UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2019
Commission file number 000-23446
SUGARMADE, INC.
(Exact name of registrant as specified
in its charter)
Delaware
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94-3008888
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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750 Royal Oaks Dr., Suite 108,
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Monrovia, CA
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91016
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(Address of principal executive offices)
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(Zip Code)
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(888) 982-1628
(Registrant’s telephone number,
including area code)
Securities registered pursuant to Section 12(b)
of the Act: None
Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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Common Stock, par value $0.001 per
share
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SGMD
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OTCQB
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Securities registered pursuant to Section
12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes ☐ No
☒
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ☐ No
☒
Indicate
by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes ☒ No
☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit such files). Yes ☒ No
☐
Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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☒
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Emerging growth company
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☐
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If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
No ☒
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
The aggregate market value of
the voting and non-voting common stock held by non-affiliates of the registrant was approximately $41,286,265 as of December 31,
2018, the last business day of the registrant’s most recently completed second quarter.
The number of shares of the registrant’s
common stock outstanding as of October 9, 2019 was 812,686,536.
Table of Contents
PART I
SPECIAL NOTE OF CAUTION
REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K
contains “forward-looking statements.” All statements other than statements of historical fact are “forward-looking
statements” for purposes of federal and state securities laws, including, but not limited to, any projections of earnings,
revenue or other financial items; any statements of the plans, strategies and objections of management for future operations; any
statements concerning proposed new services or developments; any statements regarding future economic conditions or performance;
any statements or belief; and any statements of assumptions underlying any of the foregoing.
Forward-looking statements of Sugarmade,
Inc. and our wholly owned active operating subsidiary, SWC Group, Inc. (collectively, the “Company”) include
descriptions of the Company’s plans or objectives for future operations, products or services, and forecasts of its revenues,
earnings or other measures of economic performance. Forward-looking statements can be identified by the fact that they do not relate
strictly to historical or current facts. They often include the words “believe,” “expect,” “intend,”
“estimate,” “anticipates,” “project,” “assume,” “plan,” “predict,”
or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,”
“could” or “may.”
These forward-looking statements
present our estimates and assumptions only as of the date of this report. Accordingly, readers are cautioned not to place undue
reliance on forward-looking statements, which speak only as of the dates on which they are made. Except for our compliance with
ongoing securities laws, we do not intend, and undertake no obligation, to update and forward-looking statement. Additionally,
the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 most likely do not apply to our forward-looking
statements as a result of being a penny stock issuer. You should, however, consult further disclosures we make in future filings
of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
Although we believe the expectations
reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected
or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking
statements, are subject to change and inherent risks and uncertainties. The factors impacting these risks and uncertainties include,
but are not limited to:
For a detailed description of these
and other factors that could cause actual results to differ materially from those expressed in any forward-looking statement, please
see Item 1A, Risk Factors, in this document.
Our securities are registered under
the Securities Act of 1933 and the Securities Exchange Act of 1934 and we will file reports and other information with the Securities
and Exchange Commission as a result. Additionally, we shall file supplementary and periodic information, documents and reports
that are required under section 13(a) and Section 15(d) of the Exchange Act , as amended.
Any annual, quarterly, special
reports and other information filed with the SEC can be inspected and copied at the public reference facility maintained by the
SEC at 100 F Street, N.E., Room 1580, Washington, DC 20549-0405. Information regarding the public reference facilities may be obtained
from the SEC by telephoning 1-800-SEC-0330. The Company’s filings are also available through the SEC’s Electronic Data
Gathering Analysis and Retrieval System which is publicly available through the SEC’s website (www.sec.gov). Copies of such
materials may also be obtained by mail from the public reference section of the SEC at 100 F Street, N.E., Room 1580, Washington,
D.C. 20549-0405 at prescribed rates.
PART I
Item 1. Business
General
Sugarmade, Inc. (hereinafter referred to as “we”, “us” or “the/our
Company”) is a publicly traded company incorporated in the state of Delaware. Our previous legal name was Diversified Opportunities,
Inc. Our Company primarily operates through our subsidiary, Sugarmade, Inc., a California corporation (“SWC Group,
Inc., - CA”). We are headquartered in Monrovia, California, a suburb of Los Angeles, with an additional
warehouse location in Southern California. As of date of this filing, we employ 21 full and part-time workers and contractors.
Our Company was originally incorporated on
June 5, 1986 in California as Lab, Inc. and later changed its name to Software Professionals, Inc. During this time our Company
was in the software solutions business, developing, marketing, and supporting software products designed to automate the management
of computer systems for commercial concerns. On May 21, 1996, our Company filed a Certificate of Amendment to its Amended
and Restated Articles of Incorporation changing its name to Enlighten Software Solutions, Inc. During August 2001, our Company
filed a Form 15 for the purpose of deregistering its securities. On September 13, 2001, our Company filed a voluntary petition
under Chapter 7, in the U.S. Bankruptcy Court, Northern District of California. On November 2, 2004, the Trustee filed its
Report of Distribution and on January 4, 2005 a final decree was entered and the case was closed. On or near July 10, 2007,
we filed the requisite documents with the State of California for the purpose of reinstating our corporate charter. On July
30, 2007, our Company through a series of transactions effectively reincorporated in the state of Delaware, while retaining the
capital structure and number of shares outstanding of the previous California corporation. On January 14, 2008, our Company
officially changed its name to Diversified Opportunities, Inc.
On April 23, 2011, we entered into an exchange agreement (the “Exchange Agreement”) with Sugarmade, Inc., a California corporation (“Sugarmade-CA”), which, as a result of the transactions contemplated in the Exchange Agreement, became our wholly-owned subsidiary. Under the terms of the Exchange Agreement, we acquired all of the outstanding stock of Sugarmade-CA (the “Exchange”). On May 9, 2011, our Company completed the Exchange. Our Company then changed its name from “Diversified Opportunities, Inc.” to “Sugarmade, Inc.” on June 24, 2011. Under the terms of the Exchange Agreement, Sugarmade-CA’s shareholders exchanged all of their shares of stock on a one-for-one basis for an aggregate of 8,864,108 shares of our common stock. In connection with the Exchange Agreement and effective at the closing of the Exchange transaction, our previous three principal shareholders agreed to enter into a Share Cancellation Agreement pursuant to which 8,762,500 shares held by them were canceled or redeemed in exchange for our Company’s payment of $210,000, the issuance of 200,000 warrants to purchase our common stock at $1.25 per share, and certain registration rights.
Business Overview
As of the end of the reporting period, June
30, 2019, we were involved primarily in two main business operations 1) the supply of hydroponic and related agricultural supplies,
and 2) the supply of products to the quick service restaurant sub-sector of the restaurant industry.
In the future, we plan to continue to concentrate
primarily on the hydroponic and cultivation marketplace, in addition to the quick service restaurant supply sector and post harvested
packaging. In addition, we are currently analyzing expanding our business operations into the hydroponic and cultivation retail
sector via direct acquisitions of participants in that market sector.
While the majority of our managerial talent
is focused on the rapidly expanding specialty cultivation marketplace, we plan to continue our business pursuits relative to our
CarryOutSuppies.com business.
Hydroponic and Cultivation Supplies
Our primary business is the supply of hydroponic
cultivation equipment, and related products, through our e-commerce portals. Our websites offers thousands of cultivation-oriented
products in several general categories, such as lighting systems, ventilation units, organic nutrients and state of the art electronic
controls for cultivation, among other less prevalent categories. We source our products from a variety of manufacturers and distributors
located both domestically and internationally. By sourcing our products in bulk from numerous sources, we believe we are able to
reduce overall costs, which allows us to not only pass savings on to our customers, but to also realize positive margins on products
sold. Our product and marketing philosophy is based on beliefs of not only offering premium quality products, but to also offer
such products at attractive prices to our customers.
The majority of our customers are either commercial
or home cultivators. Commercial growers rely on us to not only stock the products required on an ongoing basis, but these customers
also rely on us to ensure the products can be delivered on a timely basis. Thus, paramount to our business operation is efficiency,
especially relating to shipping and delivery. These customers set up online accounts and place orders electronically, receiving
their orders via either postal service or private courier services. Other customers, select to pick up the purchased products at
our will call office location.
The needs of our commercial grower customers
are varied and typically differ from traditional cultivators and growers. Many of our commercial customers are involved in specialty
crops and medicine-based cultivation. Thus, these customers often require products that offer the ability for the cultivator to
precisely control environmental growth conditions, such as lighting, temperature, humidity, growth medium PH, and other factors.
We also cater to craft home cultivators who
are increasing sophisticated relative to cultivation science. These home growers are most interested in advanced lighting systems,
organic nutrients and soils in order to cultivate organic greens, micro-greens, vegetables and medicine-based plants. These home
cultivators typically place smaller orders online with delivery directly to the customer’s home location.
Our board of directors and management team
believe our chosen mixed strategy of catering to both the commercial grower and the home cultivator in on target with the overall
movement of the marketplace. While over the past few years, we have seen increased interest among commercial cultivators, while
the home cultivator market has softened; we nevertheless believe the home cultivation market will continue to be robust over the
coming years.
During December of 2017, we entered into a
master marketing agreement with BizRight, LLC, a leading marketer and manufacturer of hydroponic growth supplies, which offers
a range of hydroponics-related products including: HPS grow lights, electronic ballasts, HPS Bulbs, nutrient mixes, environmental
control products, pH measurement and calibration solutions and other grow and storage products. BizRight operates the ZenHydro.com
website and other e-commerce properties, and sells various products to distributors and retailers. This relationship has allowed
our Company to significantly expand our revenue growth prospects. On April 11, 2018, the same rights under the master marketing
agreement were assigned to BZRTH Inc., on February 5, 2019 the Company exercised its option to acquire BZRTH and has worked diligently
to close on the transaction at the earliest time possible.
Quick Service Restaurant Suppliers
Sugarmade is also a significant supplier to
the quick service restaurant sector of the overall restaurant industry. We plan to continue our business pursuits relative to our
CarryOutSuppies.com business, which is a producer and wholesaler of custom printed and generic supplies servicing more than
2,000 quick service restaurants. Our products include double poly paper cups for cold beverage; disposable, clear, plastic
cold cups, paper coffee cups, yogurt cups, ice cream cups, cup lids, cup sleeves, edible packaging, food containers, soup containers,
plastic spoons and many other similar products for this market sector. CarryOutSupplies.com was founded in 2009.
We plan to continue our business pursuits relative
to our CarryOutSuppies.com business, which is a producer and wholesaler of custom printed and generic supplies servicing more
than 2,000 quick service restaurants. Our products include double poly paper cups for cold beverage; disposable, clear, plastic
cold cups, paper coffee cups, yogurt cups, ice cream cups, cup lids, cup sleeves, food containers, soup containers, plastic spoons
and many other similar products for this market sector. CarryOutSupplies.com was founded in 2009.
Employees and Consultants
As of June 30, 2019, the Company
had approximately thirteen (13) employees & eight (8) contractors.
Available Information
Any annual, quarterly, special
reports and other information filed with the SEC can be inspected and copied at the public reference facility maintained by the
SEC at 100 F Street, N.E., Room 1580, Washington, DC 20549-0405. Information regarding the public reference facilities may be obtained
from the SEC by telephoning 1-800-SEC-0330. The Company’s filings are also available through the SEC’s Electronic Data
Gathering Analysis and Retrieval System which is publicly available through the SEC’s website (www.sec.gov). Copies
of such materials may also be obtained by mail from the public reference section of the SEC at 100 F Street, N.E., Room 1580, Washington,
D.C. 20549-0405 at prescribed rates.
Item 1A. Risk Factors
RISK FACTORS
Cautionary Statements
The discussions and information in this
Form 10-K may contain both historical and forward-looking statements. To the extent that the Form 10-K contains forward-looking
statements regarding the financial condition, operating results, business prospects, or any other aspect of our business, please
be advised that our actual financial condition, operating results, and business performance may differ materially from that projected
or estimated by us in forward-looking statements. We have attempted to identify, in context, certain of the factors we currently
believe may cause actual future experience and results to differ from our current expectations.
RISKS RELATED TO OUR BUSINESS
The report of our independent registered
public accounting firm expresses substantial doubt about the Company’s ability to continue as a going concern.
The report of our independent registered
public accounting firm expresses substantial doubt about the Company’s ability to continue as a going concern. Our auditors,
L&L CPAs, have indicated in their report on the Company’s financial statements for the fiscal year ended June 30, 2019,
that conditions exist that raise substantial doubt about our ability to continue as a going concern due to our recurring losses
from operations and substantial decline in our working capital. A “going concern” opinion could impair our ability
to finance our operations through the sale of equity, incurring debt, or other financing alternatives. Our ability to continue
as a going concern will depend upon the availability and terms of future funding, continued growth, improved operating margins
and our ability to profitably meet service commitments. If we are unable to achieve these goals, our business would be jeopardized
and the Company may not be able to continue. If we ceased operations, it is likely that all of our investors would lose their investment.
We face risks associated with strategic
acquisitions.
Our business strategy includes strategically
acquisitions of businesses and assets, some of which may be material. We plan to investigate and acquire strategic businesses with
the potential to be accretive to earnings, increase our market penetration, brand strength and our market position or enhancement
our existing product offerings. There can be no assurance that we will be able to identify or successfully complete transactions
with suitable acquisition candidates in the future.
These acquisitions may involve a number
of financial, accounting, managerial, operational, legal, compliance and other risks and challenges, including the following, any
of which could adversely affect our results of operations:
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Any acquired business could under-perform relative to our expectations and the price that we paid for it, or not perform in accordance with our anticipated timetable;
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We may incur or assume significant debt in connection with our acquisitions;
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Acquisitions could cause our results of operations to differ from our own or the investment community’s expectations in any given period, or over the long term; and
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Acquisitions could create demands on our management that we may be unable to effectively address, or for which we may incur additional costs.
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Additionally, if we were to undertake
a substantial acquisition, the acquisition would likely need to be financed in part through additional financing from banks, through
possible public offerings or private placements of debt or equity securities or through other arrangements. There can be no assurance
that the necessary acquisition financing would be available to us on acceptable terms if and when required.
Acquisitions could also result in dilutive
issuances of equity securities or the incurrence of debt, which could adversely affect our operating results. We may also unknowingly
inherit liabilities from acquired businesses or assets that arise after the acquisition and that are not adequately covered by
indemnities. Following any business acquisition, we could experience difficulty in integrating personnel, operations, financial
and other systems, and in retaining key employees and customers. In addition, if an acquired business fails to meet our expectations,
our operating results, business and financial position may suffer.
In addition, a significant portion of
the purchase price of companies we acquire may be allocated to acquired goodwill and other intangible assets, which must be assessed
for impairment at least annually. We may record goodwill and other intangible assets on our consolidated balance sheet in connection
with our acquisitions. If we are not able to realize the value of these assets, we may be required to incur charges relating to
the impairment of these assets, which could materially impact our financial condition and results of operations.
We may have difficulties integrating
acquisitions or identifying new acquisitions.
A major part of our strategy is to grow
through acquisition. However, we may be unable to identify and consummate additional acquisitions or may be unable to successfully
integrate and manage the product lines or businesses that we have recently acquired or may acquire in the future. In addition,
we may be unable to achieve a substantial portion of any anticipated cost savings from acquisitions or other anticipated benefits
in the timeframe we anticipate, or at all. Moreover, any acquired product lines or businesses may require a greater than anticipated
amount of trade, promotional and capital spending. Acquisitions involve numerous risks, including difficulties in the assimilation
of the operations, technologies, services and products of the acquired companies, personnel turnover and the diversion of management’s
attention from other business concerns. Any inability by us to integrate and manage any product lines or businesses that we have
recently acquired or may acquire in the future in a timely and efficient manner, any inability to achieve a substantial portion
of any anticipated cost savings or other anticipated benefits from these acquisitions in the time frame we anticipate or any unanticipated
required increases in trade, promotional or capital spending could adversely affect our business, consolidated financial condition,
results of operations or liquidity. Moreover, future acquisitions by us could result in our incurring substantial additional indebtedness,
being exposed to contingent liabilities or incurring the impairment of goodwill and other intangible assets, all of which could
adversely affect our financial condition, results of operations and liquidity.
We may need additional capital in
the future, which could dilute the ownership of current shareholders or we may be unable to secure additional funding in the future
or to obtain such funding on favorable terms.
Historically, we have raised equity
capital, including debt convertible into equity capital, to support and expand our operations. To the extent that we raise additional
equity capital, existing shareholders will experience a dilution in the voting power and ownership of their shares of Common Stock,
and earnings per share, if any, would be negatively impacted. Our inability to use our equity securities to finance our operations
could materially limit our growth. Any borrowings made to finance operations could make us more vulnerable to a downturn in our
operating results, a downturn in economic conditions, or increases in interest rates on borrowings that are subject to interest
rate fluctuations. The amount and timing of such additional financing needs will vary principally depending on the timing of new
product launches, investments and/or acquisitions, and the amount of cash flow from our operations. If our resources are insufficient
to satisfy our cash requirements, we may seek to issue additional equity or debt securities or obtain a credit facility. If our
cash flow from operations is insufficient to meet any debt service
requirements, we could be required to
sell additional equity securities, refinance our obligations, or dispose of assets in order to meet debt service requirements.
There can be no assurance that any financing will be available to us when needed or will be available on terms acceptable to us.
Our failure to obtain sufficient financing on favorable terms and conditions could have a material adverse effect on our growth
prospects and our business, financial condition and results of operations.
Uncertainty of profitability
Our business strategy may result in increased
volatility of revenues, loses and/or earnings. As we will only develop a limited number of products at a time, our overall success
will depend on a limited number of products, which may cause variability and unsteady profits and losses depending on the products
and/or services offered and their market acceptance.
Our revenues and our profitability may be adversely
affected by economic conditions and changes in the market for our products. Our business is also subject to general economic risks
that could adversely impact the results of operations and financial condition.
Because of the anticipated nature of the products
that we offer and attempt to develop, it is difficult to accurately forecast revenues and operating results and these items could
fluctuate in the future due to a number of factors. These factors may include, among other things, the following:
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Our ability to raise sufficient capital to take advantage of opportunities and generate sufficient revenues to cover expenses.
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Our ability to source strong opportunities with sufficient risk adjusted returns.
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Our ability to manage our capital and liquidity requirements based on changing market conditions.
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The amount and timing of operating and other costs and expenses.
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The nature and extent of competition from other companies that may reduce market share and create pressure on pricing and investment return expectations.
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We cannot guarantee that we will
succeed in achieving our goals, and our failure to do so would have a material adverse effect on our business, prospects, financial
condition and operating results
Some
of business initiatives in the hydroponic sector are new and are only in early stages of commercialization. As is typical in a
new and rapidly evolving industry, demand and market acceptance for recently introduced products and services are subject to a
high level of uncertainty and risk. Because the market for our Company is new and evolving, it is difficult to predict with any
certainty the size of this market and its growth rate, if any. We cannot guarantee that a market for our Company will develop or
that demand for our products will emerge or be sustainable. If the market fails to develop, develops more slowly than expected
or becomes saturated with competitors, our business, financial condition and operating results would be materially adversely affected.
We have incurred losses since our
inception, have yet to achieve profitable operations and anticipate that we will continue to incur losses for the foreseeable future.
Even
if we obtain more customers or increase sales to our existing customers, there is no guarantee we will be able to generate a profit.
Because we are a small company and have limited capital, we must limit our products and services. Because we will be limiting our
marketing activities, we may not be able to attract enough customers to buy our products to operate profitably. Further, we are
subject to raw material pricing which can erode the profitability of our products and put additional negative pressure on profitability.
If we cannot operate profitably, we may have to suspend or cease operations.
