The accompanying notes are an integral
part of these condensed consolidated financial statements
The accompanying notes are an integral
part of these condensed consolidated financial statements
The accompanying notes are an integral
part of these condensed consolidated financial statements
Notes to Unaudited Condensed Consolidated
Financial Statements
1. Nature of Business
Sugarmade, Inc. (hereinafter referred
to as “we”, “us” or “the/our Company”) is a publicly traded product
and brand marketing company investing in products and brands with disruptive potential. We are incorporated in the state of Delaware.
Our previous legal name was Diversified Opportunities, Inc. Our Company, Sugarmade, Inc. operates through our subsidiary,
S W C Group, Inc. - CA (dba CarryOutSupplies.com) (“CarryOutSupplies”).
We are headquartered in City of Industry,
California, a suburb of Los Angeles, with two (2) additional warehouse locations in Southern California. As of date of this filing,
we employ 25 full and part-time workers and contractors.
As of the end of the reporting period,
March 31, 2017, we were involved in several businesses including 1) the manufacturer and marketing of packaging for transport of
products for the emerging legal cannabis industry, 2) manufacturer and supply of products to the quick service restaurant sub-sector
of the restaurant industry 3) distribution of paper products derived from non-wood sources, and 4) as a marketer of a new seasoning
food product.
The Company has also launched several
packaging products serving the developing legal market for cannabis. CannaShroud is a new cannabis transport packaging system specifically
designed to allow for discrete and protected transportation of cannabis. DabBox, a cannabis concentrate packaging product with
a unique PTFE containment system. We are also in the process of developing active packaging for the cannabis industry and is in
the advanced development stages for several other cannabis storage/transport and packaging products to serve this growing market
sector.
Our main business operation, CarryOutSupplies.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, carryoutsupplies.com was founded to provide products to this underserved section of the market. Since that time,
the Company has become a key supplier to 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 of FreeHand® ThumbTray™ for the western part of the
United States.
During September of 2016, the Company
completed negotiations for and signed a license agreement with HUY FONG FOODS, INC. (“HFFI”), the maker of Sriracha
Hot Chili Sauce. Under the terms of the agreement, the Company was granted license to use the licensed marks of HFFI on and for
products the Company is currently in process of designing and testing. Based on this agreement and a separate license agreement
signed in 2015 with Seasoning Stixs International, LLC, the Company’s plan was to introduce a new culinary seasoning product
named Sriracha Seasoning Stixs. Sriracha Seasoning Stixs are encapsulated Huy Fong Sriracha Sauce and other seasonings in the form
of a stick, which are inserted into meat, fish and poultry prior to cooking. Sriracha Seasoning Stixs are a hard solid at room
temperature, but as heat is applied the sticks begin to liquefy allowing the meat fibers to act like a sponge absorbing the seasonings
and flavors that had previously been encapsulated in the stick.
The Company is on target to complete
its California manufacturing facility, which will produce Sriracha Seasoning Stix. The facility and an additional contract manufacturing
site located on the East coast will provide the Company with initial manufacturing capability of thousands of bottles of Sriracha
Seasoning Stix on a weekly basis and thousands into millions more per month.
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. 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 unaudited condensed
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America and the rules and regulations of the United States Securities and Exchange Commission for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and
footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. It is management's
opinion however, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary
for a fair financial statement presentation.
These interim condensed consolidated
financial statements should be read in conjunction with our Company’s Annual Report on Form 10-K for the fiscal year ended
June 30, 2016, 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 period ended June 30, 2016, as filed on or about
November 1, 2016 and as amended on November 15, 2016 (the “Annual Report”). The interim results for the period ended
March 31, 2017 are not necessarily indicative of the results for the full fiscal year.
Principles of consolidation
The condensed consolidated unaudited
financial statements include the accounts of our Company and its wholly-owned subsidiaries, Sugarmade-CA and SWC. 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 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 accounts receivable net allowances of $132,177 as of March 31, 2017 and
of $117,866 as of June 30, 2016.
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 March 31, 2017 and June 30, 2016, the balance for the inventory totaled $623,144 and $468,262, respectively. No amounts
were recognized as an obsolescence reserve at March 31, 2017 and June 30, 2016.
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 March 31, 2017.
