceased to have control over the day-to-day business of Indigo and it was deconsolidated and recorded as an investment in nonconsolidated affiliate at its $505,449 estimated fair value and changed to equity method of accounting. Pursuant to the terms of the Indigo agreement, if the Company determines, in its discretion not to continue to make monthly payments, its 40% ownership interest in Indigo will be decreased according to the payment then made. During the quarter ended December 31 ,2020, if the Company makes no additional payments, it will hold approximately 33% of the ownership of Indigo. See Note 5 and Note 6.

Subsequent to the end of the December reporting period, Sugarmade became a joint owner of Nug Avenue, Inc., a California corporation (“Nug Avenue”), which operates a licensed and regulated cannabis delivery service out of Lynwood, California, serving the greater Los Angeles Metropolitan area (the “Lynwood Operations”). The Company currently owns a majority stake of seventy percent (70%) of Nug Avenue’s Lynwood Operations and holds first rights of refusal on Nug Avenue’s business expansion relative to the cannabis marketplace.

Our CarryOutSupplies.com Operation

Our legacy business operation, CarryOutSupplies.com, is a producer and wholesaler of custom printed and generic supplies, servicing more than 2,000 businesses in the Quick Service Restaurant Sector. 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, edible packaging, food containers, soup containers, plastic spoons, and many other similar products for this market sector. CarryOutSupplies.com was founded in 2009. Our products are viewable on our website: www.CarryOutSupplies.com.

We believe we occupy a defensible space within the Quick Service Restaurant Sector by way of our significant experience in serving this customer base, our knowledge of the industry fundamentals, and our significant experience in Asia factory sourcing and importing goods from Asian factories. Our niche within the market pertains to serving the many quick-service restaurants that 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, CarryOutSupplies.com was founded to provide products to this underserved section of the market. Since that time, the Company has become a key supplier to more than 2,000 establishments, particularly within the frozen dessert segment.

-30-

The business of supplying such products to the quick-service restaurant sector remains highly competitive. Over the past few years, operating margins have compressed as a result of increased competition, the emergence of relatively inexpensive digital printing processes, and the larger printing and paper product manufacturers lowering minimum order quantities. Sugarmade expects the sector to remain highly competitive and is responding to the industry changes by realigning staff, eliminating less profitable products, and introducing new product areas.

The CarryOutSupplies operation has recently expanded its product offerings to include consumable sanitary supplies, such as non-medical gloves, non-medical facemasks, face shields, and other non-medical protective equipment. We believe our significant experience in sourcing products from Asian factories and the importation of goods from Asia makes us well-equipped to operate within the marketplace for non-medical, consumable, protective equipment.

We plan to continue our business pursuits relative to our CarryOutSuppies.com business, and have significantly restructured the operations over the past year. We plan to continue to modify our strategies and product lines to remain competitive in these niche market sectors.

BudCars Cannabis Delivery Service

In early 2020, our Company entered into an agreement to purchase Bud Cars, Inc., a California corporation, which is engaged in the licensed, and legal under California state law, delivery of cannabis and cannabis-containing products. Under the terms of the acquisition agreement, Sugarmade acquired a 33% stake in the operation and an option to gain a controlling interest in the delivery service.

Cannabis is already one of the fastest-growing markets in the U.S. According to Fortune Business Insights, during 2019, the cannabis market produced approximately $100 billion in U.S sales. Growth over the next few years is expected to top 32% compounded annually. The U.S. cannabis segment has clearly been one of the fastest-growing markets within the American economy over the past 50 years. The California market clearly leads the U.S. market, with the legal California market worth at least $13 billion annually with strong growth continuing. The illegal market is likely even more extensive.

As the market shifts from the black to white markets, the legal providers are expected to benefit further. We urge investors to consider this trend in their investment decisions. One of the primary reasons many legal providers across several states have developed business issues is flawed state government policies that have allowed illegal operators to continue in business at the expense of the licensed and heavily taxed industry.

According to BDS Analytics and Arcview Market Research, two firms that closely monitor the cannabis marketplace, California’s total cannabis market is expected to produce about $12.8 billion this year, with $8.7 billion going to illicit operators and $3.1 billion to the state-authorized market.

