UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended:December 31, 2019September 30, 2020
☐ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from N/A to N/A
Commission file number: 000-23446
SUGARMADE, INC. |
(Exact name of registrant as specified in its charter) |
Delaware | 94-3008888 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
750 Royal Oaks Dr., Suite 108, Monrovia, CA | 91016 | |
(Address of principal executive offices) | (Zip Code) |
(888) 982-1628 |
(Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
N/A | N/A | N/A |
Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes☒ No☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | Smaller reporting company | ☒ | |
Emerging growth company | ☐ | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
At February 17,November 20, 2020, there were 713,207,8113,103,636,740 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, 2019SEPTEMBER 30, 2020
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, 2019, 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.circumstances on which any statement is based.
We have identified some of the important factors that could cause future events to differ from our current expectations and they are described in this quarterly report under the caption “Risk Factors,” below, and elsewhere in this quarterly report, which you should review carefully. Please consider our forward-looking statements in light of those risks as you read this quarterly report.
PART 1: Financial Information
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 |
As of | ||||||||
September 30, 2020 | June 30, 2020 | |||||||
(Unaudited) | (Audited) | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash | $ | 681,093 | $ | 441,004 | ||||
Accounts receivable, net | 156,425 | 134,517 | ||||||
Inventory, net | 606,090 | 679,471 | ||||||
Loan receivables, current | 10,344 | 1,365 | ||||||
Loan receivables - related party, current | 124,774 | 122,535 | ||||||
Other current assets | 868,723 | 263,404 | ||||||
Right of use asset, current | 277,204 | 270,363 | ||||||
Total current assets | 2,724,653 | 1,912,659 | ||||||
Non-current assets: | ||||||||
Equipment, net | 496,024 | 499,047 | ||||||
Intangible asset, net | 9,450 | 9,800 | ||||||
Other assets | 54,163 | 54,163 | ||||||
Loan receivables - related party, non-current | 196,000 | 196,000 | ||||||
Right of use asset, non-current | 763,447 | 835,393 | ||||||
Total non-current assets | 1,519,084 | 1,594,403 | ||||||
Total assets | 4,243 ,737 | 3,507,062 | ||||||
Liabilities and Stockholders' Deficiency | ||||||||
Current liabilities: | ||||||||
Note payable due to bank | 25,982 | 25,982 | ||||||
Accounts payable and accrued liabilities | 1,510,634 | 1,583,228 | ||||||
Customer deposits | 600,357 | 466,337 | ||||||
Customer overpayment | 50,684 | 47,890 | ||||||
Unearned revenue | 47,536 | 53,248 | ||||||
Other payables | 851,681 | 691,801 | ||||||
Accrued interest | 460,621 | 494,740 | ||||||
Accrued compensation and personnel related payables | 30,778 | 35,361 | ||||||
Notes payable - Current | 20,000 | 20,000 | ||||||
Notes payable - Related Parties, Current | 15,427 | 15,427 | ||||||
Lease liability - Current | 279,750 | 372,285 | ||||||
Loans payable - Current | 271,768 | 319,314 | ||||||
Due to related parties | 655,337 | 35,943 | ||||||
Convertible notes payable, Net, Current | 1,470,221 | 1,740,122 | ||||||
Derivative liabilities, net | 1,470,894 | 5,597,095 | ||||||
Warrants liabilities | 13,695 | 79,910 | ||||||
Shares to be issued | 120,327 | 101,577 | ||||||
Total liabilities | 7,895,692 | 11,680,260 | ||||||
Non-Current liabilities: | ||||||||
Loans payable | 356,431 | 197,946 | ||||||
Lease liability | 795,863 | 767,729 | ||||||
Total liabilities | 9,047,986 | 12,645,935 | ||||||
Stockholders’ deficiency: | ||||||||
Preferred stock, $0.001 par value, 10,000,000 shares authorized 3,541,500 and 3,541,500 shares issued outstanding at September 30, 2020 and June 30, 2020, respectively | 3,542 | 3,542 | ||||||
Common stock, $0.001 par value, 10,000,000,000 shares authorized, 2,844,688,836 and 1,763,277,230 shares issued and outstanding at September 30, 2020 and June 30, 2020, respectively | 2,844,690 | 1,763,278 | ||||||
Additional paid-in capital | 59,305,003 | 57,307,767 | ||||||
Common Stock Subscribed | 236,008 | 236,008 | ||||||
Accumulated deficit | (67,159,520 | ) | (68,438,332 | ) | ||||
Total stockholders' deficiency | (4,770,277 | ) | (9,127,737 | ) | ||||
Non-Controlling Interest | (33,971 | ) | (11,136 | ) | ||||
Total stockholders' deficiency | (4,804,249 | ) | (9,138,873 | ) | ||||
Total liabilities and stockholders' deficiency | 4,243,737 | 3,507,062 |
The accompanying notes are an integral part of these unaudited condensed unaudited consolidated financial statements
-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 | |||||||||||||
Revenues, net | $ | 720,810 | $ | 1,445,269 | $ | 1,474,784 | $ | 2,886,885 | ||||||||
Cost of goods sold | 435,690 | 1,071,033 | 927,858 | 2,130,452 | ||||||||||||
Gross profit | 285,120 | 374,236 | 546,925 | 756,433 | ||||||||||||
Selling, general and administrative expenses | 7,215,933 | 3,823,085 | 8,419,563 | 4,736,957 | ||||||||||||
Loss from operations | (6,930,814 | ) | (3,448,849 | ) | (7,872,637 | ) | (3,980,524 | ) | ||||||||
Non-operating income (expense): | ||||||||||||||||
Other income | 1,867 | 1,451 | 3,098 | 5,101 | ||||||||||||
Interest expense | (735,196 | ) | (460,102 | ) | (1,319,800 | ) | (741,480 | ) | ||||||||
Change in fair value of derivative liabilities | 1,291,168 | (2,019,927 | ) | 2,314,046 | (3,661,383 | ) | ||||||||||
Warrant Expense | — | 3,195 | (55,278 | ) | 25,920 | |||||||||||