For
the fiscal year ended June 30, 2019 we incurred an operating loss of $4,915,077. For the fiscal year ended June 30, 2018, we incurred
an operating loss of $1,241,947. At June 30, 2019 we had an accumulated deficit of $47,088,950. Although we have generated
substantial revenues, they are insufficient to make the Company profitable. We plan to increase our expenses associated with the
development of our business. There is no assurance we will be able to derive revenues from the development of our business to successfully
achieve positive cash flow or that our business will be successful. If we achieve profitability, we may be unable to sustain or
increase profits on a quarterly or annual basis.
We do not have sufficient cash on
hand.
As of June 30, 2019, we had $34,371
cash on hand. These cash resources are not sufficient for us to execute our business plan. If we do not generate sufficient
cash from our intended financing activities and sales, we will be unable to continue our operations. We estimate that within
the next 12 months we will need at least $5,000,000 in cash from either investors or operations. While we intend to engage
in several equity or debt financings, there is no assurance that these will actually occur. Nor can we assure our shareholders
that we will not be required to obtain additional financing on terms that are dilutive of their interests. You should recognize
that if we are unable to generate sufficient revenues or obtain debt or equity financing, we will not be able to earn profits and
may not be able to continue operations.
The success of our new and existing
products and services is uncertain.
We expect to continue to commit significant
resources and capital to develop and market existing and new products, services and enhancements. These products and services are
relatively untested, and there is no assurance that we will achieve market acceptance for these products and services, or other
new products and services that we may offer in the future. Moreover, these and other new products and services may face significant
competition with new and existing competitors. In addition, new products, services and enhancements may pose a variety of technical
challenges and require us to attract additional qualified employees. The failure to successfully develop and market these new products,
services or enhancements could seriously harm our business, financial condition and results of operations. In addition, we are
subject to raw material pricing which can erode the profitability of our products and put additional negative pressure on profitability.
Moreover, if we fail to accurately project demand for our new or existing products, we may encounter problems of overproduction
or underproduction which would materially and adversely affect our business, financial condition and results of operations, as
well as damage our reputation and brand.
Third-party suppliers could fail
to fulfill our orders for parts used to assemble our products, which would disrupt our business, increase our costs, harm our reputation,
and potentially cause us to lose our market.
We depend on international third-party
suppliers, including in The People’s Republic of China, for materials used to assemble our products. Changing federal tariffs
could adversely affect our international third-party suppliers. We cannot predict the nature of any future tariffs, laws, regulations,
interpretations or applications, nor can we determine what effect additional governmental regulations or administrative policies
and procedures, when and if promulgated, could have on our suppliers and our business. These suppliers could increase prices to
us, fail to produce products to our specifications or in a workmanlike manner and may not deliver the material or products on a
timely basis. Our suppliers may also have to obtain inventories of the necessary parts and tools for production. Any change in
our suppliers’ approach to tariffs or resolving production issues could disrupt our ability to fulfill orders and could also
disrupt our business due to delays in finding new suppliers, providing specifications and testing initial production. Such disruptions
in our business and/or delays in fulfilling orders would materially and adversely affect our business, financial condition and
results of operations, as well as damage our reputation and brand.
Even if we expand our customer base,
there is no assurance that we will continue to make a profit.
Our revenue growth has been derived
from the sale of our products. Our success and the planned growth and expansion of our business depend on us achieving greater
and broader acceptance of our products and expanding our customer base. There can be no assurance that customers will purchase
our products or that we will continue to expand our customer base. If we are unable to effectively market or expand our product
offerings, we will be unable to grow and expand our business or implement our business strategy. Even if we obtain more customers,
there is no guarantee that we will be able to continue to generate a profit. Because we have limited capital, we may be required
to limit our products and services. Because we will be limiting our marketing activities, we may not be able to attract enough
customers to buy our products to operate profitably. If we cannot market our new and existing products and services profitably,
we may have to limit or suspend or cease operations.
Even if we are able to expand our
business operations, we may be unable to successfully manage our future growth.
If we are able to continue expanding
our operations, we may experience periods of rapid growth that will require additional resources. Any such growth could place increased
strain on our management, operational, financial and other resources, and we will need to train, motivate, and manage employees,
as well as attract management, sales, finance and accounting, international, technical, and other professionals. In addition, we
will need to expand the scope of our infrastructure and develop further physical resources. Any failure to expand these areas and
implement appropriate procedures and controls in an efficient manner and at a pace consistent with the business objectives could
have a material adverse effect on our business and results of operations.
Our inability to effectively manage
our growth could harm our business and materially and adversely affect our operating results and financial condition.
Our strategy envisions growing our business.
We plan to expand our product, sales, administrative and marketing operations. Any growth in or expansion of our business is likely
to continue to place a strain on our management and administrative resources, infrastructure and systems. As with other growing
businesses, we expect that we will need to further refine and expand our business development capabilities, our systems and processes
and our access to financing sources. We also will need to hire, train, supervise, and manage new employees. These processes are
time consuming and expensive, will increase management responsibilities and will divert management attention.
If we do not successfully generate additional
products and services, or if such products and services are developed but not successfully commercialized, we could lose revenue
opportunities.
Our future success depends, in part,
on our ability to expand our product and service offerings. To that end we have engaged in the process of identifying new product
opportunities to provide additional products and related services to our customers. The processes of identifying and commercializing
new products is complex and uncertain, and if we fail to accurately predict customers’ changing needs and emerging trends,
our business could be harmed. We have already and may have to continue to commit significant resources to commercializing new products
before knowing whether our investments will result in products the market will accept. Furthermore, we may not execute successfully
on commercializing those products because of errors in product planning or timing, technical hurdles that we fail to overcome in
a timely fashion, or a lack of appropriate resources. This could result in competitors providing those solutions before we do and
a reduction in net sales and earnings.
The success of new products depends
on several factors, including proper new product definition, timely completion, and introduction of these products, differentiation
of new products from those of our competitors, and market acceptance of these products. There can be no assurance that we will
successfully identify additional new product opportunities, develop and bring new products to market in a timely manner, or achieve
market acceptance of our products or that products and technologies developed by others will not render our products or technologies
obsolete or noncompetitive.
If we are not able to raise enough
funds through the Investment Agreement or other sources, we may not be able to successfully develop and market our products and
our business may fail.
We do not have any commitments for financing
other than the Investment Agreement, and we will need additional financing to meet our obligations and to continue our business.
Although we plan to raise funds through the Investment Agreement, due to the conditions of the Investment Agreement we cannot guarantee
that we will be able to raise money through the use of the Investment Agreement or that we will be able to utilize the full Investment
Agreement.
Our business may suffer if we are
unable to attract or retain talented personnel.
Our success will depend in large measure on
the abilities, expertise, judgment, discretion, integrity and good faith of Management, as well as other personnel. We have a small
management team, and the loss of a key individual or our inability to attract suitably qualified replacements or additional staff
could adversely affect our business. Our success also depends on the ability of Management to form and maintain key commercial
relationships within the marketplace. No assurance can be given that key personnel will continue their association or employment
with us or that replacement personnel with comparable skills will be found. If we are unable to attract and retain key personnel
and additional employees, our business may be adversely affected. We do not maintain key-man life insurance on any of our executive
employees.
The loss of key Management personnel
could adversely affect our business
We depend
on the continued services of our executive officers and senior management team as they work closely with independent associate
leaders and are responsible for our day-to-day operations. Our success depends in part on our ability to retain our executive officers,
to compensate our executive officers at attractive levels, and to continue to attract additional qualified individuals to our management
team. Although we have entered into employment agreements with our senior management team, and do not believe that any of them
are planning to leave or retire in the near term, we cannot assure you that our senior managers will remain with us. The loss or
limitation of the services of any of our executive officers or members of our senior management team, or the inability to attract
additional qualified management personnel, could have a material adverse effect on our business, financial condition, results of
operations, or independent associate relations.
The lack of available and cost-effective
directors and officer’s insurance coverage in our industry may cause us to be unable to attract and retain qualified executives,
and this may result in our inability to further develop our business
Our
business depends on attracting independent directors, executives and senior management to advance our business plans. We currently
do not have directors and officer’s insurance to protect our directors, officers and the company against to possible third-party
claims. This is due to the significant lack availability of such policies in the cannabis industry at reasonably competitive prices.
As a result, the Company and our executive directors and officers are susceptible to liability claims arising by third parties,
and as a result, we may be unable to attract and retain qualified independent directors and executive management causing the development
of our business plans to be impeded as a result.
If we fail to maintain satisfactory
relationships with our larger customers, our business may be harmed.
We do not have and are unlikely to enter
into long-term fixed quantity supply agreements with our customers. Due to competition or other factors, we could lose future business
from our customers, either partially or completely. The future loss of one or more of our significant customers or a substantial
future reduction of orders by any of our significant customers could harm our business and results of operations. Moreover, our
customers may vary their order levels significantly from period to period and customers may not continue to place orders with us
in the future at the same levels as in prior periods. In the event that in the future we lose any of our larger customers, we may
not be able to replace that revenue source. This could harm our financial results.
Management of growth will be necessary
for us to be competitive
Successful expansion of our business will depend
on our ability to effectively attract and manage staff, strategic business relationships, and shareholders. Specifically, we will
need to hire skilled management and technical personnel as well as manage partnerships to navigate shifts in the general economic
environment. Expansion has the potential to place significant strains on financial, management, and operational resources, yet
failure to expand will inhibit our profitability goals.
We import many of our products from
Asian counties, including the People’s Republic of China. Disruptions or a change in the tariff situation may negatively
affect our business
Many of the products we market are manufactured
in Asian countries and are then imported to our facilities in the United States and ultimately sold to our customers. There can
be no assurance of the reliability of such channels and disruption would likely have a significant impact on our business operations,
our ability to retain customers and on our ability to generate profits. A significant change in trade tariffs could also negatively
affect our business operations.
If product liability lawsuits
are successfully brought against us, we will incur substantial liabilities.
From time to time, we may receive complaints
from customers regarding our goods and services. We may become subject to product liability lawsuits from customers alleging injury
because of a purported defect in our products or services, claiming substantial damages and demanding payments from us. Liability
claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product,
negligence, strict liability and a breach of warranties. Claims could also be asserted under state consumer protection acts. We
may be in the chain of ownership when we supply or distributes products, and therefore is subject to the risk of being held legally
responsible for such products. Given the nature of these products (including their relation to cannabis or for
other reasons), these claims may not
be subject to insurance coverage or covered by insurance policies. Any resulting litigation, regardless of the merits or eventual
outcome, could decrease demand for our products, result in product recalls or withdrawals, be costly, divert management attention,
result in increased costs of doing business, or otherwise have a material adverse effect on our business, results of operations,
and financial condition. Any litigation or even negative publicity generated as a result of customer frustration or disagreement
with the products or services could damage our reputation and diminish the value of our brand name, which could have a material
adverse effect on our business, results of operations, and financial condition.
We cannot guarantee that we will
succeed in achieving our goals, and our failure to do so would have a material adverse effect on our business, prospects, financial
condition and operating results
Some
of business initiatives in the hydroponic sector are new and are only in early stages of commercialization. As is typical in a
new and rapidly evolving industry, demand and market acceptance for recently introduced products and services are subject to a
high level of uncertainty and risk. Because the market for our Company is new and evolving, it is difficult to predict with any
certainty the size of this market and its growth rate, if any. We cannot guarantee that a market for our Company will develop or
that demand for our products will emerge or be sustainable. If the market fails to develop, develops more slowly than expected
or becomes saturated with competitors, our business, financial condition and operating results would be materially adversely affected.
RISKS OF GOVERNMENT ACTION AND REGULATORY UNCERTAINTY
The Farm Bill recently passed, and undeveloped
shared state-federal regulations over hemp cultivation and production may impact our business.
The Farm
Bill was signed into law on December 20, 2018. Under Section 10113 of the Farm Bill, state departments of agriculture must
consult with the state’s governor and chief law enforcement officer to devise a plan that must be submitted to the Secretary
of USDA. A state’s plan to license and regulate hemp can only commence once the Secretary of USDA approves that state’s
plan. In states opting not to devise a hemp regulatory program, USDA will need to construct a regulatory program under which hemp
cultivators in those states must apply for licenses and comply with a federally-run program. The details and scopes of each state’s
plans are not known at this time and may contain varying regulations that may impact our business. Even if a state creates a plan
in conjunction with its governor and chief law enforcement officer, the Secretary of the USDA must approve it. There can be no
guarantee that any state plan will be approved. Review times may be extensive. There may be amendments and the ultimate plans,
if approved by states and the USDA, may materially limit our business depending upon the scope of the regulations.
Laws and regulations affecting our industry to be developed
under the Farm Bill are in development
As a
result of the Farm Bill’s recent passage, there will be a constant evolution of laws and regulations affecting the hemp industry
could detrimentally affect our operations. Local, state and federal hemp laws and regulations may be broad in scope and subject
to changing interpretations. These changes may require us to incur substantial costs associated with legal and compliance fees
and ultimately require us to alter our business plan. Furthermore, violations of these laws, or alleged violations, could disrupt
our business and result in a material adverse effect on our operations. In addition, we cannot predict the nature of any future
laws, regulations, interpretations or applications, and it is possible that regulations may be enacted in the future that will
be directly applicable to our business.
U.S. Federal and foreign regulation
and enforcement may adversely affect the implementation of cannabis laws and regulations and may negatively impact our revenue,
or we may be found to be violating the Controlled Substances Act or other U.S. federal, state, or foreign laws.
Even though we do not cultivate, process,
market or distribute cannabis or any products that contain cannabis, some of our customers do engage in such activities. Cannabis,
as not strictly defined in the 2018 Farm Bill, is a Schedule-I controlled substance and is illegal under federal law. Even in those
states where the use of cannabis, as not strictly defined in the 2018 Farm Bill, has been legalized, its use remains a violation
of federal law. A Schedule I controlled substance is defined as a substance that has no currently accepted medical use in the United
States, a lack of safety for use under medical supervision and a high potential for abuse. The Department of Justice defines Schedule
1 controlled substances as “the most dangerous drugs of all the drug schedules with potentially severe psychological or physical
dependence.”
At present, numerous states and the
District of Columbia allow their citizens to use medical cannabis. Additionally, many states have approved legalization of cannabis,
as not strictly defined in the 2018 Farm Bill, for adult recreational use. The laws of these states relative to cannabis as not
strictly defined in the 2018 Farm Bill, are in conflict with the Federal Controlled Substances Act, which makes cannabis, as not
strictly defined in the 2018 Farm Bill, use and possession illegal on a national level. If the federal government decides to enforce
the Controlled Substances Act with respect to cannabis, as not strictly defined in the 2018 Farm Bill, persons that are charged
with distributing, possessing with intent to distribute, or growing cannabis, as not strictly defined in the 2018 Farm Bill, could
be subject to fines and imprisonment. Any such change in the federal government’s enforcement of current federal laws will
cause significant financial damage to us.
The approach to the enforcement
of cannabis laws may be subject to change, which creates uncertainty for our business.
As a result of the conflicting views
between state legislatures and the federal government regarding cannabis, as not strictly defined in the 2018 Farm Bill, investments
in, and the operations of, cannabis businesses in the U.S. are subject to inconsistent laws and regulations. Laws and regulations
affecting the cannabis industry are constantly changing, which could detrimentally affect our operations. Local, state and federal
cannabis laws and regulations are broad in scope and subject to evolving interpretations, which could require us to incur substantial
costs associated with compliance or alter our business plan. In addition, violations of these laws, or allegations of such violations,
could disrupt our business and result in a material adverse effect on our operations. It is also possible that regulations may
be enacted in the future that will be directly applicable to our business. These ever-changing regulations could even affect federal
tax policies that may make it difficult to claim tax deductions on our returns. We cannot predict the nature of any future laws,
regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative
policies and procedures, when and if promulgated, could have on our business.
RISKS ASSOCIATED WITH BANK AND INSURANCE
LAWS AND REGULATIONS
We and our customers may have
difficulty accessing the service of banks, which may make it difficult to sell our products and services and manage
our cashflows.
Since the commerce in cannabis, as not
strictly defined in the 2018 Farm Bill, is illegal under federal law, federally most chartered banks will not accept for deposit
funds from businesses involved with cannabis. Consequently, businesses involved in the cannabis industry often have trouble finding
a bank willing to accept their business. The inability to open bank accounts may make it difficult for our customers to operate.
There does appears to be recent movement to allow state-chartered banks and credit unions to provide banking to the industry, but
as of the date of this report there are only nominal entities that have been formed that offer these services. Further, in a February
6, 2018, Forbes article, United States Secretary of the Treasury, Steven Munchin, is reported to have testified that his department is “reviewing the existing
guidance.” But he clarified that he doesn’t want to rescind it without having an alternate policy in place to address
public safety concerns.
Financial transactions involving proceeds
generated by cannabis-related conduct can form the basis for prosecution under the federal money laundering statutes, unlicensed
money transmitter statute and the U.S. Bank Secrecy Act. Despite guidance from the U.S. Department of the Treasury suggesting it
may be possible for financial institutions to provide services to cannabis-related businesses consistent with their obligations
under the Bank Secrecy Act, banks remain hesitant to offer banking services to cannabis-related businesses. Consequently, those
businesses involved in the cannabis industry continue to encounter difficulty establishing banking relationships. Our inability
to maintain our current bank accounts would make it difficult for us to operate our business, increase our operating costs, and
pose additional operational, logistical and security challenges and could result in our inability to implement our business plan.
Similarly, many of our customers are directly involved in cannabis sales and further restriction to their ability to access banking
services may make it difficult for them to purchase our products, which could have a material adverse effect on our business, financial
condition and results of operations.
We are subject to certain federal regulations relating
to cash reporting.
The Bank Secrecy Act, enforced by FinCEN,
requires us to report currency transactions in excess of $10,000, including identification of the customer by name and social security
number, to the IRS. This regulation also requires us to report certain suspicious activity, including any transaction that exceeds
$5,000 that we know, suspect or have reason to believe involves funds from illegal activity or is designed to evade federal regulations
or reporting requirements and to verify sources of funds. Substantial penalties can be imposed against us if we fail to comply
with this regulation. If we fail to comply with these laws and regulations, the imposition of a substantial penalty could have
a material adverse effect on our business, financial condition and results of operations.
Due to our involvement in the cannabis
industry, we may have a difficult time obtaining the various insurances that are desired to operate our business, which may expose
us to additional risk and financial liability
Insurance that is otherwise readily available,
such as general liability, and directors and officer’s insurance, is more difficult for us to find, and more expensive, because
we are service providers to companies in the cannabis industry. There are no guarantees that we will be able to find such insurances
in the future, or that the cost will be affordable to us. If we are forced to go without such insurances, it may prevent us from
entering into certain business sectors, may inhibit our growth, and may expose us to additional risk and financial liabilities.
RISK ASSOCIATED WITH OUR INDUSTRY
Our business and financial performance may be adversely
affected by downturns in the target markets that we serve or reduced demand for the types of products we sell.
Demand for our products is often affected
by general economic conditions as well as product-use trends in our target markets. These changes may result in decreased demand
for our products. The occurrence of these conditions is beyond our ability to control and, when they occur, they may have a significant
impact on our sales and results of operations. The inability or unwillingness of our customers to pay a premium for our products
due to general economic conditions or a downturn in the economy may have a significant adverse impact on our sales and results
of operations.
Changes within the cannabis industry may adversely
affect our financial performance.
Changes in the identity, ownership structure
and strategic goals of our competitors and the emergence of new competitors in our target markets may harm our financial performance.
New competitors may include foreign-based companies and commodity-based domestic producers who could enter our specialty markets
if they are unable to compete in their traditional markets. The paper industry has also experienced consolidation of producers
and distribution channels. Further consolidation could unite other producers with distribution channels through which we intend
to sell our products, thereby limiting access to our target markets.
We are subject to certain tax
risks and treatments that could negatively impact our results of operations.
