Notes
to Unaudited Condensed Consolidated Financial Statements
December
31, 2020
Sugarmade,
Inc. (hereinafter referred to as “we,” “us” or “Company”) is a publicly-traded company incorporated
in the state of Delaware. Our previous legal name was Diversified Opportunities, Inc. Our Company operates much of its business
activities through our subsidiary, SWC Group, Inc., a California corporation (“SWC”). Sugarmade, Inc. was founded
in 2010. In 2014, CarryOutSupplies.com was acquired by Sugarmade, Inc., creating the Company as it is today.
As
of December 31, 2020, we operated our business in the following three segments:
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1)
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Paper and paper-based products: The supply of consumable products to the quick-service restaurant sub-sector of the restaurant industry, and as an importer and distributor of non-medical personal protection equipment to business and consumers, via our CarryOutSupplies.com subsidiary (“Carryout Supplies”). Carryout Supplies is a producer and wholesaler of custom printed and generic supplies, servicing more than 2,000 quick-service restaurants. The primary products are plastic cold cups, paper coffee cups, yogurt cups, ice cream cups, cup lids, cup sleeves, edible packaging, food containers, soup containers, plastic spoons, and similar products for this market sector. This subsidiary, which was formed in 2009, was recently expanded to also offer non-medical personal protective equipment.
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2)
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Non-medical supplies: Beginning in 2020, we sell non-medical personal protective equipment through Carryout Supplies.
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3)
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Cannabis products delivery service and sales: As a joint owner in the Budcars licensed cannabis delivery service brand (“Budcars” or the “Budcars Brand”). Budcars operates a licensed cannabis delivery service in the Sacramento, California area. During early 2020, the Company gained a 40% stake in the Budcars Brand and in the Sacramento delivery operations via acquiring a 40% stake in Indigo Dye Group (“Indigo”). Under the terms of the agreement with Indigo, Sugarmade acquired an option to purchase an additional 30% interest in Budcars. Upon exercise of this option, the Company would acquire a controlling interest in Indigo. As of December 31, 2020, the option has not yet been exercised and the Company’s stake in Budcars was at 40%. Starting on October 1, 2020, the Company plans to open new locations via purchasing equity in other Brand/Franchises to cover delivery for the entire California. Therefore, the Company is not likely at this time to exercise its option to acquire the additional 30% interest in Indigo. In addition, the Company is no longer involved in day-to-day operations of Indigo and going forward, the Company intends to pursue cannabis delivery independent of Indigo. As of October 1, 2020, the Company ceased to have control over the day-to-day business of Indigo and it was deconsolidated and recorded as an investment in nonconsolidated affiliate at its $505,449 estimated fair value and changed to equity method of accounting. Pursuant to the terms of the Indigo agreement, if the Company determines, in its discretion not to continue to make monthly payments, its 40% ownership interest in Indigo will be decreased according to the payment then made. During the quarter ended December 31 ,2020, if the Company makes no additional payments, it will hold approximately 33% of the ownership of Indigo. See Note 5 and Note 6.
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Subsequent to the end of the December reporting period, Sugarmade became a joint owner of Nug Avenue, Inc., a California corporation (“Nug Avenue”), which operates a licensed and regulated cannabis delivery service out of Lynwood, California, serving the greater Los Angeles Metropolitan area (the “Lynwood Operations”). The Company currently owns a majority stake of seventy percent (70%) of Nug Avenue’s Lynwood Operations and holds first rights of refusal on Nug Avenue’s business expansion relative to the cannabis marketplace.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
December
31, 2020
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2.
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Summary
of Significant Accounting Policies
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Basis
of presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) and the rules and regulations of the United States Securities
and Exchange Commission (the “SEC”) for interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation
of financial position, results of operations, or cash flows. It is management’s opinion however, that all material adjustments
(consisting of normal recurring adjustments) have been made which are necessary for a fair financial statement presentation.
These
interim condensed consolidated financial statements should be read in conjunction with our Company’s Annual Report on Form
10-K for the year ended June 30, 2020, which contains our audited consolidated financial statements and notes thereto, together
with the Management’s Discussion and Analysis of Financial Condition and Results of Operation, for the fiscal year ended
June 30, 2020. The interim results for the period ended December 31, 2020 are not necessarily indicative of the results for the
full fiscal year.
Principles
of consolidation
The unaudited condensed consolidated financial
statements include the accounts of our Company and SWC, the Company’s wholly-owned subsidiary. 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
unaudited condensed consolidated financial statements have been prepared assuming that we will continue as a going concern.
Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. These
unaudited condensed consolidated financial statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the
Company be unable to continue as a going concern.
Management
endeavors to increase revenue-generating operations. While the Company’s priority is on generating cash from
operations, management also seek 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.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
December
31, 2020
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2.
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Summary
of Significant Accounting Policies (continued)
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Use
of estimates
The
preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly
from those estimates.
Revenue
recognition
We
recognize revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC’’) No. 606, Revenue Recognition. Sugarmade applied a five-step approach in determining the amount and
timing of revenue to be recognized: (1) identifying the contract with a customer, (2) identifying the performance obligations
in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations in
the contract and (5) recognizing revenue when the performance obligation is satisfied.
Substantially
all of the Company’s revenue is recognized at the time control of the products transfers to the customer.
Property
and equipment
Property
and equipment is stated at the historical cost, less accumulated depreciation. Depreciation on property and equipment is provided
using the straight-line method over the estimated useful lives of the assets for both financial and income tax reporting purposes
as follows:
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Machinery
and equipment
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3-5
years
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Furniture
and equipment
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7
years
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Vehicles
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5
years
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Leasehold
improvements
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5
years
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Expenditures
for renewals and betterments are capitalized while repairs and maintenance costs are normally charged to the statement of operations
in the year in which they are incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in
an increase in the future economic benefits expected to be obtained from the use of the asset, the expenditure is capitalized
as an additional cost of the asset.
Upon
sale or disposal of an asset, the historical cost and related accumulated depreciation or amortization of such asset were removed
from their respective accounts and any gain or loss is recorded in the statements of income.
The
Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate
that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use
and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment
loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by
management in performing this assessment include current operating results, trends and prospects, the manner in which the property
is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, no impairment
expenses for property, plant, and equipment was recorded in operating expenses during the six months ended December
31, 2020 and 2019.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
December
31, 2020
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2.