Loss on notes conversion | (184,626 | ) | — | (184,626 | ) | 8,763 | ||||||||||
Loss on settlement | (232,776 | ) | (94,207 | ) | (382,635 | ) | (255,882 | ) | ||||||||
Gain on asset disposal | — | — | 7,000 | — | ||||||||||||
Amortization of debt discount | (963,407 | ) | (31,591 | ) | (2,118,407 | ) | (59,597 | ) | ||||||||
Debt forgiveness | 16,649 | (172,096 | ) | 16,649 | ||||||||||||
Miscellaneous | (740 | ) | — | (740 | ) | — | ||||||||||
Total non-operating expenses, net | (823,710 | ) | (2,584,531 | ) | (1,909,438 | ) | (4,661,909 | ) | ||||||||
Net loss | $ | (7,754,524 | ) | $ | (6,033,380 | ) | $ | (9,782,075 | ) | $ | (8,642,433 | ) | ||||
Basic net income (loss) per share | $ | (0.04 | ) | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.03 | ) | ||||
Diluted net income (loss) per share | $ | (0.04 | ) | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.03 | ) | ||||
Basic and diluted weighted average common shares outstanding * | 191,886,785 | 393,670,334 | 880,355,944 | 330,029,294 |
For the Three Months Ended, | ||||||||
September 30, 2020 | September 30, 202019 | |||||||
Revenues, net | $ | 2,146,326 | $ | 753,974 | ||||
Cost of goods sold | 1,028,815 | 492,168 | ||||||
Gross profit | 1,117,512 | 261,806 | ||||||
Selling, general and administrative expenses | 602,805 | 335,830 | ||||||
Advertising and Promotion Expense | 277,806 | 41,356 | ||||||
Marketing and Research Expense | 222,348 | 4,971 | ||||||
Professional Expense | 503,430 | 680,096 | ||||||
Salaries and Wages | 362,524 | 129,376 | ||||||
Stock Compensation Expense | 18,750 | 12,000 | ||||||
Total selling, general and administrative expenses | 1,987,763 | 1,203,629 | ||||||
Loss from operations | (870,251 | ) | (941,823 | ) | ||||
Non-operating income (expense): | ||||||||
Other income | — | 1,231 | ||||||
Interest expense | (466,774 | ) | (584,604 | ) | ||||
Bad debts | (3,517 | ) | — | |||||
Change in fair value of derivative liabilities | 3,495,147 | 1,022,878 | ||||||
Warrant Expense | 66,216 | (55,278 | ) | |||||
Loss on settlement | (75,000 | ) | (149,859 | ) | ||||
Loss on asset disposal | — | 7,000 | ||||||
Amortization of debt discount | (814,545 | ) | (1,155,000 | ) | ||||
Debt forgiveness | — | (172,096 | ) | |||||
Other expenses | (51,299 | ) | — | |||||
Total non-operating income (expenses), net | 2,150,227 | (1,085,728 | ) | |||||
Net income (loss) | $ | 1,279,977 | $ | (2,027,551 | ) | |||
Less: net loss attributable to the noncontrolling interest | $ | 1,165 | $ | — | ||||
Net income (loss) attributable to Sugarmade, Inc. | $ | 1,278,812 | $ | (2,027,551 | ) | |||
Basic net income (loss) per share | $ | 0.00 | $ | (0.00 | ) | |||
Diluted net income (loss) per share | $ | 0.00 | $ | (0.00 | ) | |||
Basic and diluted weighted average common shares outstanding * | 2,422,975,968 | 777,839,270 |
* 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-
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 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended September 30, 2020 & 2019 Equity Statements | Three Months Ended September 30, 2020 & 2019 Equity Statements | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | capital | shares | shares | shares | deficit | Total | 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, 2019 | 2,000,000 | 2,000 | 697,608,570 | 697,610 | 61,038,875 | — | — | 29,000 | (47,088,950 | ) | 14,678,534 | 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 | ) | — | — | — | — | 1,000,000 | 1,000 | 28,000 | (29,000 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reclass Derivative liability from conversion | — | — | 659,526 | — | — | — | — | 659,526 | — | — | — | — | 659,526 | — | — | — | — | 659,526 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares issued for conversions | — | — | 71,915,557 | 71,906 | 475,926 | — | — | — | — | 547,833 | — | — | 71,915,557 | 71,916 | 475,917 | — | — | — | — | 547,833 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share issued for Cash | — | — | 11,348,591 | 11,349 | 88,651 | — | — | — | — | 100,000 | — | — | 11,348,591 | 11,349 | 88,651 | — | — | — | — | 100,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares issued for Warrant Exercise | — | — | 28,381,818 | 28,382 | (14,249 | ) | — | — | — | — | 14,132 | — | — | 28,371,818 | 28,382 | (14,249 | ) | — | — | — | — | 14,133 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net Loss | — | — | — | — | — | — | — | — | (2,027,551 | ) | (2,027,551 | ) | — | — | — | — | — | — | — | (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 | 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 | 1,129,926,122 | 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 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred Stock | Common stock | Additional paid-in | Shares to be cancelled, common | Common Shares | Accumulated | Non Controlling | Total Shareholders' | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 | — | — | — | — | 3,574,808 | — | — | — | — | 3,574,808 | — | — | — | — | 1,805,188 | — | — | — | — | 1,805,188 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares issued for conversions | — | — | 47,865,888 | 47,866 | 967,525 | — | — | — | — | 1,015,391 | — | — | 1,081,411,606 | 1,081,412 | 192,048 | — | — | — | — | 1,273,459 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Repayment of capital to noncontrolling minority | — | — | — | — | — | — | — | (24,000 | ) | (24,000 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net Income | — | — | — | — | — | — | — | 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 | (67,155,519 | ) | (33,971 | ) | (4,804,249 | ) |
The accompanying notes are an integral part of these unaudited condensed unaudited consolidated financial statements.