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
We calculate basic earnings per share
(“EPS”) by dividing our net loss by the weighted average number of common shares outstanding for the period, without
considering common stock equivalents. Diluted EPS is computed by dividing net income or net loss by the weighted average number
of common shares outstanding for the period and the weighted average number of dilutive common stock equivalents, such as options
and warrants. Options and warrants are only included in the calculation of diluted EPS when their effect is dilutive; 9,929,119
and 13,751,366 diluted shares were excluded in calculating diluted loss per share for the nine and three months ended March 31,
2017 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:
|
|
March 31, 2017
|
Annual dividend yield
|
|
|
—
|
|
Expected life (years)
|
|
|
0.46
|
|
Risk-free interest rate
|
|
|
0.90
|
%
|
Expected volatility
|
|
|
146
|
%
|
|
|
Carrying Value
|
|
Fair Value Measurements at
|
|
|
As of
|
|
March 31, 2017
|
|
|
March 31,
|
|
Using Fair Value Hierarchy
|
|
|
2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
2,150,000
|
|
|
$
|
—
|
|
|
$
|
2,150,000
|
|
|
$
|
—
|
|
Total
|
|
$
|
2,150,000
|
|
|
$
|
—
|
|
|
$
|
2,150,000
|
|
|
$
|
—
|
|
|
|
June 30, 2016
|
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, 2016
|
|
|
June 30,
|
|
Using Fair Value Hierarchy
|
|
|
2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
701,000
|
|
|
$
|
—
|
|
|
$
|
701,000
|
|
|
$
|
—
|
|
Total
|
|
$
|
701,000
|
|
|
$
|
—
|
|
|
$
|
701,000
|
|
|
$
|
—
|
|
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 March 2016, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-08, Revenue from Contracts
with customers. The standard addresses the implementation guidance on principal versus agent considerations in the new revenue
recognition standard. The ASU clarifies how an entity should identify the unit of accounting (i.e. the specified good or service)
for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. The ASU
is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2017, with early adoption
permitted. We are currently evaluating the impact that this standard will have on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-04,
Recognition of Breakage for Certain Prepaid Stored-Value Products. The standard specifies how prepaid stored- value product liabilities
should be derecognized, thereby eliminating the current and potential future diversity in practice. The ASU is effective for fiscal
years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted. We are currently
evaluating the impact that this standard will have on our consolidated financial statements.
In February 2016, the FASB issued ASU
2016-02, Leases. The standard requires a lessee to recognize a liability to make lease payments and a right-of-use asset representing
a right to use the underlying asset for the lease term on the balance sheet. The ASU is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the impact
that this standard will have on our consolidated financial statements.
In November 2015, the FASB issued ASU
2015-17, Balance Sheet Classification of Deferred Taxes. The standard amends the current requirement for organizations to present
deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organization will now be
required to classify all deferred tax assets and liabilities as noncurrent. The ASU is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2016, with early adoption permitted. The Company early adopted this standard
during the fourth quarter of fiscal 2016, utilizing retrospective applications as permitted. As such, prior period amounts have
been retrospectively adjusted to conform to the current presentation.
In September 2015, the FASB issued ASU
2015-06, Simplifying the Accounting for Measurement-period Adjustments. Under this standard, an acquirer in a business combination
must recognize measurement-period adjustments during the period in which the acquirer determines the amounts, including the effect
on earnings of any amounts the acquirer would have recorded in previous periods if the accounting had been completed at the acquisition
date, as opposed to retrospectively. This guidance is effective for fiscal years beginning after December 15, 2015 with early adoption
permitted. The Company early adopted this standard during the fourth quarter of fiscal 2016.
In July 2015, the FASB issued ASU 2015-11,
Simplifying the Measurement of Inventory. This standard, changes the measurement principle for inventory from the lower of cost
or market to the lower of cost and net realizable value. Net realizable value is defined as the estimated selling price in the
ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This standard is effective
for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. We do not anticipate
that adoption of this standard will have a material impact to our consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03,
Simplifying the Presentation of Debt Issuance Costs. This standard requires that debt issuance costs related to a recognized debt
liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with
debt discounts. ASU 2015-03 is effective for interim and annual reporting periods beginning after December 15, 2015, with early
application permitted. This standard will be applied retrospectively, and we do not expect the adoption of this standard to materially
impact our consolidated financial statements.
In May 2014, the FASB issued Accounting
Standards Update No. 2014-09, Revenue from Contracts with Customers ASU 2014-09, which supersedes nearly all existing revenue recognition
guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred
to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services.
ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required
within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods
beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective
approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients,
or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption
(which includes additional footnote disclosures). Early adoption is not permitted. In August 2015, the FASB issued ASU No. 2015-04,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendment in this ASU defers the effective
date of ASU No. 2014-09 for all entities for one year. Public business entities, certain not-for-profit entities, and certain employee
benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning December 15, 2017, including interim
reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning
after December 31, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating
the impact of the pending adoption of ASU 2014-09 on its consolidated financial statements and has not yet determined the method
by which it will adopt the standard.
Other recent accounting pronouncements
issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities
and Exchange Commission are not believed by management to have a material impact on the Company’s present or future consolidated
financial statements.
3. Concentration
Customers
For the three and nine months ended
March 31, 2017, our Company earned net revenues of $903,950 and $2,759,595 respectively. The vast majority of these revenues for
the three (3) month / three (3) and nine (9) month period ending March 31, 2017 were derived from three (3) customers of the Company.
