Notes To Consolidated Financial Statements
|
1.
|
Summary of significant accounting policies
|
1. Nature of Business
Sugarmade, Inc. (hereinafter referred
to as “we”, “us” or “the/our Company”) is a publicly traded company
incorporated in the state of Delaware. Our previous legal name was Diversified Opportunities, Inc. Our Company, Sugarmade,
Inc. operates through our subsidiary, Sugarmade, Inc., a California corporation (“SWC Group, Inc., - CA”). As
of the end of the reporting period, March 31, 2015, we were involved in several businesses including the supply of products to
the quick service restaurant sub-sector of the restaurant industry and as a distributor of paper products derived from non-wood
sources. We are headquartered in City of Industry, California, a suburb of Los Angeles, with
two additional warehouse locations in Southern California. As of date of this filing, we employ 21 full and
part-time workers and contractors.
Our main business operation, CarryOutSuppies.com,
is a producer and wholesaler of custom printed and generic supplies servicing more than 3,000 quick service restaurants.
Our
products include double poly paper cups for cold beverage; disposable, clear, plastic cold cups, paper coffee cups, yogurt cups,
ice cream cups, cup lids, cup sleeves, food containers, soup containers, plastic spoons and many other similar products for this
market sector. CarryOutSupplies.com was founded in 2009 when the founders gained first-hand experience within the restaurant
industry of the difficulty for restaurant owners to acquire custom printed supplies at a reasonable cost. Many quick
service restaurants wish to acquire custom printed products, such as those embossed with logos, but the minimum order size for
such customization had been cost prohibitive. With that in mind, carry out supplies was founded to provide products to this underserved
section of the market. Since that time, the company has become a key supplier to many popular U.S. franchises, particularly in
the frozen dessert segments. The company estimates it holds approximately 40% market share of generic and printed products within
the take out frozen yogurt and ice cream industries. We also hold a product supply and licensing agreement FreeHand® ThumbTray™ for the
western part of the United States.
We are also a distributor of paper made from
100% reclaimed sugarcane fiber, enhanced with bamboo. Sugarcane fiber, called bagasse, is a discarded byproduct of sugarcane production. Sugarmade,
Inc. was founded in 2010. As is explained below, in 2014, CarryOutSupplies.com was acquired by Sugarmade, Inc.,
creating the Company as it is today. Relative to Sugarmade Paper, our third-party contract manufacturer uses bagasse
and bamboo, as opposed to wood products significantly reducing its manufacturing carbon footprint, energy consumption,
and attendant water pollution during the manufacture of its products. This allows us to offer our unique, exclusive, tree-free
paper products at price-parity equal to or less than current recycled fiber products already on the market. Our products are unique
and we believe offer an ideal solution for those consumers (both corporate and individual) seeking to meet their sustainability
mandates or personal environmentally conscious goals, at a price that is equal to or less than current recycled products.
Our primary focus for this business unit as of filing of this report is the organization and administration of fundraisers and
paper drives for schools, non-profits and other institutions.
2. Summary of Significant Accounting
Policies
Basis of presentation
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles (“GAAP”) as promulgated in the United States of America.
Principles of consolidation
These consolidated financial statements include the accounts of
our Company and its wholly-owned subsidiary, Sugarmade-CA. All significant intercompany transactions and balances have been eliminated
in consolidation.
Going concern
The Company sustained continued operating losses
during the years ended June 30, 2015 and 2014. 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.
Use of estimates
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires our management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ significantly from those estimates.
Revenue recognition
We recognize revenue in accordance with Financial
Accounting Standards Board Accounting Standards Codification (“FASB ASC”) No. 605,
Revenue Recognition
.
Revenue is recognized when an arrangement and a determinable fee occur, and when collection is considered to be probable and products
are delivered or title has been transferred. This generally occurs upon shipment of the merchandise, which is when legal transfer
of title occurs. In the event that final acceptance of our product by the customer is uncertain, revenue is deferred until all
acceptance criteria have been met. We currently have a consignment arrangement with two of our customers. We record revenue on
consignment goods when the consigned goods are sold by the consignee and all other above mentioned revenue recognition criteria
have been satisfied. Cash deposits received in connection with the sales of our products prior to their being delivered or acceptance
if applicable is recorded as deferred revenue.
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 allowances of accounts receivable of $70,772 as of June 30, 2015 and 2014.
During
July 2013, the Company entered into an accounts receivable factoring arrangement with a non-related third party financial institution
(the
“
Factor
”
).
Pursuant to the terms of the arrangement, the Company, from time to time, shall sell to the Factor certain of its accounts receivable
balances on a recourse basis for credit approved accounts. At sole discretion of the Factor, the
Factor remits 80% of the accounts receivable balance (less any sales tax) to the Company, with the remaining balance, less fees,
to be forwarded to the Company once the Factor collects the full accounts receivable balance from the customer. An administrative
and processing fee of 1.15% is charged on the gross amount of accounts receivables factored, plus factoring commission ranging
from 0.5% to 1.15% of the gross face amount factored depending on the days outstanding for the accounts. The total amount of accounts
receivable factored was $0 and $$20,553 at December 31, 2015 and 2014, respectively.
Equipment
Equipment is stated at cost, less accumulated
depreciation. ciation. was plus factoring commission raare charged to expense as incurred. incurred. ion. ciation. was plus factoring
commisare capitalized and depreciated on a straight-line basis over their estimated useful lives ranging from 3-7 years.
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.
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 June 30, 2015 and 2014, the balance for the inventory totaled $528,566 and $69,319, respectively. No amounts were recognized
as an obsolescence reserve at June 30, 2015 and 2014.
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 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 June
30, 2015.