-3-
Sugarmade, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows For
The Three Months Ended September 30, 2020 and 2019
(Unaudited)
For the six months ended December 31, | ||||||||
2019 | 2018 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (9,782,075 | ) | $ | (8,642,432 | ) | ||
Adjustments to reconcile net loss to cash flows from operating activities: | ||||||||
Initial valuation of debt discount | 239,300 | 149,143 | ||||||
Loss on settlement | 382,635 | 255,882 | ||||||
Gain on debt forgiveness | — | (16,649 | ) | |||||
Amortization of debt discount | 330,192 | 565,978 | ||||||
Stock based compensation | 6,041,550 | 5,097,206 | ||||||
Change in fair value of derivative liability | 273,299 | 3,661,418 | ||||||
Amortization of Intangible Assets | 700 | 700 | ||||||
Change in exercise of warrant | 67,387 | (25,920 | ) | |||||
Depreciation and amortization | 46,189 | 26,578 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | 60,145 | 113,179 | ||||||
Inventory | (138,801 | ) | (49,226 | ) | ||||
Prepayment, deposits and other receivables | 261,183 | (54,876 | ) | |||||
Lease liability | (36,919 | ) | — | |||||
Accounts payable and accrued liabilities | 5,955 | (40,876 | ) | |||||
Customer deposits | (62,174 | ) | (118,974 | ) | ||||
Other assets | (35,000 | ) | — | |||||
Unearned revenue | (19,890 | ) | (89,344 | ) | ||||
Interest Payable | 166,753 | 172,221 | ||||||
Right of use assets | 39,169 | — | ||||||
Accrued interest and other payables | 37,962 | 56,972 | ||||||
Net cash provided by (used in) operating activities | (2,122,441 | ) | 1,060,980 | |||||
Cash flows from investing activities: | ||||||||
Payment for property and equipment | — | (87,154 | ) | |||||
Net cash used in investing activities | — | (87,154 | ) | |||||
Cash flows from financing activities: | ||||||||
Proceeds from shares issuance | 340,000 | 235,000 | ||||||
Proceeds from convertible debt | 1,451,687 | 1,022,500 | ||||||
Proceeds (Repayment) from(to) loans | (22,555 | ) | (5,261 | ) | ||||
Payment to loan payable-related parties | 105,000 | 25,634 | ||||||
Proceeds from advance share issuance | 236,000 | (2,121,000 | ) | |||||
Bank overdraft | 5,907 | — | ||||||
Loan receivable | 75,033 | (13,151 | ) | |||||
Net cash provided by (used in) financing activities | 2,191,072 | (856,278 | ) | |||||
Net increase (decrease) in cash | 68,631 | 117,550 | ||||||
Cash paid during the period for: | ||||||||
Cash, beginning of period | 34,371 | 42,121 | ||||||
Cash, end of period | $ | 103,002 | $ | 159,671 | ||||
Supplemental disclosure of non-cash financing activities — | ||||||||
Shares issued for conversion of convertible debt | 689,997 | 516,391 | ||||||
Reclassification from derivative liabilities to APIC | 957,488 | 6,289,241 | ||||||
Debt discount related to convertible debt | 951,581 | 1,888,248 | ||||||
Debts settled through shares issuance | 229,000 | 1,292,544 | ||||||
Shares issued for award to Bizright and to be cancelled in future | (32,291,060 | ) | — | |||||
Shares issued for warrant exercise | 28,381 | — |
For The Three Months Ended | ||||||||
September 30, | ||||||||
2020 | 2019 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | 1,278,812 | $ | (2,027,551 | ) | |||
Non-controlling interest | 1,165 | — | ||||||
Adjustments to reconcile net loss to cash flows from operating activities: | ||||||||
Loss on settlement | — | 149,859 | ||||||
Amortization of debt discount | 814,545 | 302,801 | ||||||
Stock based compensation | 18,750 | 12,000 | ||||||
Change in fair value of derivative liability | (3,495,147 | ) | 332,024 | |||||
Warrant expense | (66,215 | ) | 67,387 | |||||
Depreciation | 41,617 | 23,142 | ||||||
Amortization of intangible assets | 350 | 350 | ||||||
Interest Expense – excess of debt discount | 278,488 | — | ||||||
Bad Debt | 3,517 | — | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (25,425 | ) | 125,024 | |||||
Inventory | 73,381 | (26,851 | ) | |||||
Prepayment, deposits and other receivables | (605,319 | ) | 256,996 | |||||
Loan receivable | — | — | ||||||
Other payables | 155,297 | (420,450 | ) | |||||
Accounts payable and accrued liabilities | (72,594 | ) | 269,604 | |||||
Customer deposits | 136,814 | (29,171 | ) | |||||
Unearned revenue | (5,712 | ) | (23,024 | ) | ||||
Right of use assets | 65,104 | 11,361 | ||||||
Lease liability | (64,401 | ) | (10,236 | ) | ||||
Interest Payable | 37,640 | 72,885 | ||||||
Net cash used in operating activities | (1,429,333 | ) | (913,850 | ) | ||||
Cash flows from investing activities: | ||||||||
Payment for property and equipment | (38,594 | ) | — | |||||
Net cash used in investing activities | (38,594 | ) | — | |||||
Cash flows from financing activities: | ||||||||
Proceeds from shares issuance | — | 100,000 | ||||||
Loan receivable | (8,979 | ) | 75,033 | |||||
Loan receivable - related parties | (2,239 | ) | — | |||||
Proceeds from advanced shares issuance | — | 96,000 | ||||||
Proceeds from loans - related parties | 619,394 | — | ||||||
Proceeds from convertible notes | 1,240,900 | 840,806 | ||||||
Repayment of convertible notes | (228,000 | ) | — | |||||
Repayment of capital to noncontrolling minority | (24,000 | ) | — | |||||
Proceeds from (repayment of) loans | 110,939 | (5,527 | ) | |||||
Net cash provided by financing activities | 1,708,015 | 1,106,312 | ||||||
Net increase in cash | 240,089 | 192,462 | ||||||
Cash paid during the period for: | ||||||||
Cash, beginning of period | 441,004 | 34,371 | ||||||
Cash, end of period | $ | 681,093 | $ | 226,833 | ||||
Cash paid interest | 81,244 | — | ||||||
Supplemental disclosure of non-cash financing activities — | ||||||||
Shares issued for conversion of convertible debt | 1,805,188 | 547,833 | ||||||
Reduction in derivative liability due to conversion | 1,273,460 | 659,526 | ||||||
Debt discount related to convertible debt | 918,600 | 539,300 | ||||||
Debts settled through shares issuance | — | 229,000 | ||||||
Shares issued for advanced payments | — | 14,132 |
The accompanying notes are an integral part of these unaudited condensed unaudited consolidated financial statements
-4-
Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019September 30, 2020
1. | Nature of Business |
Sugarmade, Inc. (hereinafter referred to as’‘we’’, ’‘us”as “we’ ’us” or “the/our 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’’).
Sugarmade, Inc. was founded in 2010. In 2014, CarryOutSupplies.com was acquired by Sugarmade, Inc., creating the Company as it is today.
As of the end of the reporting period, September 30, 2019,2020, we wereare involved in two businesses including themain business areas including:
1) The supply of consumable products to the quick servicequick-service restaurant sub-sector of the restaurant industry, and as an importer and distributor of non-medical personal protection equipment to business and marketer of hydroponic supplies to various agricultural sectors. We had previously been a marketer of culinary seasoning products Seasoning Stixconsumers, 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 engaged2) As an investor in the legal cultivation, processing and/Budcars licensed cannabis delivery service brand (“Budcars” or distributionthe “Budcars Brand”) and as a joint owner and joint operator in Budcar’s first operating location in Sacramento, California. 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 cannabis or cannabis containing products, ourthe agreement with Indigo, Sugarmade acquired an option to purchase an additional 30% interest in Budcars, upon which will provide the Company neither sells any products containing cannabis nor do we handle, process, or distribute any products containing cannabis.with a controlling interest. As of the date of this filing, the option has not yet been exercised and the Company’s stake in Budcars is at 40%.