Section 280E of the Internal Revenue
Code, as amended, prohibits businesses from deducting certain expenses associated with trafficking-controlled substances (within
the meaning of Schedule I and II of the Controlled Substances Act). The IRS has invoked Section 280E in tax audits against various
cannabis businesses in the U.S. that are permitted under applicable state laws. Although the IRS issued a clarification allowing
the deduction of certain expenses, the scope of such items is interpreted very narrowly, and the bulk of operating costs and general
administrative costs are not permitted to be deducted. While there are currently several pending cases before various administrative
and federal courts challenging these restrictions, there is no guarantee that these courts will issue an interpretation of Section
280E favorable to cannabis businesses.
The Company’s industry is
highly competitive, and we have less capital and resources than many of our competitors which may give them and advantage in developing
and marketing products similar to ours or make our products obsolete.
We are
involved in a highly competitive industry where we may compete with numerous other companies who offer alternative methods or approaches,
who may have far greater resources, more experience, and personnel perhaps more qualified than we do. Such resources may give our
competitors an advantage in developing and marketing products similar to ours or products that make our products less desirable
to consumers or obsolete. There can be no assurance that we will be able to successfully compete against these other entities.
We
may be unable to respond to the rapid technological change in the industry and such change may increase costs and competition that
may adversely affect our business
Rapidly
changing technologies, frequent new product and service introductions and evolving industry standards characterize our market.
The continued growth of the Internet and intense competition in our industry exacerbates these market characteristics. Our future
success will depend on our ability to adapt to rapidly changing technologies by continually improving the performance features
and reliability of our products. We may experience difficulties that could delay or prevent the successful development, introduction
or marketing of our products. In addition, any new enhancements must meet the requirements of our current and prospective customers
and must achieve significant market acceptance. We could also incur substantial costs if we need to modify our products and services
or infrastructures to adapt to these changes.
We also
expect that new competitors may introduce products or services that are directly or indirectly competitive with us. These competitors
may succeed in developing, products and services that have greater functionality or are less costly than our products and services
and may be more successful in marketing such products and services. Technological changes have lowered the cost of operating communications
and computer systems and purchasing software. These changes reduce our cost of selling products and providing services, but also
facilitate increased competition by reducing competitors’ costs in providing similar products and services. This competition
could increase price competition and reduce anticipated profit margins.
RISKS RELATED TO OUR COMMON STOCK
We may need additional
capital that will dilute the ownership interest of investors.
We may require additional capital
to fund our future business operations. If we raise additional funds through the issuance of equity, equity-related or convertible
debt securities, these securities may have rights, preferences or privileges senior to those of the rights of holders of our shares
of common stock, who may experience dilution of their ownership interest of our shares of Common Stock. We cannot predict whether
additional financing will be available to us on favorable terms when required, or at all. Since our inception, we have experienced
negative cash flow from operations and expect to experience significant negative cash flow from operations in the future. The issuance
of additional shares of Common Stock by our board of directors may have the effect of further diluting the proportionate equity
interest and voting power of holders of our shares of Common Stock.
We have the ability to
issue additional shares of our shares of preferred stock without asking for stockholder approval, which could cause your investment
to be diluted.
Our Articles of Incorporation
authorizes the Board of Directors to issue up to 1,990,000,000 shares of Common Stock. The power of the Board of Directors to issue
shares of Common Stock, preferred stock or warrants or options to purchase shares of Common Stock or preferred stock is generally
not subject to stockholder approval. Accordingly, any additional issuance of our shares of Common Stock, or shares of preferred
stock that may be convertible into Common Stock, may have the effect of diluting your investment.
Our shares of Common Stock
qualify as a penny stock. As such, we are subject to the risks associated with “penny stocks”. Regulations relating to
“penny stocks” limit the ability of our shareholders to sell their shares and, as a result, our shareholders may have
to hold their shares indefinitely.
Our shares of Common Stock are
deemed to be “penny stock” as that term is defined in Regulation Section 240.3a51-1 of the Securities and Exchange Commission.
Penny stocks are stocks: (a) with a price of less than $5.00 per share; (b) that are not traded on a “recognized” national
exchange; (c) whose prices are not quoted on the NASDAQ automated quotation system (NASDAQ - where listed stocks must still meet
requirement (a) above); or (d) in issuers with net tangible assets of less than $2,000,000 (if the issuer has been in continuous
operation for at least three years) or $5,000,000 (if in continuous operation for less than three years), or with average revenues
of less than $6,000,000 for the last three years.
Section 15(g) of the Securities
Exchange Act of 1934 and Regulation 240.15g(c)2 of the Securities and Exchange Commission require broker dealers dealing in penny
stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and
dated written receipt of the document before effecting any transaction in a penny stock for the investor’s account. Potential investors
in our shares of Common Stock are urged to obtain and read such disclosure carefully before purchasing any shares of Common Stock
that are deemed to be “penny stock”.
Moreover, Regulation 240.15g-9
of the SEC requires broker dealers in penny stocks to approve the account of any investor for transactions in such stocks before
selling any penny stock to that investor. This procedure requires the broker dealer to: (a) obtain from the investor information
concerning his or her financial situation, investment experience and investment objectives; (b) reasonably determine, based on
that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge
and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (c) provide the investor with a
written statement setting forth the basis on which the broker dealer made the determination in (ii) above; and (d) receive a signed
and dated copy of such statement from the investor confirming that it accurately reflects the investor’s
financial situation, investment
experience and investment objectives. Compliance with these requirements may make it more difficult for investors in our shares
of Common Stock to resell their shares to third parties or to otherwise dispose of them. Holders should be aware that, according
to SEC Release No. 34-29093, dated April 17, 1991, the market for penny stocks suffers from patterns of fraud and abuse. Such patterns
include:
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control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
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manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
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boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced salespersons;
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excessive and undisclosed bid-ask differential and mark-ups by selling broker-dealers; and
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the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses.
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Our Management is aware of the
abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the
behavior of the market or of broker-dealers who participate in the market, Management will strive within the confines of practical
limitations to prevent the described patterns from being established with respect to our securities.
FINRA sales practice requirements
may also limit a stockholder’s ability to buy and sell our stock and to deposit certificates in paper form or to clear shares
for trading under Safe Harbor exemptions and regulations for unregistered shares.
In addition to the “penny stock”
rules described above, the Financial Industry Regulatory Authority (known as “FINRA”) has adopted rules that require
that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment
is suitable for that customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers
must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives
and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced
securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker- dealers to recommend
that their customers buy our shares of Common Stock, which may limit your ability to buy and sell our stock and have an adverse
effect on the market for our shares. FINRA requirements make it more difficult for our investor to deposit paper stock certificates
or to clear our shares of Common Stock that are transferred electronically to brokerage accounts. There can be no assurances that
our investors will be able to clear our shares for eventual resale.
Costs and expenses of being a
reporting company under the 1934 Securities Exchange Act may be burdensome and prevent us from achieving profitability
As a public company, we are subject
to the reporting requirements of the Securities Exchange Act of 1934, as amended, and parts of the Sarbanes-Oxley Act. We expect
that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs,
make some activities more difficult, time-consuming and costly, and place significant strain on our personnel, systems and resources.
The trading market for our common
stock is limited.
We are quoted on the OTC Markets Group’s
OTCQB Over-the-Counter Bulletin Board under the trading symbol “SGMD”. The OTCQB is regarded as a junior trading venue.
This may result in limited shareholder interest and hence lower prices for our common stock than might otherwise be obtained.
Our principal stockholders, executive
officers and directors own a significant percentage of our common stock and will be able to exert a significant control over matters
submitted to the stockholders for approval.
Our officers and directors, and stockholders
who own more than 5% of our common stock beneficially own a significant percentage of our common stock. This significant concentration
of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in
owning stock in companies with controlling stockholders. These stockholders, if they acted together, could significantly influence
all matters requiring approval by the stockholders, including the election of directors. The interests of these stockholders may
not always coincide with the interests of other stockholders.
We do not intend to pay dividends
on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price
of our common stock.
We have never declared or paid any cash
dividend on our common stock and do not currently intend to do so for the foreseeable future. We currently anticipate that we will
retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any
cash dividends for the foreseeable future. Therefore, the success of an investment in shares of our common stock will depend upon
any future appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value or even
maintain the price at which our stockholders have purchased their shares.
If we fail to establish or maintain
effective internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud,
and investor confidence and the market price of our common stock may, therefore, be adversely impacted.
As a public company, we are required
to maintain internal control over financial reporting for each of our fiscal years and to report any material weaknesses in such
internal control. Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) requires that we evaluate
and determine the effectiveness of our internal control over financial reporting, provide a management report on the internal control
over financial reporting, which must be attested to by our independent registered public accounting firm to the extent we decide
not to avail ourselves of the exemptions provided under federal laws. Management has presently concluded that our internal control
over financial reporting is not effective and has reported such conclusions in management’s report in this annual report
on Form 10-K. In the event that the Company’s status with the SEC changes to that of an accelerated filer from a smaller
reporting company, our independent registered public accounting firm will be required to attest to and report on our management’s
assessment of the effectiveness of our internal control over financial reporting. Under such circumstances, even if our management
concludes that our internal control over financial reporting are effective, our independent registered public accounting firm may
still decline to attest to our management’s assessment, or may issue a report that is qualified, if it is not satisfied with
our controls, or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant
requirements differently from us.
Shareholders and investors may lose
confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively
affected, we could become subject to investigations by the Securities and Exchange Commission, or other regulatory authorities,
which could require additional financial and management resources and could damage our reputation and diminish the value of our
brand name.
The market price of our common stock
may be volatile and may be affected by market conditions beyond our control. The market price of our common stock is subject to
significant fluctuations in response to, among other factors:
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variations in our operating results and market conditions specific to our business;
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the emergence of new competitors or new technologies;
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operating and market price performance of other companies that investors deem comparable;
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changes in our Board or management;
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sales or purchases of our common stock by insiders;
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commencement of, or involvement in, litigation;
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changes in governmental regulations, in particular with respect to the cannabis industry; and
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general economic conditions and slow or negative growth of related markets.
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In addition, if the market for stocks
in our industry, or the stock market in general, experiences a loss of investor confidence, the market price of our common stock
could decline for reasons unrelated to our business, financial condition, or results of operations. If any of the foregoing occurs,
it could cause the price of our common stock to fall and may expose us to lawsuits that, even if unsuccessful, could be costly
to defend and a distraction to our Board of Directors and management.
The application of the “penny
stock” rules could adversely affect the market price of our common shares and increase your transaction costs to sell those
shares.
Our shares of Common Stock are considered
to be “penny stocks” as the Securities and Exchange Commission has adopted Rule 3a51-1, which establishes the definition
of a “penny stock,” to include any equity security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share and because they are not registered on a national securities exchange or listed on
an automated quotation system sponsored by a registered national securities association, pursuant to Rule 3a51-1(a) under the Exchange
Act. For any transaction involving a penny stock, unless exempt, the rules require that a broker or dealer approve a person’s
account for transactions in penny stocks and that the broker or dealer receives from the investor a written agreement to the transaction,
setting forth the identity and quantity of the penny stock to be purchased. The broker or dealer must also deliver, prior to any
transaction in a penny stock, a disclosure schedule prescribed by the Securities and Exchange Commission relating to the penny
stock market, which sets forth the basis on which the broker or dealer made the suitability determination and that the broker or
dealer received a signed, written agreement from the investor prior to the transaction. Generally, brokers may be less willing
to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors
to dispose of our common stock and cause a decline in the market value of our stock.
Item 2. Properties
The principal executive offices of the Company
are located in Monrovia, California, and are leased by the Company. The current lease expires on February 28, 2023.
Our warehouse along with some office space
is located at 2399 Bateman Avenue, Duarte, California, where we lease approximately 8,500 square feet of combined space. This sublease
terminates on December 31, 2019. The current monthly rental payment including utilities and operating expenses for the facility
is $11,375.
We believe that our existing facilities are
adequate for our present purposes. The Company leases all its facilities and believes that if necessary, it could secure suitable
alternative facilities on similar terms without adversely affecting operations.
Item 3. Legal Proceedings
From time to time and in the course
of business, we may become involved in various legal proceedings seeking monetary damages and other relief. The amount of the ultimate
liability, if any, from such claims cannot be determined. As of the date of this filing, there were no legal claims currently pending
or, to our knowledge, threatened against our 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, except as follows:
●
|
|
On August 13, 2019, a lawsuit
was filed against the Company for unpaid legal fees of $50,000.00, which originates from the Company’s former chairman and CEO.
The Company was served in or around September 2019. The Company plans to amicably resolve this matter and anticipates that
it will be settled and dismissed.
|
●
|
|
On December 11, 2013, the
Company was served with a complaint from two Convertible Note Holders and investors in the Company. On February 21, 2017, the
Company signed a settlement agreement with the plaintiffs. Under the terms of the settlement agreement, the Company agreed to
pay the plaintiffs $227,000 to settle all claims against the Company, which included the payoff of the two notes outstanding within
one (1) week. Upon receipt of all payments, plaintiffs will surrender for cancellation 230,000 of the Company’s shares within
ten (10) days. The parties agreed that all claims against the Company would be satisfied through such payments and that the matter
would be fully resolved. Thus far, third-parties had purchased two (2) notes of approximately $80,000, reducing the Company’s
exposure. As of the date of this filing, there is a remaining balance of $227,000, plus accrued interest.
|
●
|
|
The Company had originally
filed a lawsuit in Contra Costa County, California, against Diversified Products Group, Inc. (DPG), including its former employees
and chairman of the Company. The named defendants had filed a counterclaim against the Company. As of June
30, 2019, all parties have agreed to settlement terms and are awaiting for defendants’ counsel to file the formal dismissal.
|
There can be no assurances the ultimate
liability relative to these lawsuits will not exceed what is outlined above.
Item 4. Mine Safety Disclosures.
Not Applicable.
PART II
Item 5. Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock
Our Certificate of Incorporation authorizes
the issuance of up to 1,990,000,000 shares of common stock, par value $0.001 per share. As of October 9, 2019, there were 812,686,536
shares of common stock issued and outstanding, which were held by 264 holders of record. The number of holders was determined from
the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of
broker-dealers and registered clearing agencies.
Preferred Stock
Our Certificate of Incorporation authorizes
the issuance of up to 10,000,000 shares of preferred stock, par value $0.001 per share. As of June 30, 2019, the Company had issued
2,000,000 shares of Series A preferred stock to multiple investors.
On October 8, 2019, the Company filed
a certificate of designation of Series B Senior Preferred Stock. The number of shares initially constituting the Series B Preferred
Stock shall be Five Million (5,000,000). Each Series B Preferred Share shall be convertible to One Thousand (1,000) shares of Common
Stock. As of the date of this filing, the Company had not issued any Series B Preferred Shares.
Options and Warrants
None
of the shares of our common stock are subject to outstanding options or warrants.
Dividend Policy
The Company has not declared or paid
any cash dividends on its common stock and does not intend to declare or pay any cash dividend in the foreseeable future. The payment
of dividends, if any, is within the discretion of the Board of Directors and will depend on the Company’s earnings, if any,
its capital requirements and financial condition and such other factors as the Board of Directors may consider.
Securities Authorized for Issuance
under Equity Compensation Plans
The Company does have an equity compensation
plans and arrangements with respect to its common stock. The issuance of any of our common stock is within the discretion of the
Company’s Board of Directors, which has the power to issue any or all of the Company’s authorized but unissued shares
without stockholder approval.
During the period of this filing, the
Company has issued 7,808,312 common shares under an S-8 Plan to various consultants and technical service providers in lieu of
cash.
Market for Our Shares of Common Stock
Our common stock currently is traded
on the OTCQB under the symbol “SGMD.” The market for our common stock is highly volatile. We cannot assure you that
there will be a market in the future for our common stock. OTCQB securities are not listed and traded on the floor of an organized
national or regional stock exchange. Instead, OTCQB securities transactions are conducted through a telephone and computer network
connecting dealers in stocks. OTCQB stocks are traditionally smaller companies that do not meet the financial and other listing
requirements of a regional or national stock exchange.
The following table sets forth the high
and low bid prices per share of our common stock by both the OTC Bulletin Board and OTC Markets for the periods indicated. The
following quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent
actual transactions
For the year ended June 30, 2018
|
|
High
|
|
Low
|
Fourth Quarter
|
|
$
|
0.23
|
|
|
$
|
0.12
|
|
Third Quarter
|
|
$
|
0.41
|
|
|
$
|
0.12
|
|
Second Quarter
|
|
$
|
0.29
|
|
|
$
|
0.03
|
|
First Quarter
|
|
$
|
0.05
|
|
|
$
|
0.02
|
|
For the year ended June 30, 2019
|
|
High
|
|
Low
|
Fourth Quarter
|
|
$
|
0.06
|
|
|
$
|
0.03
|
|
Third Quarter
|
|
$
|
0.10
|
|
|
$
|
0.04
|
|
Second Quarter
|
|
$
|
0.15
|
|
|
$
|
0.09
|
|
First Quarter
|
|
$
|
0.18
|
|
|
$
|
0.09
|
|
As of the previous trading close of the date of this filing, October 14, 2019, the shares traded at $0.0105 with a total
of 1,177,953 shares traded.
Transfer Agent
Our transfer agent is West Coast Stock
Transfer, Inc. of Encinitas, California; Telephone (619) 664-4780.
Dividends
We have never declared or paid any cash dividends on our
common stock. For the foreseeable future, we do not anticipate paying any cash dividends on our common stock. Any future determination
to pay dividends will be at the discretion of our Board of Directors.
Recent Sales of Unregistered Securities
Convertible Notes
On September 27, 2018,
the Company entered a convertible promissory note with an accredited investor for a total amount of $267,500 (includes $5,000 legal
fee and an OID of $12,500). The note is due 360 days and bears an interest rate of 8%. The conversion price for the note is 55%
of the lowest closing bid for the 20 consecutive trading days prior to the conversion date. On April 15, 2019, the Company issued
1,916,117 shares of the Company’s Common Stock for debt conversions in total amount of $45,000. On May 2, 2019, the Company
issued 2,066,116 shares of the Company’s Common Stock for debt conversions in total amount of $40,000.
On October 5, 2018,
the Company entered a convertible promissory note with an accredited investor for a total amount of $250,000 (includes $5,000 OID).
The note is due 360 days and bears an interest rate of 8%. The conversion price for the note is 45% of average three lowest closing
bid for the 20 consecutive trading days prior to the conversion date. On April 11, 2019, the Company issued 4,278,074 shares of
the Company’s Common Stock for debt conversions in total amount of $100,000.
On April 2, 2019, the Company entered a convertible
promissory note with an accredited investor for a total amount of $100,000. The note is due 365 days and bears an interest rate
of 8%. The conversion price for the note is 40% discount to the average of the three lowest trading prices during the previous
ten trading days to the date of a conversion notice.
On April 4, 2019, the Company entered a convertible
promissory note with an accredited investor for a total amount of $100,000. The note is due 365 days and bears an interest rate
of 8%. The conversion price for the note is 58% of the average of the two lowest daily traded prices for the twenty prior trading
days including the day upon which a notice of conversion is received by the Company.
On May 2, 2019, the Company entered a convertible
promissory note with an accredited investor for a total amount of $125,000. The note is due 365 days and bears an interest rate
of 8%. The conversion price for the note is 40% discount to the average of the three lowest trading prices during the previous
ten trading days to the date of a conversion notice.
On May 7, 2019, the Company entered a convertible
promissory note with an accredited investor for a total amount of $125,000. The note is due 365 days and bears an interest rate
of 8%. The conversion price for the note is 58% of the average of the two lowest daily traded prices for the twenty prior trading
days including the day upon which a notice of conversion is received by the Company.