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 Black-Scholes-Merton Option Pricing Model. Key assumptions used to estimate the fair value of stock
options will include the exercise price of the award, the fair value of our common stock on the date of grant, the expected option
term, the risk free interest rate at the date of grant, the expected volatility and the expected annual dividend yield on our common
stock. We use our company’s own data among other information to estimate the expected price volatility and the expected forfeiture
rate. Share-based compensation awards issued to non-employees for services rendered are recorded at either the fair value of the
services rendered or the fair value of the share-based payment, whichever is more readily determinable.
Loss per share
Basic Earnings (loss) per share is computed
by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS is computed similar
to basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding
if all the potential common shares, warrants and stock options had been issued and if the additional common shares were dilutive.
Diluted EPS is based on the assumption that all dilutive convertible shares and stock options and warrants were converted
or exercised. Dilution is computed by applying the treasury stock method for the outstanding options and warrants, and the if-converted
method for the outstanding convertible instruments. Under the treasury stock method, options and warrants are assumed to be exercised
at the beginning of the period (or at the time of issuance, if later) and as if funds obtained thereby were used to purchase common
stock at the average market price during the period. Under the if-converted method, outstanding convertible instruments are assumed
to be converted into common stock at the beginning of the period (or at the time of issuance, if later). 994,587 potential shares
issuable upon conversion of convertible debts and 73,364 potential shares issuable upon exercising of warrants were excluded in
calculating diluted loss per share for the year ended June 30, 2015 due to the fact that issuance of the shares is anti-dilutive
as a result of the Company’s net loss.
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 2 inputs for its valuation
methodology for the derivative liabilities in determining the fair value using the Black-Scholes option-pricing model with the
following assumption inputs:
|
|
June 30, 2015
|
Annual dividend yield
|
|
|
—
|
|
Expected life (years)
|
|
|
0.99
|
|
Risk-free interest rate
|
|
|
0.27
|
%
|
Expected volatility
|
|
|
377
|
%
|
|
|
Carrying Value
|
|
Fair Value Measurements at
|
|
|
As of
|
|
June 30, 2015
|
|
|
June 30,
|
|
Using Fair Value Hierarchy
|
|
|
2015
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
304,000
|
|
|
$
|
—
|
|
|
$
|
304,000
|
|
|
$
|
—
|
|
Total
|
|
$
|
304,000
|
|
|
$
|
—
|
|
|
$
|
304,000
|
|
|
$
|
—
|
|
|
|
June 30, 2014
|
Annual dividend yield
|
|
|
—
|
|
Expected life (years)
|
|
|
1.29
|
|
Risk-free interest rate
|
|
|
0.16
|
%
|
Expected volatility
|
|
|
109
|
%
|
|
|
Carrying Value
|
|
Fair Value Measurements at
|
|
|
As of
|
|
June 30, 2014
|
|
|
June 30,
|
|
Using Fair Value Hierarchy
|
|
|
2014
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
228,237
|
|
|
$
|
—
|
|
|
$
|
228,237
|
|
|
$
|
—
|
|
Total
|
|
$
|
228,237
|
|
|
$
|
—
|
|
|
$
|
228,237
|
|
|
$
|
—
|
|
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 Black-Scholes-Merton 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. Refer to Note 6 for details.
Segment Reporting
FASB ASC Topic 280, “Segment Reporting”,
requires use of the “management approach” model for segment reporting. The management approach
model
is based on the way a company’s management organizes segments within the Company for making operating decisions and assessing
performance. Reportable segments are based on products and services, geography, legal structure, management structure,
or any other manner in which management disaggregates a company.
FASB ASC Topic 280 has no effect on the Company’s
financial statements as substantially all of its operations are conducted in one industry segment – paper and paper-based
products such as paper cups, cup lids, food containers, etc.
New accounting pronouncements not yet
adopted
In August
2014, the FASB issued ASU 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties
about an Entity’s Ability to Continue as a Going Concern. The amendments is ASU 2014-15 are intended to define management’s
responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern
and to provide related footnote disclosures. The amendments in this standard are effective for annual periods ending after December
15, 2016, and interim periods within annual periods beginning after December 15, 2016. We are evaluating the effect, if any; adoption
of ASU No. 2014-15 will have on our condensed consolidated financial statements.
In November
2014, the FASB issued ASU 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial
Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity. The amendments in ASU 2014-16 clarifies how current
U.S. GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument
that is issued in the form of a share. The amendments clarify that an entity should consider all relevant terms and features, including
the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. The amendments
in this standard are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2015. We are evaluating the effect, if any; adoption of ASU No. 2014-16 will have on our condensed consolidated
financial statements.
In November
2014, the FASB issued ASU No. 2014-17, Business Combinations (Topic 805): Pushdown Accounting. The amendments in ASU 2014-17 provide
an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event
in which an acquirer obtains control of the acquired entity. The amendment in this standard is effective on November 18, 2014.
After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control events or to
its most recent change-in-control event. We are evaluating the effect, if any; adoption of ASU No. 2014-17 will have on our condensed
consolidated financial statements.
In February
2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The amendments in ASU
2015-02 are intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited
liability corporations, and securitization structures. The amendment in this standard is effective for public business entities
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. We are evaluating the effect,
if any, adoption of ASU No. 2015-02 will have on our condensed consolidated financial statements.
3. Concentration
Customers
For the year ended June 30, 2015, our Company
earned net revenues of $2.91 million. The vast majority of these revenues were derived from a large number of customers. No customers
accounted for over 10% of the Company’s total revenues for the year ended June 30, 2015.
For the year ended June 30, 2014, our Company
had earned net revenues of $70,751. A significant portion of our Company’s revenue was derived from a small number of customers.
For the year ended June 30, 2014, sales to one of our Company’s customers accounted for 50% of net sales. The revenues only
reflected prior to the acquisition of SWC, and were revenues from Sugarmade, Inc.
Suppliers
For the year ended June 30, 2015, we purchased
products for sale by CarryOutSupplies from several contract manufacturers located in Asia. A substantial portion of the Company’s
inventory was purchased from one supplier that functioned as an independent foreign procurement agent. Two suppliers accounted
for 62% and 15% of the Company’s total inventory purchase in the year ended June 30, 2015, respectively.