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.quick-service restaurants (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 when2009. We have recently expanded the founders gained first-hand experience within the restaurant industry of the difficulty for restaurant ownersCarryOutSupplies.com operation 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,include non-medical personal protective equipment, 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.we also offer via our website.
-5-
Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019September 30, 2020
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, 2019September 30, 2020 are not necessarily indicative of the results for the full fiscal year.
Principles of consolidation
The condensed consolidated unaudited financial statements include the accounts of our Company, and its wholly-owned subsidiaries,subsidiary, SWC Group Inc., and Indigo Dye Group Corp., a variable interest entity (“VIE”). 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 condensed consolidated financial statements have been prepared assuming that we will continue as a going concern. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. These condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.
Management is endeavoring to increase revenue-generating operations. While priority is on generating cash from operations through the sale of the Company’s products, management is also seeking to raise additional working capital through various financing sources, including the sale of the Company’s equity and/or debt securities, which may not be available on commercially reasonable terms to our Company, or which may not be available at all. If such financing is not available on satisfactory terms, we may be unable to continue our business as desired and our operating results will be adversely affected. In addition, any financing arrangement may have potentially adverse effects on us and/or our stockholders. Debt financing (if available and undertaken) will increase expenses, must be repaid regardless of operating results and may involve restrictions limiting our operating flexibility. If we issue equity securities to raise additional funds, the percentage ownership of our existing stockholders will be reduced, and the new equity securities may have rights, preferences or privileges senior to those of the current holders of our common stock.
-6-
Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019September 30, 2020
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
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 | 3-5 years | |||
Furniture and equipment | 7 years | |||
Vehicles | 5 years | |||
Leasehold improvements | 5 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 sixthree months ended December 31, 2019September 30, 2020 and 2018.2019.
-7-
Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 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'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$350 for the sixthree months ended December 31,September 30, 2020 and 2019, and 2018, respectively.
-8-
Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019September 30, 2020
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$1,040,651 of operating lease right-of-use asset and $428,907$1,075,612 of operating lease liabilities were reflected to December 31, 2019on the Company’s September 30, 2020 financial statements.
Income taxes
We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their perspective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded, when necessary, to reduce deferred tax assets to the amount expected to be realized.
As a result of the implementation of certain provisions of ASC 740, Income Taxes (“ASC 740”), which clarifies the accounting and disclosure for uncertainty in tax position, as defined, ASC 740 seeks to reduce the diversity in practice associated with certain aspect of the recognition and measurement related to accounting for income taxes. We adopted the provisions of ASC 740 as of October 2, 2008, and have analyzed filing positions in each of the federal and state
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Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019September 30, 2020
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 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 sixthree months ended December 31, 2019.September 30, 2020.
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Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019September 30, 2020
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 theThe Company’s financial statements as of September 30, 2020 substantially all of its operations are conducted in onethree industry segmentsegments – (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; (3) cannabis products delivery service and sales, which accounts for approximately 73% of the Company’s total revenues.
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 31, 2019. 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.
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Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2020
3. | Concentration |
Customers
For the sixthree months ended December 31,September 30, 2020 and 2019, and 2018, our Company earned net revenues of $1,474,784$2,146,326 and $2,886,885$753,974 respectively. The vast majority of these revenues for the period ending December 31, 2019September 30, 2020 were derived from a large number of customers, whereas the vast majority of these revenues for the period ending December 31, 2018September 30, 2019 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.September 30, 2020.
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Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019
Suppliers
For the six monthsperiod ended December 31, 2019 and 2018,September 30, 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 September 30, 2020.
For the period ended September 30, 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,September 30, 2019, and 2018, respectively.
4. | Equity Transaction - Exclusive License Rights and Acquisition |
OnDuring December 13, 2017, wethe Company entered into a Master Marketing Agreementmaster 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 On April 11, 2018, the terms ofsame rights under 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 thismaster marketing agreement during April 2018 and stopped recognizingwere assigned to BZRTH Inc. On February 5, 2019, the revenue early 2019 upon exercise of the purchaseCompany exercised its option under the agreement. As of June 30, 2019, BizRight had assigned the marketing agreement to its operating entity,acquire 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.
Ontransaction closed 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.
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.
5. | VIE |
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,February 7, 2020, the Company will retain or will receive 102,248 sharesentered into a share sale and purchase agreement (the “Indigo Agreement”) with Indigo Dye Group Corp. ("Indigo"), a corporation located in BZRTH.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.
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Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019September 30, 2020
5. | VIE (continued) |
Pursuant to the terms of the Indigo 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 have 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 $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 Indigo. Upon exercise of the option, the Company will obtain control over Indigo.
Since late May 2020, the Company has been 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.
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Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2020
Presented below are condensed financial position data and operating results of the Indigo’s business segments for the period ended September 30, 2020.
As of September 30, 2020 | ||||
Current Assets | $ | 935,593 | ||
Non-Current Assets | 257,060 | |||
Total Assets | 1,192,653 | |||
Total Liabilities | 623,123 | |||
Total Equity | 569,530 | |||
Total Liabilities & Equity | $ | 1,192,653 | ||
Revenues | 1,571,356 | |||
Cost of Goods Sold | (647,460 | ) | ||
Gross Profit | 923,896 | |||
Expenses | (921,954 | ) | ||
Net Income | $ | 1,942 |
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Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2020
6. | 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,September 30, 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:
● | 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 September 30, 2020, there remains a balance, plus accrued interest on the $227,000 and on the $80,000 due under the notes. | |
● | On August 13, 2019, a lawsuit was filed against the Company for unpaid legal fees of $50,000 which originated from the Company’s former chairman and CEO. The Company entered into a settlement and owes a remaining total of $30,000, payable at the rate of $10,000 per month under this agreement. |
There can be no assurances the ultimate liability relative to these lawsuits will not exceed what is outlined above.
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
September 30, 2020
8. | 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 $156,425 as of September 30, 2020 and of $134,517 as of June 30, 2020.
9. | Loans Receivable |
Loans receivable amounted $10,344 and $1,365 as of September 30, 2020 and June 30, 2020, respectively. Loan receivables are mainly advanced payments to the other companies.
10. | Loans Receivable – Related Parties |
Loan receivables – related parties amounted $320,774 and $318,535 as of September 30, 2020 and June 30, 2020, respectively. Loan receivables – related parties are mainly advanced payments to the related party companies for business expense.