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Summary
of Significant Accounting Policies (continued)
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Impairment
of Long-Lived Assets
Long-lived
assets, which include property, plant and equipment and intangible assets, are reviewed for impairment whenever events or changes
in circumstances indicate the carrying amount of an asset may not be recoverable.
Recoverability
of long-lived assets to be held and used is measured by comparing the carrying amount of an asset to the estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted
future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair
value of the assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market
value, if readily determinable. Based on its review, the Company, as of June 30, 2020, performed an impairment test of all of
its intangible assets. Based on the Company’s analysis, the company had an amortization of intangible assets of $700 for
the six months ended December 31, 2020 and 2019, respectively.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
December
31, 2020
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2.
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Summary
of Significant Accounting Policies (continued)
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Leases
In
February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (“ASU”) No. 2016-02,
which requires lessees to recognize the rights and obligations created by leases on the balance sheet and disclose key information
about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-11, Targeted Improvements, ASU No. 2018-10, Codification
Improvements to Topic 842, and ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842. The new standard
establishes a right-of-use model (“ROU”) that requires a lessee to recognize a ROU asset and lease liability on the
balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification
affecting the pattern and classification of expense recognition in the statement of operations.
The
new standard became effective April 1, 2019. A modified retrospective transition approach is required, applying the new standard
to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the
beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity
chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date
of initial application and the effective date. The entity must also recast its comparative period financial statements and provide
the disclosures required by the new standard for the comparative periods. The Company adopted the new standard on July 1, 2019
using the modified retrospective transition approach as of the effective date of the initial application. The new standard provides
a number of optional practical expedients in transition. The Company elected the “package of practical expedients”,
which permits entities not to reassess under the new lease standard prior conclusions about lease identification, lease classification
and initial direct costs. The Company does not expect to elect the use-of-hindsight or the practical expedient pertaining to land
easements.
The
most significant effects of the adoption of the new standard relate to the recognition of new ROU assets and lease labilities
on our balance sheet for office operating leases and providing significant new disclosures about our leasing activities.
The
new standard also provides practical expedients for an entity’s ongoing accounting. The Company has also elected the short-term
leases recognition exemption for all leases that qualify. This means that the Company will not recognize ROU assets or lease liabilities,
and this includes not recognizing ROU assets and lease liabilities, for existing short-term leases of those assets in transition.
The Company also currently expects to elect the practical expedient to not separate lease and non-lease components for its leases.
All existing leases are reported under this rule.
Under
ASC 840, leases were classified as either capital or operating, and the classification significantly impacted the effect the contract
had on the company’s financial statements. Capital lease classification resulted in a liability that was recorded on a company’s
balance sheet, whereas operating leases did not impact the balance sheet. After the new adoption, $1,105,755 of operating lease
right-of-use asset and $1,140,041 of operating lease liabilities were reflected on the Company’s June 30, 2020 financial
statements and $842,549 of operating lease right-of-use asset and $878,214 of operating lease liabilities were reflected on the
Company’s December 31, 2020 financial statements.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
December
31, 2020
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2.
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Summary
of Significant Accounting Policies (continued)
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Stock
based compensation
Stock
based compensation cost to employees is measured at the date of grant, based on the calculated fair value of the stock-based award,
and will be recognized as expense over the employee’s requisite service period (generally the vesting period of the award).
We estimate the fair value of employee stock options granted using the Binomial Option Pricing Model. Key assumptions used to
estimate the fair value of stock options will include the exercise price of the award, the fair value of our common stock on the
date of grant, the expected option term, the risk-free interest rate at the date of grant, the expected volatility and
the expected annual dividend yield on our common stock. We use our company’s own data among other information to estimate
the expected price volatility and the expected forfeiture rate. Share-based compensation awards issued to non-employees for services
rendered are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever
is more readily determinable.
Earnings
(Loss) per share
We
calculate basic earnings (loss) per share (“EPS”) by dividing our net income (loss) by the weighted average number
of common shares outstanding for the period, without considering common stock equivalents. Diluted EPS is computed by dividing
net income or net loss by the weighted average number of common shares outstanding for the period and the weighted average number
of dilutive common stock equivalents, such as options and warrants. Options and warrants are only included in the calculation
of diluted EPS when their effect is dilutive.
Fair
value of financial instruments
ASC
Topic 820 defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy
for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy
is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels
are defined as follows:
Level
1 - observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level
2 - include other inputs that are directly or indirectly observable in the marketplace.
Level
3 - unobservable inputs which are supported by little or no market activity.
The
Company used Level 3 inputs for its valuation methodology for the derivative liabilities in determining the fair value using the
Binomial option-pricing model for the six months ended December 31, 2020.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
December
31, 2020
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2.
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Summary
of Significant Accounting Policies (continued)
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Derivative
instruments
The
fair value of derivative instruments is recorded and shown separately under current liabilities. Changes in the fair value of
derivatives liability are recorded in the consolidated statement of operations under non-operating income (expense).
Our
Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify
as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument
is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported
in the consolidated statements of operations. For stock-based derivative financial instruments, the Company uses a weighted average
Binomial option-pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification
of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at
the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current
based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet
date.
Segment
Reporting
FASB
ASC Topic 280, “Segment Reporting”, requires use of the “management approach” model for segment reporting.
The management approach model is based on the way a company’s management organizes segments within the Company for making
operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure,
management structure, or any other manner in which management disaggregates a company.
As of December 31, 2020 substantially
all of the Company’s operations were conducted in three industry segments – (1) paper and paper-based
products such as paper cups, cup lids, food containers, etc., which accounted for approximately 24% of the Company’s
revenues as of December 31, 2020; (2) non-medical supplies such as non-medical fascial masks, which accounted
for approximately 3% of the Company’s total revenues as of December 31, 2020; (3) cannabis products delivery
service and sales, which accounted for approximately 73% of the Company’s total revenues as of December 31, 2020.
New
accounting pronouncements
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard establishes an ROU model that requires a
lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases
will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income
statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within
those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing
at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain
practical expedients available. The Company have adopted this ASU on the consolidated financial statements in the quarter ended
September 30, 2019.
In
December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes”. The pronouncement simplifies
the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740, “Income Taxes”.
The pronouncement also improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending
existing guidance. ASU 2019-12 will be effective for us beginning in the first quarter of fiscal 2021, with early adoption permitted.
We are still evaluating the impact this guidance will have on our consolidated financial statements.