For the first time, the white market/black market balance is beginning to shift as authorities crackdown on unlicensed business. This is starting to benefit legal operators. For example, California regulators and law enforcement agencies have recently announced hundreds of enforcement actions across California seizing millions of dollars of black market cannabis products. We believe this trend toward enforcement against illegal operators will directly benefit companies like the BudCars cannabis delivery service.

The outbreak of COVID-19, new social unrest in the United States, and the general movement toward retail home delivery have resulted in radical shifts in the cannabis marketplace. As a result, the general market for delivery services is proliferating.

Budcars operates its delivery service in strict adherence to all state, local and municipal regulations and is fully licensed for operations by California regulators.

 

Discussions with respect to our Company’s operations included herein referthose of, SWC and Indigo Dye Group Corp., a variable interest entity (“VIE”). During the quarter ended December 31, 2020, the Company plans to our operating subsidiary, SWC.open new locations via purchasing equity into other Brand/Franchises to cover delivery for the entire California. Therefore, the Company likely not to proceeds the option to acquire the additional 30% interest in Indigo at the moment. In addition, the Company is no longer involve in day-to-day operations and the Company will be pursuing cannabis delivery moving forward, independently of Indigo Dye. Therefore, the Company losses the control over Indigo since October 1, 2020. As of the date of this filing,December 31, 2020, we had no other operations other than SWC.

-31-

Our Ownership in Nug Avenue, Inc. Relative to Licensed and Permitted Cannabis Delivery in the Los Angeles Metropolitan Area

On February 8, 2020, Sugarmade became a joint owner of Nug Avenue, Inc., a California corporation (“Nug Avenue”), which is party to a management services agreement relating to the licensed and regulated delivery of cannabis out of Lynwood, California, serving primarily the greater Los Angeles Metropolitan area (the “Lynwood Operations”).

As of February 8, 2020, the Company acquired a majority stake of seventy percent (70%), allowing for full financial statement consolidation of the Nug Avenue, Inc. Lynwood Operations. As part of the February 8, 2020, agreement, the Company also gained an option to invest in Nug Avenue’s future business opportunities pertaining to any and all legal and regulated cannabis business operations. Further, under the February 8, 2002 agreement, Nug Avenue agreed to grant the Company unlimited participation rights in future financings.

The Company believes the Los Angeles cannabis delivery market offers substantial opportunities for growth. By all measures, the California cannabis market continues to gain strength, with the Southern California sub-market representing the world’s largest single cannabis marketplace. According to the California Department of Tax and Fee Administration, the most recently reported quarterly period posted an almost 80% increase in cannabis tax compared to the year-ago period. Much of this growth was driven by increased use of delivery services, as consumers are increasingly relying on home delivery for many goods, including cannabis.

Discussions with respect to our Company’s operations included those of, SWC and Indigo Dye Group Corp., a variable interest entity (“VIE”). During the quarter ended December 31, 2020, the Company plans to open new locations via purchasing equity into other Brand/Franchises to cover delivery for the entire California. Therefore, the Company is not likely at this time to exercise its option to acquire the additional 30% interest in Indigo. In addition, the Company is no longer involved in Indigo’s day-to-day operations and going forward, the Company intends to pursue cannabis delivery, independent of Indigo. As of October 1, 2020, the Company continues to hold approximately 29% of the ownership of Indigo but ceased to have a controlling interest in the partnership and it was deconsolidated and recorded as an investment in nonconsolidated affiliate at its $505,449 estimated fair value and changed to equity method of accounting. During the quarter ended December 31 ,2020, the Company invested additional $61,484 in Indigo, or 3.5% of Indigo’s issued shares. As of December 31, 2020, the Company continues to hold approximately 33% of the ownership of Indigo. As of December 31, 2020, we had no other operations other than SWC.

 

Results of Operations

 

The following table sets forth the results of our operations for the three months ended December 31, 20192020 and 2018.2019.