11. | 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 September 30, 2020 and June 30, 2020, the balance for the inventory totaled $606,090 and $679,471, respectively. Obsolescence reserve at September 30, 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
September 30, 2020
12. | Other Current Assets |
As of December 31, 2019September 30, 2020 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:
For the periods ended | ||||||||
September 30, 2020 | June 30, 2020 | |||||||
Prepaid Deposit | $ | 8,483 | $ | 48,483 | ||||
Prepaid Inventory | 585,957 | 65,449 | ||||||
Employees Advance | 2,397 | 324 | ||||||
Prepaid Expenses | 93,580 | 35,157 | ||||||
Undeposited Funds | 123,924 | 71,550 | ||||||
Other | 54,382 | 42,441 | ||||||
Total: | $ | 868,723 | $ | 263,404 |
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$350 for the periodsthree months ended December 31, 2019September 30, 2020 and June 30, 2019, respectively.
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Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019September 30, 2020
Property and Equipment, net |
As of December 31, 2019September 30, 2020 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 | September 30, 2020 | June 30, 2020 | ||||||
Office and equipment | $ | 739,447 | $ | 739,447 | ||||
Motor vehicles | 202,839 | 164,244 | ||||||
Leasehold Improvement | 24,470 | 24,470 | ||||||
Total | 966,756 | 928,161 | ||||||
Less: accumulated depreciation | (470,733 | ) | (429,116 | ) | ||||
Plant and Equipment, net | $ | 496,024 | $ | 499,045 |
For the six monthsperiods ended December 31, 2019September 30, 2020 and 2018,June 30, 2020, depreciation expenses amounted to $46,189$41,617 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, 2019September 30, 2020 and 2018.June 30, 2020.
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Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2020
Unearned Revenues |
Unearned revenue amounted to $47,536 and $53,248 as of September 30, 2020 and June 30, 2020, respectively. Unearned revenues are mainly due to contracts with extended payment terms, acceptance provisions and future delivery obligation.
16. | Other Payables |
Other payable amounted to $851,681 and $691,801 as of September 30, 2020 and June 30, 2020, respectively. Other payables are mainly credit card payables and taxes payables. As of September 30, 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%.
17. | Convertible Notes |
As of December 31, 2019September 30, 2020 and June 30, 2019,2020, the balance owing on convertible notes, net of debt discount, with terms as described below was $1,378,221$1,470,894 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,September 30, 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,September 30, 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,September 30, 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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Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019September 30, 2020
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 September 30, 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 September 30, 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 September 30, 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 September 30, 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.
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Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019
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.
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Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019
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 September 30, 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 September 30, 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 September 30, 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 September 30, 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 September 30, 2020, the note has been fully converted.
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Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2020
17. | 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.
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Table As of ContentsSeptember 30, 2020, the note has been fully converted.
Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019
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 September 30, 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.
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.
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 September 30, 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 September 30, 2020, the note principal and unpaid interest has been fully repaid by cash.
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Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2020
17. | 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 September 30, 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. During the three months ended September 30, 2020, the note holder converted $50,000 principal into 42,444,821 shares of the Company’s common stock.
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.
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Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2020
17. | 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.
In connection with the convertible debt, debt discount balance as of December 31, 2019September 30, 2020 and June 30, 20192020 were $2,015,634$961,980 and $1,189,341,$880,879, respectively, and were being amortized and recorded as interest expenses over the term of the convertible debt.
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Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2020
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, 2019September 30, 2020 and June 30, 2019,2020, the derivative liability was $3,259,345$1,416,409 and $2,991,953,$5,597,095, respectively. The Company recorded $2,314,046$3,788,146 gain and $3,661,383$1,442,295 loss from changes in derivative liability during the six monthsperiod ended December 31, 2019September 30, 2020 and 2018,June 30, 2020, respectively. The Binomial Option Price Modelmodel with the following assumption inputs:
September 30, 2020 | |||
Annual dividend yield | — | ||
Expected life (years) | 0.5-1.00 | ||
Risk-free interest rate | 0.09-0.16 | % | |
Expected volatility | 89-176 | % |
Annual dividend yield | — | |||
Expected life (years) | 0.5-1.00 | |||
Risk-free interest rate | % | |||
Expected volatility | % |
Fair value of the derivative is summarized as below:
Beginning Balance, June 30, 2020 | $ | 5,597,097 | ||
Additions | 1,174,134 | |||
Cancellation of Derivative Liabilities Due to Cash Repayment | (228,489 | ) | ||
Mark to Market | (3,266,657 | ) | ||
Reclassification to APIC due to conversions | (1,805,189 | ) | ||
Ending Balance, September 30, 2020 | $ | 1,470,894 |
Beginning Balance, June 30, 2019 | $2,991,953 |
Additions | |
Mark to Market | |
Reclassification to APIC due to conversions | |
Ending Balance, | $ |
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Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019September 30, 2020
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, 2019September 30, 2020 and June 30, 2019,2020, the fair value of the warrant liability was $15,663$695 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 September 30, 2020 and June 30, 2020, the fair value of the warrant liability was $13,000 and $78,000, respectively.
As of December 31, 2019September 30, 2020 and June 30, 2019,2020, the total fair value of the warrant liability was $15,663$13,695 and $24,658,$79,910, respectively.
Note payable |
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, 2019September 30, 2020 and June 30, 2019,2020, the loan principal balance was $25,982. As of December 31, 2019,September 30, 2020, the note is in default.
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 September 30, 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, 2019September 30, 2020 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.
On July 7, 2016, SWC received a loan in total amount of $30,000 from an employee. During the three months ended December 31, 2019, SWC received additional loan in total amount of 105,000 from a related party. The amount of the loan bear no interest and due on demand. As of December 31, 2019 and June 30, 2019, the balance of the loan due to related party were $135,000 and $30,000, respectively.
From time to time, SWC would receive short-term loans from company former director for its working capital needs.
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Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019September 30, 2020
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, 2019September 30, 2020 and June 30, 2019,2020, the note was in default and the outstanding balance under this note was $63,924$85,332 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, 2019September 30, 2020 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, 2019September 30, 2020 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, 2019September 30, 2020 and June 30, 2019,2020, the outstanding balance under this loan were $0$22,594 and $29,243,$24,524, respectively.
As of December 31, 2019 and June 30, 2019,On March 18, 2020, the Company had an outstandingentered into a loan balance of $192,030 and $214,585, respectively.
The Company is authorized to issue 1,990,000,000 shares of $.001 par value common stock and 10,000,000 shares of $.001 par value preferred stock.
Share issuance during the three months ended September 30, 2019 -
During the three months ended September 30, 2019, the Company issued 1,000,000 shares of common stock to settle the old liability to be issued in total amount of $29,000.
During the three months ended September 30, 2019, the Company issued 71,915,557 shares of common stockagreement for debt conversions in total amount of $547,833.
During the three months ended September 30, 2019, the Company issued 11,348,591 shares of common stock for cash in total amount of $100,000.
During the three months ended September 30, 2019, the Company issued 28,381,818 shares of common stock for warrant exercise in total amount of $14,132.