In
January 2020, the FASB issued ASU No. 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint
Ventures (Topic 323), and Derivative and Hedging (Topic 815), which clarifies the interaction of rules for equity securities,
the equity method of accounting, and forward contracts and purchase options on certain types of securities. The guidance clarifies
how to account for the transition into and out of the equity method of accounting when considering observable transactions under
the measurement alternative. The ASU is effective for annual reporting periods beginning after December 15, 2020, including interim
reporting periods within those annual periods, with early adoption permitted. We are currently evaluating the impact of the new
guidance on our consolidated financial statements.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
December
31, 2020
Customers
For
the six months ended December 31, 2020 and 2019, our Company earned net revenues of $2,446,979 and $1,474,784 respectively. The
vast majority of these revenues for the period ended December 31, 2020 were derived from a large number of customers, whereas
the vast majority of these revenues for the period ended December 31, 2019 were derived from a limited number of customers.
There was one customer that accounted for approximately 13.9% of the Company’s total revenues for the period ended December
31, 2020.
Suppliers
For
the period ended December 31, 2020, we purchased products for sale by the Company’s subsidiary from several contract manufacturers
located in Asia and the U.S. A substantial portion of the Company’s inventory was purchased from two (2) suppliers. The
two suppliers accounted for 25.5% and 16.20%, respectively, of the Company’s total inventory purchase for the period ended
December 31, 2020.
For
the period ended December 31, 2019, we purchased products for sale by the company’s subsidiaries from several contract manufacturers
located in Asia and the U.S. A substantial portion of the Company’s inventory is purchased from two (2) suppliers. The two
(2) suppliers accounted as follows: Two suppliers accounted for 31.21% and 17.80% of the Company’s total inventory purchase
for the period ended December 31, 2019, respectively.
On
February 7, 2020, the Company entered into a share sale and purchase agreement (the “Indigo Agreement”) with Indigo
Dye Group Corp. (“Indigo”), a corporation located in Sacramento, California. Indigo carries on business as a cannabis
seller and delivery business under the name BudCars. The major Cannabis Products include Flower, Edibles, Vape Cartridges, Pre-Rolls,
& Concentrates, etc. All the products are finished goods. In addition, Indigo is operating a non-store front retail delivery
business (Type-9 License# C9-0000286) in California.
Pursuant
to the terms of the Indigo Agreement, the Company agree to invest $700,000 (the “Investment”) into Indigo for inventory,
equipment, and marketing expenses. The Investment shall be made in twelve monthly equal installments of $58,333 with the acceleration
of the payment schedule possible depending on business growth, cash flow needs and capital availability.
In
exchange, the Company received 40% of Indigo’s issued shares. upon execution of the final agreement. The value used for
this transaction is $1,750,000 and each percentage (1%) of the company is worth $17,500. In the event that the Company is not
able to make a payment of $58,333 in any month, it will have 90 days to cure the default. On the 91st day the investment plan
will cease and the amount of invested capital will be calculated based on an enterprise value of $1,750,000 or $17,500 per 1%
of owned equity.
In
addition, subject to the terms and conditions of the Indigo Agreement, the Company has the option to acquire an additional 30%
interest in Indigo. Upon exercise of the option, the Company would obtain control over Indigo.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
December
31, 2020
From
late May 2020 until September 30, 2020, the Company was
actively involved in development of Indigo’s operations with power to direct the activities and significantly impact
Indigo’s economic performance. The Company also has obligations to absorb losses and right to receive benefits from Indigo.
As such, in accordance with ASC 810-10-25-38A through 25-38J, Indigo is consolidated as an VIE of the Company.
Starting on October 1, 2020, the Company
plans to open new locations via purchasing equity into other Brand/Franchises to cover delivery for the entire California. Therefore,
the Company likely not to proceeds the option to acquire the additional 30% interest in Indigo at the moment. In addition, the
Company is no longer involve in day-to-day operations and the Company will be pursuing cannabis delivery moving forward, independently
of Indigo Dye Group. Sugarmade is no longer involve in day-to-day operations. As of October 1, 2020, the Company continues to
hold approximately 29% of the ownership of Indigo but ceased to have a controlling interest in the partnership and it was deconsolidated
and recorded as an investment in nonconsolidated affiliate at its $505,449 estimated fair value and changed to equity method of
accounting. See footnote #6 Noncontrolling interest and deconsolidation of VIE for details.
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6.
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Noncontrolling
Interest and Deconsolidation of VIE
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Starting
in fiscal year ended June 30, 2020, the Company had a variable interest entity, Indigo Dye Group, for accounting purposes. The
Company owned approximately 29% of Indigo’s outstanding equity and as of September 30, 2020, involved its day-to-day operations,
which gave the Company the power to direct the activities of Indigo that most significantly impact its economic performance. Accordingly,
the Company recognized the carrying value of the noncontrolling interest as a component of total shareholders’ equity, and
the consolidated financial statements included the financial position and results of operations of Indigo as of and for the periods
ended June 30, 2020 and September 30, 2020.
Starting on October 1, 2020, the Company plans to open new locations
via purchasing equity in other Brand/Franchises to cover delivery for the entire California. Therefore, the Company is not likely
at this time to exercise its option to acquire the additional 30% interest in Indigo. In addition, the Company is no longer involved
in day-to-day operations of Indigo and going forward, the Company intends to pursue cannabis delivery independent of Indigo. As
of October 1, 2020, the Company ceased to have control over the day-to-day business of Indigo and it was deconsolidated and recorded
as an investment in nonconsolidated affiliate at its $505,449 estimated fair value and changed to equity method of accounting.
Pursuant to the terms of the Indigo agreement, if the Company determines, in its discretion not to continue to make monthly payments,
its 40% ownership interest in Indigo will be decreased according to the payment then made. During the quarter ended December 31
,2020, if the Company makes no additional payments, it will hold approximately 33% of the ownership of Indigo. See Note 5 and Note
6.
The
net asset value of the Company’s variable interest in Indigo Dye Group was approximately $326,812 as of October 1, 2020,
the date of deconsolidation. The value of the Company’s variable interest on the date of deconsolidation was based on
management’s estimate of the fair value of Indigo at that time. The Company concluded that the market approach was the most
appropriate method to determine the fair value of the entity on the date of deconsolidation, given that Indigo raised equity funding
from third-party investors around the same period (i.e., level 2 inputs). The Company recognized a gain on deconsolidation of
approximately $313,928 with no related tax impact, which is included in other income, net on the consolidated statement of operations.