On May 29, 2019, the Company entered a convertible
promissory note with an accredited investor for a total amount of $125,000 (includes $2,000 OID). The note is due 360 days and
bear an interest rate of 8%. The conversion price for the note is 40% of average three lowest closing bid for the 10 consecutive
trading days prior to the conversion date.
On June 12, 2019, the Company entered a convertible
promissory note with an accredited investor for a total amount of $125,000 (includes $2,500 OID). The note is due 360 days and
bear an interest rate of 8%. The conversion price for the note is 58% of average two lowest closing bid for the 20 consecutive
trading days prior to the conversion date.
On July 3, 2019, the Company entered a convertible
promissory note with an accredited investor for a total amount of $125,000. The note is due 360 days and bear an interest rate
of 8%. The conversion price for the note is 40% of average three lowest closing bid for the 10 consecutive trading days prior to
the conversion date.
On July 30, 2019, the Company entered a convertible
promissory note with an accredited investor for a total amount of $162,000. 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.
Shares of Common Stock
Subsequent to June 30, 2019, there were multiple
accredited investors converted approx. $547,000 of the convertible notes into 71,915,557 shares of the Company’s common stocks.
The Company filed a registration statement
on a Form S-1 that relates to the offer and resale of up to 138,461,538 shares of the Company to K & J Funds LLC (“K&J”)
pursuant to an Investment Agreement dated April 16, 2019 (the “Investment Agreement”). We will not and did not
receive any proceeds from the sale of the shares by K&J. However, the Company will receive proceeds from our initial
sale of the shares to K&J pursuant to the Investment Agreement. Subject to the terms of the Investment Agreement, we have the
right to “put,” or sell an amount of Shares equal to up to either (i) two hundred percent (200%) of the average daily
volume (U.S. market only) of the Common Stock for the ten (10) Trading Days prior to the applicable Put Notice Date, multiplied
by the average of the three (3) lowest traded prices during the ten (10) trading days prior to the Put Date or (ii) an amount not
to exceed five hundred thousand dollars ($500,000). The shares of Common Stock identified in the Put Notice shall be purchased
for a price equal to the Purchase Price. Subject to the Company’s acceptance, the Investor may agree to an increase in the
number of Put Shares over the Put Amount. At any time and from time to time during the term of the Investment agreement, which
is commencing on April 16, 2019, and ending on the earlier of (i) the date on which the Investor shall have purchased Put Shares
pursuant to the Investment Agreement equal to the maximum commitment amount of $20 million, (ii) two (2) years from the date of
an effective Registration Statement on Form S-1, or (iii) written notice of termination by the Company to the Investor (which shall
not occur at any time that the Investor holds any of the Put Shares), the Company may deliver a Put Notice to Investor and shall
deliver the Put Shares to Investor within seven (7) trading days after the Put Date. The Purchase Price for the Put Shares is 85%
of the average of the three (3) lowest traded prices of the Shares (as reported by Bloomberg Finance L.P.) during the ten (10)
trading days prior to the Put Date associated with the applicable Put Notice. The closing of a Put Notice shall occur within seven
(7) trading day following the end of the Put Date, whereby (i) the Investor shall deliver the investment amount to the Company
by wire transfer of immediately available funds and (ii) Investor shall return surplus Put Shares if the value of the Put Shares
delivered to the Investor causes the Company to exceed the maximum commitment amount. The Company shall not deliver another Put
Notice to Investor within ten (10) Trading Days of a prior Put Notice. We will pay for the expenses of registering the Shares under
the Securities Act, except that K&J will pay any broker discounts or commissions or equivalent expenses applicable to the sale
of the Shares.
K&J may be deemed to be an “underwriter”
within the meaning of the Securities Act in connection with the resale of the Shares under the Investment Agreement, and any broker-dealers
or agents that are involved in such resales may be deemed to be “underwriters” within the meaning of the Securities
Act in connection therewith.
On July 29, 2019, we sold and issued to K&J
11,348,591 shares of stock for $100,000. We are required to file a post-effective amendment under the Investment
Agreement, and related documents, for any unsold shares held by K&J.
Except as otherwise noted,
the securities in these transactions were sold in reliance on the exemption from registration provided in Section 4(a)(2) of the
Securities Act for transactions not involving any public offering. Each of the persons acquiring the foregoing securities was an
accredited investor (as defined in Rule 501(a) of Regulation D) and confirmed the foregoing and acknowledged, in writing, that
the securities must be acquired and held for investment. All certificates evidencing the shares sold bore a restrictive legend.
The Company took reasonable steps to verify that the investors were accredited investors. No underwriter participated in the offer
and sale of these securities, and no commission or other remuneration was paid or given directly or indirectly in connection therewith.
The proceeds from these
sales were used for general corporate purposes.
Purchase of Equity Securities
The Company did not purchase or redeem
any of its equity securities during the fourth quarter of its fiscal year ended June 30, 2019.
Item 6. Selected Financial Data
Not applicable.
Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations
This discussion and analysis may include
statements regarding our expectations with respect to our future performance, liquidity, and capital resources. Such statements,
along with any other non-historical statements in the discussion, are forward-looking. These forward-looking statements are subject
to numerous risks and uncertainties, including, but not limited to, factors listed in other documents we file with the Securities
and Exchange Commission (the “SEC’’). We do not assume an obligation to update any forward- looking statement. Our actual
results may differ materially from those contained in or implied by any of the forward-looking statements in this Form 10-K. See
“SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS” above.
Overview and Financial Condition
Discussions with respect to our Company’s
operations included herein refer to our previous operating subsidiary, Sugarmade, Inc., a California corporation (“Sugarmade-CA’’).
Our Company purchased Sugarmade-CA, which was in the business to import, sell and distribute sustainable and environmentally friendly
non-tree-based paper products. On May 9, 2011, our Company formerly known as Simple Earth, Inc. acquired all of the common stock
of Sugarmade-CA. As of the date of this filing, we have discontinued the operations of Sugarmade-CA. Information with respect to
our Company’s nominal operations prior to the Sugarmade Acquisition is not included herein.
Results of Operations
The following table sets forth the results
of our operations for the years ended June 30, 2019 and 2018. Certain columns may not add due to rounding.
|
|
For the years ended June 30
|
|
|
2019
|
|
2018
|
Revenues, net
|
|
|
4,637,644
|
|
|
|
4,439,324
|
|
Cost of goods sold:
|
|
|
3,368,659
|
|
|
|
3,226,365
|
|
Gross margin
|
|
|
1,268,985
|
|
|
|
1,212,959
|
|
Operating Expense
|
|
|
6,184,062
|
|
|
|
2,454,906
|
|
Loss from operations
|
|
|
(4,915,077
|
)
|
|
|
(1,241,947
|
)
|
Non-operating income (expense):
|
|
|
(7,314,073
|
)
|
|
|
(5,054,444
|
)
|
Net Income (Loss)
|
|
|
(12,229,151
|
)
|
|
|
(6,296,390
|
)
|
Revenues
For
the years ended June 30, 2019 and 2018, revenues were $4,637,644 and $4,439,324 respectively. The increase was primarily due to
seasonality changes within the yogurt and restaurant supply industry.
Cost of goods sold
For the years
ended June 30, 2019 and 2018, cost of goods sold were $3,368,659 and $3,226,365 respectively. The increase was primarily due to
the frozen yogurt sector expanding and preparing for the industry’s pick-up in its seasonal trend.
Gross Profit
For the years ended June 30, 2019 and
2018, gross profit was $1,268,985 and $1,212,959, respectively. The increase was primarily due to the seasonality changes in yogurt
and restaurant supply industry. The gross profit margin was 27.36% and 27.32%, respectively, for the years ended June 30, 2019
and 2018.
Selling, general
and administrative, expenses
For the years ended
June 30, 2019 and 2018, selling, general and administrative expenses were $6,184,062 and $2,454,906 respectively. The increase was attributable to issuing
of the common stock compensation expenses for employees, legal, and consulting fees.
Non-operating income expenses
The Company had total non-operating
expense of $7,314,073 and $5,054,444 for the years ended June 30, 2019 and 2018, respectively. The increase
in non-operating income is related to the accounting for derivative liabilities.
Net loss
Net loss totaled $12,229,151 for the year ended June 30, 2019, compared to a net loss of $6,296,390 for the year ended
June 30, 2018. The increase was attributable to issuing all of the stock compensation expenses for employees, legal, and consulting
fees.
Outstanding Litigation
As of the date of this filing, the Company
is a plaintiff, in Contra Costa County, California, in a suit against Diversified Products Group Inc. (DPG), including its former
employees and Chairman of the Company. The matter has been settled and is pending dismissal of the entire action.
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’ $227,000 to settle all claims against the Company, which included the payoff of the two notes
outstanding. The parties had estimated the value of the notes at approximately $80,000. As of June 30, 2019, third-parties had
purchased two (2) notes of approximately $80,000. As of the date of this filing, there remains a balance, plus accrued interest.
On August 13, 2019, a lawsuit was filed
against the Company for unpaid legal fees of $50,000.00, which originates from the Company’s former chairman and CEO. The
Company was served in or around September 2019. The Company plans to amicably resolve this matter and anticipates that it
will be settled and dismissed.
There can be no assurances the ultimate
liability relative to these lawsuits will not exceed what is outlined above.
Related Party Transactions
On July 7, 2016, SWC received a loan
from the same employee indicated above for $15,000 and during the fiscal year the total advance to the company was $29,255.87.
The amount of the loan bears no interest. As of June 30, 2019, the balance of the loan is $30,000.
On January 23, 2013, SWC received a
loan from an employee for $40,000. The amount of loan bears no interest. As of June 30, 2019, the balance of loan is $18,000.
On June 26, 2017, SGMD entered a straight
promissory note with a company (whose major shareholder is the former director of the Company) for borrowing $180,820 with maturity
date on December 31, 2017; the note bears an interest rate of 12%, commencing on October 31, 2017, and on the last day of each
moth thereafter until the notes is paid in full, the Company shall make an interest payment As of June 30, 2019, the note has been
fully converted into 7,596,000 shares of the Company’s common stock.
Leverage Ratio
Due to net losses from the previous
years, the Company’s insolvency is a result of their stockholder’s deficiency. Total liabilities amounted to $7,222,978 where the
company experienced a stockholder’s deficiency total of a negative $3,006,937 resulting in a Debt to Equity ratio of -2.40:1.
Going Concern
The Company sustained continued operating
losses during the years ended June 30, 2019 and 2018. 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.
The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern; however, the above condition raises substantial
doubt about the Company’s ability to do so. The 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, if 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.
Liquidity and Capital Resources
We have primarily financed our operations
through the sale of unregistered equity, loans and convertible notes payable. As of June 30, 2019, our Company had a cash balance
of $34,371, current assets of $3,414,209 and total assets of $21,925,965. We had current liability of $7,247,431 and total liabilities
of $7,247,431. Stockholders’ equity reflected of $14,678,534.
The following is a summary of cash provided
by or used in each of the indicated types of activities during the years ended June 30, 2019 and 2018:
Cash (used in) provided by:
|
|
2019
|
|
2018
|
Operating activities
|
|
$
|
(2,323,231
|
)
|
|
$
|
(2,894,210
|
)
|
Investing activities
|
|
|
(351,395
|
)
|
|
|
(178,421
|
)
|
Financing activities
|
|
|
2,666,876
|
|
|
|
3,012,872
|
|
Net cash used in operating activities
was $2,323,231 for the year ended June 30, 2019, and $2,894,210 for the year ended June 30, 2018. The decrease was attributable
to the increased net loss, increased cash outflow on stock compensations, and change in fair value of derivative liability.
Net cash used in investing activities
for the year ended June 30, 2019 and 2018 was $351,395 and $178,421, which was for the purchase of fixed assets.
Net cash provided by financing activities
totaled $2,666,876 for the year ended June 30, 2019. Net cash provided by financing activities totaled $3,012,872 for the year
ended June 30, 2018. The decrease in cash inflow in 2019 was mainly due to decreased proceeds from selling of common shares.
Our capital requirements going forward
will consist of financing our operations until we are able to reach a level of revenues and gross margins adequate to equal or
exceed our ongoing operating expenses. Other than the notes payable discussed above, borrowings from our bank and the production
credit facility with our suppliers, we do not have any credit agreements or other sources of liquidity immediately available to
us.
Given estimates of our Company’s future
operating results and our credit arrangements with our suppliers, we are currently forecasting that we will need to secure additional
financing to obtain adequate financial resources to reach profitability. As of the date of this report, we estimate that
the cash necessary to implement our current business plan for the next twelve (12) months is approximately $5,000,000.
Based on our need to raise additional
funds to implement our business plans for the next twelve months, we have included a discussion concerning the presentation of
our financial statements on a going concern basis in the notes to our financial statements and our independent public accountants
have included a similar discussion in their opinion on our financial statements through June 30, 2019. We will be required in the
near future to issue debt or sell our Company’s equity securities in order to raise additional cash, although there are no firm
arrangements in place for any such financing at this time. We cannot provide any assurances as to whether we will be able to secure
the necessary financing, or the terms of any such financing transaction if one were to occur. The failure to secure such financing
could severely curtail our plans for future growth or in more severe scenarios, the continued operations of our Company.
Capital Expenditures
Our current plans do call for our Company
to expend significant amounts for capital expenditures for the foreseeable future beyond relatively insignificant expenditures
for office furniture and information technology related equipment and employees as it is part of the requirement to build the infrastructure
needed to support the current growth. At the same time, we will continually evaluating the production processes of our third (3rd)
party contract manufacturers to determine if there are investments, we could make in their processes to achieve manufacturing improvements
and significant cost savings. Any such desired investments would require additional cash above our current forecast requirements.
Critical Accounting Policies Involving
Management Estimates and Assumptions
Use of Fair Value
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 l - 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 activities.
Use of Estimates
The preparation of our consolidated
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 consolidated financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Background on FASB’s Development
of New Revenue Recognition Standard
In May 2014, the FASB issued ASU No.
2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 requires an entity
to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.
ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use
of either the retrospective or cumulative effect transition method. The guidance also requires additional disclosure about the
nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In August 2015, the FASB issued
ASU No. 2015-14, “Deferral of the Effective Date” (“ASU 2015-14”), which defers the effective date for
ASU 2014-09 by one year. For public entities, the guidance in ASU 2014-09 will be effective for annual reporting periods beginning
after December 15, 2017 (including interim reporting periods within those periods), and for all other entities, ASU 2014-09 will
be effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting
periods beginning after December 15, 2019. In March 2016, the FASB issued ASU No. 2016-08, “Principal versus Agent Considerations
(Reporting Revenue versus Net)” (“ASU 2016-08”), which clarifies the implementation guidance on principal versus
agent considerations in the new revenue recognition standard. In April 2016, the FASB issued ASU No. 2016-10, “Identifying
Performance Obligations and Licensing” (“ASU 2016-10”), which reduces the complexity when applying the guidance
for identifying performance obligations and improves the operability and understandability of the license implementation guidance.
In May 2016, the FASB issued ASU No. 2016-12 “Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”),
which amends the guidance on transition, collectability, noncash consideration and the presentation of sales and other similar
taxes. In December 2016, the FASB further issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue
from Contracts with Customers” (“ASU 2016-20”), which makes minor corrections or minor improvements to the Codification
that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to
most entities. The amendments are intended to address implementation and provide additional practical expedients to reduce the
cost and complexity of applying the new revenue standard. These amendments have the same effective date as the new revenue standard.
Business Overview
Sugarmade, Inc. (hereinafter referred to as “we”, “us” or “the/our
Company”) is a publicly traded company incorporated in the state of Delaware. Our previous legal name was Diversified Opportunities,
Inc. Our Company primarily operates through our subsidiary, Sugarmade, Inc., a California corporation (“SWC Group,
Inc., - CA”). We are headquartered in Monrovia, California, a suburb of Los Angeles, with an additional
warehouse location in Southern California. As of date of this filing, we employ 21 full and part-time workers and contractors.
As of the end of the reporting period, June
30, 2019, we were involved primarily in two main business operations 1) the supply of hydroponic and related agricultural supplies,
and 2) the supply of products to the quick service restaurant sub-sector of the restaurant industry.
|
1)
|
Supplying hydroponic cultivation equipment, and related products, through our e-commerce portals. While our entrance into this business sector was announced during late November 2017, we did not begin to recognize revenues from this operation until later in calendar 2018.
|
|
2)
|
The supply of genetic and custom printed products to the quick service restaurant sub-sector of the restaurant industry and,
|
In the future, we plan to continue to concentrate
primarily on the hydroponic and cultivation marketplace, in addition to the quick service restaurant supply sector and post harvested
packaging. In addition, we are currently analyzing expanding our business operations into the hydroponic and cultivation retail
sector via direct acquisitions of participants in that market sector.
While the majority of our managerial talent
is focused on the rapidly expanding specialty cultivation marketplace, we plan to continue our business pursuits relative to our
CarryOutSuppies.com business.
Our board of directors and management team
believe our chosen mixed strategy of catering to both the commercial grower and the home cultivator in on target with the overall
movement of the marketplace. While over the past few years, we have seen increased interest among commercial cultivators, while
the home cultivator market has softened; we nevertheless believe the home cultivation market will continue to be robust over the
coming years.
We plan to continue our business pursuits relative
to our CarryOutSuppies.com business, which is a producer and wholesaler of custom printed and generic supplies servicing more
than 2,000 quick service restaurants. Our products include double poly paper cups for cold beverage; disposable, clear, plastic
cold cups, paper coffee cups, yogurt cups, ice cream cups, cup lids, cup sleeves, food containers, soup containers, plastic spoons
and many other similar products for this market sector. CarryOutSupplies.com was founded in 2009.
Sales Cycle
The sales transaction is initiated when Company
receives a purchase orders from its customer either online or by emails. For special/customized order, a sales contract is entered
between the Company and its customer to summarize the price, product spec, method of shipping, and other general terms. Company
normally collects 50% of deposit from is customer in advance. Afterward, the Company would arrange a purchase with its vendors
to fulfill the customer’s need.
For regular sales, general and key
contract provisions include the following:
Delivery:
For the online orders, seller (the Company)
is responsible to arrange a carrier (Fedex/UPS) to pick up the product at the warehouse and deliver to the customer. A Packing
List and Delivery Note (Delivery confirmation) will be sent to the customer to summarize the quantity, weight, and specification
of products.
For the store pickup, invoice will be
signed by the Customer as a way to confirm the acceptance.
Transfer of ownership: Products need
to be received and inspected by the customer.
Five Steps Analysis performed by
the Company to determine whether there will be a material impact on the adoption of ASC 606
Step 1: Identify the contract
Currently, all sales transaction are
outlined and initiated by an online purchase order or sales contract for special order. The purchase order and sales contract clearly
defined the price, payment terms, and specs.
Step 2: Identify the performance obligations
Based on the nature of the business
and the product, a sales transaction entered by the Company and its customer only has a single performance obligation, which is
selling and arrange the delivery of products. No additional service nor continued involvement are provided.
Currently, the Company usually is paid
after the customer placed their orders.
In addition, the Company requires 50%
payments before process for the special purchase order. The special order usually take about two months to produce. This is treated
as an advance from customers and is mainly the advancement for products purchased.
The Company does not provide or sell
any services.
Performance obligation is fulfilled
when the Company completes the sale and transferred its ownership and risk based on the terms and conditions defied on the sales
contract.
Step 3: Determine the transaction price
All purchase orders have a fixed amount.
No variable amounts are involved.
Step 4: Allocate the transaction price
There is no need to allocate the transaction
price since the company only has one performance obligation as discussed above.
Step 5: Recognize revenue
Revenue is recognized when all steps
are accomplished. No major difference with the current revenue recognition policy due to the nature of the business and products.
Conclusion: The Company assessed the
potential impact of the adoption Topic 606 and will elect using the retrospective transition method. However, the Company does
not expect that the adoption of this guidance will have a material impact on its financial statements. The Company adopted Topic
606 in the first quarter of our fiscal 2018.