These three (3) customers accounted for 28% of revenue for the three months ended March 31, 2017. One customer accounted for 13%
for the nine (9) months ending March 31, 2017.
For the three and nine months ended
March 31, 2016, our Company earned net revenues of $826,867 and $3,144,207, respectively. The vast majority of these revenues for
the periods were derived from a large number of customers, with no customers accounted for over 10% of the Company’s total
revenues in either period.
Suppliers
For the three (3) months ended March
31, 2017, we purchased products for sale by CarryOutSupplies from several contract manufacturers located in Asia and the U.S. A
substantial portion of the Company’s inventory is purchased from three (3) suppliers. The three (3) suppliers accounted as
follows: One supplier accounted for 57% and the remaining two (2) account for 36% the Company’s total inventory purchase
for the three (3) months ended March 31, 2017 respectively.
For the nine (9) months ended March
31, 2017, we purchased products for sale by CarryOutSupplies from several contract manufactures located in Asia and the U.S. A
substantial portion of the Company’s inventory is purchased from three (3) suppliers. The three (3) suppliers accounted as
follows: One supplier accounted for 73% and the remaining two (2) account for 23% of the Company’s total inventory purchase
for the nine (9) months ended March 31, 2017.
For the three and nine months end March
31, 2016, we purchased products for sale by CarryOutSupplies from several contract manufacturers located in Asia and U.S. A substantial
portion of the Company’s inventory is purchased from one supplier that functions as an independent foreign procurement agent.
Two suppliers accounted for 10% and 76% of the Company’s total inventory purchase for the three and nine months ending March
31, 2016 respectively. There were no purchases of tree free paper products during this period.
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 March 31, 2017, there were no legal claims pending or threatened
against the Company; 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.
On February 4, 2014, the Company filed
suit in Contra Costa County, California, alleging breach of fiduciary duty, conspiracy to commit breach of fiduciary duty, fraud,
conspiracy to commit fraud, conversion, breach of contract, and interference with contractual relations against, Diversified Products
Group Inc. (DPG), Stephen Pinto, Lewis Cohen and Heidi Estiva, who were former sales agents for the Company. Stephen Pinto is the
Company’s former Chairman 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. As of March 31, 2017, this matter is still pending.
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. As of March 31, 2017, this matter
is pending.
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. We believe the Hannan case is now in the middle of depositions and it appears
a trial is scheduled, tentatively, in the second quarter of 2017. We believe the claims in that case are still primarily of two
categories, the first being repayment of the promissory notes and a series of allegations about improper investment solicitations
and other misrepresentations.
On February 21, 2017, the Company signed
a settlement agreement with the plaintiffs. Under the terms of the settlement agreement, the Company agreed to pay the plaintiffs’
$227,000 to settle all claims against the Company, which includes the payoff of the two notes outstanding within one (1) week.
The parties had estimated the value of the notes at approximately $80,000. The Company has agreed to pay the plaintiff $97,000
within one hundred and twenty (120) days of the agreement with the remaining balance of $50,000 due within one hundred and eighty
(180) days of the agreement. Upon receipt of all payments, plaintiffs shall surrender for cancellation 230,000 of the Company’s
shares within ten (10) days. The parties agreed that all claims against the Company shall be satisfied through such payments and
that the matter shall therefore be fully resolved. As of March 31, 2017, third-parties have purchased two (2) notes of approximately
$80,000, hence reducing the Company’s exposure by $80,000.
There can be no assurances the ultimate
liability relative to these law suits will not exceed what is outlined above.
5. Convertible Notes
As of March 31, 2017 and June 30, 2016
the balance owing on convertible notes with term as describe below was $1,414,523 and $394,167 respectively. The convertible promissory
notes must be repaid by our Company within six months from the date of issuance; accrue interest at the average rate from 8% -
12%; 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 45% 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 March 31, 2017, three (3) convertible promissory notes in the amount of $100,000 with accrued interest of $61,339,
were converted to 12,738,334 restricted common shares as follows:
Principal amount of $25,000, interest
in the amount of $15,295;
Principal amount of $50,000, interest
in the amount of $30,819; and
Principal amount of $25,000, interest
in the amount of S15,225.
Convertible notes issued during the
nine months ended March 31, 2017:
On January 17, 2017, the Company entered
into a convertible promissory note with an accredited investor for $25,000. The note has a term of six (6) months with an interest
rate of 8% and is convertible to common shares at a 40% discount to the then current market price of our shares.
On January 17, 2017, the Company entered
into a convertible promissory note with an accredited investor for $20,000. The note has a term of six (6) months with an interest
rate of 8% and is convertible to common shares at a 40% discount to the then current market price of our shares.
On January 20, 2017, the Company entered
into a convertible promissory note with an accredited investor for $80,000. The note has a term of seven (6) months with an interest
rate of 8% and is convertible to common shares at a 40% discount to the then current market price of our shares.