As the Company is not obligated to fund future losses of Indigo, the carrying amount is the Company’s maximum risk of loss.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
December
31, 2020
From
time to time and in the course of business, we may become involved in various legal proceedings seeking monetary damages and other
relief. The amount of the ultimate liability, if any, from such claims cannot be determined. As of December 31, 2020, there were
no legal claims pending or threatened against the Company that in the opinion of our management would be likely to have a material
adverse effect on our financial position, results of operations or cash flows. However, as of December 31, 2020, we were involved
in the following legal proceedings:
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●
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On
December 11, 2013, the Company was served with a complaint from two convertible note holders and investors in the Company.
On February 21, 2017, the Company signed a settlement agreement with the plaintiffs in the matter of Hannan vs. Sugarmade.
Under the terms of the settlement agreement, the company agreed to pay the plaintiffs an aggregate of $227,000 to settle all
claims against the Company, which included the payoff of two notes outstanding. The parties had estimated the value of the
notes at approximately $80,000. As of June 30, 2020, third parties had purchased two (2) notes of approximately $80,000. As
of December 31, 2020, there remains a balance, plus accrued interest on the $227,000 and on the $80,000 due under the notes.
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There
can be no assurances the ultimate liability relative to these lawsuits will not exceed what is outlined above.
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.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
December
31, 2020
Accounts
receivable are carried at their estimated collectible amounts, net of any estimated allowances for doubtful accounts. We grant
unsecured credit to our customer’s deemed credit worthy. Ongoing credit evaluations are performed and potential credit losses
estimated by management are charged to operations on a regular basis. At the time any particular account receivable is deemed
uncollectible, the balance is charged to the allowance for doubtful accounts. The Company had accounts receivable net of allowances
of $11,546 as of December 31, 2020 and of $134,517 as of June 30, 2020.
Loans
receivable amounted $0 and $1,365 as of December 31, 2020 and June 30, 2020, respectively. Loan receivables are mainly
advanced payments to the other companies.
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11.
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Loans
Receivable – Related Parties
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Loan
receivables – related parties amounted $211,276 and $318,535 as of December 31, 2020 and June 30, 2020, respectively.
Loan receivables – related parties are mainly advanced payments to the related party companies for business expense.
Inventory
consists of finished goods paper and paper-based products such as paper cups and food containers ready for sale and is stated
at the lower of cost or market. We value our inventory using the weighted average costing method. Our Company’s policy is
to include as a part of inventory any freight incurred to ship the product from our contract manufacturers to our warehouses.
Outbound freights costs related to shipping costs to our customers are considered period costs and are reflected in selling, general
and administrative expenses. We regularly review inventory and consider forecasts of future demand, market conditions and product
obsolescence.
If
the estimated realizable value of our inventory is less than cost, we make provisions in order to reduce its carrying value to
its estimated market value. On a consolidated basis, as of December 31, 2020 and June 30, 2020, the balance for the inventory
totaled $617,855 and $679,471, respectively. Obsolescence reserve at December 31, 2020 and June 30, 2020 were $185,312 and $15,445,
respectively.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
December
31, 2020
As
of December 31, 2020 and June 30, 2020, other current assets consisted of the following:
|
|
|
For the periods ended
|
|
|
|
|
December 31, 2020
|
|
|
June 30, 2020
|
|
|
Prepaid Deposit
|
|
$
|
8,483
|
|
|
$
|
48,483
|
|
|
Prepaid Inventory
|
|
|
938,422
|
|
|
|
65,449
|
|
|
Employees Advance
|
|
|
1,786
|
|
|
|
324
|
|
|
Prepaid Expenses
|
|
|
2,859
|
|
|
|
35,157
|
|
|
Undeposited Funds
|
|
|
11,711
|
|
|
|
71,550
|
|
|
Other
|
|
|
—
|
|
|
|
42,441
|
|
|
Total:
|
|
$
|
963,261
|
|
|
$
|
263,404
|
|
On
August 21, 2017, the Company entered into an intellectual property assignment agreement with Sound Decisions to revamp the Company’s
shoplifty website to generate and attract more traffic from potential customers. The Company made a payment of $14,000 for the
website (intellectual property). The Company amortized this use right as intangible asset over ten years, and recorded amortization
expense of $700 for the six months ended December 31, 2020 and 2019, respectively.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
December
31, 2020
|
15.
|
Property
and Equipment, net
|
As
of December 31, 2020 and June 30, 2020, property, plant and equipment consisted of the following:
|
Fixed Assets
|
|
December 31, 2020
|
|
|
June 30, 2020
|
|
|
Office and equipment
|
|
$
|
732,062
|
|
|
$
|
739,447
|
|
|
Motor vehicles
|
|
|
63,954
|
|
|
|
164,244
|
|
|
Leasehold Improvement
|
|
|
21,970
|
|
|
|
24,470
|
|
|
Total
|
|
|
817,986
|
|
|
|
928,161
|
|
|
Less: accumulated depreciation
|
|
|
(457,641
|
)
|
|
|
(429,116
|
)
|
|
Plant and Equipment, net
|
|
$
|
360,345
|
|
|
$
|
499,045
|
|
For
the periods ended December 31, 2020 and June 30, 2020, depreciation expenses amounted to $44,684 and $110,032, respectively.
The
Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the
carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual
disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized
equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing
this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects
of obsolescence, demand, competition and other economic factors. Based on this assessment, no impairment expenses for property,
plant, and equipment was recorded in operating expenses during the periods ended December 31, 2020 and June 30, 2020.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
December
31, 2020
Unearned
revenue amounted to $57,157 and $53,248 as of December 31, 2020 and June 30, 2020, respectively. Unearned revenues are mainly
due to contracts with extended payment terms, acceptance provisions and future delivery obligation.
Other
payable amounted to $950,187 and $691,801 as of December 31, 2020 and June 30, 2020, respectively. Other payables are mainly credit
card payables and taxes payables. As of December 31, 2020, the Company had 8 credit cards, one American Express is a charge
card with no limit and zero interest. The remaining 7 cards had total credit limit of $85,000, and APR from 11.24% to 29.99%.
As
of December 31, 2020 and June 30, 2020, the balance owing on convertible notes, net of debt discount, with terms as described
below was $1,651,430 and $1,740,122, respectively.
Convertible
note 1: On August 24, 2012, the Company entered into a convertible promissory note with an accredited investor for $25,000. The
note has a term of six (6) months with an interest rate of 10% and is convertible to common shares at a 25% discount of the average
of 30 days prior to the conversion date. As of December 31, 2020, the note is in default.