For the year ended June 30, 2014, all of our
tree free paper products were purchased from Sugarcane Paper Company (SCPC) and their contract manufacturers. SCPC is a company
controlled by the Company’s former CEO, Clifton Leung. Mr. Leung was also a former director of the Company. We were presently
diversifying our manufacturing and process management options to include other third party contract manufacturers for current and
future production needs.
4. Litigation
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 June 30, 2015, there were no legal claims currently pending or threatened
against us that in the opinion of our management would be likely to have a material adverse effect on our financial position, results
of operations or cash flows. However, as of the date of this filing, we were involved in the following legal proceedings.
As of the date of this filing
,
the
Company is a plaintiff, in Contra Costa County, California, in a suit alleging breach of fiduciary duty, conspiracy to commit breach
of fiduciary duty, fraud, conspiracy to commit fraud, conversion, breach of contract, and interference with contractual relations
against, Diversified Products Group Inc. (DPG), Stephen Pinto, Lewis Cohen and Heidi Estiva, who were former sales agents for the
Company. Pinto is the Company’s former Chairman of the board of directors. The Company plans to actively pursue this case.
During November of 2014, the Company received notice that a cross complaint had been filed against the Company. The complaint alleges
the parties were induced to make a series of investments in the Company by the material misrepresentations and omissions made by
the Company. The Company believes the allegations are without merit. The Company plans to vigorously defend against such claims.
No changes have occurred as of the filing date of this report.
On May 24, 2014, the Labor Commissioner, State
of California issued an Order, Decision or Award of the Labor Commissioner against the Company in the amount of $56,365. On October
28, 2014, the Company entered into a settlement agreement, which was effective October 28, 2014, to resolve a judgment against
the Company via the issuance of 502,533 restricted shares and a $30,000 cash payment.
On December 11, 2013, the Company was served
with a complaint from two Convertible Note Holders and investors in the Company, Lovitt & Hannan, Inc. Salary Deferral Plan
FBO J. Thomas Hannan, Attorney at Law 401K Plan and Trust, and Kevin M. Kearney. The Company’s former CEO, Scott Lantz, was
also named in the suit. The complaint alleges Hannan was induced to make a series of investments in the Company by the material
misrepresentations and omissions made by the Company. The Company believes the allegations are without merit. The Company still
continues to vigorously defend against such claims. No changes have occurred as of the filing date of this report.
5.
Convertible
Notes
As of June 30, 2015 and 2014 the balance owing
on convertible notes was $419,167 and $525,000 respectively.
On various dates during June 2014 and July
2014, the Company and holders of certain convertible notes agreed to 1) cancel $0.50 warrants and retained the $0.01 warrant, as
defined in the original Convertible Note Purchase Agreements warrants to purchase common shares in the Company, 2) extend the due
dates on the Notes to July 1, 2016, and 3) reduce the interest on the notes to 10% from 14%. As of June 30, 2014, the Company extended,
seven of the convertible notes totaling $275,000 for two years until July 1, 2016. The remaining $250,000 convertible notes have
reached maturity and the Company was in the process of negotiating a settlement.
The convertible promissory notes must be repaid
by our Company within six months from the date of issuance; accrue interest at the rate of 14%; and are subject to conversion at
the election of the investors at such time as our Company has raised a minimum of $500,000 in a subsequent equity financing. The
conversion price will be the lower of 80% of the per share purchase price paid for by the new investors in the subsequent financing,
or $0.50 per share. Unless these promissory notes are converted or repaid earlier, our Company must pay the note-holders the amount
of the then accrued interest on the three, six, and nine month anniversaries of the issue date. As of June 30, 2015, one convertible
promissory note, in the amount of $100,000, was converted to restricted common shares.
As of June 30, 2015, the Company’s convertible
notes consisted of following:
|
|
|
|
As of June 30, 2015
|
Note Type and Investor
|
|
|
|
|
|
|
|
|
|
|
Due Date
|
|
Balance
|
|
Discount
|
|
Carrying Value
|
|
|
|
|
|
|
|
|
|
Convertible Note
|
|
|
7/1/2016
|
|
|
$
|
25,000
|
|
|
$
|
—
|
|
|
$
|
25,000
|
|
Convertible Note
|
|
|
7/1/2016
|
|
|
|
25,000
|
|
|
|
—
|
|
|
|
25,000
|
|
Convertible Note
|
|
|
7/1/2016
|
|
|
|
40,000
|
|
|
|
—
|
|
|
|
40,000
|
|
Convertible Note
|
|
|
7/1/2016
|
|
|
|
50,000
|
|
|
|
—
|
|
|
|
50,000
|
|
Convertible Note
|
|
|
7/1/2016
|
|
|
|
25,000
|
|
|
|
—
|
|
|
|
25,000
|
|
Convertible Note
|
|
|
6/18/2014
|
|
|
|
25,000
|
|
|
|
—
|
|
|
|
25,000
|
|
Convertible Note
|
|
|
6/18/2014
|
|
|
|
25,000
|
|
|
|
—
|
|
|
|
25,000
|
|
Convertible Note
|
|
|
12/28/2014
|
|
|
|
25,000
|
|
|
|
—
|
|
|
|
25,000
|
|
Convertible Note
|
|
|
7/1/2016
|
|
|
|
8,333
|
|
|
|
—
|
|
|
|
8,333
|
|
Convertible Note
|
|
|
7/1/2016
|
|
|
|
20,834
|
|
|
|
—
|
|
|
|
20,834
|
|
Convertible Note
|
|
|
7/31/2014
|
|
|
|
25,000
|
|
|
|
—
|
|
|
|
25,000
|
|
Convertible Note
|
|
|
7/1/2016
|
|
|
|
25,000
|
|
|
|
—
|
|
|
|
25,000
|
|
Convertible Note
|
|
|
7/1/2016
|
|
|
|
100,000
|
|
|
|
—
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Convertible Promissory Notes
|
|
|
|
|
|
$
|
419,167
|
|
|
|
|
|
|
$
|
419,167
|
|
6. Derivative liabilities
The derivative
liability is derived from the conversion features in note 5 and stock warrant in note 7. All were valued
using the
weighted-average Black-Scholes-Merton option pricing model using the assumptions detailed below. As of June 30, 2015 and 2014,
the derivative liability was $304,000 and $228,237, respectively. The Company recorded $82,737 loss and $90,662 gain from changes
in derivative liability during the years ended June 30, 2015 and 2014, respectively. The Black-Scholes model with the following
assumption inputs:
|
|
June 30, 2015
|
June 30, 2014
|
Annual dividend yield
|
|
|
—
|
|
-
|
Expected life (years)
|
|
|
0.99
|
|
0.41 – 2.15
|
Risk-free interest rate
|
|
|
0.27
|
%
|
0.14% - 0.19%
|
Expected volatility
|
|
|
377
|
%
|
66% - 147%
|
7. Stock warrants
In connection with the issuance of the promissory
notes, the investors in the aggregate received two-year warrants to purchase up to a total of 50,000 shares of common stock at
$0.50 per share, and two-year warrants purchasing up to a total of 81,250 shares of common stock at $0.01 per share. For purposes
of accounting for the detachable warrants issued in connection with the convertible notes, the fair value of the warrants was estimated
using the Black-Scholes-Merton option pricing formula. The value of all warrants granted at the date of issuance totaled $508,413
and was recorded as a discount to the notes payable. The amount will be amortized over the nine month term of the respective convertible
note as additional interest expense.