Cash
Cash and cash equivalents consist of
amounts held as bank deposits and highly liquid debt instruments purchased with an original maturity of three months or less.
From time to time, we may maintain bank
balances in interest bearing accounts in excess of the $250,000 currently insured by the Federal Deposit Insurance Corporation
for interest bearing accounts (there is currently no insurance limit for deposits in noninterest bearing accounts). We have not
experienced any losses with respect to cash. Management believes our Company is not exposed to any significant credit risk with
respect to its cash.
Accounts receivable
Accounts receivable are carried at their
estimated collectible amounts, net of any estimated allowances for doubtful accounts. We grant unsecured credit to our customer’s
deemed credit worthy. Ongoing credit evaluations are performed and potential credit losses estimated by management are charged
to operations on a regular basis. At the time any particular account receivable is deemed uncollectible, the balance is charged
to the allowance for doubtful accounts. The Company had accounts receivable net of allowances of $218,145 as of June 30, 2019 and
of $453,623 as of June 30, 2018.
Inventory
Inventory consists of finished goods
paper and paper-based products ready for sale and is stated at the lower of cost or market. We value inventories using the weighted
average costing method (approximate FIFO costing method). 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.
Intangible assets, net
Intangible assets with finite lives
are amortized over their estimated useful life. The Company monitors conditions related to these assets to determine whether events
and circumstances warrant a revision to the remaining amortization period. The Company tests its intangible assets with finite
lives for potential impairment whenever management concludes events or changes in circumstances indicate that the carrying amount
may not be recoverable. The original estimate of an asset’s useful life and the impact of an event or circumstance on either an
asset’s useful life or carrying value involve significant judgment.
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 Lattice Binomial
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 9 for details.
Stock Based Compensation
Stock based compensation cost 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.
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. As of June
30, 2019, there are approximately 143,317,350 potential shares issuable upon conversion of convertible debts and PPM, and 1,083,880
shares of warrants were excluded in calculating diluted loss per share for the year ended June 30, 2019 due to the fact that issuance
of the shares is anti-dilutive as a result of the Company’s net loss.
Income taxes
We account for income taxes under the
asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their perspective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date. Valuation allowances are recorded, when necessary, to reduce
deferred tax assets to the amount expected to be realized.
As a result of the implementation of
certain provisions of ASC 740, Income Taxes (“ASC 740”), which clarifies the accounting and disclosure for uncertainty
in tax position, as defined, ASC 740 seeks to reduce the diversity in practice associated with certain aspect of the recognition
and measurement related to accounting for income taxes. We adopted the provisions of ASC 740 as of October 2, 2008 and have analyzed
filing positions in each of the federal and state jurisdictions where we are required to file income tax returns, as well as open
tax years in these jurisdictions. We have identified the U.S. federal and California as our “major” tax jurisdictions
and generally, we remain subject to Internal Revenue Service examination of our 2013 U.S. federal income tax returns. However,
we have certain tax attribute carryforwards, which will remain subject to review and adjustment by the relevant tax authorities
until the statute of limitations closes with respect to the year in which such attributes are utilized.
We believe that our income tax filing
positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material change
to our financial position. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740. In
addition, we did not record a cumulative effect adjustment related to the adoption
of ASC 740. Our policy for recording interest and penalties associated with income-based tax audits is to record such items as
a component of income taxes. We have no interest or penalties as of June 30, 2018.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU
No. 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (“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 will adopt this standard with an effective date of July 1, 2019 using the prospective adoption approach.
In March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue versus Net). In April
2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing.
In May 2016, the FASB issued ASU 2016-11, Revenue from Contracts with Customers (Topic 606) and Derivatives and Hedging (Topic
815) - Rescission of SEC Guidance Because of ASU 2014-09 and 2014-16, and ASU 2016-12, Revenue from Contracts with Customers (Topic
606) - Narrow Scope Improvements and Practical Expedients. These ASUs clarify the implementation guidance on a few narrow areas
and adds some practical expedients to the guidance Topic 606. The Company is evaluating the effect that these ASUs will have on
its consolidated financial statements and related disclosures. The Company has adopted the new topic during the first quarter of
FY 2019.
In June 2016, the FASB issued ASU No.
2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial
assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.
This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured
at amortized cost. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2019. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2018. The Company is currently evaluating the impact that the standard will have on its consolidated
financial statements and related disclosures.
In January 2017, the FASB issued ASU
2017-04, Simplifying the Test for Goodwill Impairment. The guidance removes Step 2 of the goodwill impairment test, which requires
a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying
value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance should be adopted on a prospective basis
for the annual or any interim goodwill impairment tests beginning after December 15, 2019. The Company is currently evaluating
the impact of adopting this standard on its consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07,
Stock-based Compensation: Improvements to Nonemployee Share-based Payment Accounting, which amends the existing accounting standards
for share-based payments to nonemployees. This ASU aligns much of the guidance on measuring and classifying nonemployee awards
with that of awards to employees. Under the new guidance, the measurement of nonemployee equity awards is fixed on the grant date.
This ASU becomes effective in the first quarter of fiscal year 2019 and early adoption is permitted but no earlier than an entity’s
adoption date of ASC 606. Entities will apply the ASU by recognizing a cumulative-effect adjustment to retained earnings as of
the adoption date. The Company adopted this update on July 1, 2018 and the adoption had no material impact to the Company’s
consolidated financial statements.
Business Strategy
Our business strategy is to use the
power of the Internet and e-commerce marketing to brand and market products in order to grow our Company and maximize value for
our shareholders. Over many years, our management team has gained significant experience in the sourcing and manufacturing of products,
particularly in Asia, and the importation and distribution of such products. We plan to use this expertise in order to invest in
products and brands with disruptive potential and we have molded our business operations toward this goal.
Below, we explain our business strategy
for our major products and markets.
Hydroponic and Agricultural Supplies
Our primary business is the supply of hydroponic
cultivation equipment, and related products, through our e-commerce portals. Our websites offers thousands of cultivation-oriented
products in several general categories, such as lighting systems, ventilation units, organic nutrients and state of the art electronic
controls for cultivation, among other less prevalent categories. We source our products from a variety of manufacturers and distributors
located both domestically and internationally. By sourcing our products in bulk from numerous sources, we believe we are able to
reduce overall costs, which allows us to not only pass savings on to our customers, but to also realize positive margins on products
sold. Our product and marketing philosophy is based on beliefs of not only offering premium quality products, but to also offer
such products at attractive prices to our customers.
The majority of our customers are either commercial
or home cultivators. Commercial growers rely on us to not only stock the products required on an ongoing basis, but these customers
also rely on us to ensure the products can be delivered on a timely basis. Thus, paramount to our business operation is efficiency,
especially relating to shipping and delivery. These customers set up online accounts and place orders electronically, receiving
their orders via either postal service or private courier services. Other customers, select to pick up the purchased products at
our will call office location.
The needs of our commercial grower customers
are varied and typically differ from traditional cultivators and growers. Many of our commercial customers are involved in specialty
crops and medicine-based cultivation. Thus, these customers often require products that offer the ability for the cultivator to
precisely control environmental growth conditions, such as lighting, temperature, humidity, growth medium PH, and other factors.
We also cater to craft home cultivators who
are increasing sophisticated relative to cultivation science. These home growers are most interested in advanced lighting systems,
organic nutrients and soils in order to cultivate organic greens, micro-greens, vegetables and medicine-based plants. These home
cultivators typically place smaller orders online with delivery directly to the customer’s home location.
Our board of directors and management team
believe our chosen mixed strategy of catering to both the commercial grower and the home cultivator in on target with the overall
movement of the marketplace. While over the past few years, we have seen increased interest among commercial cultivators, while
the home cultivator market has softened; we nevertheless believe the home cultivation market will continue to be robust over the
coming years.
During December of 2017, we entered into a
master marketing agreement with BizRight, LLC, a leading marketer and manufacturer of hydroponic growth supplies, which offers
a range of hydroponics-related products including: HPS grow lights, electronic ballasts, HPS Bulbs, nutrient mixes, environmental
control products, pH measurement and calibration solutions and other grow and storage products. BizRight operates the ZenHydro.com
website and other e-commerce properties, and sells various products to distributors and retailers. This relationship has allowed
our Company to significantly expand our revenue growth prospects. On April 11, 2018, the same rights under the master marketing
agreement were assigned to BZRTH Inc., on February 5, 2019 the Company exercised its option to acquire BZRTH and has worked diligently
to close on the transaction at the earliest time possible.
We also seek to grow our Company and
our revenue bases via acquisitions. We recently issued two proposals summarizing the principal terms regarding the acquisition
of all of the outstanding capital stock, assets and assumption of liabilities of two market participants within the hydroponic
cultivation supply sector. Additionally, the Company has recently announced it is in talks with other potential acquisition targets.
At this time, none of these transactions has been completed and there is no assurance that any such transactions will take place.
Quick Service Restaurant Supply
CarryOutSupplies.com remains a major
business unit for the Company, but we expect other business initiatives to be the major growth drivers of the business during future
periods. CarryOutSupplies.com, is a producer and wholesaler of custom printed and generic supplies and has served more than 2,000
quick service restaurants. Our products include double poly paper cups for cold beverage; disposable, clear, plastic cold cups,
paper coffee cups, yogurt cups, ice cream cups, cup lids, cup sleeves, food containers, soup containers, plastic spoons and many
other similar products for this market sector.
Over the past year, we have redirected
out staff toward improving the online presence of this business operation. As a result of these efforts, our web presence has grown
significantly with major improvements to our website traffic. We attribute these Internet gains to a complete redesign of our web
presence and significantly expanded search engine optimization initiatives. These redesigns, and other programs implemented by
management, have allowed us to maintain a relatively stable business operation for this unit even though competition has increased.
Over the coming year, we will continue to expand our web presence while we introduce new products to the CarryOutSupplies portfolio.
Recent Updates to our Business Strategy
As of the end of the second calendar
quarter of 2018, our management team and our board of directors determined the business operation of acting as a marketer and distributor
of culinary seasoning products Seasoning Stix and Sriracha Seasoning Stix was no longer strategic to the Company and thus this
business operation was terminated in order to focus all corporate resources in hydroponic-related and quick services restaurant-related
areas.
In the future, we plan to continue to
concentrate primarily on the hydroponic and cultivation market place, in addition to the quick service restaurant supply sector.
In addition, we are currently analyzing expanding our business operations into the hydroponic and cultivation equipment and supplies
sector via direct acquisitions of participants in that market sector.
Item 7A. Quantitative and Qualitative
Disclosures about Market Risk
Pursuant to Item 305(e) of Regulation
S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller
reporting company,” as defined by Rule 229.10(f)(1).
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements at June
30, 2018 and 2017 nor at any time during the years then ended or through the date of this report.
Item 8. Financial Statements and Supplementary
Data
Reports of Independent Registered Public Accountants
|
|
|
36
|
|
Consolidated Balance Sheets as of June 30, 2019 and 2018
|
|
|
37
|
|
Consolidated Statements of Operations for the years ended June 30, 2019 and 2018
|
|
|
38
|
|
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the years ended
June 30, 2019 and 2018
|
|
|
39
|
|
Consolidated Statements of Cash Flows for the years ended June 30, 2019 and 2018
|
|
|
40
|
|
Notes to Consolidated Financial Statements
|
|
|
41
|
|
|
19720 Jetton Road, 3rd Floor
Cornelius, NC 28031
Tel: 704-897-8336
Fax: 704-919-5089
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors and Stockholders of
Sugarmade, Inc. and Subsidiary
Opinion
on the Financial Statements
We have audited
the accompanying consolidated balance sheets of Sugarmade, Inc. and Subsidiary (“the Company”) as of June 30, 2019
and 2018 and the related statements of operations, stockholders’ deficit, cash flows and the related notes to consolidated
financial statements (collectively referred to as the consolidated financial statements)for the years ended June 30, 2019 and 2018
. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of June 30, 2019 and 2018, and the results of its operations, changes in stockholders’ deficit
and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are
the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required
to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included
performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
The Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has an accumulated deficit, recurring losses, and expects continuing future
losses, and has stated that substantial doubt exists about the Company’s ability to continue as a going concern.
Management’s evaluation of the events and conditions and management’s plans regarding these matters are also
described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
/s/ L&L CPAS, PA
L&L CPAS, PA
Certified Public Accountants
Plantation, FL
The United States of America
October 15, 2019
We have served as the Company's auditor since March 2018.
Sugarmade, Inc. and Subsidiary
Consolidated Balance Sheets
Assets
|
|
As of June 30
|
Current Assets:
|
|
2019
|
|
2018
|
Cash
|
|
$
|
34,371
|
|
|
$
|
42,121
|
|
Accounts Receivables, Net
|
|
|
218,145
|
|
|
|
453,623
|
|
Inventory, Net
|
|
|
356,285
|
|
|
|
531,249
|
|
Loan Receivable
|
|
|
85,533
|
|
|
|
157,872
|
|
Other Current Assets
|
|
|
2,719,875
|
|
|
|
756,565
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
3,414,209
|
|
|
|
1,941,432
|
|
|
|
|
|
|
|
|
|
|
Equipment, Net
|
|
|
476,585
|
|
|
|
195,180
|
|
Intangible Assets
|
|
|
11,200
|
|
|
|
12,600
|
|
Other Assets
|
|
|
23,970
|
|
|
|
38,751
|
|
Advanced to Investments
|
|
|
18,000,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
21,925,965
|
|
|
$
|
2,187,963
|
|
Liabilities and Stockholders’ Deficit
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Note Payable Due to Bank
|
|
|
25,982
|
|
|
|
25,982
|
|
Accounts Payable and
Accrued Liabilities
|
|
|
1,431,379
|
|
|
|
1,707,641
|
|
Customer Deposits
|
|
|
287,789
|
|
|
|
329,509
|
|
Customer Overpayment
|
|
|
42,307
|
|
|
|
—
|
|
Unearned Revenue
|
|
|
61,672
|
|
|
|
110,142
|
|
Other Payables
|
|
|
420,450
|
|
|
|
241,771
|
|
Accrued Interest
|
|
|
507,218
|
|
|
|
493,365
|
|
Accrued Compensation and
Personnel Related Payables
|
|
|
24,528
|
|
|
|
869,673
|
|
Note Payable
|
|
|
20,000
|
|
|
|
20,000
|
|
Note Payable – Related Parties
|
|
|
18,000
|
|
|
|
23,000
|
|
Loan Payable
|
|
|
214,585
|
|
|
|
329,029
|
|
Loan Payable – Related Parties
|
|
|
30,000
|
|
|
|
30,000
|
|
Convertible Note Payables, Net
|
|
|
1,046,909
|
|
|
|
2,399,941
|
|
Derivative Liabilities
|
|
|
2,991,953
|
|
|
|
3,069,616
|
|
Warrant Liabilities
|
|
|
24,658
|
|
|
|
40,400
|
|
Share to Be Issued
|
|
|
100,000
|
|
|
|
2,691,000
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
7,247,431
|
|
|
|
12,381,069
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
7,247,431
|
|
|
|
12,381,069
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Deficit:
|
|
|
|
|
|
|
|
|
Preferred Stock, $0.001 Par Value, 10,000,000 Shares Authorized, 2,000,000 and 0 Shares Issued and Outstanding at June 30, 2019 and June 2018, respectively
|
|
|
2,000
|
|
|
|
—
|
|
Common Stock, $0.001 Par Value, 300,000,000 Shares Authorized, 697,608,570 and 246,135,203
|
|
|
|
|
|
|
|
|
Shares Issued and Outstanding
at June 30, 2019 and 2018
|
|
|
697,610
|
|
|
|
246,136
|
|
Additional Paid-In Capital
|
|
|
61,038,875
|
|
|
|
21,952,561
|
|
Shares to Be Issued, Preferred Shares
|
|
|
—
|
|
|
|
2,000,000
|
|
Shares to Be Issued, Common Shares
|
|
|
29,000
|
|
|
|
467,996
|
|
Accumulated Deficit
|
|
|
(47,088,950
|
)
|
|
|
(34,859,799
|
)
|
Total Stockholders’ Deficit
|
|
|
14,678,534
|
|
|
|
(10,193,106
|
)
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity (Deficit)
|
|
$
|
21,925,965
|
|
|
$
|
2,187,963
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
Sugarmade, Inc. and Subsidiary
Consolidated Statements of Operations
|
|
For the Years Ended June 30,
|
|
|
2019
|
|
2018
|
Revenues, Net
|
|
$
|
4,367,644
|
|
|
$
|
4,439,324
|
|
|
|
|
|
|
|
|
|
|
Cost of Goods Sold
|
|
|
3,368,659
|
|
|
|
3,226,365
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
1,268,985
|
|
|
|
1,212,959
|
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative Expenses
|
|
|
6,184,062
|
|
|
|
2,454,906
|
|
|
|
|
|
|
|
|
|
|
Loss From Operations
|
|
|
(4,915,077
|
)
|
|
|
(1,241,947
|
)
|
|
|
|
|
|
|
|
|
|
Non-Operating Income (Expense):
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
(1,418,754
|
)
|
|
|
(2,077,900
|
)
|
Warrant Expense
|
|
|
15,742
|
|
|
|
(15,150
|
)
|
Change in Fair Value of Derivative Liabilities
|
|
|
(4,191,727
|
)
|
|
|
(525,394
|
)
|
Stock Based Compensation
|
|
|
—
|
|
|
|
(1,038,270
|
)
|
Amortization of Debt Discount
|
|
|
(1,026,324
|
)
|
|
|
(1,010,329
|
)
|
Bad Debt
|
|
|
—
|
|
|
|
(129,418
|
)
|
Debt Forgiveness
|
|
|
(298,510
|
)
|
|
|
—
|
|
Other Income (Expense)
|
|
|
34,473
|
|
|
|
14,292
|
|
Gain on debt conversion
|
|
|
8,763
|
|
|
|
—
|
|
Loss on settlement
|
|
|
(432,495
|
)
|
|
|
(44,607
|
)
|
Loss on Impairment
|
|
|
—
|
|
|
|
(65,625
|
)
|
Loss on asset disposal
|
|
|
(5,242
|
)
|
|
|
(166,693
|
)
|
|
|
|
|
|
|
|
|
|
Total Non-Operating Income (Expense)
|
|
|
(7,314,073
|
)
|
|
|
(5,054,444
|
)
|
|
|
|
|
|
|
|
|
|
Income Tax Expense
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
(12,229,151
|
)
|
|
$
|
(6,296,390
|
)
|
|
|
|
|
|
|
|
|
|
Basic Net Income (Loss) Per Share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
Diluted Net Income (Loss) Per Share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Weighted Average Common Shares Outstanding*
|
|
|
496,507,241
|
|
|
|
242,058,522
|
|
*
|
|
Shares issuable upon conversion of convertible debts and exercising of warrants were
excluded in calculating diluted loss per share.
|
The accompanying notes are an integral part of
these consolidated financial statements.