On January 24, 2017, the Company entered
into a convertible promissory note with an accredited investor for $43,000. The note has a term of twelve (12) months with an interest
of 8% and is convertible to common shares at a 45% discount to the then current market price of our shares.
On February 8, 2017, the Company entered
into a convertible promissory note with an accredited investor for $50,000. The note has a term of six (6) months with an interest
rate of 8% and is convertible to common shares at a 40% discount to the then current market price of our shares.
On February 9, 2017, the Company entered
into a convertible promissory note with an accredited investor for $50,000. The note has a term of six (6) months with an interest
rate of 8% and is convertible to common shares at a 40% discount to the then current market price of our shares.
On February 15, 2017, the Company entered
into a convertible promissory note with an accredited investor for $63,000. The note has a term of nine (9) months with an interest
rate of 8% and is convertible to common shares at 40% discount to the then current market price of our shares.
On February 16, 2017, the Company entered
into a convertible promissory note with an accredited investor for $30,000. The note has a term of six (6) months with an interest
rate of 8% and is convertible to common shares at a 40% discount to the then current market price of our shares.
On February 24, 2017, the Company entered
into a convertible promissory note with an accredited investor for $66,023. The note has a term of six (6) months with an interest
rate of 8% and is convertible to common shares at a 40% discount to the then current market price of our shares.
On February 28, 2017, the Company entered
into a convertible promissory note with an accredited investor for $75,000. The note has a term of six (6) months with an interest
rate of 8% and is convertible to common shares at a 40% discount.
On March 1, 2017, the Company entered
into a convertible promissory note with an accredited investor for $100,000. The note has 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.
On March 23, 2017, the Company entered
into a convertible promissory note with an accredited investor for $70,000. The note has a term of six (6) months with an interest
rate of 8% and is convertible to common shares at a 40% discount to the then current market price of our shares.
On March 31, 2017, the Company entered
into a convertible promissory note with an accredited investor for $200,000. The note has a term of six (6) months with an interest
rate of 8% and is convertible to common shares at a 40% discount to the then current market price of our shares.
On October 18, 2016, the Company entered
into a convertible promissory note with an accredited investor for $84,750. The note has a term of twelve (12) months with an interest
rate of 10% and is convertible to common shares at a 50% discount.
On November 4, 2016, the Company entered
into a convertible promissory note with an accredited investor for $84,750. The note has a term of nine (9) months with an interest
rate of 10% and is convertible to common shares at a 50% discount.
On November 16, 2016, the Company entered
into a convertible promissory note with an accredited investor for $110,000. The note has a term of nine (9) months with an interest
rate of 10% and is convertible to common shares at a 45% discount.
On December 19, 2016, the Company entered
into a convertible promissory note with an accredited investor for $20,000. The note has a term of six (6) months with an interest
rate of 8% and is convertible to common shares at a 40% discount.
On December 20, 2016, the Company entered
into a convertible promissory note with an accredited investor for $38,000. The note has a term of nine (9) months with an interest
rate of 10% and is convertible to common shares at a 45% discount.
On December 23, 2016, the Company entered
into a convertible promissory note with an accredited investor for $55,000. The note has a term of nine (9) months with an interest
rate of 8% and is convertible to common shares at a 42% discount.
During the nine months ended March 31,2017,
the Company received cash proceeds of $1,264,523 from issuance of convertible notes.
As of March 31, 2017, the Company’s
convertible notes consisted of following:
|
|
|
|
As of March 31, 2017
|
|
|
|
|
|
|
|
|
|
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
|
|
|
100,000
|
|
|
|
—
|
|