 

 For the three months ended For the three months ended 
 December 31, December 31, 
 2019 2018 2020  2019 
         
Net Sales  720,810   1,445,269  $300,652  $720,810 
Cost of Goods Sold:  435,690  1,071,033   242,531   435,690 
Gross profit 285,120 374,236   58,122   285,120 
Operating Expenses  7,215,933  3,823,085   634,703   7,215,934 
Loss From Operations (6,930,814) (3,448,849)
Other non-operating Income (Expense):  (823,710)  (2,584,531)
Net Income (Loss)  (7,754,524)  (6,033,380)
Loss from Operations  (576,581)  (6,930,814)
Other non-operating Expense:  (1,077,702)  (823,710)
Equity Method Investment Loss  (2,144)    
Less: net income attributable to the noncontrolling interest      
Net Loss $(1,656,397) $(7,754,524)

 

Revenues

 

For the three months ended December 31, 20192020 and 2018,2019, revenues were $720,810$300,652 and $1,445,269, respectively. The decrease was primarily due to business loss within the stick supply industry.

Cost of goods sold

For the three month ended December 31, 2019 and 2018, costs of goods sold were $435,690 and $1,071,033$720,810, respectively. The decrease was primarily due to the business loss within the stick supply industry.of control of Indigo.

 

Gross profitCost of goods sold

 

For the three monthmonths ended December 31, 2020 and 2019, costs of goods sold were $242,531 and 2018, gross profit was $285,120 and $374,236,$435,690 respectively. The decrease was primarily due to the business loss within the stick supply industry.of control of Indigo.

 

Operating expensesGross profit

 

For the three monthmonths ended December 31, 2020 and 2019, gross profit was $58,122 and 2018,$285,120, respectively. The decrease was primarily due to the loss of control of Indigo.

Operating expenses

For the three months ended December 31, 2020 and 2019, operating expenses were $7,215,933$634,703 and $3,823,085,$7,215,934, respectively. The increasedecrease was primarily due to the increase of employeedecrease in stock compensation. based compensations.

 

 -25-

Other non-operating income (expense)

 

The Company had total other non-operating expenseincome (expense) of $823,710$(1,077,702) and $2,584,531$(823,710) for the three months ended December 31, 20192020 and 2018,2019, respectively. The decreaseincrease in non-operating incomeexpense is related to the accounting for the changes in derivative liabilities.liabilities due to conversions.

 

Net income (loss)

 

Net loss totaled $7,754,524$1,656,397 for the three monthmonths ended December 31, 2019,2020, compared to a net loss totaling $6,033,380$7,754,524 for the three-month ended December 31, 2018.2019. The increasedecrease was mainly due to a reduction in stock-based compensation and accounting for the increase of employee stock compensation.changes in derivative liabilities due to conversions.

-32-

 

The following table sets forth the results of our operations for the six months ended December 31, 20192020 and 2018.2019.

 

 For the six months ended For the six months ended 
 December 31, December 31, 
 2019 2018 2020  2019 
         
Net Sales  1,474,784   2,886,885  $2,446,979  $1,474,784 
Cost of Goods Sold:  927,858  2,130,452   1,272,429   927,858 
Gross profit 546,925 756,433   1,174,550   546,925 
Operating Expenses  8,419,563  4,736,957   2,619,720   8,419,563 
Loss From Operations (7,872,637) (3,980,524)
Loss from Operations  (1,445,170)  (7,872,637)
Other non-operating Income (Expense):  (1,909,438)  (4,661,909)  1,072,095   (1,909,438)
Net Income (Loss)  (9,782,075)  (8,642,433)
Equity Method Investment Loss  (2,114)   
Less: net income attributable to the noncontrolling interest      
Net Loss attributed to Sugarmade, Inc. $(375,189) $(9,782,075)

 

Revenues

 

For the six months ended December 31, 20192020 and 2018,2019, revenues were $1,474,784$2,446,979 and $2,886,885,$1,474,784, respectively. The decreaseincrease was primarily due to business loss within the stick supply industry.new cannabis delivery business.

 

Cost of goods sold

 

For the six monthmonths ended December 31, 20192020 and 2018,2019, costs of goods sold were $927,858$1,272,429 and $2,130,452$927,858 respectively. The decreaseincrease was primarily due to the business loss within the stick supply industry.acquisition of a 40% interest in Indigo.