On various dates during June 2014 and December
2014 the Company and holders of certain convertible notes agreed to cancel warrants to purchase common shares in the company and
to extend the due dates on the Notes to July 1, 2016. $0.50 warrants and “Bonus Warrants” priced at $0.01, as defined
in the original Convertible Note Purchase Agreements we cancelled pertaining to the Note and warrants acquired on the following
dates for the following Convertible Notes and amounts. In total, 48,750 warrants at $0.50 and 25,000 “Bonus Warrants at $0.01
were cancelled.
|
|
Number of
Shares
|
|
Weighted Average
Exercise Price
|
|
Outstanding at June 30, 2014
|
|
|
$
|
180,000
|
|
|
$
|
0.20
|
|
|
Granted
|
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited September 30, 2014
|
|
|
|
38,750
|
|
|
|
0.09
|
|
|
Forfeited December 31, 2014
|
|
|
|
10,000
|
|
|
|
0.04
|
|
|
Outstanding at June 30, 2015
|
|
|
$
|
131,250
|
|
|
$
|
0.04
|
|
Following is a summary of the status of warrants
outstanding at June 30, 2015:
Date Issued
|
|
|
Exercise Price
|
|
Number of Shares
|
|
Expiration Date
|
|
|
8/17/12
|
|
|
|
$
|
0.01
|
|
|
|
6,250
|
|
|
|
7/1/2016
|
|
|
|
8/20/12
|
|
|
|
$
|
0.01
|
|
|
|
6,250
|
|
|
|
7/1/2016
|
|
|
|
9/10/12
|
|
|
|
$
|
0.01
|
|
|
|
10,000
|
|
|
|
7/1/2016
|
|
|
|
9/13/12
|
|
|
|
$
|
0.01
|
|
|
|
12,500
|
|
|
|
7/1/2016
|
|
|
|
9/18/12
|
|
|
|
$
|
0.01
|
|
|
|
6,250
|
|
|
|
7/1/2016
|
|
|
|
10/5/12
|
|
|
|
$
|
0.01
|
|
|
|
2,500
|
|
|
|
7/1/2016
|
|
|
|
10/25/12
|
|
|
|
$
|
0.01
|
|
|
|
6,250
|
|
|
|
7/1/2016
|
|
|
|
1/31/13
|
|
|
|
$
|
0.01
|
|
|
|
6,250
|
|
|
|
7/1/2016
|
|
|
|
10/22/12
|
|
|
|
$
|
0.01
|
|
|
|
25,000
|
|
|
|
7/1/2016
|
|
|
|
8/24/12
|
|
|
|
$
|
0.50
|
|
|
|
50,000
|
|
|
|
8/24/2016
|
|
|
|
Total warrants as of June 30, 2015
|
|
|
131,250
|
|
Following is a summary of the status of warrants
outstanding at June 30, 2014:
|
Date Issued
|
|
|
|
Exercise Price
|
|
|
|
Number of Shares
|
|
|
|
Expiration Date
|
|
|
8
|
/17/12
|
|
$
|
0.01
|
|
|
|
6,250
|
|
|
|
7
|
/1/2016
|
|
8
|
/20/12
|
|
$
|
0.01
|
|
|
|
6,250
|
|
|
|
7
|
/1/2016
|
|
9
|
/10/12
|
|
$
|
0.01
|
|
|
|
10,000
|
|
|
|
7
|
/1/2016
|
|
9
|
/13/12
|
|
$
|
0.01
|
|
|
|
12,500
|
|
|
|
7
|
/1/2016
|
|
9
|
/18/12
|
|
$
|
0.01
|
|
|
|
6,250
|
|
|
|
7
|
/1/2016
|
|
10
|
/5/12
|
|
$
|
0.01
|
|
|
|
2,500
|
|
|
|
7
|
/1/2016
|
|
10
|
/25/12
|
|
$
|
0.01
|
|
|
|
6,250
|
|
|
|
7
|
/1/2016
|
|
1
|
/31/13
|
|
$
|
0.01
|
|
|
|
6,250
|
|
|
|
7
|
/1/2016
|
|
10
|
/22/12
|
|
$
|
0.01
|
|
|
|
25,000
|
|
|
|
7
|
/1/2016
|
|
8
|
/24/12
|
|
$
|
0.50
|
|
|
|
50,000
|
|
|
|
8
|
/24/2016
|
9/18/12 – 10/31/12
|
|
$
|
0.50
|
|
|
|
48,750
|
|
|
|
9/18/2014 – 10/31/2014
|
|
Total warrants as of June 30, 2014
|
|
|
180,000
|
|
|
|
|
|
8. 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 (3.25% as of September 30, 2013). 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 June 30, 2015 and 2014, the loan principal balance was $25,982.