Sugarmade, Inc. and Subsidiary
Consolidated Statements of Changes
in Stockholders’ Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
Shares to
|
|
Shares to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
be issued,
|
|
be issued,
|
|
|
|
|
|
|
Preferred Stock
|
|
Common stock
|
|
paid-in
|
|
preferred
|
|
common
|
|
Accumulated
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
capital
|
|
shares
|
|
shares
|
|
deficit
|
|
Total
|
Balance at June 30, 2017
|
|
|
—
|
|
|
$
|
—
|
|
|
|
226,734,372
|
|
|
$
|
226,735
|
|
|
$
|
20,768,187
|
|
|
$
|
2,000,000
|
|
|
$
|
467,996
|
|
|
$
|
(28,563,409
|
)
|
|
$
|
(5,100,492
|
)
|
Shares issued for debts settlement
|
|
|
—
|
|
|
|
—
|
|
|
|
12,754,812
|
|
|
|
12,755
|
|
|
|
272,661
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
285,416
|
|
Reclass Derivative liability from conversion
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
509,323
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
509,323
|
|
Initial valuation of BCF
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
125,642
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
125,642
|
|
Shares issued for compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
4,736,842
|
|
|
|
4,737
|
|
|
|
175,263
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
180,000
|
|
Shares issued for debts settlement
|
|
|
—
|
|
|
|
—
|
|
|
|
737,748
|
|
|
|
738
|
|
|
|
20,656
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21,394
|
|
Share issued for Cash
|
|
|
—
|
|
|
|
—
|
|
|
|
1,171,429
|
|
|
|
1,171
|
|
|
|
80,829
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
82,000
|
|
Net Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,296,390
|
)
|
|
|
(6,296,390
|
)
|
Balance at June 30, 2018
|
|
|
—
|
|
|
|
—
|
|
|
|
246,135,203
|
|
|
$
|
246,136
|
|
|
$
|
21,952,561
|
|
|
$
|
2,000,000
|
|
|
$
|
467,996
|
|
|
$
|
(34,859,799
|
)
|
|
$
|
(10,193,106
|
)
|
Shares issued for debts settlement
|
|
|
—
|
|
|
|
—
|
|
|
|
8,658,685
|
|
|
|
8,659
|
|
|
|
717,426
|
|
|
|
—
|
|
|
|
(60,166
|
)
|
|
|
|
|
|
|
665,918
|
|
Reclass Derivative liability from conversion
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,335,771
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,335,771
|
|
Shares issued for conversions
|
|
|
—
|
|
|
|
—
|
|
|
|
121,332,262
|
|
|
|
121,332
|
|
|
|
2,661,905
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,783,237
|
|
Initial valuation of BCF
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
149,143
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
149,143
|
|
Share issued for Cash
|
|
|
—
|
|
|
|
—
|
|
|
|
14,842,857
|
|
|
|
14,843
|
|
|
|
500,157
|
|
|
|
—
|
|
|
|
(125,000
|
)
|
|
|
|
|
|
|
390,000
|
|
Shares issued for service compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
96,639,563
|
|
|
|
96,640
|
|
|
|
6,757,834
|
|
|
|
—
|
|
|
|
(253,830
|
)
|
|
|
|
|
|
|
6,600,643
|
|
Shares issued for LOI
|
|
|
—
|
|
|
|
—
|
|
|
|
10,000,000
|
|
|
|
10,000
|
|
|
|
1,165,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,175,000
|
|
Shares issued for Award - Bizright
|
|
|
—
|
|
|
|
—
|
|
|
|
200,000,000
|
|
|
|
200,000
|
|
|
|
17,800,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,000,000
|
|
Shares issued for EB-5
|
|
|
2,000,000
|
|
|
|
2,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,998,000
|
|
|
|
(2,000,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Option for Service
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,080
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,080
|
|
Net Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(12,229,151
|
)
|
|
|
(12,229,151
|
)
|
Balance at June 30, 2019
|
|
|
2,000,000
|
|
|
|
2,000
|
|
|
|
697,608,570
|
|
|
$
|
697,610
|
|
|
$
|
61,038,875
|
|
|
$
|
—
|
|
|
$
|
29,000
|
|
|
$
|
(47,088,950
|
)
|
|
$
|
14,678,534
|
|
The accompanying notes are an integral part of
these consolidated financial statements.
Sugarmade, Inc. and Subsidiary
Consolidated Statements of Cash Flows
|
|
For the Years Ended June 30,
|
|
|
2019
|
|
2018
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(12,229,151
|
)
|
|
$
|
(6,296,390
|
)
|
Adjustments to Reconcile Net Loss to Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Gain on Debt Forgiveness
|
|
|
(16,649
|
)
|
|
|
—
|
|
Change in exercise of warrant
|
|
|
(15,742
|
)
|
|
|
15,150
|
|
Change in Fair Value of Derivative Liability
|
|
|
4,040,237
|
|
|
|
525,394
|
|
Amortization of debt discount
|
|
|
1,026,324
|
|
|
|
1,781,337
|
|
Loss on Extinguishment of Debt
|
|
|
295,963
|
|
|
|
—
|
|
Excess of debt discount
|
|
|
149,143
|
|
|
|
237,547
|
|
Stock Compensation Expense
|
|
|
4,280,136
|
|
|
|
1,038,270
|
|
Depreciation and Amortization Expense
|
|
|
71,390
|
|
|
|
105,558
|
|
Changes in Operating Assets and Liabilities
|
|
|
|
|
|
|
|
|
Accounts Receivable
|
|
|
235,478
|
|
|
|
(340,405
|
)
|
Inventory
|
|
|
173,915
|
|
|
|
36,980
|
|
Other Assets
|
|
|
14,781
|
|
|
|
(11,670
|
)
|
Loan Receivable
|
|
|
72,339
|
|
|
|
(147,872
|
)
|
Prepayment, deposits and other receivables
|
|
|
(788,308
|
)
|
|
|
(566,229
|
)
|
Amount due to a related party
|
|
|
—
|
|
|
|
(23,086
|
)
|
Accounts Payable and Accrued Liabilities
|
|
|
108,581
|
|
|
|
222,010
|
|
Customer Deposits
|
|
|
587
|
|
|
|
96,918
|
|
Unearned Revenue
|
|
|
(48,470
|
)
|
|
|
46,838
|
|
Accrued Interest and Other Payables
|
|
|
306,214
|
|
|
|
385,439
|
|
Net Cash (Used in) Operating Activities
|
|
|
(2,323,231
|
)
|
|
|
(2,894,210
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Intangible
|
|
|
—
|
|
|
|
(7,325
|
)
|
Payment for Acquisition of Property and Equipment
|
|
|
(351,395
|
)
|
|
|
(171,096
|
)
|
Net Cash (Used in) Provided by Investing Activities
|
|
|
(351,395
|
)
|
|
|
(178,421
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from Issuance of Common Stock
|
|
|
205,000
|
|
|
|
82,000
|
|
Proceeds from Share to be Issued
|
|
|
100,000
|
|
|
|
1,798,000
|
|
Proceeds from (Repayment of) Loan
|
|
|
36,376
|
|
|
|
156,228
|
|
Repayment to Related Parties
|
|
|
(5,000
|
)
|
|
|
(246,078
|
)
|
Proceeds from Convertible Note
|
|
|
2,330,500
|
|
|
|
1,222,722
|
|
Net Cash Provided by Financing Activities
|
|
|
2,666,876
|
|
|
|
3,012,872
|
|
|
|
|
|
|
|
|
|
|
Net (Decrease) in Cash
|
|
|
(7,750
|
)
|
|
|
(59,759
|
)
|
|
|
|
|
|
|
|
|
|
Cash, Beginning of Year
|
|
|
42,121
|
|
|
|
101,880
|
|
Cash, Ending of Year
|
|
|
34,371
|
|
|
|
42,121
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Non-Cash Activities:
|
|
|
|
|
|
|
|
|
Shares Issued for Debt Settlement
|
|
|
564,051
|
|
|
|
—
|
|
Reduction in derivative liability due to conversion
|
|
|
7,335,771
|
|
|
|
271,777
|
|
Shares issued for conversion of convertible debt
|
|
|
2,783,235
|
|
|
|
306,810
|
|
Debt discount related to convertible debt
|
|
|
3,217,870
|
|
|
|
1,681,999
|
|
Shares Issued for Advanced Payments
|
|
|
2,641,000
|
|
|
|
—
|
|
Advanced to Investment
|
|
|
18,000,000
|
|
|
|
—
|
|
The accompanying notes are an
integral part of these consolidated financial statements
Notes to Consolidated
Financial Statements
1.
Nature of Business
Sugarmade, Inc. (hereinafter referred
to as ’‘we’’, ’‘us” or “the/our Company’’) is a publicly traded company
incorporated in the state of Delaware. Our previous legal name was Diversified Opportunities, Inc. Our Company, Sugarmade, Inc.
operates much of its business activities through our subsidiary, SWC Group, Inc., a California corporation (“SWC’’).
Sugarmade, Inc. was founded in 2010.
In 2014, CarryOutSupplies.com was acquired by Sugarmade, Inc., creating the Company as it is today. As of the end of the reporting
period, June 30, 2019, we were involved in two businesses including the supply of products to the quick service restaurant sub-sector
of the restaurant industry and as an importer, distributor and marketer of hydroponic supplies to various agricultural sectors.
We had previously been a marketer of culinary seasoning products Seasoning Stix and Sriracha Seasoning Stix and a marketer of tree-free
paper products. These products were discontinued during 2018 in order to focus the majority of our corporate resources on the marketing
of hydroponic supplies.
The marketplace in which we plan to
be mainly engaged is generally referred to as hydroponic agricultural supplies. While some of our customers are engaged in the
legal cultivation, processing and/or distribution of cannabis or cannabis containing products, our Company neither sells any products
containing cannabis nor do we handle, process, or distribute any products containing cannabis.
Our legacy business operation, CarryOutSupplies.com,
is a producer and wholesaler of custom printed and generic supplies servicing more than 2,000 quick service restaurants. Our products
include double poly paper cups for cold beverage; disposable, clear, plastic cold cups, paper coffee cups, yogurt cups, ice cream
cups, cup lids, cup sleeves, food containers, soup containers, plastic spoons and many other similar products for this market sector.
CarryOutSupplies.com was founded in 2009 when the founders gained first-hand experience within the restaurant industry of the difficulty
for restaurant owners to acquire custom printed supplies at a reasonable cost. Many quick service restaurants wish to acquire custom
printed products, such as those embossed with logos, but the minimum order size for such customization had been cost prohibitive.
With that in mind, carry out supplies was founded to provide products to this underserved section of the market. Since that time,
the company has become a key supplier to many popular U.S. franchises, particularly in the frozen dessert segments.
In December 2017, we announced a Master
Marketing Agreement with BizRight, LLC where the Company would market BizRight’s products. The Company also gained an option
to acquire all of BizRight’s operations. As of the date of this report, the Company had exercised the option to purchase
100% of BZRTH, the assignee and operating entity of BizRight. See Note 4 below for further details.
During October 2018, the Company signed
a Letter of Intent to acquire Sky Unlimited, LLC doing business as Athena United, a Southern California-based, supplier of hydroponic
cultivation supplies to the wholesale sector and to large commercial cultivators. Athena United operates its ecommerce website
at www.AthenaUnited.com. Under the terms of the Agreement, which contains
both binding and non-binding elements, Sugarmade will acquire all of the outstanding capital stock and the business operations
for a combination of cash and common shares of Sugarmade. Athena United, and its associated operations, is believed to be one of
the larger operators in this market sector and is producing revenues of approximately $40 million per year, is profitable, and
cash flow positive. Should the Company be successful in its acquisition efforts, the operation would be integrated under the Sugarmade
corporate umbrella with Sugarmade assuming all operations and recognizing all revenues and profits.
During
January of 2019, the Company announced its intention to acquire a retail location of Washington State-based Hydro4Less. The operation
is expected to produce approximately $5 million in revenues and to be profitable during calendar 2019. Additionally, via the pending
transaction, Sugarmade will gain an option to purchase two additional Hydro4Less retail operations, which are currently producing
in excess of $20 million annually. Should all three Hydro4Less acquisitions close, Sugarmade will increase its annual revenues
by approximately $25 million per year.
2.
Summary of Significant Accounting Policies
Basis of presentation
The accompanying consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.
Principles of consolidation
The consolidated financial
statements include the accounts of our Company and its wholly-owned subsidiary, SWC Group Inc. All significant intercompany transactions
and balances have been eliminated in consolidation.
Going concern
The Company’s continuation as a going
concern is dependent on its ability to generate sufficient cash flows from operations to meet its obligations, in which it has
not been successful, and/or obtaining additional financing from its shareholders or other sources, as may be required.
Our consolidated financial statements
have been prepared assuming that we will continue as a going concern. Such assumption contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. These consolidated financial statements do not include any adjustments
to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of
liabilities that may result should the Company be unable to continue as a going concern.
Management is endeavoring to increase
revenue-generating operations. While priority is on generating cash from operations through the sale of the Company’s products,
management is also seeking to raise additional working capital through various financing sources, including the sale of the Company’s
equity and/or debt securities, which may not be available on commercially reasonable terms to our Company, or which may not be
available at all. If such financing is not available on satisfactory terms, we may be unable to continue our business as desired
and our operating results will be adversely affected. In addition, any financing arrangement may have potentially adverse effects
on us and/or our stockholders. Debt financing (if available and undertaken) will increase expenses, must be repaid regardless of
operating results and may involve restrictions limiting our operating flexibility. If we issue equity securities to raise additional
funds, the percentage ownership of our existing stockholders will be reduced, and the new equity securities may have rights, preferences
or privileges senior to those of the current holders of our common stock.
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. 606, Revenue Recognition. Sugarmade
applied a five-step approach in determining the amount and timing of revenue to be recognized: (1) identifying the contract with
a customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4) allocating
the transaction price to the performance obligations in the contract and (5) recognizing revenue when the performance obligation
is satisfied.
Substantially
all of the Company’s revenue is recognized at the time control of the products transfers to the customer.
Cash
Cash and cash equivalents consist of
amounts held as bank deposits and highly liquid debt instruments purchased with an original maturity of three months or less.
From time to time, we may maintain bank
balances in interest bearing accounts in excess of the $250,000 currently insured by the Federal Deposit Insurance Corporation
for interest bearing accounts (there is currently no insurance limit for deposits in noninterest bearing accounts). We have not
experienced any losses with respect to cash. Management believes our Company is not exposed to any significant credit risk with
respect to its cash.
Accounts receivable
Accounts receivable are carried at their
estimated collectible amounts, net of any estimated allowances for doubtful accounts. We grant unsecured credit to our customer’s
deemed credit worthy. Ongoing credit evaluations are performed and potential credit losses estimated by management are charged
to operations on a regular basis. At the time, any particular account receivable is deemed uncollectible, the balance is charged
to the allowance for doubtful accounts. The Company had accounts receivable, net of allowance, of $218,145 and 453,623 as of June
30, 2019 and 2018, respectively; and allowance for doubtful accounts of $412,666 and $126,262 as of June 30, 2019 and 2018, respectively.
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. The total inbound freight
costs are $247,263 & $271,343 as of June 30, 2019 & 2018 respectively.
If the estimated realizable value of
our inventory is less than cost, we make provisions in order to reduce its carrying value to its estimated market value. On a consolidated
basis, as of June 30, 2019 and June 30, 2018, the balance for the inventory totaled $356,285 and $531,249, respectively. $14,548
were reserved for obsolescent inventory for the year ended June 30, 2019, and $120,486 were reserved for obsolescent inventory
for the year ended June 30, 2018.
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 believes that, as of June 30, 2019, there was no significant impairment of its long-lived assets.
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 after 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 not
taken any uncertain positions that would necessitate recording of tax related liability as of June 30, 2019 and 2018.
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.
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 BPS 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 2 inputs for
its valuation methodology for the derivative liabilities for conversion feature of the convertible notes and warrants in determining
the fair value using Lattice Binomial model with the following assumption inputs:
Derivative instruments
The fair value of derivative instruments
is recorded and shown separately under 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 12months of the balance sheet date.
Segment Reporting
FASB ASC Topic 280, “Segment Reporting’’,
requires use of the ’‘management approach” model for segment reporting. The management approach model is based on the way
a company’s management organizes segments within the Company for making operating decisions and assessing performance. Reportable
segments are based on products and services, geography, legal structure, management structure, or any other manner in which management
disaggregates a company.
FASB ASC Topic 280 has no effect on
the Company’s financial statements 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 February 2016, the FASB issued ASU
No. 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (“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 will adopt this ASU on the consolidated financial statements in the quarter ended September 30, 2019.
Prior period reclassification
Certain prior period balance sheet accounts
have been reclassified in conformity with current period presentation including reclassification of $4,000 from derivative liability
to warrant liability. The reclassification had no effect to the company’s consolidated statement of operations, statement of cash
flow or statement of shareholder’s equity.
3.
Concentration
Customer
For the year ended June 30, 2019, our
Company earned net revenues of $4,637,644. The company does not have any concentration of revenue with any customer that represent
over 10% of overall revenue. The highest revenue from (2) customers accounted for 7.90% and 7.69% respectively, as percentage of
overall revenue for the year ended June 30, 2019.
For the year ended June 30, 2018, our
Company earned net revenues of $4,439,324. 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. The highest revenue from
(2) customers accounted for 8.51% and 6.96% respectively, as percentage of overall revenue for the year ended June 30, 2018.
Suppliers
For the year ended June 30, 2019, we
purchased products for sale by the company’s subsidiaries from several contract manufacturers located in Asia and the U.S. A substantial
portion of the Company’s inventory is purchased from two (2) suppliers. The two (2) suppliers accounted as follows: Two suppliers
accounted for 31.21% and 17.80% of the Company’s total inventory purchase for the year ended June 30, 2019, respectively.
For the year ended June 30, 2018, two
suppliers accounted for 36% and 17.50% of the Company’s total inventory purchase for the year ended June 30, 2018, respectively.
4.
Equity Transaction – Exclusive License Rights
On December 13, 2017, we entered into a Master
Marketing Agreement with BizRight, LLC (“BizRight”), a leading marketer and manufacturer of hydroponic growth supplies,
which offers a range of hydroponics-related products including: HPS grow lights, electronic ballasts, HPS Bulbs, nutrient
mixes, environmental control products, pH measurement and calibration solutions and other grow and storage products. BizRight operates
the ZenHydro.com website and other e-commerce properties, and sells various products to distributors and retailers.
Under the terms of the Master Marketing Agreement,
all products procured, developed and imported by BizRight will be sold by the Company. The expected term of the exclusive license
rights is 20 years. BizRight and its owners will be compensated via a combination of cash and common shares in Sugarmade. Effective
the contract date, Bizright will be compensated Two hundred million (200,000,000) common shares. Sugarmade will compensate BizRight
and its owners six million dollars ($6,000,000) in cash. The amount due will be divided over 3 payments equally and are contingent
upon the filing of the S-1 and significant funding.
We began recognizing revenues under this marketing
agreement during April 2018 and stopped recognizing the revenue early 2019 upon exercise of the purchase option under the agreement.
As of June 30, 2019, BizRight had assigned the marketing agreement to its operating entity, BZRTH and the Company had exercised
the option to purchase 100% equity ownership of BZRTH.
As of June 30, 2019, cash of $870,000 and 200
million shares of the Company’s common stock had been paid and issued in connection with the acquisition.
5.
Litigation
From time to time and in the course
of business, we may become involved in various legal proceedings seeking monetary damages and other relief. The amount of the ultimate
liability, if any, from such claims cannot be determined. As of June 30, 2019, 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.
●
|
The Company had originally filed a lawsuit in Contra Costa County, California, against Diversified Products Group, Inc. (DPG), including its former employees and chairman of the Company. The named defendants had filed a counterclaim against the Company. As of June 30, 2019, all parties have agreed to settlement terms and are awaiting for defendants’ counsel to file the formal dismissal.
|
●
|
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. Under the terms of the settlement agreement, the Company agreed to pay the plaintiffs $227,000 to settle all claims against the Company, which included the payoff of the two notes outstanding within one (1) week. Upon receipt of all payments, plaintiffs will surrender for cancellation 230,000 of the Company’s shares within ten (10) days. The parties agreed that all claims against the Company would be satisfied through such payments and that the matter would be fully resolved. Thus far, third-parties had purchased two (2) notes of approximately $80,000, reducing the Company’s exposure. As of the date of this filing, there is a remaining balance of $227,000, plus accrued interest.
|
●
|
On August 13, 2019, a lawsuit was filed against the Company for
unpaid legal fees of $50,000.00, which originates from the Company’s former chairman and CEO. The Company was served in or
around September 2019. The Company plans to amicably resolve this matter and anticipates that it will be settled and dismissed.
|
There can be no assurances the ultimate
liability relative to these lawsuits will not exceed what is outlined above.