 

Gross profit

 

For the six monthmonths ended December 31, 20192020 and 2018,2019, gross profit was $546,925$1,174,550 and $756,433,$546,925, respectively. The decreaseincrease was primarily due to the business loss within the stick supply industry.acquisition of a 40% interest in Indigo.

 

Operating expenses

 

For the six monthmonths ended December 31, 20192020 and 2018,2019, operating expenses were $8,419,563$2,619,720 and $4,736,957,$8,419,563, respectively. The increasedecrease was due to the increase of employee stockdecrease in stock-based compensation.

 

Other non-operating income (expense)

 

The Company had total other non-operating expenseincome (expense) of $1,909,438$1,072,095 and $4,661,909$(1,909,438) for the six months ended December 31, 20192020 and 2018,2019, respectively. The decreaseincrease in non-operating income is related to the accounting for the changes in derivative liabilities.liabilities due to conversions.

 

Net income (loss)loss

 

Net loss totaled $9,782,075$375,189 for the six monthmonths ended December 31, 2019,2020, compared to a net loss totaling $8,642,433$9,782,075 for the six-monththree-month ended December 31, 2018.2019. The increasedecrease was mainly due to the increase of employee stock compensation.decrease in stock-based compensation and the accounting for the changes in derivative liabilities due to conversions.

 

-33-

 -26-

Liquidity and Capital Resources

 

We have primarily financed our operations through the sale of unregistered equity and convertible notes payable. As of December 31, 2019,2020, our Company had cash balance of $103,002,$360,550, current assets totaling $3,225,281$2,200,173 and total assets of $4,141,568.$3,995,463. We had current and total liabilities totaling $8,280,102$8,324,947 and $8,598,185,$9,236,534, respectively. Stockholders’ equity reflected a deficiency of $4,456,617.$5,241,070.

 

The following is a summary of cash provided by or used in each of the indicated types of activities during the six months ended December 31, 20192020 and 2018:2019:

 

 2019 2018 2020 2019 
Cash (used in) provided by:             
Operating activities $(2,122,441) $1,060,980  $(2,167,187) $(2,122,441)
Investing activities —   (87,154      
Financing activities 2,191,072 (856,278  2,086,732   2,191,072 

 

Net cash (used in) provided byused in operating activities was $(2,167,187) for the six months ended December 31, 2020, and $(2,122,441) for the six months ended December 31, 2019, and $1,060,9802019.

Net cash used in investing activities was $nil for the six months ended December 31, 2018.

There were2020, and $nil and $87,154 fixed assets and intangible assets purchased duringfor the six months ended December 31, 2019 and 2018 relating to investing activities, respectively.2019.

 

Net cash (used in) provided by financing activities was $2,086,732 for the six months ended December 31, 2020 and $2,191,072 for the six months ended December 31, 2019 and $(856,278) for the six months ended December 31, 2018.2019.

 

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,December 31, 2020, 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 unaudited condensed consolidated financial statements and our independent public accountants have included a similar discussion in their opinion on our financial statements through June 30, 2019.2020. 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.

 

-34-

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 partythird-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

Basis of presentation

 

Please seeThe accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) 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 unaudited 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, 2020, 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 fiscal year ended June 30, 2020. The interim results for the period ended December 31, 2020 are not necessarily indicative of the results for the full fiscal year.

Principles of consolidation

The consolidated financial statements include the accounts of our Company, its wholly owned subsidiary, SWC Group Inc., and Indigo Dye Group Corp., an investment in nonconsolidated affiliate (formerly a variable interest entity as of September 30, 2020). All significant intercompany transactions and balances have been eliminated in consolidation.

Going concern

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 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 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.

-35-

Use of estimates

The preparation of financial statements in conformity with GAAP 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 (“FASB”) Accounting Standards Codification (“ASC’’) No. 606, Revenue Recognition. Sugarmade 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 the Company’s revenue is recognized at the time control of the products transfers to the customer.

Property and equipment

Property and equipment are 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:

Machinery and equipment3-5 years
Furniture and equipment7 years
Vehicles5 years
Leasehold improvements5 years

Expenditures for renewals and betterments are capitalized while repairs and maintenance costs are normally charged to the statement of 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, 2020 and 2019.