|
|
100,000
|
|
Convertible Note
|
|
10/18/2017
|
|
|
84,750
|
|
|
|
—
|
|
|
|
84,750
|
|
Convertible Note
|
|
8/4/2017
|
|
|
84,750
|
|
|
|
—
|
|
|
|
84,750
|
|
Convertible Note
|
|
8/16/2017
|
|
|
110,000
|
|
|
|
—
|
|
|
|
110,000
|
|
Convertible Note
|
|
9/20/2017
|
|
|
38,000
|
|
|
|
—
|
|
|
|
38,000
|
|
Convertible Note
|
|
7/17/2017
|
|
|
20,000
|
|
|
|
—
|
|
|
|
20,000
|
|
Convertible Note
|
|
9/30/2017
|
|
|
55,000
|
|
|
|
—
|
|
|
|
55,000
|
|
Convertible Note
|
|
7/17/2017
|
|
|
25,000
|
|
|
|
—
|
|
|
|
25,000
|
|
Convertible Note
|
|
7/17/2017
|
|
|
20,000
|
|
|
|
—
|
|
|
|
20,000
|
|
Convertible Note
|
|
1/24/2018
|
|
|
43,000
|
|
|
|
—
|
|
|
|
43,000
|
|
Convertible Note
|
|
8/8/2017
|
|
|
50,000
|
|
|
|
—
|
|
|
|
50,000
|
|
Convertible Note
|
|
7/20/2017
|
|
|
80,000
|
|
|
|
—
|
|
|
|
80,000
|
|
Convertible Note
|
|
8/24/2017
|
|
|
66,023
|
|
|
|
—
|
|
|
|
66,023
|
|
Convertible Note
|
|
8/9/2017
|
|
|
50,000
|
|
|
|
—
|
|
|
|
50,000
|
|
Convertible Note
|
|
8/31/2017
|
|
|
75,000
|
|
|
|
—
|
|
|
|
75,000
|
|
Convertible Note
|
|
12/1/2017
|
|
|
100,000
|
|
|
|
—
|
|
|
|
100,000
|
|
Convertible Note
|
|
9/23/2017
|
|
|
70,000
|
|
|
|
—
|
|
|
|
70,000
|
|
Convertible Note
|
|
11/20/2017
|
|
|
63,000
|
|
|
|
—
|
|
|
|
63,000
|
|
Convertible Note
|
|
8/16/2017
|
|
|
30,000
|
|
|
|
—
|
|
|
|
30,000
|
|
Convertible Note
|
|
9/30/2017
|
|
|
200,000
|
|
|
|
—
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Convertible Promissory Notes
|
|
$
|
1,414,523
|
|
|
|
|
|
|
$
|
1,414,523
|
|
As of June 30, 2016, the Company’s
convertible notes consisted of following:
|
|
|
|
As of June 30, 2016
|
|
|
|
|
|
|
|
|
|
Note Type and Investor
|
|
Due Date
|
|
Balance
|
|
Discount
|
|
Carrying Value
|
|
|
|
|
|
|
|
|
|
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
|
|
7/1/2016
|
|
|
25,000
|
|
|
|
—
|
|
|
|
25,000
|
|
Convertible Note
|
|
7/1/2016
|
|
|
25,000
|
|
|
|
—
|
|
|
|
25,000
|
|
Convertible Note
|
|
7/1/2016
|
|
|
25,000
|
|
|
|
—
|
|
|
|
25,000
|
|
Convertible Note
|
|
7/1/2016
|
|
|
25,000
|
|
|
|
—
|
|
|
|
25,000
|
|
Convertible Note
|
|
7/1/2016
|
|
|
25,000
|
|
|
|
—
|
|
|
|
25,000
|
|
Convertible Note
|
|
7/1/2016
|
|
|
100,000
|
|
|
|
—
|
|
|
|
100,000
|
|
Convertible Note
|
|
7/1/2016
|
|
|
20,834
|
|
|
|
—
|
|
|
|
20,834
|
|
Convertible Note
|
|
7/1/2016
|
|
|
8,333
|
|
|
|
—
|
|
|
|
8,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Convertible Promissory Notes
|
|
$
|
394,167
|
|
|
|
|
|
|
$
|
394,167
|
|
6. Debt settlements
On December 31, 2016, the Company issued
1,486,101 common shares in exchange for the cancellation of $51,996 in vendor debt. The fair value of the 1,486,101 common shares
was $89,166, which resulted in a loss on settlement of debt of $37,170.
On January 1, 2017, the Company agreed
to issue 300,000 common shares and paid $15,000 cash in exchange for past legal services in the amount of $62,149.
7. Derivative liabilities
The derivative liability is derived
from the conversion features in note 5 and stock warrant in note 8. All were valued using the weighted-average Black-Scholes- Merton
option pricing model using the assumptions detailed below. As of March 31, 2017 and June 30, 2016, the derivative liability was
$2,150,000 and $701,000, respectively. For the three months ended March 31, 2017 and 2016, the Company recorded a $1,337,000 loss
and $83,000 gain from changes in derivative liability, respectively. For the nine months ended March 31, 2017 and 2016, the Company
recorded a $1,449,000 loss and $5,000 gain from changes in derivative liability, respectively. The Black-Scholes model with the
following assumption inputs:
|
|
March 31, 2017
|
Annual dividend yield
|
|
|
—
|
|
Expected life (years)
|
|
|
0.46
|
|
Risk-free interest rate
|
|
|
0.90
|
%
|
Expected volatility
|
|
|
146
|
%
|
|
|
June 30, 2016
|
Annual dividend yield
|
|
|
—
|
|
Expected life (years)
|
|
|
0.01
|
|
Risk-free interest rate
|
|
|
0.21
|
%
|
Expected volatility
|
|
|
449
|
%
|
8. 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 an exercise price of $0.50 per share, and two-year warrants purchasing up to a total of 81,250 shares of common stock
at an exercise price of $0.01 per share. For purposes of accounting for the detachable warrants issued in connection with the convertible
notes, the fair value of the warrants was estimated using the 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 (9) month term of the respective convertible note as additional interest expense.