Convertible
note 2: On September 18, 2012, the Company entered into a convertible promissory note with an accredited investor for $25,000.
The note has a term of six (6) months with an interest rate of 10% and is convertible to common shares at a 25% discount of the
average of 30 days prior to the conversion date. As of December 31, 2020, the note is in default.
Convertible
note 3: On December 21, 2012, the Company entered into a convertible promissory note with an accredited investor for $100,000.
The note has a term of six (6) months with an interest rate of 10% and is convertible to common shares at a 25% discount of the
average of 30 days prior to the conversion date. As of December 31, 2020, the note is in default.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
December
31, 2020
|
18.
|
Convertible
Notes (continued)
|
Convertible
note 4: On November 1, 2018, the Company entered into a convertible promissory note with an accredited investor for $100,000.
The note has a term of one year with an interest rate of 8% and is convertible to common shares at a fixed conversion price of
$0.07. As of December 31, 2020, the note is in default.
Convertible
note 5: On November 16, 2018, the Company entered into a convertible promissory note with an accredited investor for $80,000.
The note has a term of one year with an interest rate of 8% and is convertible to common shares at a fixed conversion price of
$0.07. As of December 31, 2020, the note is in default.
Convertible
note 6: On November 16, 2018, the Company entered into a convertible promissory note with an accredited investor for $40,000.
The note has a term of one year with an interest rate of 8% and is convertible to common shares at a fixed conversion price of
$0.07. As of December 31, 2020, the note is in default.
Convertible
note 7: On December 3, 2018, the Company entered into a convertible promissory note with an accredited investor for $35,000. The
note has a term of one year with an interest rate of 8% and is convertible to common shares at a fixed conversion price of $0.07.
As of December 31, 2020, the note is in default.
Convertible
note 8: On September 27, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount
of $165,000 (includes $16,250 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note
is 55% of the lowest closing bid for the 20 consecutive trading days prior to the conversion date. During the year ended June
30, 2020, the note holder converted $50,000 principal with $2,992 interest expense into 56,007,062 shares of the Company’s
common stock. As of December 31, 2020, the note has been fully converted.
Convertible
note 9: On October 28, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount
of $225,500 (includes $23,000 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note
is 60% of the lowest closing bid for the 20 consecutive trading days prior to the conversion date. As of December 31, 2020, the
note has been fully converted.
Convertible
note 10: On October 28, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount
of $225,500 (includes $23,000 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note
is 60% of the lowest closing bid for the 20 consecutive trading days prior to the conversion date. As of December 31, 2020, the
note has been fully converted.
Convertible
note 11: On November 29, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount
of $106,150 (includes $11,150 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note
is 60% of the lowest closing bid for the 20 consecutive trading days prior to the conversion date. As of December 31, 2020, the
note has been fully converted
Convertible
note 12: On November 29, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount
of $106,150 (includes $11,150 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note
is 60% of the lowest closing bid for the 20 consecutive trading days prior to the conversion date. As of December 31, 2020, the
note has been fully converted.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
December
31, 2020
|
18.
|
Convertible
Notes (continued)
|
Convertible
note 13: On December 10, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount
of $106,700 (includes $11,700 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note
is 60% of the lowest closing bid for the 20 consecutive trading days prior to the conversion date. As of December 31, 2020, the
note has been fully converted.
Convertible
note 14: On December 10, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount
of $106,700 (includes $11,700 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note
is 60% of the lowest closing bid for the 20 consecutive trading days prior to the conversion date. As of December 31, 2020, the
note has been fully converted.
Convertible
note 15: On December 27, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount
of $112,200 (includes $12,200 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note
is 60% of the lowest closing bid for the 20 consecutive trading days prior to the conversion date. As of December 31, 2020, the
note has been fully converted.
Convertible
note 16: On October 31, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount
of $139,301. The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is $0.008 per share.
Convertible
note 17: On November 1, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount
of $100,000. The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is $0.008 per share.
Convertible
note 18: On January 3, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount
of $112,200 (includes $12,200 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note
is 60% of the lowest closing bid for the 20 consecutive trading days prior to the conversion date. As of December 31, 2020, the
note has been fully converted.
Convertible
note 19: On January 14, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount
of $150,000 (includes $3,000 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note
is 38% discount to average of three lowest closing prices for the 10 consecutive trading days prior to the conversion date. During
the three months ended September 30, 2020, the note holder converted $50,000 principal into 29,868,578 shares of the Company’s
common stock. As of December 31, 2020, the remaining principal and unpaid interest has been fully repaid by cash.
Convertible
note 20: On January 22, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount
of $128,000 (includes $3,000 OID). The note is due 360 days and bear an interest rate of 10%. The conversion price for the note
is 35% discount to average of two lowest closing prices for the 20 consecutive trading days prior to the conversion date. As of
December 31, 2020, the note principal and unpaid interest has been fully repaid by cash.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
December
31, 2020
|
18.
|
Convertible
Notes (continued)
|
Convertible
note 21: On February 4, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount
of $110,000 (includes $10,000 OID). The note is due 360 days and bear an interest rate of 12%. The conversion price for the note
is $0.001 per share. As of December 31, 2020, the note has been fully converted.
Convertible
note 22: On February 18, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount
of $100,000 (includes $10,000 OID). The note is due 360 days and bear an interest rate of 12%. The conversion price for the note
is $0.001 per share.
Convertible
note 23: On March 5, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of
$125,000 (includes $3,000 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is
38% discount to average of three lowest closing prices for the 10 consecutive trading days prior to the conversion date. As of
December 31, 2020, the note has been fully converted.
Convertible
note 24: On April 24, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of
$75,000 (includes $2,000 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is
38% discount to average of three lowest trading prices for the 10 consecutive trading days prior to the conversion date.
Convertible
note 25: On June 10, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of
$36,300 (includes $3,300 OID and $3,000 legal expense). The note is due 360 days and bear an interest rate of 8%. The conversion
price for the note is 60% of the lowest trading bid for the 20 consecutive trading days prior to the conversion date.
Convertible
note 26: On June 18, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of
$36,300 (includes $3,300 OID and $3,000 legal expense). The note is due 360 days and bear an interest rate of 8%. The conversion
price for the note is 60% of the lowest closing bid for the 20 consecutive trading days prior to the conversion date.