Note payable to others
On January 23, 2013, the Company entered into
a promissory note with Mira Ablaza (a former employee of the Company owns less than 5% of the Company’s stock). The original
principal amount was $40,000 and the note bore no interest. The note was payable upon demand. As of June 30, 2015, this note had
a balance of $25,000.
On January 28, 2013, the Company entered into
a promissory note with David Troung (a former employee of the Company, whom owns less than 5% of the Company’s stock). The
principal amount was $150,000 and the interest rate on the note was 10%. The note was due on December 31, 2015 and became payable
upon demand after December 31, 2015. As of June 30, 2015, this note was paid in full.
On December 31, 2013, the Company entered into
a promissory note with Kalvin Kwong (an employee of the Company, whom owns less than 5% of the Company’s stock). The principal
amount was $20,000 and the interest rate on the note was 10%. The note had a term of six months. However, this note was now payable
upon demand per the oral agreement with the lender. As of June 30, 2015, this note had a balance of $20,000.
On January 3, 2014, the Company entered into
a promissory note with David Troung (a former employee of the Company, whom owns less than 5% of the Company’s stock). The
principal amount was $70,000 and the interest rate on the note was 10%. The note was due on December 31, 2015 and became payable
upon demand after December 31, 2015. As of June 30, 2015, this note had a balance of $50,000.
On January 13, 2014, the Company entered into
a promissory note with Tsz Ming Wong (an employee of the Company, whom owns less than 5% of the Company’s stock). The principal
amount was $25,000 and the note bore no interest. The note had a term of 24 months and was due on January 13, 2016, and became
payable upon demand after January 13, 2016. As of June 30, 2015, this note had a balance of $25,000.
On January 13, 2014, the Company entered into
a promissory note with Michael Yeh (an employee of the Company, whom owns less than 5% of the Company’s stock). The principal
amount was $30,000 and the note bore no interest. The note had a term of 24 months and was due on January 13, 2016, and became
payable upon demand after January 13, 2016. As of June 30, 2015, this note had a balance of $23,000.
On January 14, 2015, the Company entered into
a promissory note with Richard Ko (an employee of the Company, whom owns less than 5% of the Company’s stock). The principle
amount was $30,000 and the note bore no interest. The note had a term of one year and was due on January 14, 2016, and became payable
upon demand after January 14, 2016. As of June 30, 2015, this note had a balance of $30,000.
On May 1, 2015, the Company entered into a
promissory note with Dung Tran (a former employee of the Company, whom owns less than 5% of the Company’s stock). The principal
amount was $89,000 and the repayment amount will be $100,000 with interest of $11,000. The note had a term of 3 months and is due
on July 31, 2015. As of June 30, 2015, this note had a balance of $100,000.
9. Debt settlements
On August 7, 2014, the Company resolved a debt
from line of credit of $274,000 through the issuance of 2,840,000 restricted common shares at fair value of $343,640 with a loss
of $1,714,000.
On August 7, 2014, the Company resolved a debt
of $47,500 through the issuance of 3,000,000 restricted common shares at fair value of $363,000 with no gain or loss recognized.
On August 7, 2014, the Company resolved a debt
of $111,392 through the issuance of 1,113,918 restricted common shares at fair value of $779,743 with a loss of $668,351.
On August 7, 2014, the Company resolved a debt
of $252,706 through the issuance of 900,000 restricted common shares at fair value of $108,900 with a loss of $377,295.
On October 28, 2014, the Company resolved a
debt of $28,528 through the issuance of 570,556 restricted common shares at fair value of $11,411 with a gain of $17,117.
On October 28, 2014, the Company resolved a
debt of $13,274 through the issuance of 265,480 restricted common shares at fair value of $5,310 with a gain of $7,965.
On October 28, 2014, the Company converted
$275,000 of short-term debt into 15,277,778 common shares at fair value of $1,665,078 with a loss of $1,390,078. The holder of
the debt was LMK CAPITAL LLC, DBA PREMIER PAPER & PLASTIC INTERNATIONAL (“LMK”), a Company in which our CEO, Jimmy
Chan, is currently employed as an independent consultant.
On October 28, 2014, the Company converted
$75,000 of short-term debt into 4,166,666 common shares at fair value of $452,239 with a loss of $377,239. The holder of the debt
was LMK CAPITAL LLC, DBA PREMIER PAPER & PLASTIC INTERNATIONAL (“LMK”), a Company in which our CEO, Jimmy Chan,
is currently employed as an independent consultant.
On October 28, 2014, the Company resolved debts
related to former employees and/or contractors through the issuance of 4,841,901 restricted common shares at fair value of $532,609
with a loss of $268,622. Shares were issued December 19, 2014.
On October 28, 2014, a note holder converted
$200,000 of short-term debt into 10,000,000 common shares at fair value of $1,089,245 with a loss of $900,000.
On November 28, 2014, the Company resolved
debts related to consulting services through the issuance of 2,500,000 restricted common shares at fair value of $150,000 with
no gain or loss recognized.
On December 5, 2014, the Company resolved a
debt of $30,000 with the issuance of 1,000,000 restricted common shares at fair value of $80,000 with no gain or loss recognized.
On December 19, 2014, the Company resolved
a debt of $105,753 through the issuance of 1,057,534 restricted common shares at fair value of $116,329 with a loss of $10,575.
On December 19, 2014, the Company resolved
a debt of $33,373 through the issuance of 667,466 restricted common shares at fair value of $73,421 with a loss of $40,048.