On various dates during June 2014 and
December 2014 the Company and holders of certain convertible notes agreed to cancel warrants to purchase common shares in the Company
and to extend the due dates on the Notes to July 1, 2016. $0.50 warrants and “Bonus Warrants” priced at $0.01, as defined
in the original Convertible Note Purchase Agreements we cancelled pertaining to the Note and warrants acquired on the following
dates for the following Convertible Notes and amounts. During the nine months ended March 31, 2017, all the warrants were expired.
There were no warrants outstanding at March 31, 2017.
|
|
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
|
|
|
|
0.20
|
|
|
Outstanding at June 30, 2016
|
|
|
|
131,250
|
|
|
|
0.20
|
|
|
Expired
|
|
|
|
131,250
|
|
|
|
0.20
|
|
|
Outstanding at December 31, 2016
|
|
|
|
—
|
|
|
$
|
—
|
|
|
Outstanding at March 31, 2017
|
|
|
|
—
|
|
|
|
—
|
|
Following is a summary of the status of warrants outstanding
at June 30, 2016:
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
|
|
|
|
8/24/16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total warrants as of June 30, 2016
|
|
|
|
131,250
|
|
|
|
|
|
9. 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 March 31, 2017, the loan principal balance was $25,982.
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 bore no interest. The note was payable upon demand. As of March 31, 2017, this note had
a balance of $18,000.
On December 31, 2013, the Company entered
into a promissory note with Kalvin Kwong (an employee of the Company, who 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 (6) months. However, this note
was now payable upon demand per the oral agreement with the lender. As of March 31, 2017, this note had a balance of $20,000.
On January 14, 2015, the Company entered
into a promissory note with Richard Ko (an employee of the Company, who owns less than 5% of the Company’s stock). The principle
amount was $30,000 and the note bore no interest. The note had a term of one (1) year and was due on January 14, 2016, and became
payable upon demand after January 14, 2016. As of March 31, 2017, this note had a balance of $25,000.
On January 13, 2014, the Company entered
into a promissory note with an employee (an employee of the Company, who 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 twenty-four (24) months and was due on January 13, 2016,
and became payable upon demand after January 13, 2016. As of March 31, 2017, this note had a balance of $12,666.
As of March 31, 2017, the Company has
an outstanding balance of notes payable due to related parties of $75,666. During the nine months ended March 31, 2017, the Company
repaid $10,000 cash for notes payable due to related parties.
10. Shares issued for services
Effective February 1, 2017, the Company
entered into an agreement with PDCG, LLC (“PDCG”) to provide strategic marketing consulting services for a period from
February 1, 2017 to April 30, 2017. PDCG has agreed to accept in lieu of cash, total of 750,000 of the Company’s common shares
with title of these shares to be transferred to PDCG at effective date. As of March 31, 2017, these shares had yet to be issued
and are being recorded as a liability for stock to be issued for $52,500.
10a. Shares issued by assignment
On September 27, 2012, the Company received
monies under a subscription agreement and a convertible note (the “Note”) for the principal amount of $25,000. On January
30, 2017, the holder of the Note assigned the Note to Paladin Advisors, LLC (“Paladin”) for the principal amount, plus
accrued interest. On January 30, 2017, Paladin submitted a notice of conversion, to which Paladin converted $40,225 based on the
following: principal amount of $25,000, accrued interest of $15,225, for a total of $40,225 at the conversion rate of $0.005 per
share. On March 30, 2017, the Company agreed to issue 8,045,000 of common shares to Paladin under the terms of the Note and notice
of conversion.
On October 25, 2012, the Company received
a loan in the form of a convertible note (the “Note”) for the principal amount of $25,000. On February 8, 2016, the
holder of the Note executed an assignment of the Note to Blueprint Media, LLC (“BPM”) due to a debt in which the holder
of the Note owed BPM. On December 31, 2016, BPM by and though its managing director executed a notice of conversion of the Note
as follows: principal amount of $25,000, accrued interest of $12,483, for a total of $37,483 at the conversion rate of $0.035 per
share. On March 30, 2017, the Company agreed to issue 1,070,943 of common shares to BPM under the terms of the Note and notice
of conversion.
10b. Shares issued by conversion
On December 31, 2016, the holder of
a convertible note (the “Note”) executed a conversion of its Note dated September 12, 2012. The terms and conditions
under the Note allowed the holder to convert its Note for said total common shares issued. Upon conversion, the principal amount
of the Note was $40,000, interest of $20,669, for a total of $60,669, at the conversion rate of $0.035 per share. On March 30,
2017, the Company agreed to issue 1,733,400 common shares to the holder of the Note under the terms of the Note and notice of conversion.
11. Common shares issued for
equity financing
On October 11, 2016, the Company sold
2,000,000 shares of restricted common stock to an accredited investors for $100,000 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 (the “Securities Act”).