As of June 30, 2019 and 2018, other current assets consisted
of the following:
|
|
For the years ended June 30,
|
|
|
2019
|
|
2018
|
Prepaid Deposit
|
|
$
|
2,145,000
|
|
|
$
|
355,500
|
|
Prepaid Inventory
|
|
|
172,045
|
|
|
|
92,737
|
|
Employees Advance
|
|
|
16,052
|
|
|
|
41,303
|
|
Prepaid Expenses
|
|
|
358,702
|
|
|
|
246,260
|
|
Others
|
|
|
28,075
|
|
|
|
20,765
|
|
Total
|
|
$
|
2,719,875
|
|
|
$
|
756,565
|
|
7.
Intangible Asset
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 was obliged
to issue common shares of the Company valued at $75,000 for acquiring the use right of the distribution and intellectual property.
The Company amortized this use right as intangible asset over ten years, and recorded $0 and $67,850 amortization expense for the
years ended June 30, 2019 and 2018, respectively.
8.
Convertible Notes
As of June 30, 2019 and June 30, 2018, the
balance owing on convertible notes, net of debt discount, with terms as described below was $1,046,909 and $2,399,941, respectively.
Convertible notes issued prior to the year
ended June 30, 2017 were as follows:
Convertible note 1: On August 24, 2012, the
Company entered into a convertible promissory note with an accredited investor for $25,000. The note has a term of six (6) months
with an interest rate of 10% and is convertible to common shares at a 25% discount of the average of 30 days prior to the conversion
date. As of June 30, 2019, 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 June 30, 2019, 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 June 30, 2019, the note is in default.
Convertible note 4: 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. As of June 30, 2019, the note has been fully
converted.
Convertible note 5: 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. As
of June 30, 2019, the note has been fully converted.
Convertible note 6: 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 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.
As of June 30, 2019, the note has been fully converted.
Convertible note 7: 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.
As of June 30, 2019, the note has been fully converted.
Convertible note 8: 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.
As of June 30, 2019, the note has been fully converted.
Convertible note 9: 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.
As of June 30, 2019, the note has been fully converted.
Convertible note 10: 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. As of June 30, 2019, the note has been
fully converted.
Convertible note 11: On March 1, 2017, the
Company entered into a convertible promissory note with an accredited investor for $100,000. The note has been purchased by other
investor in total amount of $156,067 with a term of nine (9) months with an interest rate of 10% and is convertible to common shares
at a 45% discount to the then current market price of our shares. As of June 30, 2019, the Company converted $63,567 and the remaining
balance of note was $60,751.
Convertible note 12: 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.
As of June 30, 2019, the note has been fully converted.
Convertible note 13: 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. As of June 30, 2019, the note has been fully converted.
Convertible note 14: 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.
As of June 30, 2019, the note has been fully converted.
Convertible note 15 & 16: On May 17, 2017,
the Company entered a convertible promissory note with an investor for a total amount of $1,375,000 (after $10,000 legal and due
diligence fee) with an OID of $125,000, the note will be fulfilled through a series of funding. The note is due 12 months after
each funding date and bears an interest rate of 10%. The conversion price for the note is 55% of the lowest closing bid for the
20 consecutive trading days prior to the conversion date. In connection with the note, the investor will also receive warrants
and is calculated based on 15% of the maturity amount. The warrants have a life of four years with exercise price of $0.15 per
share and have cashless exercise option. The Company had outstanding balance of $921,004 as of the year ended June 30, 2018. The
fair value of the warrants was $40,400 as of June 30, 2018. During the year ended June 30, 2019, the principal balance has been
fully converted, the remaining default charge balance of the note was $250,000 as of June 30, 2019 and the fair value of the warrant
liability was $5,555. As of June 30, 2019, the note is in default and bears a default interest rate of 22% per annum.
Convertible notes issued during the year
ended June 30, 2018 were as follows:
Convertible note 17: On July 17, 2017, the
Company entered into a convertible promissory note with an accredited investor for $164,900. 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 $0.025. As of June 30, 2019, the note
has been fully converted.
Convertible note 18: On August 3, 2017, the
Company entered into a convertible promissory note with an accredited investor for $150,000. The note has a term of six (6) months
with an interest rate of 10% and is convertible to common shares at a 45% discount to average of 3 lowest trading price during
last 20 trading days. As of June 30, 2019, the note has been fully converted.
Convertible note 19: On August 22, 2017, the
Company entered into a convertible promissory note with an accredited investor for $35,000. 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 of average two lowest price of last 20 trading
days prices. As of June 30, 2019, the note has been fully converted.
Convertible note 20: On September 15, 2017,
the Company entered into a convertible promissory note with an accredited investor for $150,000. The note has a term of six (6)
months with an interest rate of 10% and is convertible to common shares at a 45% discount to average of 3 lowest trading price
during last 20 trading days. As of June 30, 2019, the note has been fully converted.
Convertible note 21: On September 26, 2017,
the Company entered into a convertible promissory note with an accredited investor for $15,000. 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 of average two lowest price of last 20
trading days prices. As of June 30, 2019, the note has been fully converted.
Convertible note 22: On December 7, 2017, the
Company entered into a convertible promissory note with an accredited investor for $50,000. 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 $0.05. As of June 30, 2019, the note
has been fully converted.
Convertible notes issued during the year
ended June 30, 2019 were as follows:
Convertible note 23: On September 20, 2018,
the Company entered a convertible promissory note with an accredited investor for a total amount of $267,500 (includes $5,000 legal
fee and an OID of $12,500). The note is due 360 days and bears an interest rate of 8%. The conversion price for the note is 55%
of the lowest closing bid for the 20 consecutive trading days prior to the conversion date. During the year ended June 30, 2019,
the principal balance of 205,000 has been converted into the Company’s common stock, and the remaining balance of the note
was $62,500 as of June 30, 2019.
Convertible note 24: On October 5, 2018, the
Company entered a convertible promissory note with an accredited investor for a total amount of $250,000 (includes $5,000 OID).
The note is due 360 days and bears an interest rate of 8%. The conversion price for the note is 45% of average three lowest closing
bid for the 20 consecutive trading days prior to the conversion date. As of June 30, 2019, the note has been fully converted.
Convertible note 25: 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.
Convertible note 26: 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.
Convertible note 27: 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.
Convertible note 28: 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.
Convertible note 29: On December 26, 2018,
the Company entered a convertible promissory note with an accredited investor for a total amount of $250,000 (includes $5,000 OID).
The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 45% of average three lowest closing
bid for the 20 consecutive trading days prior to the conversion date. During the year ended June 30, 2019, the principal balance
of 100,000 has been converted into the Company’s common stock, and the remaining balance of the note was $150,000 as of June
30, 2019.
Convertible note 30: On January 8, 2019, the
Company entered a convertible promissory note with an accredited investor for a total amount of $105,000. The note is due 360 days
and bear an interest rate of 8%. The conversion price for the note is 35% of average two lowest closing bid for the 20 consecutive
trading days prior to the conversion date.
Convertible note 31: On January 22, 2019, the
Company entered a convertible promissory note with an accredited investor for a total amount of $100,000. The note is due 360 days
and bear an interest rate of 8%. The conversion price for the note is 42% of average three lowest closing bid for the 20 consecutive
trading days prior to the conversion date.
Convertible note 32: On January 24, 2019, the
Company entered a convertible promissory note with an accredited investor for a total amount of $53,000. The note is due 360 days
and bear an interest rate of 8%. The conversion price for the note is 35% of average two lowest closing bid for the 20 consecutive
trading days prior to the conversion date.
Convertible note 33: On February 26, 2019,
the Company entered a convertible promissory note with an accredited investor for a total amount of $100,000. The note is due 360
days and bear an interest rate of 8%. The conversion price for the note is 42% of average three lowest closing bid for the 20 consecutive
trading days prior to the conversion date.
Convertible note 34: On March 4, 2019, the
Company entered a convertible promissory note with an accredited investor for a total amount of $250,000 (includes $7,000 OID).
The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 58% of average two lowest closing
bid for the 20 consecutive trading days prior to the conversion date.
Convertible note 35: On April 2, 2019, the
Company entered a convertible promissory note with an accredited investor for a total amount of $100,000 (includes $2,000 OID).
The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 40% of average three lowest closing
bid for the 10 consecutive trading days prior to the conversion date.
Convertible note 36: On April 4, 2019, the
Company entered a convertible promissory note with an accredited investor for a total amount of $100,000 (includes $2,000 OID).
The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 58% of average two lowest closing
bid for the 20 consecutive trading days prior to the conversion date.
Convertible note 37: On May 2, 2019, the Company
entered a convertible promissory note with an accredited investor for a total amount of $125,000 (includes $2,000 OID). The note
is due 360 days and bear an interest rate of 8%. The conversion price for the note is 40% of average three lowest closing bid for
the 10 consecutive trading days prior to the conversion date.
Convertible note 38: On May 7, 2019, the Company
entered a convertible promissory note with an accredited investor for a total amount of $125,000 (includes $2,500 OID). The note
is due 360 days and bear an interest rate of
8%. The conversion price for the note is 58%
of average two lowest closing bid for the 20 consecutive trading days prior to the conversion date.
Convertible note 39: On May 29, 2019, the Company
entered a convertible promissory note with an accredited investor for a total amount of $125,000 (includes $2,000 OID). The note
is due 360 days and bear an interest rate of 8%. The conversion price for the note is 40% of average three lowest closing bid for
the 10 consecutive trading days prior to the conversion date.
Convertible note 40: On June 12, 2019, the
Company entered a convertible promissory note with an accredited investor for a total amount of $125,000 (includes $2,500 OID).
The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 58% of average two lowest closing
bid for the 20 consecutive trading days prior to the conversion date.
As of the year ended June 30, 2019,
the Company’s convertible notes consisted of following:
Balance at 06.30.2018
|
|
Addition/(Repayment)
|
|
Conversion in principal
|
|
# of Shares Issued
|
|
Balance at 6.30.2019
|
|
Due Date
|
|
Interest Rate
|
|
Conversion Terms
|
$
|
25,000.00
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
25,000.00
|
|
|
2/24/2013
|
|
|
14
|
%
|
|
75% of the average of 30 days prior to the conversion date.
|
|
25,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,000
|
|
|
3/18/2013
|
|
|
14
|
%
|
|
75% of the average of 30 days prior to the conversion date.
|
|
100,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
100,000
|
|
|
6/21/2013
|
|
|
14
|
%
|
|
75% of the average of 30 days prior to the conversion date.
|
|
20,000
|
|
|
|
—
|
|
|
|
20,000
|
|
|
|
1,160,391
|
|
|
|
—
|
|
|
7/17/2017
|
|
|
10
|
%
|
|
40% discount of average price of last 20 trading days prices
|
|
25,000
|
|
|
|
—
|
|
|
|
25,000
|
|
|
|
1,426,674
|
|
|
|
—
|
|
|
7/17/2017
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days prices
|
|
50,000
|
|
|
|
—
|
|
|
|
50,000
|
|
|
|
2,931,188
|
|
|
|
—
|
|
|
8/8/2017
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days prices
|
|
80,000
|
|
|
|
—
|
|
|
|
80,000
|
|
|
|
4,530,846
|
|
|
|
—
|
|
|
7/20/2017
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days prices
|
|
66,023
|
|
|
|
—
|
|
|
|
66,023
|
|
|
|
3,712,324
|
|
|
|
—
|
|
|
8/24/2017
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days prices
|
|
50,000
|
|
|
|
—
|
|
|
|
50,000
|
|
|
|
2,390,805
|
|
|
|
—
|
|
|
8/9/2017
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days prices
|
|
75,000
|
|
|
|
—
|
|
|
|
75,000
|
|
|
|
4,378,547
|
|
|
|
—
|
|
|
7/31/2017
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days prices
|
|
124,318
|
|
|
|
—
|
|
|
|
63,567
|
|
|
|
3,919,404
|
|
|
|
60,751
|
|
|
12/1/2017
|
|
|
10
|
%
|
|
45% discount of lowest price of last 20 trading days prices
|
|
70,000
|
|
|
|
—
|
|
|
|
70,000
|
|
|
|
4,067,072
|
|
|
|
—
|
|
|
9/23/2017
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days prices
|
|
30,000
|
|
|
|
—
|
|
|
|
30,000
|
|
|
|
1,500,010
|
|
|
|
—
|
|
|
8/16/2017
|
|
|
8
|
%
|
|
Greater of 40% discount to average of 3 lowest trading price during last 20 trading days or $.05
|
|
200,000
|
|
|
|
—
|
|
|
|
200,000
|
|
|
|
11,557,652
|
|
|
|
—
|
|
|
9/30/2017
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days prices
|
|
921,004
|
|
|
|
—
|
|
|
|
671,004
|
|
|
|
31,483,740
|
|
|
|
250,000
|
|
|
5/12/2018
|
|
|
22
|
%
|
|
45% discount of lowest price of last 20 trading days prices
|
|
150,000
|
|
|
|
—
|
|
|
|
150,000
|
|
|
|
3,745,330
|
|
|
|
—
|
|
|
5/3/2018
|
|
|
10
|
%
|
|
45% discount to average of 3 lowest trading price during last 20 trading days
|
|
150,000
|
|
|
|
—
|
|
|
|
150,000
|
|
|
|
3,744,005
|
|
|
|
—
|
|
|
6/15/2018
|
|
|
10
|
%
|
|
42% discount to average of 3 lowest trading price during last 20 trading days
|
|
164,900
|
|
|
|
—
|
|
|
|
164,900
|
|
|
|
6,596,000
|
|
|
|
—
|
|
|
7/17/2018
|
|
|
8
|
%
|
|
The conversion price shall be $0.025 per share
|
|
35,000
|
|
|
|
—
|
|
|
|
35,000
|
|
|
|
691,184
|
|
|
|
—
|
|
|
8/22/2018
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days prices
|
|
15,000
|
|
|
|
—
|
|
|
|
15,000
|
|
|
|
294,114
|
|
|
|
—
|
|
|
9/26/2018
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days prices
|
|
50,000
|
|
|
|
—
|
|
|
|
50,000
|
|
|
|
1,000,000
|
|
|
|
—
|
|
|
12/7/2018
|
|
|
8
|
%
|
|
The conversion price shall be $0.05 per share
|
|
—
|
|
|
|
267,500
|
|
|
|
205,000
|
|
|
|
10,785,299
|
|
|
|
62,500
|
|
|
9/15/2019
|
|
|
8
|
%
|
|
55% discount of lowest price of last 20 trading days prices
|
|
—
|
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
13,453,675
|
|
|
|
—
|
|
|
10/5/2019
|
|
|
8
|
%
|
|
45% discount of average three lowest price of last 20 trading days prices
|
|
—
|
|
|
|
100,000
|
|
|
|
—
|
|
|
|
|
|
|
|
100,000
|
|
|
10/31/2019
|
|
|
8
|
%
|
|
The conversion price shall be $0.07 per share
|
|
—
|
|
|
|
80,000
|
|
|
|
—
|
|
|
|
|
|
|
|
80,000
|
|
|
11/15/2019
|
|
|
8
|
%
|
|
The conversion price shall be $0.07 per share
|
|
—
|
|
|
|
40,000
|
|
|
|
—
|
|
|
|
|
|
|
|
40,000
|
|
|
11/15/2019
|
|
|
8
|
%
|
|
The conversion price shall be $0.07 per share
|
|
—
|
|
|
|
35,000
|
|
|
|
—
|
|
|
|
|
|
|
|
35,000
|
|
|
12/2/2019
|
|
|
8
|
%
|
|
The conversion price shall be $0.07 per share
|
|
—
|
|
|
|
250,000
|
|
|
|
100,000
|
|
|
|
7,964,002
|
|
|
|
150,000
|
|
|
12/26/2019
|
|
|
8
|
%
|
|
45% discount of average three lowest price of last 20 trading days prices
|
|
—
|
|
|
|
105,000
|
|
|
|
—
|
|
|
|
|
|
|
|
105,000
|
|
|
1/8/2020
|
|
|
8
|
%
|
|
35% discount to average of 2 lowest trading price during last 20 trading days
|
|
—
|
|
|
|
100,000
|
|
|
|
—
|
|
|
|
|
|
|
|
100,000
|
|
|
1/22/2020
|
|
|
8
|
%
|
|
42% discount to average of 3 lowest trading price during last 20 trading days
|
|
—
|
|
|
|
53,000
|
|
|
|
—
|
|
|
|
|
|
|
|
53,000
|
|
|
1/24/2020
|
|
|
8
|
%
|
|
35% discount to average of 2 lowest trading price during last 20 trading days
|
|
—
|
|
|
|
100,000
|
|
|
|
—
|
|
|
|
|
|
|
|
100,000
|
|
|
2/26/2020
|
|
|
8
|
%
|
|
42% discount to average of 3 lowest trading price during last 20 trading days
|
|
—
|
|
|
|
250,000
|
|
|
|
—
|
|
|
|
|
|
|
|
250,000
|
|
|
3/4/2020
|
|
|
8
|
%
|
|
58% discount to average 2 lowest trading prices during 20 days prior conversion date
|
|
—
|
|
|
|
100,000
|
|
|
|
—
|
|
|
|
|
|
|
|
100,000
|
|
|
4/2/2020
|
|
|
8
|
%
|
|
40% discount to average 3 lowest trading prices during 10 days prior conversion date
|
|
—
|
|
|
|
100,000
|
|
|
|
—
|
|
|
|
|
|
|
|
100,000
|
|
|
4/4/2020
|
|
|
8
|
%
|
|
58% discount to average 2 lowest trading prices during 20 days prior conversion date
|
|
—
|
|
|
|
125,000
|
|
|
|
—
|
|
|
|
|
|
|
|
125,000
|
|
|
5/2/2020
|
|
|
8
|
%
|
|
40% discount to average 3 lowest trading prices during 10 days prior conversion date
|
|
—
|
|
|
|
125,000
|
|
|
|
—
|
|
|
|
|
|
|
|
125,000
|
|
|
5/7/2020
|
|
|
8
|
%
|
|
58% discount to average 2 lowest trading prices during 20 days prior conversion date
|
|
—
|
|
|
|
125,000
|
|
|
|
—
|
|
|
|
|
|
|
|
125,000
|
|
|
5/29/2020
|
|
|
8
|
%
|
|
40% discount to average 3 lowest trading prices during 10 days prior conversion date
|
|
—
|
|
|
|
125,000
|
|
|
|
—
|
|
|
|
|
|
|
|
125,000
|
|
|
6/12/2020
|
|
|
8
|
%
|
|
58% discount to average 2 lowest trading prices during 20 days prior conversion date
|
$
|
2,426,245
|
|
|
$
|
2,330,500
|
|
|
$
|
2,520,494
|
|
|
$
|
121,332,262
|
|
|
$
|
2,236,251
|
|
|
|
|
|
|
|
|
|
As of the year ended June 30, 2019,
the Company’s debt discount consisted of following:
|
Date of
|
|
|
Due Date
|
|
|
Related Debt Discount
|
|
|
|
Amortization in 06/30/2018
|
|
|
|
Debt Discount Balance 06/30/18
|
|
|
|
Total Amortization in 06/30/2019
|
|
|
|
Debt Discount Balance 06/30/2019
|
|
|
8/22/2017
|
|
|
8/22/2018
|
|
$
|
35,000
|
|
|
$
|
29,918
|
|
|
$
|
5,082
|
|
|
$
|
5,082
|
|
|
$
|
—
|
|
|
9/26/2017
|
|
|
9/26/2018
|
|
$
|
15,000
|
|
|
$
|
11,384
|
|
|
$
|
3,616
|
|
|
$
|
3,616
|
|
|
$
|
—
|
|
|
7/17/2017
|
|
|
7/17/2018
|
|
$
|
164,900
|
|
|
$
|
160,445
|
|
|
$
|
4,455
|
|
|
$
|
4,455
|
|
|
$
|
—
|
|
|
12/7/2017
|
|
|
12/7/2018
|
|
$
|
30,000
|
|
|
$
|
16,849
|
|
|
$
|
13,151
|
|
|
$
|
13,151
|
|
|
$
|
—
|
|
|
9/20/2018
|
|
|
9/15/2019
|
|
$
|
12,500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,826
|
|
|
$
|
2,674
|
|
|
9/20/2018
|
|
|
9/15/2019
|
|
$
|
250,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
196,528
|
|
|
$
|
53,472
|
|
|
10/5/2018
|
|
|
10/5/2019
|
|
$
|
5,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,000
|
|
|
$
|
—
|
|
|
10/5/2018
|
|
|
10/5/2019
|
|
$
|
245,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
245,000
|
|
|
$
|
—
|
|
|
11/1/2018
|
|
|
11/1/2019
|
|
$
|
84,286
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
55,652
|
|
|
$
|
28,634
|
|
|
11/16/2018
|
|
|
11/16/2019
|
|
$
|
36,571
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22,644
|
|
|
$
|
13,927
|
|
|
11/16/2018
|
|
|
11/16/2019
|
|
$
|
18,286
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,322
|
|
|
$
|
6,964
|
|
|
12/3/2018
|
|
|
12/3/2019
|
|
$
|
10,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,726
|
|
|
$
|
4,274
|
|
|
12/26/2018
|
|
|
12/26/2019
|
|
$
|
5,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,548
|
|
|
$
|
2,452
|
|
|
12/26/2018
|
|
|
12/26/2019
|
|
$
|
245,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
124,849
|
|
|
$
|
120,151
|
|
|
1/8/2019
|
|
|
1/8/2020
|
|
$
|
0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
43,653
|
|
|
$
|
48,448
|
|
|
1/22/2019
|
|
|
1/22/2020
|
|
$
|
0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
38,107
|
|
|
$
|
49,371
|
|
|
1/22/2019
|
|
|
1/22/2020
|
|
$
|
2,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
871
|
|
|
$
|
1,129
|
|
|
1/24/2019
|
|
|
1/24/2020
|
|
$
|
0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20,402
|
|
|
$
|
27,030
|
|
|
2/26/2019
|
|
|
2/26/2020
|
|
$
|
0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
32,854
|
|
|
$
|
63,854
|
|
|
2/26/2019
|
|
|
2/26/2020
|
|
$
|
2,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
679
|
|
|
$
|
1,321
|
|
|
3/4/2019
|
|
|
3/4/2020
|
|
$
|
243,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
78,344
|
|
|
$
|
164,656
|
|
|
3/4/2019
|
|
|
3/4/2020
|
|
$
|
7,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,257
|
|
|
$
|
4,743
|
|
|
4/2/2019
|
|
|
4/2/2020
|
|
$
|
98,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23,831
|
|
|
$
|
74,169
|
|
|
4/2/2019
|
|
|
4/2/2020
|
|
$
|
2,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
486
|
|
|
$
|
1,514
|
|
|
4/4/2019
|
|
|
4/4/2020
|
|
$
|
98,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23,295
|
|
|
$
|
74,705
|
|
|
4/4/2019
|
|
|
4/4/2020
|
|
$
|
2,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
475
|
|
|
$
|
1,525
|
|
|
5/2/2019
|
|
|
5/2/2020
|
|
$
|
123,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
19,828
|
|
|
$
|
103,172
|
|
|
5/2/2019
|
|
|
5/2/2020
|
|
$
|
2,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
322
|
|
|
$
|
1,678
|
|
|
5/7/2019
|
|
|
5/7/2020
|
|
$
|
122,500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,074
|
|
|
$
|
104,426
|
|
|
5/7/2019
|
|
|
5/7/2020
|
|
$
|
2,500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
369
|
|
|
$
|
2,131
|
|
|
5/29/2019
|
|
|
5/29/2020
|
|
$
|
123,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,754
|
|
|
$
|
112,246
|
|
|
5/29/2019
|
|
|
5/29/2020
|
|
$
|
2,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
175
|
|
|
$
|
1,825
|
|
|
6/12/2019
|
|
|
6/12/2020
|
|
$
|
122,500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,025
|
|
|
$
|
116,475
|
|
|
6/12/2019
|
|
|
6/12/2020
|
|
$
|
2,500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
123
|
|
|
$
|
2,377
|
|
|
Total:
|
|
|
|
|
|
|
|
|
$
|
218,597
|
|
|
$
|
26,303
|
|
|
$
|
1,026,324
|
|
|
$
|
1,189,341
|
|
9.