On December 19, 2014, the Company resolved
a debt of $393 through the issuance of 7,855 restricted common shares at fair value of $157 with a gain of $236.
On December 19, 2014, the Company resolved
a debt of $26,000 through the issuance of 520,000 restricted common shares at fair value of $39,000 with a loss of $36,400.
On June 1, 2015, Adam Levy signed a note conversion
request to convert a convertible note into 46,466 restricted shares to settle a debt of $2,248. The Company recorded $2,399 loss
on this conversion and issued the shares on June 4, 2015.
On June 1, 2015, Nathan Financial, LLC signed
a note conversion request to convert a convertible note into 112,291 restricted shares to settle a debt of $5,432. The Company
recorded $5,797 loss on this conversion and issued the shares on June 4, 2015.
10. Shares issued for services
On March
19, 2015, the Board approved the issuance of 1,000,000 restricted common shares as the compensation for EB5-program consulting
services. Total fees for the consulting service is $20,000 cash and $30,000 worth of the Company’s stock at the rate of $0.03
per share, equivalent to 1,000,000 restricted shares of common stock of the Company. The Company recorded $30,000 stock compensation
expense for the year ended June 30, 2015.
On February
1, 2015, the Company entered another EB5-program consulting service agreement with an individual for the issuance of 1,000,000
restricted common shares as the compensation for its consulting service. Total fees for the consulting service is $20,000 cash
and $30,000 worth of the Company’s stock at the rate of $0.03 per share, equivalent to 1,000,000 shares of common stock of
the Company. The Company recorded $30,000 stock compensation expense for the year ended June 30, 2015.
On January
1, 2015, the Company entered a consulting and marketing agreement with a consulting firm for the issuance of 2,000,000 restricted
common shares in exchange for the marketing and sales related services. The stock price was $0.04 on the approval day. The Company
recorded $80,000 stock compensation expense for the year ended June 30, 2015.
On December
23, 2014, the Board approved the issuance of 10,492,460 shares as part of a management and employees retention stock award program.
The stock price was $0.04 on the approval day. The Company recorded $541,668 stock compensation expense for the year ended June
30, 2015.
On January
15, 2014, the Company entered a consulting service agreement with an individual for the issuance of 1,500,000 restricted common
shares as the compensation for its consulting service. The stock price was $0.07 on the approval day. The Company recorded $405,000
stock compensation expense for the year ended June 30, 2015.
On September
18, 2013, the Board approved the issuance of 2,500,000 restricted common shares as the compensation for management service. On
November 11, 2014, the Company and the consultant entered an amendment to the management agreement and both party agreed the 2,500,000
shares would be rewarded to the consult at his resignation date. The stock price was $0.7 on the approval day. The Company recorded
$1,750,000 stock compensation expense for the year ended June 30, 2015.
11. Common shares issued for equity financing
On August 7, 2014, the Company
issued 8,750,000 restricted common shares for equity financing of $210,000.
On September 9, 2014, the
Company issued 4,500,000 restricted common shares for equity financing of $50,000.
On December 19, 2014, the
Company issued 900,000 restricted common shares for equity financing of $10,000.
On February 25, 2015, the
Company issued 1,000,000 restricted common shares for equity financing of $20,000.
12.
Common shares reserved for future
issuances
The following table summarizes shares of our common stock reserved
for future issuance at June 30, 2015:
Common shares to be issued under conversion feature
|
|
|
5,109,398
|
|
Common shares to be issued under $0.01 warrants
|
|
|
81,250
|
|
Common shares to be issued under $0.50 warrants
|
|
|
50,000
|
|
|
|
|
|
|
Total common shares reserved for future issuance
|
|
|
5,240,648
|
|
13. Related party transactions
On December
23, 2014, the Board approved the issuance of 10,492,460 shares as part of a management and employees retention stock award program.
The stock price was $0.04 on the approval day. The Company recorded $541,668 stock compensation expense for the six months ended
December 31, 2014.
On October 28, 2014, the Company converted
$275,000 of short-term debt into 15,277,778 common shares at fair value of $1,665,078 with a loss of $1,390,078. The holder of
the debt was LMK CAPITAL LLC, DBA PREMIER PAPER & PLASTIC INTERNATIONAL (“LMK”), a Company in which our CEO, Jimmy
Chan, is currently employed as an independent consultant.
On October 28, 2014, the Company converted
$75,000 of short-term debt into 4,166,666 common shares at fair value of $452,239 with a loss of $377,239. The holder of the debt
was LMK CAPITAL LLC, DBA PREMIER PAPER & PLASTIC INTERNATIONAL (“LMK”), a Company in which our CEO, Jimmy Chan,
is currently employed as an independent consultant.
In addition, at June 30, 2015, the Company
had outstanding balance of $114,179 from two of its directors, and $12,583 from one major shareholder’s family member for
its working capital needs. These borrowings bore no interest, and were payable upon demand.
14. Loans payable
On August 14, 2009, SWC entered a loan agreement
with a bank for $50,000 with maturity on August 14, 2016. The loan had an annual interest rate of 7% with monthly payment of $755.
At June 30, 2015, the outstanding balance under this loan was $10,816.
On March 1, 2012, SWC entered an equipment
loan agreement with a bank with maturity on January 1, 2017. The monthly payment is $435. At June 30, 2015, the outstanding balance
under this loan was $7,962.
On July 1, 2012, SWC entered an equipment loan
agreement with a bank with maturity on June 1, 2017. The monthly payment is $255. At June 30, 2015, the outstanding balance under
this loan was $5,742.
On March 5, 2013, SWC entered an auto loan
agreement with a financial service company for $32,312. The loan had monthly payment of $539, bore no interest with maturity on
March 5, 2018. At June 30, 2015, the outstanding balance under this loan was $17,233.
On April 30, 2014, SWC entered a promissory
note agreement with a bank for its working capital needs with maturity on August 3, 2015. The principal amount of the loan was
$228,000 and the repayment amount was $303,240 with daily payment of $963. At June 30, 2015, the outstanding balance under this
loan was $22,876.