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, 2020, performed an impairment test of all of its intangible assets. Based on the Company’s analysis, the company had an amortization of intangible assets of $700 for the six months ended December 31, 2020 and 2019, respectively.

-36-

Leases

In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (“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.

Under ASC 840, leases were classified as either capital or operating, and the classification significantly impacted the effect the contract had on the company’s financial statements. Capital lease classification resulted in a liability that was recorded on a company’s balance sheet, whereas operating leases did not impact the balance sheet. After the new adoption, $1,105,755 of operating lease right-of-use asset and $1,140,041 of operating lease liabilities were reflected on the Company’s June 30, 2020 financial statements and $842,549 of operating lease right-of-use asset and $878,214 of operating lease liabilities were reflected on the Company’s December 31, 2020 financial statements.

 

Stock based compensation

 -27-

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.

Earnings (Loss) per share

We calculate basic earnings (loss) per share (“EPS”) by dividing our net income (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.

-37-

 Table

Fair value of Contentsfinancial 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 3 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, 2020.

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.

The Company’s financial statements as of December 31, 2020 substantially all of its operations are conducted in three industry segments – (1) paper and paper-based products such as paper cups, cup lids, food containers, etc., which accounts for approximately 24% of the Company’s revenues; (2) non-medical supplies such as non-medical fascial mask, which accounts for approximately 3% of the Company’s total revenues; and cannabis products delivery service and sales.

New accounting pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard establishes an 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 have adopted this ASU on the consolidated financial statements in the quarter ended September 30, 2019.

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes”. The pronouncement simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740, “Income Taxes”. The pronouncement also improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 will be effective for us beginning in the first quarter of fiscal 2021, with early adoption permitted. We are still evaluating the impact this guidance will have on our consolidated financial statements.

In January 2020, the FASB issued ASU No. 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivative and Hedging (Topic 815), which clarifies the interaction of rules for equity securities, the equity method of accounting, and forward contracts and purchase options on certain types of securities. The guidance clarifies how to account for the transition into and out of the equity method of accounting when considering observable transactions under the measurement alternative. The ASU is effective for annual reporting periods beginning after December 15, 2020, including interim reporting periods within those annual periods, with early adoption permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements.

-38-

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Intentionally omitted pursuant to Item 305(e) of Regulation S-K.Not applicable.

 

ITEM 4 – CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

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 CommissionSEC 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 September 30, 2019,December 31, 2020, our disclosure controls and procedures were ineffective due tonot effective because 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 unaudited 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 September 30, 2019December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

-39-

 -28-

PART II: Other Information

ITEM 1 – 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 December 31, 2020, there were no legal claims pending or threatened against the 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. However, as of December 31, 2020, we were involved in the following legal proceedings:

On December 11, 2013, the Company was served with a complaint from two convertible note holders and investors in the Company. On February 21, 2017, the Company signed a settlement agreement with the plaintiffs in the matter of Hannan vs. Sugarmade. Under the terms of the settlement agreement, the Company agreed to pay the plaintiffs an aggregate of $227,000 to settle all claims against the Company, which included the payoff of two notes outstanding. The parties estimated the value of the notes at approximately $80,000. As of June 30, 2020, third parties had purchased two (2) notes of approximately $80,000. As of December 31, 2020, there remains a balance, plus accrued interest on the $227,000 and on the $80,000 due under the notes.

 

ITEM 11A – 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” belowNot required 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.smaller reporting companies.

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 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– UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS

 

During the threesix months ended December 31, 2019,2020, the Company issuedissued/cancelled shares as followings:

 

 ·18,181,818 shares of common stock for settlement of debts in total fair value of $290,455

·24,994,3411,492,583,421 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$1,594,337.

 

All of the aforementioned securities were issued pursuant to Section 4(a)(2) of the 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.

 

 -29-

-40-

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.

Exhibit No. Description
31.1(1)Certification of Chief Executive Officer and Principal 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 Principal 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 19, 202022, 2021By:/s/ Jimmy Chan
  Jimmy Chan
  CEO, CFO,Chief Executive Officer (principal executive officer, principal financial officer and Directorprincipal accounting officer)

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