$150,000 with Celtic Bank with maturity date on March 18, 2020. As of September 30, 20192020 and June 30, 2019,2020, the outstanding balance under this loan were $69,230 and $117,635, respectively.
On June 26, 2020, the Company had 2,000,000 shareentered into a government loan agreement for $8,000 with maturity date on December 26, 2020. As of its preferred stock, 810,254,536September 30, 2020 and 697,608,570 shares of its common stock, respectively, issued and outstanding.
Share issuance duringJune 30, 2020, the three months ended December 31, 2019 -
During the three months ended December 31, 2019, the Company issued 18,181,818 shares of common stock to settle the old liability to be issued in total amount of $290,455.outstanding balance under this loan were $8,000.
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Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019September 30, 2020
During the three months ended December 31, 2019, theOn April 27, 2020, we entered into a loan borrowed $110,000 from Bank of America (“Lender”), pursuant to a Promissory Note issued by 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.to Lender (the “PPP Note”). The shares are to be cancelled in subsequent periodloan was made pursuant to the rescission on January 15, 2020.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.
During the three months ended December 31, 2019, theOn July 28, 2020, we entered into a loan borrowed $159,900 from Bank of America (“Lender”), pursuant to a Promissory Note issued by Company issued 750,001 shares of preferred stock for acquisition of BZRTH in total fair value of $10,725,014.to Lender (the “PPP Note”). The shares of preferred stock are to be cancelled in subsequent periodloan was made pursuant to the rescission on January 15, 2020.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.
DuringThe Company accounting for the three months ended December 31, 2019,PPP loan under Topic 470: (a). Initially record the Company issued 415,000 shares of series B preferred stock for awardcash 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 employee bonus in total fair value of $5,934,500.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, 2019September 30, 2020 and June 30, 2019,2020, 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.
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 hadoutstanding loan balance of $262,000$628,199 and $100,000 share to be issued.$517,260, respectively.
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Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019September 30, 2020
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 the year endedSeptember 30, 2020 and June 30, 2019,2020, the Company had potential shares to be issued under common stock in total amountbalance of $29,000.the loan was $30,000 and $30,000, respectively.
During the three months ended September 30, 2019,2020, the Company received loans from related parties. The amount of the loan bears no interest. As of September 30, 2020, the balance of the loan was $655,337 and $0, respectively.
23. | 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 $29,000three months ended September 30, 2020, the Company had potential shares to be issued to one employment agreement of $18,750.
As of September 30, 2020 and June 30, 2020, the Company had balance of $120,327 and $101,577 share to be issued, – equity by 1,000,000respectively.
24. | Stockholder’s Equity |
The Company is authorized to issue 10,000,000,000 shares of $.001 par value common stock and 10,000,000 shares of $.001 par value preferred stock. On April 22, 2020, the Company’sCompany filed an amendment to increase the total authorized shares to 10,010,000,000 – 10,000,000,000 shall be designated common stock.stock, par $0.001 per share and 10,000,000 shares shall be designated as preferred stock, par value $0.001 per share.
Share issuance during the three months ended September 30, 2020 -
During the three months ended December 31, 2019,September 30, 2020, the Company recordedissued 1,081,411,606 shares of common stock for debt conversions in total amount of $100,000 potential share to be issued – equity.$1,273,459.
As of December 31, 2019September 30, 2020 and June 30, 2019,2020, the Company had total potential3,541,500 share of its preferred stock, 2,844,688,836 and 1,763,277,230 shares to be issued underof its common stock, respectively, issued and preferred stock in total amount of $100,000 and $29,000, respectively.
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.outstanding.
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Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019September 30, 2020
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 of the date of this filing, this property became the headquarter of the company.
Six Months Ended | |||
December 31, 2019 | |||
Lease Cost | |||
Operating lease cost (included in general and administration in the Company’s unaudited condensed statement of operations) | $ | 74,988 | |
Other Information | |||
Cash paid for amounts included in the measurement of lease liabilities for the six months ended December 31, 2019 | $ | 72,738 | |
Remaining lease term – operating leases (in years) | 3.17 | ||
Average discount rate – operating leases | 10% | ||
The supplemental balance sheet information related to leases for the periods are as follows: | |||
Operating leases | |||
Right-of-use assets | $ | 416,421 | |
Total operating lease assets | $ | 416,421 | |
Short-term operating lease liabilities | $ | 110,824 | |
Long-term operating lease liabilities | $ | 318,083 | |
Total operating lease liabilities | $ | 428,907 | |
Maturities of the Company’s lease liabilities are as follows: | |||
Period ending June 30, | Operating | ||
Lease | |||
2020 | $ 146,932 | ||
2021 | 151,344 | ||
2022 | 155,888 | ||
2023 | 105,984 | ||
Total lease payments | 560,148 | ||
Less: Imputed interest/present value discount | 104,558 | ||
Present value of lease liabilities | $ 455,590 |
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.
Three Months Ended | |||
September 30, 2020 | |||
Lease Cost | |||
Operating lease cost (included in general and administration in the Company’s unaudited condensed statement of operations) | $ | 93,071 | |
Other Information | |||
Cash paid for amounts included in the measurement of lease liabilities for the nine months ended September 30, 2020 | $ | 65,105 | |
Remaining lease term – operating leases (in years) | 3.06 | ||
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 | $ | 1,040,651 | |
Total operating lease assets | $ | 1,040,651 | |
Short-term operating lease liabilities | $ | 279,749 | |
Long-term operating lease liabilities | $ | 795,863 | |
Total operating lease liabilities | $ | 1,075,612 | |
Maturities of the Company’s lease liabilities are as follows: | |||
Period ending June 30, | Operating | ||
Lease | |||
2021 | $ 280,166 | ||
2022 | 368,400 | ||
2023 | 326,225 | ||
2024 | 172,465 | ||
2025 | 147,446 | ||
Total lease payments | 1,294,701 | ||
Less: Imputed interest/present value discount | (219,089) | ||
Present value of lease liabilities | $ 1,075,612 |
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Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2019September 30, 2020
Subsequent events |
Convertible Notes
On December 27, 2019,October 9, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of $112,200$231,000 (includes $12,200$21,000 OID). The note is due 360180 days and bear an interest rate of 8%12%. The conversion price for the note is 60%$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 closing bidtrading price of the common stock for the 20 consecutiveprior trading days prior toincluding the day upon which a conversion date. The principal amount wasnotice is received in January 2020.by the Company or its transfer agent.
On January 30,October 13, 2020, the Company issued 6,684,843entered 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.