Convertible
note 27: On July 6, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of
$77,000 (includes $2,000 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is
38% discount to average of three lowest trading prices for the 10 consecutive trading days prior to the conversion date.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
December
31, 2020
|
18.
|
Convertible
Notes (continued)
|
Convertible
note 28: On July 7, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of
$153,000 (includes $3,000 OID). The note is due 360 days and bear an interest rate of 10%. The conversion price for the note is
35% discount to average of two lowest trading prices for the 20 consecutive trading days prior to the conversion date.
Convertible
note 29: On July 16, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of
$260,700 (includes $23,700 OID and $12,000 legal expense). The note is due 360 days and bear an interest rate of 8%. The conversion
price for the note is 60% of the lowest trading bid for the 20 consecutive trading days prior to the conversion date.
Convertible
note 30: On July 21, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of
$200,200 (includes $18,200 OID and $7,000 legal expense). The note is due 360 days and bear an interest rate of 8%. The conversion
price for the note is 60% of the lowest trading bid for the 20 consecutive trading days prior to the conversion date.
Convertible
note 31: On September 8, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount
of $110,000 (includes $10,000 OID). The note is due 180 days and bear an interest rate of 12%. The conversion price for the note
is $0.01 per share. After the six months anniversary of this note, the conversion price shall be equal to the lower of the fixed
price of $0.01 or 65% of the lowest trading price of the common stock for the 20 prior trading days including the day upon which
a conversion notice is received by the Company or its transfer agent.
Convertible
note 32: On September 10, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount
of $227,700 (includes $20,700 OID and $7,000 legal expense). The note is due 360 days and bear an interest rate of 8%. The conversion
price for the note is 60% of the lowest trading bid for the 20 consecutive trading days prior to the conversion date.
Convertible
note 33: On September 24, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount
of $212,300 (includes $19,300 OID). The note is due 180 days and bear an interest rate of 12%. The conversion price for the note
is $0.01 per share. After the six months anniversary of this note, the conversion price shall be equal to the lower of the fixed
price of $0.01 or 65% of the lowest trading price of the common stock for the 20 prior trading days including the day upon which
a conversion notice is received by the Company or its transfer agent.
Convertible
note 34: On October 8, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount
of $231,000 (includes $21,000 OID). The note is due 180 days and bear an interest rate of 12%. The conversion price for the note
is $0.01 per share. After the six months anniversary of this note, the conversion price shall be equal to the lower of the fixed
price of $0.01 or 65% of the lowest trading price of the common stock for the 20 prior trading days including the day upon which
a conversion notice is received by the Company or its transfer agent.
Convertible
note 35: On October 13, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount
of $275,000 (includes $25,000 OID). The note is due 180 days and bear an interest rate of 12%. The conversion price for the note
is $0.01 per share. After the six months anniversary of this note, the conversion price shall be equal to the lower of the fixed
price of $0.01 or 65% of the lowest trading price of the common stock for the 20 prior trading days including the day upon which
a conversion notice is received by the Company or its transfer agent.
Convertible
note 36: On November 10, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount
of $58,300 (includes $5,300 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note
is 60% of the lowest trading bid for the 20 consecutive trading days prior to the conversion date.
In
connection with the convertible debt, debt discount balance as of December 31, 2020 and June 30, 2020 were $1,045,671 and $880,879,
respectively, and were being amortized and recorded as interest expenses over the term of the convertible debt.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
December
31, 2020
|
19.
|
Derivative
liabilities
|
The
derivative liability is derived from the conversion features in note 8 and stock warrant in note 10. All were valued using the
weighted-average Binomial option pricing model using the assumptions detailed below. As of December 31, 2020 and June 30, 2020,
the derivative liability was $1,595,186 and $5,597,095, respectively. The Company recorded $3,992,108 and $1,442,295 loss from
changes in derivative liability during the period ended December 31, 2020 and June 30, 2020, respectively. The Binomial model
with the following assumption inputs:
|
|
|
|
December 31, 2020
|
|
|
Annual dividend yield
|
|
|
—
|
|
|
Expected life (years)
|
|
|
0.2-1.00
|
|
|
Risk-free interest rate
|
|
|
0.09-0.16
|
%
|
|
Expected volatility
|
|
|
89-187
|
%
|
|
|
|
|
June
30, 2020
|
|
|
Annual dividend yield
|
|
|
—
|
|
|
Expected life (years)
|
|
|
0.5-1.00
|
|
|
Risk-free interest rate
|
|
|
0.16-2.10
|
%
|
|
Expected volatility
|
|
|
113-175
|
%
|
Fair
value of the derivative is summarized as below:
|
Beginning Balance, June 30, 2020
|
|
$
|
5,597,095
|
|
|
Additions
|
|
|
2,326,977
|
|
|
Cancellation of Derivative Liabilities Due to Cash Repayment
|
|
|
(228,489
|
)
|
|
Cancellation of Derivative liabilities Due to Share Reservation
|
|
|
(214,757
|
)
|
|
Mark to Market
|
|
|
(3,763,618
|
)
|
|
Reclassification to APIC due to conversions
|
|
|
(2,122,022
|
)
|
|
Ending Balance, December 31, 2020
|
|
$
|
1,595,186
|
|
|
Beginning Balance, June 30, 2019
|
|
$
|
2,991,953
|
|
|
Additions
|
|
|
3,538,927
|
|
|
Mark to Market
|
|
|
2,314,089
|
|
|
Reclassification to APIC due to conversions
|
|
|
(957,488
|
)
|
|
Ending Balance, December 31, 2019
|
|
$
|
3,259,345
|
|
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
December
31, 2020
On
September 7, 2018, the Company entered into a settlement agreement with several investors to settle all disputes by issues additional
unrestricted shares. In connection with the note each individual investor will also receive warrants equal to the number of the
shares the investors own as of the effective date of the settlement agreement. The warrants have a life of five years with an
exercise price as of the date of exchange. The fair value of the warrants at the grant date was $56,730. As of December 31, 2020
and June 30, 2020, the fair value of the warrant liability was $521 and $1,910, respectively.
On
February 4, 2020, the Company entered into a warrant agreement with an accredited investor up to 10,000,000 shares of common stock
of the Company at exercise price of $0.008 per share, subject to adjustment. The warrants have a life of five years with an exercise
price as of the date of exchange. The fair value of the warrants at the grant date was $80,000. As of December 31, 2020 and June
30, 2020, the fair value of the warrant liability was $9,000 and $78,000, respectively.