12. Common shares reserved
for future issuances
The following table summarizes shares
of our common stock reserved for future issuance at March 31, 2017:
Common shares to be issued under conversion feature
|
|
|
32,178,898
|
|
Common shares to be issued under $0.01 warrants
|
|
|
—
|
|
Common shares to be issued under $0.50 warrants
|
|
|
—
|
|
|
|
|
|
|
Total common shares reserved for future issuance
|
|
|
32,178,898
|
|
The following table summarizes shares
of our common stock reserved for future issuance at June 30, 2016:
Common shares to be issued under conversion feature
|
|
|
11,702,118
|
|
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
|
|
|
11,833,368
|
|
13. Related party transactions
From time to time, the Company would
receive short-term loans from LMK Capital, LLC (“LMK”) for its working capital needs. The loan payable as of June 30,
2016 was $264,449. As of March 31, 2017, the Company’s outstanding balance to LMK is $53,689.
On December 1, 2016, the Company received
a loan from an employee for $12,500 with an interest charge of $12,500. This amount was recorded as interest owed to the loan payable
amount and is to be amortized on a monthly basis over the life of the loan. The loan is due on December 1, 2017. As of March 31,
2017, the balance is $9,375.
On July 7, 2016, the Company received
a loan from an employee. The amount of the loan bore no interest and amortized on a monthly basis over the life of the loan. As
of March 31, 2017, the balance of the loan is $39,207.
On November 21, 2016, the Company received
a loan from an employee. The amount of the loan bore no interest and amortized on a monthly basis over the life of the loan. As
of March 31, 2017, the balance of the loan is $1,260.
As of March 31, 2017, the Company has
outstanding loan balance of $103,530 from Shareholders and directors of the Company.
13a Miscellaneous – related
party transactions
On September 7, 2016, our CEO and Chairman,
Jimmy Chan, was awarded five (5) million shares of restricted common stock in the Company in lieu of salary, equivalent to $150,000.
On September 7, 2016, Director Waylon Huang, was awarded three (3) million shares of restricted common stock in the Company in
lieu of salary, equivalent to $90,000. Mr. Huang is also the general manager of the CarryOutSupplies.com.
On September 7, 2016, Richard Ko, was
awarded three (3) million shares of restricted common stock in the Company in lieu of salary, equivalent to $90,000 annually for
services provided to the Company.
14. Loans payable
On January 25, 2017, the Company entered
into an agreement with a lending company for $100,000 for its working capital needs. As of March 31, 2017, the Company has an outstanding
balance of $63,348.
On December 22, 2016, CarryOutSupplies
entered an agreement with a lending company for its working capital needs. The loan was payable on the 22nd day from the entering
date of the agreement. The principal amount of the loan was $75,000 and the repayment amount was $109,425 including interest with
daily payment of $899. At March 31, 2017, the outstanding balance under the loan was $33,728.
Reported as of December 31, 2016, the
Company had an outstanding balance of $5,053 between two (2) vendors. As of March 31, 2017, the Company now has an outstanding
loan balance of $1,599 from one (1) vendor of the Company.
On September 21, 2016, the Company received
a loan from Greater Asia Technology for $100,000, with prepaid interest of $40,000 and is due on September 30, 2017. As of March
31, 2017, this note had a balance of $100,000.
On July 11, 2016, the Company received
a loan from Greater Asia Technology for $150,000. There were loan fees of $8,000 associated with origination of the loan, which
bears 40% annual interest and is due on January 15, 2017. As of March 31, 2017, this note had a balance of $58,300.
On October 28, 2016, the Company received
a loan from Autumn Group, LLC for $100,000. It was predetermined interest on the loan would be $100,000. This amount was recorded
as a discount to the loan payable amount and is to be amortized on a monthly basis over the life of the loan. The loan is due on
September 26, 2017. The loan bears 100% annual interest and is due on November 1, 2017. As of March 31, 2017, this note had a balance
of $100,000.
On July 1, 2016, the Company entered
into a repayment agreement with its employee for $20,280 at no interest. As of March 31, 2017, the Company has an outstanding balance
of $20,280. Repayment on this loan will be repaid at a later date with no interest being accrued.
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 March 31, 2017, the Company has an
outstanding balance of $4,076.
On July 2, 2015, the Company entered
into a repayment agreement for $22,583 at no interest. As of March 31, 2017, the Company has an outstanding balance of $17,583.
On July 1, 2012, CarryOutSupplies entered
an equipment loan agreement with a bank with maturity on June 1, 2017. The monthly payment is $255. At March 31, 2017, the outstanding
balance under this loan was $980.
On March 5, 2013, the Company entered
an equipment loan agreement with Toyota financial services with maturity date of April 4, 2018. As of March 31, 2017 the balance
under this loan is $5,924.
During the nine months ended March 31,
2017, the Company received cash proceeds of $700,910 from loans, and repaid $776,505 cash for loans payable.