Conversions
Subsequent to November 20, 2020, there were multiple accredited investors converted approx. $187,200 of the convertible notes with $13,047 accrued interest into 256,515,904 shares of the Company’s common stock for debt conversions in total amount of $33,291.stocks.
Lease
On January 15,September 28, 2020, the Company and LMK Capital LLC (“LMK”) entered into a RescissionResidential Lease (the “Lease”) pursuant to which LMK agreed to lease to the Company five acres located in Northern California and Mutual Release Agreement (“Agreement”owned by LMK (the “Property”) with each. Jimmy Chan, Chairman of the parties agreeing to return all consideration exchanged pursuant toBoard, Chief Executive Officer, Chief Financial Officer and majority stockholder of the Stock Exchange Agreement.Company, is majority owner of LMK. The Agreementterm of the Lease begins on October 1, 2020 and ends on September 30, 2023; provided, for mutual releases and indemnities.
The shareholdershowever, that at the end 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 toterm, 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 sharesLease will continue on a 1 for 1,000month-to-month 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.
On February 7, 2020, the Company signed a definitive agreement (the “Agreement”) with Indigo Dye Group Corp. (“Indigo”) with a mailing address of 5600 Warehouse Way, Sacramento, CA 95826, the operator of BudCars Cannabis Delivery Service (“Budcars”), which provides services in the Sacramento metropolitan area. UnderPursuant to the terms of the Agreement,Lease, the Company will purchase a 40% stakepay rent in the Budcars operation for a cash amount of $700,000, and$20,000 per month. The Lease also provides that the Company will receive an optionpay a $250,000 security deposit to acquire an additional 30%, whichLMK. Pursuant to the terms of the Lease, the monthly rent will increase to $0.50 per sq. ft. on cultivation area upon exerciseapproval of certificate of occupancy with a 3% increase each subsequent year. The lease will provide a controlling stake innot be executed until the operation for the Company.patents approved.
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Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
N/A
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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.
As of September 30, 2020, we are involved in two main business areas including:
1) 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, and,
2) As an investor in the Budcars licensed cannabis delivery service brand (“Budcars” or the “Budcars Brand”) and as a joint owner and joint operator in Budcars’ first operating location in Sacramento, California. 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 which will provide the Company with a controlling interest. As of the date of this filing, the option has not yet been exercised and the Company’s stake in Budcars is at 40%.
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 (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. We have recently expanded the CarryOutSupplies.com operation to include non-medical personal protective equipment, which we also offer via our website.
Discussions with respect to our Company’s operations included herein refer to our operating subsidiary, SWC.those of, SWC and Indigo Dye Group Corp., a variable interest entity (“VIE”). As of the date of this filing,September 30, 2020, we had no other operations other than those of SWC.SWC and Indigo Dye Group Corp.
Results of Operations
The following table sets forth the results of our operations for the three months ended December 31, 2019September 30, 2020 and 2018.2019.
For the three months ended | ||||||||
December 31, | ||||||||
2019 | 2018 | |||||||
Net Sales | 720,810 | 1,445,269 | ||||||
Cost of Goods Sold: | 435,690 | 1,071,033 | ||||||
Gross profit | 285,120 | 374,236 | ||||||
Operating Expenses | 7,215,933 | 3,823,085 | ||||||
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 | ) |
For the three months ended | ||||||||
September 30, | ||||||||
2020 | 2019 | |||||||
Net Sales | $ | 2,146,326 | $ | 753,974 | ||||
Cost of Goods Sold: | 1,028,815 | 492,168 | ||||||
Gross profit | 1,117,512 | 261,806 | ||||||
Operating Expenses | 1,987,763 | 1,203,629 | ||||||
Loss from Operations | (870,251 | ) | (941,823 | ) | ||||
Other non-operating Income (Expense): | 2,150,227 | (1,085,728 | ) | |||||
Net Income (Loss) | 1,279,977 | (2,027,551 | ) | |||||
Less: net income attributable to the noncontrolling interest | 1,165 | — | ||||||
Net Income (Loss) attributed to Sugarmade, Inc. | $ | 1,278,812 | $ | (2,027,551 | ) |
Revenues
For the three months ended December 31,September 30, 2020 and 2019, and 2018, revenues were $720,810$2,146,326 and $1,445,269,$753,974, respectively. The decreaseincrease was primarily due to business loss within the stick supply industry.new cannabis delivery business.
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Cost of goods sold
For the three monthmonths ended December 31,September 30, 2020 and 2019, and 2018, costs of goods sold were $435,690$1,028,815 and $1,071,033$492,168 respectively. The decreaseincrease was primarily due to the business loss withincost of the stick supply industry.new cannabis delivery business.
Gross profit
For the three monthmonths ended December 31,September 30, 2020 and 2019, and 2018, gross profit was $285,120$1,117,512 and $374,236,$261,806, respectively. The decreaseincrease was primarily due to the business loss within the stick supply industry.new cannabis delivery business.
Operating expenses
For the three monthmonths ended December 31,September 30, 2020 and 2019, and 2018, operating expenses were $7,215,933$1,987,763 and $3,823,085,$1,203,629, respectively. The increase was due to the increase of employee stock compensation.
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Other non-operating income (expense)
The Company had total other non-operating expense of $823,710 and $2,584,531 for the three months ended December 31, 2019 and 2018, respectively. The decrease in non-operating income is related to the accounting for derivative liabilities.
Net income (loss)
Net loss totaled $7,754,524 for the three month ended December 31, 2019, compared to a net loss totaling $6,033,380 for the three-month ended December 31, 2018. The increase was mainly due to the increase of employee stock compensation.
The following table sets forth the results of our operations for the six months ended December 31, 2019 and 2018.
For the six months ended | ||||||||
December 31, | ||||||||
2019 | 2018 | |||||||
Net Sales | 1,474,784 | 2,886,885 | ||||||
Cost of Goods Sold: | 927,858 | 2,130,452 | ||||||
Gross profit | 546,925 | 756,433 | ||||||
Operating Expenses | 8,419,563 | 4,736,957 | ||||||
Loss From Operations | (7,872,637 | ) | (3,980,524 | ) | ||||
Other non-operating Income (Expense): | (1,909,438 | ) | (4,661,909 | ) | ||||
Net Income (Loss) | (9,782,075 | ) | (8,642,433 | ) |
Revenues
For the six months ended December 31, 2019 and 2018, revenues were $1,474,784 and $2,886,885, respectively. The decrease was primarily due tocannabis delivery business loss within the stick supply industry.
Cost of goods sold
For the six month ended December 31, 2019 and 2018, costs of goods sold were $927,858 and $2,130,452 respectively. The decrease was primarily due to the business loss within the stick supply industry.
Gross profit
For the six month ended December 31, 2019 and 2018, gross profit was $546,925 and $756,433, respectively. The decrease was primarily due to the business loss within the stick supply industry.