On September 3, 2014, SWC entered an agreement
with a lending company for its working capital needs with maturity on March 6, 2015. The principal amount of the loan was $200,000
and the repayment amount was $279,800 with daily payment of $2,332. At June 30, 2015, this loan was paid in full.
On December 18, 2014, SWC entered an agreement
with a lending company for its working capital needs with maturity on May 28, 2015. The principal amount of the loan was $125,000
and the repayment amount was $174,875 with daily payment of $1,457. At June 30, 2015, this loan was paid in full.
On April 30, 2015, Sugarmade entered a promissory
note agreement with an unrelated private company for its working capital needs with maturity on October 31, 2015. The principal
amount of the loan was $100,000 and the repayment amount will be $120,000 with interest of $20,000. At June 30, 2015, the outstanding
balance under this loan was $83,334.
On May 27, 2015, SWC entered an agreement with
a lending company for its working capital needs. The loan was payable on the 132
nd
day from the entering date of the
agreement. The principal amount of the loan was $275,000 and the repayment amount was $376,750 including interest with daily payment
of $2,854. At June 30, 2016, the outstanding balance under this loan was $226,312.
In addition, at June 30, 2015, the Company
had outstanding balance of $114,179 borrowed from two of its directors, $12,583 from one major shareholder’s family member
and $20,000 from LMK Capital, LLC. These borrowings bore no interest, and were payable upon demand.
15. Shares to be issued
In December 2014, the Company was obligated
to issue 10,492,460 restricted common shares for employee compensation based on the Employee Retention Stock Award Program with
fair value of $461,668.
At June 30, 2015, the Company was obligated
to issue 1,500,000 shares of Series B Convertible Preferred Stock for three EB-5 investments with the total amount of $1,500,000.
The Company received $1,500,000 proceeds during the year ended June 30, 2015 with fair value of $1,500,000. On April 1, 2015, the
Company completed a series of transactions and amended its Articles of Incorporation creating a series of preferred stock of 10,000,000
shares, which shall be designated Series B Convertible Preferred Stock, par value $0.001 per share (the “Series B Preferred
Stock”). Series B will not be eligible for dividends. Five years from the date of issue (the “Conversion Date”),
assuming the Series B investor is approved for l-526 under the U.S Government’s EB-5 Investment Program, each Preferred Share
will automatically convert into that number of Common Shares having a “fair market value” of the Initial Investment plus
a five (5) percent annualized return on Initial Investment. Fair market value will be determined by averaging the closing sale
price of a Common Share for the 40 trading days immediately preceding the date of conversion on the U.S. stock exchange on which
Common Shares are publicly traded. The offering was made pursuant to SEC Rule 506 Section 4(2), which provides exemption from registration
for transactions, which are not public offerings. The funds received were used for general working capital purposes and to accelerate
order deliveries to customers.
16. Commitments and contingencies
On April 1, 2010, the Company entered into
a lease for general office and warehouse in City of Industry, California with a lease term of three years. The Company renewed
the lease to March 31, 2017. Monthly rent was $11,583 up to March 31, 2015, and increased to $11,884 from April 1, 2015 to March
31, 2016. Monthly rent increased to $13,238 from April 1, 2016 to March 31, 2017.
On June 1, 2014, the Company entered into another
lease for a warehouse in El Monte, California with a lease term of two years. Monthly rent was $5,250.
On November 1, 2009, the Company entered into
a lease for general office and warehouse in City of Industry, California with a lease term of one year and four months. The Company
renewed the lease on a month-to-month basis with monthly rent of $2,250 after June 1, 2015.
Future minimum annual rental payments required
under operating leases as of June 30, 2015 were as below (by year):
2015
|
|
$
|
231,420
|
|
Total
|
|
$
|
231,420
|
|
17.
Other events
On December 31, 2014, the Company elected Mr.
Er Wang as Audit Committee Chair, to serve until his successor is duly elected and qualified. Mr. Wang will serve as the sole member
of the Audit Committee until additional qualified Directors can be nominated and ratified for service on the Board and/or Audit
Committee.
18. Acquisition of SWC Group, Inc.
On July 16, 2014 the Company entered into an
agreement to acquire City of Industry, California based SWC Group, Inc., a California Corporation, which does business as CarryOutSupplies.com. CarryOutSupplies.com is
a producer and wholesaler of custom printed and generic takeout supplies. CarryOutSupplies.com, which services more than 32,500
takeout establishments, restaurants and other food service operators, is headquartered at 167 N Sunset Ave, City of Industry, CA
91744, with two additional warehouse locations in Southern California. The acquisition closed on October 28, 2014. On this date,
the Board of Directors of the Company executed the final Acquisition and Share Exchange Agreement (the “Share Exchange Agreement”)
ratifying the Pending Acquisition. Under the terms of the Share Exchange Agreement, the Company will issue Thirty Five Million
(35,000,000) common shares of the Company to the holders of CarryOutSupplies.com in exchange for all of the outstanding shares
in CarryOutSupplies.com. The number of Company shares exchanged shall be modified to Forty Million (40,000,000) shares Thirty (30)
days after the effective date of this Share Exchange Agreement should CarryOutSupplies.com demonstrate revenues for the three (3)
month period ending June 30, 2014 did not fall below a level equal to 70% of the revenues for the three (3) month period ending
June 30, 2013. The number of shares exchanged shall be modified to Seventy One Million (71,000,000) Seventy Five (75) days after
the effective date of this Share Exchange Agreement should CarryOutSupplies.com demonstrate revenues for the three (3) month period
ending September 30, 2014 did not fall below a level equal to 70% of the revenues for the three (3) month period ending September
30, 2013. As of the date of this filing, all of the 71,000,000 shares had been issued to the owners of CarryOutSupplies.com.