15. Shares to be issued
Preferred Shares
As of March 31, 2017, the Company was
obligated to issue 30,501,339 shares of Series B Convertible Preferred Stock for three EB-5 investments with the total amount of
$1,500,000. The Company received $2,000,000 proceeds during the fiscal year ended June 30, 2016 with fair value of $2,000,000.
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 and Section 4(2)
of the Securities Act, 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.
Common Shares
During the nine months ended March 31,
2017, the Company issued 22,055,556 common shares, which were obligated to be issued at June 30, 2016, with a fair value in the
amount of $1,230,000.
As of March 31, 2017, the Company was
obligated to issue 500,000 shares for $25,000 proceeds received through two separate private placements with 250,000 shares each.
As of March 31, 2017, the Company was
obligated to issue 2,000,000 restricted common shares for equity financing of $100,000, the fair market value of the 2,000,000
shares was $100,000.
As of March 31, 2017, the Company was
obligated to issue 1,485,586 restricted common shares for the settlement of outstanding accounts payable in the amount of $51,996.
The fair value of the 1,486,101 common shares was $89,166, which resulted in a loss on settlement of debt of $37,170.
On December 1, 2016, the Company modified
its agreement with Bao Coc International Paper and BAO COC INTERNATIONAL PAPER AND PLASTIC COMPANY LIMITED ("Bao Cao"),
of the Socialist Republic of Vietnam. Under the terms of the revised agreement, the Company shall purchase products manufactured
by the current contract manufacturers and distribute such products to various quick service restaurant and institutions in the
United States. Revenues from such products shall belong to Sugarmade. The price of these products will be determined from time
to time in mutual agreement between the Parties. Sugarmade shall be responsible for compensating the contract manufacturer and
collection of monies from the end customer with all revenues belonging to the Company. The company is obligated to issue 5,000,000
restricted common shares, the fair market value of the 5,000,000 shares was $400,000. As of March 31, 2017, these shares had yet
to be issued and were recorded as a liability for stock to be issued – common shares.
As of March 31, 2017, the company was
obligated to issue 3,000,000 restricted common shares for consulting services, with a fair market value of $240,000.
As of March 31, 2017, the Company was
obligated to issue 1,923,077 restricted common shares for equity financing of $100,000, the fair market value of the 1,923,077
shares was $100,000.
As of March 31, 2017, the Company was
obligated to issue 1,350,166 restricted common shares for convertible debt conversion in the amount of $40,505 principle. On the
date of conversion, the market value of the shares issued was $0.12 per share. The fair value of the shares was $162,020.
As of March 31, 2017, the Company was
obligated to issue 2,000,000 restricted common shares under an assignment of a note to convert into on shares in the amount of
$40,314. The market value of the shares issued was $0.12 per share. The fair market value of the 2,000,000 shares was $240,000.
As of March 31, 2017, the Company was
obligated to issue 300,000 restricted common shares for past services. The market value of the shares issued was $0.06 per share.
The fair market value of the 300,000 shares was $18,000.
As of March 31, 2017, the Company was
obligated to issue 1,343,167 restricted common shares on a debt settlement to convert into shares in the amount of $40,295. The
market value of the shares issued was $0.12 per share. The fair market value of the 1,343,167 shares was $161,180.
For the nine month period ending March
31, 2017 and 2016, the Company received $225,000 and $230,000 respectively in proceeds from shares to be issued.
16. Cancellation of Common
Shares
On March 15, 2017, 2,000,000 common
shares were surrendered to the Company for cancellation as a result of a litigation matter in which the Company and former CEO,
Scott Lantz were named defendants. As part of the agreement with Mr. Lantz, the surrendered shares were used to fund and retain
defense counsel on Mr. Lantz behalf. 7,003,000 common shares were also surrendered for cancellation by its previous management
and consultant due to non-fulfillment of its contractual duties.
17. Commitments and contingencies
On April 1, 2015, the Company entered
into a lease for general office and warehouse in City of Industry, California with a lease term of one year. The monthly rent was
$11,884. The Company renewed the lease to March 31, 2016, effective April 1, 2016 to March 31, 2017, increasing the rent from $11,884
to $13,238. On March 6, 2017, the Company executed a Fifth Amendment to the Lease, in which the Monthly rent increased from $13,238
to $15,043 effective from April 1, 2017 to March 31, 2018. As of March 31, 2017, the Monthly rent is $15,043.
18. Subsequent events
On April 1, 2017, the Company entered
into a distribution and intellectual property assignment agreement with Wagner Bartosch, Inc. (“Wagner”) for use of
their Divider™ used in frozen desserts and other related uses. In lieu of cash payment under the agreement, the Company will
issue common shares of the Company valued at $75,000.
On April 28, 2017, the Company signed
a Marketing Service Agreement, in which it plans to “kick-start” marketing its new product Sriracha Seasoning Stixs
to the public using videos and other social media circuits. In lieu of cash payment for professional services, the Company will
issue common shares equivalent to $32,250.