Operating expenses
For the six month ended December 31, 2019 and 2018, operating expenses were $8,419,563 and $4,736,957, respectively. The increase was due to the increase of employee stock compensation.incurred more expenses.
Other non-operating income (expense)
The Company had total other non-operating expenseincome (expense) of $1,909,438$2,150,227 and $4,661,909$(1,085,728) for the sixthree months ended December 31,September 30, 2020 and 2019, and 2018, 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)
Net lossincome totaled $9,782,075$1,279,977 for the six monththree months ended December 31, 2019,September 30, 2020, compared to a net loss totaling $8,642,433$2,027,551 for the six-monththree-month ended December 31, 2018.September 30, 2019. The increase was mainly due to the accounting for the changes in derivative liabilities due to conversions.
Net income attributable to Sugarmade, Inc. totaled $1,278,812 for the three months ended September 30, 2020, compared to a net loss attributable to Sugarmade, Inc. totaled $2,027,551 for the three-month ended September 30, 2019. The increase of employee stock compensation.was mainly due to the accounting for the changes in derivative liabilities due to conversions.
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Liquidity and Capital Resources
We have primarily financed our operations through the sale of unregistered equity and convertible notes payable. As of December 31, 2019,September 30, 2020, our Company had cash balance of $103,002,$681,093, current assets totaling $3,225,281$2,724,653 and total assets of $4,141,568.$4,243,737. We had current and total liabilities totaling $8,280,102$7,895,692 and $8,598,185,$9,047,986, respectively. Stockholders’ equity reflected a deficiency of $4,456,617.$4,804,249.
The following is a summary of cash provided by or used in each of the indicated types of activities during the sixthree months ended December 31, 2019September 30, 2020 and 2018:2019:
2019 | 2018 | |||||||
Cash (used in) provided by: | ||||||||
Operating activities | $ | (2,122,441 | ) | $ | 1,060,980 | |||
Investing activities | — | (87,154 | ) | |||||
Financing activities | 2,191,072 | (856,278 | ) |
2020 | 2019 | |||||||
Cash (used in) provided by: | ||||||||
Operating activities | $ | (1,429,333 | ) | $ | (838,817 | ) | ||
Investing activities | (38,594 | ) | — | |||||
Financing activities | 1,708,015 | 1,031,279 |
Net cash (used in) provided by operating activities was $(2,122,441)$(1,429,333) for the sixthree months ended December 31, 2019,September 30, 2020, and $1,060,980$(838,817) for the sixthree months ended December 31, 2018.September 30, 2019.
There were $nil and $87,154 fixed assets and intangible assets purchased duringNet cash (used in) provided by investing activities was $(38,594) for the sixthree months ended December 31, 2019September 30, 2020, and 2018 relating to investing activities, respectively.$nil for the three months ended September 30, 2019.
Net cash (used in) provided by financing activities was $2,191,072$1,708,015 for the sixthree months ended December 31, 2019September 30, 2020 and $(856,278)$1,031,279 for the sixthree months ended December 31, 2018.September 30, 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, we estimate that the cash necessary to implement our current business plan for the next twelve months is approximately $2,000,000.
Based on our need to raise additional funds to implement our business plans for the next twelve months, we have included a discussion concerning the presentation of our financial statements on a going concern basis in the notes to our financial statements and our independent public accountants have included a similar discussion in their opinion on our financial statements through June 30, 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.
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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 see
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, 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 September 30, 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., a variable interest entity (“VIE”). 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 financial statements.Company, or which may not be available at all. If such financing is not available on satisfactory terms, we may be unable to continue our business as desired and our operating results will be adversely affected. In addition, any financing arrangement may have potentially adverse effects on us and/or our stockholders. Debt financing (if available and undertaken) will increase expenses, must be repaid regardless of operating results and may involve restrictions limiting our operating flexibility. If we issue equity securities to raise additional funds, the percentage ownership of our existing stockholders will be reduced, and the new equity securities may have rights, preferences or privileges senior to those of the current holders of our common stock.
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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 equipment | 3-5 years | |||
Furniture and equipment | 7 years | |||
Vehicles | 5 years | |||
Leasehold improvements | 5 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 three months ended September 30, 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 $350 for the three months ended September 30, 2020 and 2019, respectively.
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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 $1,040,651 of operating lease right-of-use asset and $1,075,612 of operating lease liabilities were reflected on the Company’s September 30, 2020 financial statements.
Stock based compensation
Stock based compensation cost to employees is measured at the date of grant, based on the calculated fair value of the stock-based award, and will be recognized as expense over the employee’s requisite service period (generally the vesting period of the award). We estimate the fair value of employee stock options granted using the Binomial Option Pricing Model. Key assumptions used to estimate the fair value of stock options will include the exercise price of the award, the fair value of our common stock on the date of grant, the expected option term, the risk free interest rate at the date of grant, the expected volatility and the expected annual dividend yield on our common stock. We use our company’s own data among other information to estimate the expected price volatility and the expected forfeiture rate. Share-based compensation awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable.
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.
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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 three months ended September 30, 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 September 30, 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; (3) cannabis products delivery service and sales, which accounts for approximately 73% of the Company’s total revenues.
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.
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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, 2019,2020, our disclosure controls and procedures were ineffective due to the Company is relatively inexperienced with certain complexities within USGAAP and SEC reporting.
We have taken, and are continuing to take, certain actions to remediate the material weakness related to our lack of U.S. GAAP experience. We plan to hire additional credentialed professional staff and consulting professionals with greater knowledge and experience of U.S. GAAP and related regulatory requirements to oversee our financial reporting process in order to ensure our compliance with U.S. GAAP and other relevant securities laws. In addition, we plan to provide additional training to our accounting personnel on U.S. GAAP, and other regulatory requirements regarding the preparation of financial statements.
Notwithstanding the above identified material weakness, the Company’s management believes that its condensed consolidated financial statements included in this report fairly present in all material respects the Company’s financial condition, results of operations and cash flows for the periods presented and that this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.
Changes in Internal Controls over Financial Reporting
There have not been any changes in our internal controls over financial reporting during the quarter ended September 30, 20192020 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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PART II: Other Information
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 three months ended December 31, 2019,September 30, 2020, the Company issued/cancelled shares as followings:
∙ | 1,081,411,606 shares of common stock upon conversion of convertible notes of $1,266,484. |
Subsequent to September 30, 2020, the Company issued shares as followings:
Subsequent to December 31, 2019, the Company issued shares as followings:
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.
None.
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(1) Filed as an exhibit to this Report.
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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. | |||
By: | /s/ Jimmy Chan | ||
Jimmy Chan | |||
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