As
of December 31, 2020 and June 30, 2020, the total fair value of the warrant liability was $9,521 and $79,910, respectively.
Note
Payable Due to Bank –
During
October 2011, we entered into a revolving demand note (line of credit) arrangement with HSBC Bank USA, with a revolving borrowing
limit of $150,000. The line of credit bears a variable interest rate of one quarter percent (0.25%) above the prime rate (5.5%
as of December 20, 2018). In the event the deposit account is not established or minimum balance maintained, HSBC can charge a
higher rate of interest of up to 4.0% above prime rate. As of December 31, 2020 and June 30, 2020, the loan principal balance
was $25,982. As of December 31, 2020, the note is in default.
Notes
Payable Due to Non-related parties
On
June 15, 2018, the Company entered into a promissory note with one of the accredited investors. The original principal amount
was $20,000 and the note bears 8% interest per annum. The note was payable upon demand. As of December 31, 2020 and June 30, 2020,
this note had a balance of $20,000 and $20,000, respectively.
Notes
Payable Due to Related Parties
On
January 23, 2013, the Company entered into a promissory note with its former employee of the Company who owns less than 5% of
the Company’s stock. The original principal amount was $40,000 and the note bears no interest. The note was payable upon
demand. As of December 31, 2020 and June 30, 2020, this note had a balance of $15,427 and $15,427, respectively.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
December
31, 2020
On
October 1, 2017, SGMD entered a straight promissory note with Greater Asia Technology Limited (Greater Asia) for borrowing $100,000
with maturity date on June 30, 2018; the note bears an interest rate of 33.33%. As of December 31, 2020 and June 30, 2020, the
note was in default and the outstanding balance under this note was $73,844 and $96,401, respectively.
During
the year ended June 30, 2019, the Company entered a series of short-term loan agreements with Greater Asia Technology Limited
(Greater Asia) for borrowing $375,000, with interest rate at 40% - 50% of the principal balance. As of December 31, 2020 and June
30, 2020, the outstanding balance with Greater Asia loans were $100,000 and $100,000, respectively.
On
January 6, 2015, the Company entered into repayment agreement with its former employee for a loan of $9,500 at no interest. As
of December 31, 2020 and June 30, 2020, the Company has an outstanding balance of $4,423 and $3,584.
On
July 1, 2012, CarryOutSupplies entered an equipment loan agreement with a bank with maturity on June 21, 2024. The monthly payment
is $648. As of December 31, 2020 and June 30, 2020, the outstanding balance under this loan were $20,665 and $24,524, respectively.
On
March 18, 2020, the Company entered into a loan agreement for $150,000 with Celtic Bank with maturity date on March 18, 2020.
As of December 31, 2020 and June 30, 2020, the outstanding balance under this loan were $1,815 and $117,635, respectively.
On
June 26, 2020, the Company entered into a government loan agreement for $8,000 with maturity date on December 26, 2020. As of
December 31, 2020 and June 30, 2020, the outstanding balance under this loan were $8,000.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
December
31, 2020
|
22.
|
Loans
payable (Continued)
|
On
April 27, 2020, we entered into a loan borrowed $110,000 from Bank of America (“Lender”), pursuant to a Promissory
Note issued by Company to Lender (the “PPP Note”). The loan was made pursuant to the Payroll Protection Program established
as part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP Note bears interest at
1.00% per annum and may be repaid at any time without penalty. The PPP Note contains customary events of default relating to,
among other things, payment defaults, breach of representations and warranties, or provisions of the promissory note. The occurrence
of an event of default may result in a claim for the immediate repayment of all amounts outstanding under the PPP Note.
On
July 28, 2020, we entered into a loan borrowed $159,900 from Bank of America (“Lender”), pursuant to a Promissory
Note issued by Company to Lender (the “PPP Note”). The loan was made pursuant to the Payroll Protection Program established
as part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP Note bears interest at
1.00% per annum and may be repaid at any time without penalty. The PPP Note contains customary events of default relating to,
among other things, payment defaults, breach of representations and warranties, or provisions of the promissory note. The occurrence
of an event of default may result in a claim for the immediate repayment of all amounts outstanding under the PPP Note.
The
Company accounting for the PPP loan under Topic 470: (a). Initially record the cash inflow from the PPP loan as a financial liability
and would accrue interest in accordance with the interest method under ASC Subtopic 835-30; (b). Not impute additional interest
at a market rate; (c). Continue to record the proceeds from the loan as a liability until either (1) the loan is partly or wholly
forgiven and the debtor has been legally released or (2) the debtor pays off the loan; (d). Would reduce the liability by the
amount forgiven and record a gain on extinguishment once the loan is partly or wholly forgiven and legal release is received.
As
of December 31, 2020 and June 30, 2020, the Company had an outstanding loan balance of $720,489 and $517,260, respectively.
|
23.
|
Loans
Payable – Related Parties
|
On
July 7, 2016, SWC received a loan from an employee. The amount of the loan bears no interest and amortized on a monthly basis
over the life of the loan. As of December 31, 2020 and June 30, 2020, the balance of the loan was $48,143 and $35,943,
respectively.
During
the three months ended September 30, 2020, the Company received loans from related parties. The amount of the loan bears no interest.
As of December 31, 2020 and June 30, 2020, the balance of the loan was $528,082 and $0, respectively.
As of December 31, 2020 and June 30, 2020,
the Company had an outstanding loan balance – related parties of $576,225 and $35,943, respectively.
During
the year ended June 30, 2020, the Company had entered into one consulting service agreement and one employment agreement, which
had potential shares to be issued in total amount of $101,577.
During
the six months ended December 31, 2020, the Company had potential shares to be issued to one employment agreement
of $35,000.
During
the six months ended December 31, 2020, the Company had potential shares to be issued to one consulting agreement of $31,000.
As
of December 31, 2020 and June 30, 2020, the Company had balance of $167,577 and $101,577 share to be issued, respectively.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
December
31, 2020
The Company is authorized to issue 10,000,000,000
shares of $.001 par value common stock and 10,000,000 shares of $.001 par value preferred stock. On April 22, 2020, the Company
filed an amendment to increase the total authorized shares to 10,010,000,000 – 10,000,000,000 of which are designated
as common stock, par $0.001 per share and 10,000,000 of which are designated as preferred stock, par value $0.001
per share.
Share
issuance during the three months ended September 30, 2020 -
During
the three months ended September 30, 2020, the Company issued 1,081,411,606 shares of common stock for debt conversions in total
amount of $1,273,459.