With the merger behind the Company now, we
are in the process of rolling out three new verticals under the corporate umbrella; state side manufacturing and printing, ad support
products, and online restaurant supplies catalogue. All of which is leveraging the strength of Sugarmade’s core business.
The acquisition was accounted as transactions
between entities under common control in accordance with ASC Topic 805-50-25 since both Sugarmade and CarryOutSupplies.com
had one common major shareholder and officer. When accounting for a transfer of assets or exchange of shares between entities
under common control, the entity that receives the net assets or the equity interests, shall initially measure the recognized assets
and liabilities transferred at their carrying amounts in the accounts of the transferring entity at the date of transfer. The following
table summarizes the carrying values of the assets acquired and liabilities assumed at the date of acquisition (or transfer):
Cash
|
|
$
|
209,214
|
|
Accounts receivable
|
|
|
388,399
|
|
Inventory
|
|
|
565,287
|
|
Other current assets
|
|
|
44,033
|
|
Security deposit
|
|
|
23,281
|
|
Loan receivables
|
|
|
312,521
|
|
Fixed assets
|
|
|
143,916
|
|
Intangible assets
|
|
|
3,039
|
|
Accounts payable
|
|
|
(1,727,870
|
)
|
Credit card payable
|
|
|
(420,773
|
)
|
Due to Sugarmade
|
|
|
(685,000
|
)
|
Customer deposits
|
|
|
(234,197
|
)
|
Loans payable
|
|
|
(529,064
|
)
|
Other payables
|
|
|
(297,047
|
)
|
Long term notes payables
|
|
|
(460,000
|
)
|
Net assets at carrying value:
|
|
$
|
(2,664,261
|
)
|
The following pro forma consolidated results
of operations of the Company and SWC Group for the years ended June 30, 2015 and 2014, presents the operations of the Company and
SWC Group as if the acquisition of SWC Group occurred on July 1, 2014 and 2013, respectively. The pro forma results are not necessarily
indicative of the actual results that would have occurred had the acquisition been completed as of the beginning of the periods
presented, nor are they necessarily indicative of future consolidated results.
|
|
Years ended June 30,
|
|
|
2015
|
|
2014
|
Net sales
|
|
$
|
5,806,410
|
|
|
$
|
8,743,964
|
|
Net income (loss)
|
|
$
|
(10,320,322
|
)
|
|
$
|
(1,802,471
|
)
|
19. Subsequent events
On October 15, 2015, the Company sold 833,333
shares of restricted common stock to an accredited investor for $25,000 pursuant to an exemption from registration relying on Section
4(a)(2) and Rule 506b
of Regulation D, under the Securities Act of 1933, as amended.
On October 7, 2015, the Company sold 1,250,000
shares of restricted common stock to an accredited investor for $25,000 pursuant to an exemption from registration relying on Section
4(a)(2) and Rule 506b
of Regulation D, under the Securities Act of 1933, as amended.
On October 2, 2015, the Company sold 1,000,000
shares of restricted common stock to an accredited investor for $30,000 pursuant to an exemption from registration relying on Section
4(a)(2) and Rule 506b
of Regulation D, under the Securities Act of 1933, as amended.
On September 25, 2015, the Company entered
into a consulting agreement with Tony Thai & George Zuo, respectively. The term is from the date of the agreement through June
30, 2016. Stock compensation to each shall be 10% of all revenue generated by a Restaurant Supplies website as of June 30, 2016,
which will equal the restricted stock award (“Stock Award”). The consultant shall receive restricted common shares
of the Company in the amount of the Stock Award, unless the amount of the Stock Award is less than $50,000, in which case the amount
of the Restricted Stock Award shall be assumed to be $50,000. The share price at which the stock will be awarded shall be the average
closing trading price of the common shares on the 22 trading days preceding June 30, 2016. As of June 30, 2016, the consultant
shall receive a bonus amount equaling 7.5% of the net profitability of the website if the profitability margins of the business
exceed 5% on a full year.
On August 27, 2015, the Company sold 2,500,000
shares of restricted common stock to each of two accredited investors for $50,000 each pursuant to an exemption from registration
relying on Section 4(a)(2) and Rule 506b
of Regulation D, under the Securities
Act of 1933, as amended.
On July 30, 2015, the Company completed
another EB5 investment financing and received proceeds of $500,000 from sales of Series B Convertible Preferred Stock, par value
$0.001 per share (the “Series B Preferred Stock”) from an investor. The offering was made pursuant to SEC Rule 506
Section 4(2), which provides exemption from registration for transactions, which are not public offerings. The funds received were
used for general working capital purposes and to accelerate order deliveries to customers. As of July 30, 2015, the Company completed
and received total of $2,000,000 from sales of the Series B Preferred Stock for the EB5 investment program, and of which, $1,500,000
proceeds were received in the year ended December 31, 2015.
On July 20, 2015, the Company entered in a
Memorandum of Understanding (MOU) to acquire Bao Coc International Paper and Plastic Company Limited, a manufacture of high-grade
post consumer paper products, including napkins, for the U.S. food industry. Under the terms of the non-binding MOU, the Company
will acquire 100% of Bao Coc International Paper and Plastic Company Limited in exchange for a combination of cash, restricted
common shares of the Company and a long-term profit sharing incentive to the management team of Bao Coc International Paper and
Plastic Company Limited.
On July 14, 2015, the Company sold 1,666,667
shares of restricted common stock to an accredited investor for $50,000 pursuant to an exemption from registration relying on Section
4(a)(2) and Rule 506b
of Regulation D, under the Securities Act of 1933, as amended.
On July 1, 2015, the Company entered into a
consulting agreement with Katherine Zuniga and/or K Marie Marketing, LLC, providing for compensation of 3,000,000 restricted shares
for marketing and sales related services to be earned as of the agreement date, 3,000,000 restricted shares for marketing and sales
related services to be earned as of October 1, 2015, and 2,000,000 restricted shares for marketing and sales related services to
be earned as of January 1, 2016.