Share
issuance during the three months ended December 31, 2020 -
During
the three months ended December 31, 2020, the Company issued 411,171,815 shares of common stock for debt conversions in total
amount of $320,879.
During
the periods from December 14, 2014 through March 31, 2015, the Company issued 2,000,000 Series A preferred shares from an EB5
Program Investment. Five years from the date of issue (the “Conversion Date”), assuming Investor is approved for l-526,
and each Preferred Share will automatically convert into that number of Common Shares having a “fair market value”
of the Initial Investment plus a five (5) percent annualized return on Initial Investment, Fair market value will be determined
by averaging the closing sale price of a Common Share for the 40 trading days immediately preceding the date of conversion on
the U.S. stock exchange on which Common Shares are publicly traded. Should the Investor be unsuccessful in liquidating the Common
Shares within 90 days after the Conversion Date, the Company shall buy back total Common Shares owned by Investor at a fixed amount
of $500,000.00 plus 5% ROI per annum.
During
the three months ended December 31, 2020, those shares were automatically converted into 360,647,019 of common shares with a fair
market value of $2,000,000 of initial investment plus a five percent annualized return on initial investment (“ROI”),
or total ROI of $500,000.
As
of December 31, 2020 and June 30, 2020, the Company had 1,541,500 shares of its preferred stock issued and outstanding,
and 3,616,507,670 and 1,763,277,230 shares of its common stock, respectively, issued and outstanding.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
December
31, 2020
|
26.
|
Commitments
and contingencies
|
On
February 23, 2018 the Company entered into lease agreement for a new office space commencing March 1, 2018. The term of the lease
is for a (5) Five Years with 1 month free on the 1st year of the term. The monthly rent on the 1st year will be $11,770 with a
3% increase for each subsequent year. Total commitment for the full term of the lease will be $737,367.
Our
warehouse along with some office space is located at 20529 East Walnut Drive North, Diamond Bar, California, where we lease approximately
11,627 square feet of combined space. The lease term is for five years and two months ending on April 30, 2025. The current monthly
rental payment for the facility is $13,022.
|
Six Months Ended
|
|
|
|
|
December 31, 2020
|
|
|
|
|
Lease Cost
|
|
|
|
|
|
Operating lease cost (included in general and administration in the Company’s unaudited condensed statement of operations)
|
|
$
|
154,463
|
|
|
|
|
|
|
|
|
Other Information
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities for the six months ended December 31, 2020
|
|
$
|
107,438
|
|
|
Remaining lease term – operating leases (in years)
|
|
|
3.25
|
|
|
Average discount rate – operating leases
|
|
|
10
|
%
|
|
The supplemental balance sheet information related to leases for the periods are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
|
|
|
Short-term right-of-use assets
|
|
$
|
231,685
|
|
|
Long-term right-of-use assets
|
|
$
|
610,864
|
|
|
Total operating lease assets
|
|
$
|
842,549
|
|
|
|
|
|
|
|
|
Short-term operating lease liabilities
|
|
$
|
236,528
|
|
|
Long-term operating lease liabilities
|
|
$
|
641,687
|
|
|
Total operating lease liabilities
|
|
$
|
878,214
|
|
Maturities of the Company’s lease liabilities are as follows:
|
|
|
Operating
|
|
|
Period ending June 30,
|
|
Lease
|
|
|
2021
|
|
$
|
156,118
|
|
|
2022
|
|
|
305,040
|
|
|
2023
|
|
|
273,425
|
|
|
2024
|
|
|
172,465
|
|
|
2025
|
|
|
147,446
|
|
|
Total lease payments
|
|
|
1,054,494
|
|
|
|
|
|
|
|
|
Less: Imputed interest/present value discount
|
|
|
(176,279
|
)
|
|
Present value of lease liabilities
|
|
$
|
878,214
|
|
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
December
31, 2020
Shares
issued for cash
On
February 9, 2021, the Company entered into a stock subscription agreement to issue 150,000,000 shares of the Company’s common
stock for cash in total amount of $225,000.
Convertible
Notes
On
February 9, 2021, the Company entered a convertible promissory note with an accredited investor for a total amount of $69,300
(includes $6,300 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 60% of the
lowest trading bid for the 20 consecutive trading days prior to the conversion date.
Conversions
Subsequent
to February 16, 2021, there were multiple accredited investors converted approx. $258,300 of the convertible notes into 389,256,291
shares of the Company’s common stocks.
On
February 8, 2021, Sugar Rush, Inc., a Nevada corporation and wholly owned subsidiary of Sugarmade, Inc., a Delaware corporation
entered into a Common Share Purchase Agreement with Nug Avenue, Inc., a California corporation (the “Seller”). The
Seller provides services pertaining to the licensed and regulated delivery of cannabis out of Lynwood, California, serving primarily
the greater Los Angeles Metropolitan area (the “Lynwood Operations”).
Pursuant
to the Agreement, and subject to the satisfaction of the conditions as set forth therein, the Company agreed to purchase a seventy
percent (70%) stake in the Seller’s Lynwood Operations for a purchase price of five hundred sixty thousand dollars ($560,000)
(the “Stake Purchase”). Pursuant to the Agreement, the parties agreed that the Stake Purchase will entitle the Company
to receive 70% of the revenues and profits generated by the Seller from its Lynwood Operations starting from February 8, 2021
(the “Effective Date”). Under the terms of the Agreement, the Company agreed to make periodic payments to the Seller
to satisfy the $560,000 purchase price over a twelve (12) month period beginning on the Effective Date. Pursuant to the Agreement,
the parties agreed that the $560,000 resulting from the Stake Purchase is to be used by the Seller for the expansion of business
opportunities for the Lynwood Operations.
Further,
pursuant to the Agreement, the Seller agreed to grant the Company an option to invest in all future business opportunities of
the Seller pertaining to any and all legal and regulated cannabis business operations. The Seller and the Company agreed to negotiate
a formal agreement for this option within ninety (90) days of the Effective Date. Further, pursuant to the Agreement, Seller agreed
to grant the Company unlimited participation rights in any future financings of the Seller, and to negotiate a formal agreement
for such participation rights to be entered into by the Seller and the Company within ninety (90) days of the Effective Date.
On
February 9, 2021 (the “Closing Date”), the Closing occurred, and the Company acquired a 70% stake in the Seller’s
Lynwood Operations pursuant to the terms of the Agreement.