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 June 30, 2019 and 2018, the derivative liability was $2,991,953 and $3,069,616,
respectively. The Company recorded $4,191,727 and $525,394 loss from changes in derivative liability during the year ended June
30, 2019 and 2018, respectively. The Binomial model with the following assumption inputs:
|
|
June 30, 2018
|
Annual Dividend Yield
|
|
|
—
|
|
Expected Life (Years)
|
|
|
0.15-1.00
|
|
Risk-Free Interest Rate
|
|
|
1.13%-2.06
|
%
|
Expected Volatility
|
|
|
94%-212
|
%
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
Annual Dividend Yield
|
|
|
—
|
|
Expected Life (Years)
|
|
|
0.50-1.00
|
|
Risk-Free Interest Rate
|
|
|
1.92-2.64
|
%
|
Expected Volatility
|
|
|
87-150
|
%
|
Fair value of the derivative is summarized
as below:
Beginning Balance, June 30, 2018
|
|
$
|
3,069,616
|
|
Additions
|
|
$
|
3,217,870
|
|
Mark to Market
|
|
$
|
4,040,238
|
|
Reclassification to APIC Due to Conversions
|
|
$
|
(7,335,771
|
)
|
Ending Balance, June 30, 2019
|
|
|
2,991,953
|
|
10.
Stock Warrants
In connection with the issuance of the
promissory notes in 2012, 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 Binomial 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 was 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 l, 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. These warrants were expired on July 1, 2016.
On May 17, 2017, the Company entered
a promissory note with an investor for a total amount of $1,375,000 (after $10,000 legal and due diligence fee) with an OID of
$125,000, the note will be fulfilled through a series of funding. In connection with the note, the investor will also receive warrants
and is calculated based on 15% of the maturity amount. The warrants have a life of
four years with an exercise price of $0.15 per share and have cashless exercise option. The fair value of the warrants at the grant
date was $40,400. As of June 30, 2019 and 2018, the fair value of the warrant liability was $5,555 and $40,400, respectively.
On September 7, 2018, the Company entered
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 June 30, 2019 and June 30, 2018, the fair value of the warrant
liability was $10,103 and $0, respectively.
As of June 30, 2019 and June 30, 2018,
the total fair value of the warrant liability was $24,658 and $40,400, respectively.
The Binomial model with the following
assumption inputs:
Warrants liability:
|
|
|
June 30, 2018
|
|
Annual dividend yield
|
|
|
—
|
|
Expected life (years)
|
|
|
0.5
|
|
Risk-free interest rate
|
|
|
2.06
|
%
|
Expected volatility
|
|
|
151
|
%
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in May 2017:
|
|
|
June 30, 2019
|
|
Annual dividend yield
|
|
|
—
|
|
Expected life (years)
|
|
|
5.0
|
|
Risk-free interest rate
|
|
|
1.76
|
%
|
Expected volatility
|
|
|
351
|
%
|
|
|
Number of Shares
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining contractual life
|
|
Outstanding at June 30, 2016
|
|
|
|
131,250
|
|
|
|
0.20
|
|
|
|
|
|
|
Expired
|
|
|
|
131,250
|
|
|
|
0.20
|
|
|
|
|
|
|
Granted
|
|
|
|
505,000
|
|
|
$
|
0.15
|
|
|
|
4
|
|
|
Outstanding at June 30, 2017
|
|
|
|
505,000
|
|
|
$
|
0.15
|
|
|
|
3.86
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
|
|
505,000
|
|
|
$
|
0.15
|
|
|
|
0.5
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
578,880
|
|
|
|
0.034
|
|
|
|
5
|
|
|
Outstanding at June 30, 2019
|
|
|
|
1,083,880
|
|
|
$
|
0.034
|
|
|
|
5
|
|
11.
Note Payable
Note payable due to bank
During October 2011, we entered into
a revolving demand note (line of credit) arrangement with HSBC Bank USA, with a revolving borrowing limit of $150,000. The line
of credit bears a variable interest rate of one quarter percent (0.25%) above the prime rate (3.25% as of September 30, 2013).
In the event the deposit account is not established or minimum balance maintained, HSBC can charge a higher rate of interest of
up to 4.0% above prime rate. As of June 30, 2019 and 2018, the loan principal balance was $25,982.
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 June 30, 2019 and 2018, 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 June 30, 2019 and 2018, this note had
a balance of $18,000 and $18,000, respectively.
As of June 30, 2019 and 2018, the Company
has an outstanding balance of notes payable due to related parties of 18,000 and $23,000, respectively.
12.
Stockholders’ Deficit
The Company is authorized to issue 1,990,000,000
shares of $.001 par value common stock and 10,000,000 shares of $.001 par value preferred stock.
During the year ended June 30, 2018,
the Company issued 1,171,429 shares of common stock for cash in total amount of $82,000.
During the year ended June 30, 2018,
the Company issued 4,736,842 shares of common stock for services in total amount of $180,000.
During the year ended June 30, 2018,
the Company issued 13,492,560 shares of common stock to settle the old debt in total amount of $306,810.
During the year ended June 30, 2019,
the Company issued 8,658,685 shares of common stock to settle the old debt in total amount of $665,918.
During the year ended June 30, 2019,
the Company issued 121,332,262 shares of common stock to convert the convertible notes in total amount of $2,783,237.
During the year ended June 30, 2019,
the Company issued 14,842,857 shares of common stock for cash in total amount of $390,000.
During the year ended June 30, 2019,
the Company issued 96,639,563 shares of common stock for services in total amount of $6,660,643.
During the year ended June 30, 2019,
the Company (buyer) signed a letter of intent (LOI) regarding a potential acquisition of all the outstanding capital stock, assets
and assumption of liabilities of a company (seller). The Company issued 10,000,000 shares of common stock as the stock compensations
upon the signing of the LOI in total amount of $1,175,000. The share is non-refundable and vested immediately, but was issued on
a restricted basis with a restrictive legend and will be subject to normal restrictions imposed by the financial industry and governmental
agencies.
During the year ended June 30, 2019,
the Company issued 200,000,000 shares of common stock as deposit for acquisition of BZRTH with a total value of $18,000,000. See
Note 4 for details.
During the year ended June 30, 2019,
the Company issued 2,000,000 shares of Series A preferred stock to multiple investors for EB-5 project to be issued in prior years.
As of June 30, 2019 and June 30, 2018,
the Company had 697,608,570 and 246,135,203 shares of its common stock issued and outstanding.
As of June 30, 2019 and June 30, 2018,
the Company had 2,000,000 and 0 shares of its Series A preferred stock issued and outstanding.
13.
Related Party Transactions
As of June 30, 2019 and 2018, the Company
had outstanding balance of $78,000 and $83,000 owed to various related parties, respectively. See note 11 and 15 for the details.
14.
Loans Payable
On October 1, 2017, SGMD entered a straight
promissory note with Greater Asia Technology Limited (Greater Asia) for borrowing $100,000 with maturity date on June 30, 2018;
the note bears an interest rate of 33.33%. As of June 30, 2019 and 2018, the note was in default and the outstanding balance under
this note was $63,924 and $63,924, 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 June 30, 2019 and 2018, the outstanding balance with Greater Asia
loans were $100,000 and $0, 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 June 30, 2019 and 2018, the Company
has an outstanding balance of $3,584 and $4,285.
On December 17, 2018, the Company entered
into a repayment agreement with an individual for $100,000 at no interest. As of June 30, 2019 and 2018, the Company has an outstanding
balance of $17,834 and $100,000, respectively.
On July 1, 2012, CarryOutSupplies entered
an equipment loan agreement with a bank with maturity on June 21, 2024. The monthly payment is $648. As of June 30, 2019 and 2018,
the outstanding balance under this loan were $29,243 and $0, respectively.
As of June 30, 2019 and 2018, the Company
had an outstanding loan balance of $214,585 and $329,029, respectively.
15.
Loans Payable – Related Parties
On June 26, 2017, SGMD entered a straight
promissory note with a company (whose major shareholder is the former director of the Company) for borrowing $180,820 with maturity
date on March 31, 2018; the note bears an interest rate of 12%, commencing on October 31, 2017, and on the last day of each moth
thereafter until the notes is paid in full, the Company shall make an interest payment. During the year ended June 30, 2019, all
the principles have been converted into the Company’s common stocks. As of June 30, 2019 and 2018, the outstanding balance
under this note was $0 and $180,820, respectively.
On July 7, 2016, SWC 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 June
30, 2019, and 2018, the balance of the loan were $30,000 and $30,000, respectively.
16.
Shares to Be Issued
During the year ended June 30, 2019,
the Company had entered into one private placement agreement and had potential shares to be issued in total amount of $100,000.
As of June 30, 2019 and 2018, the Company
had balance of $100,000 and $2,691,000 share to be issued.
17.
Commitments and Contingencies
On February 23, 2018 the Company entered
into lease agreement for a new office space as part of the plan to expand operation, the lease is set to commence 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. As of the date of this filing, this property became the headquarter of the company.
18.
Income Tax
The deferred tax asset as of June 30,
2019 and 2018 consisted of the following:
|
|
2019
|
|
2018
|
Net Operating Loss Carryforwards
|
|
$
|
11,909,744
|
|
|
$
|
11,849,081
|
|
Less Valuation Allowance
|
|
|
(11,909,744
|
)
|
|
|
(11,849,081
|
)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Management provided a deferred tax asset
valuation allowance equal to the potential benefit due to the Company’s loss. When the Company demonstrates the ability to
generate taxable income, management will re-evaluate the allowance.
As of June 30, 2019, the Company has
net operating loss carryforward of $44,110,162 which is available to offset future taxable income that expires by year 2035.
Reconciliation between the provision
for income taxes and the expected tax benefit using the federal statutory rate of 21% for 2019 and 34% for 2018 is as follows:
|
|
2019
|
|
2018
|
US federal statutory income tax rate
|
|
|
(21
|
)%
|
|
|
(34
|
)%
|
State tax – net of benefit
|
|
|
(7
|
)%
|
|
|
(7
|
)%
|
Non-deductible expenses, net of federal benefit
|
|
|
7
|
%
|
|
|
7
|
%
|
Increase in valuation allowance
|
|
|
21
|
%
|
|
|
34
|
%
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
19.
Subsequent Events
Convertible Notes
On July 3, 2019, the Company entered a convertible
promissory note with an accredited investor for a total amount of $125,000. The note is due 360 days and bear an interest rate
of 8%. The conversion price for the note is 40% of average three lowest closing bid for the 10 consecutive trading days prior to
the conversion date.
On July 30, 2019, the Company entered a convertible
promissory note with an accredited investor for a total amount of $162,000. 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.
Private Placement Memorandum
On July 25, 2019, the Company entered into
a private placement memorandum with an accredited investor. The Company issued 1,960,000 shares of the Company’s common stock
for total cash of $196,000.
Warrant Exercises
Subsequent to June 30, 2019, 1,766,544 shares
of the warrants were exercised in total of 28,381,818 shares of the Company’s common stocks.
In August 2019, the Company entered into
an agreement with an investor to issue an exchange note to cancel the outstanding warrants with an original value of approximately
$75,750.
Convertible note conversions
Subsequent to June 30, 2019, there were multiple
accredited investors converted approx. $547,000 of the convertible notes into 71,915,557 shares of the Company’s common stocks.
Form S-1 Registration
On June 26, 2019, the Company filed a Form
S-1 Registration Statement for the offer and resale of up to 138,461,538 shares of Sugarmade, Inc.’s Common
Stock, par value $0.001 per share, (the “Shares”) by K & J Funds, LLC (“K&J” or the “Investor”
or the “Selling Security Holder”) pursuant to an Investment Agreement dated April 16, 2019 (the “Investment Agreement”).
The received the Notice of Effective on July 18, 2019. On July 29, 2019, we sold and issued to K&J 11,348,591 shares of stock
for $100,000.
Investment
On August 1, 2019, the Company entered into
a loan agreement with Hempistry, Inc. (“Hempistry”), a Nevada corporation. Pursuant to the terms of the agreement,
the Company lent $196,000 to Hempistry. Hempistry promises to repay this principal amount to the Lender in the form of a minimum
of 13,800 pounds of dry hemp biomass or 12% stake of Hempistry’s hemp crop located at 2690 Nebo Rd. Madisonville, KY 42431,
during Hempistry’s 2019 crop harvest. Hempistry also agrees to issue and deliver a cashless Warrant registered in the name
of the Company exercisable for 100% of the total loan value at a $.50 per share price, leaving the total number of shares to be
distributed pursuant to this cashless warrant at 392,000 shares.
Acquisition
As of the date of this report, the
Company is working on the final terms to acquire 100% equity ownership of BZRTH, Inc. (“BZRTH”), a Nevada corporation.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls
and Procedures
Under the supervision and with the participation
of our senior management, including our Chief Executive Officer, who is also our Chief Financial Officer, we conducted an evaluation
of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2019, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation,
our Chief Executive Officer concluded as of June 30, 2019 that our disclosure controls and procedures were not effective such that
the information relating to us required to be disclosed in our Securities and Exchange Commission (“SEC”) reports: (i)
is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms; and (ii) is accumulated
and communicated to our management, including our chief executive officer to allow timely decisions regarding required disclosure.
(b) Changes in internal controls
over financial reporting
During the fiscal year ended June 30,
2019, there were no changes to the Company’s internal controls over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) of the Exchange Act) which have materially affected, or are reasonably likely to materially affect, the Company’s
internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial
Reporting
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule
13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision
of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management
and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with accounting principles generally accepted in the United States of America and
includes those policies and procedures that
●
|
|
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
|
●
|
|
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
|
●
|
|
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
|
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving
their control objectives. Because of the inherent limitations of internal control, there is a risk that material misstatements
may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations
are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce,
though not eliminate, this risk.
Our Chief Executive Officer conducted
an evaluation of the effectiveness of our internal control over financial reporting as of June 30, 2019, based on the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework
– 2013 (COSO 2013 Framework) and SEC guidance on conducting such assessments. Based upon such evaluation, our management
concluded that we did not maintain effective internal control over financial reporting as of June 30, 2019, based on the COSO framework
criteria, as more fully described below. This was due to deficiencies that existed in the design or operation of our internal controls
over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses.
The matters involving internal controls
and procedures that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight
Board were the relative inexperience of our management and supporting personnel with the compliance and control requirements of
U.S. GAAP and SEC reporting compliance.
We have taken, and are continuing to
take, certain actions to remediate the material weakness related to our lack of U.S. GAAP experience. We plan to hire additional
credentialed professional staff and consulting professionals with greater knowledge and experience of U.S. GAAP and related regulatory
requirements to oversee our financial reporting process in order to ensure our compliance with U.S. GAAP and other relevant securities
laws. In addition, we plan to provide additional training to our accounting personnel on U.S. GAAP, and other regulatory requirements
regarding the preparation of financial statements.
Notwithstanding the above identified
material weakness, the Company’s management believes that its condensed consolidated financial statements included in this report
fairly present in all material respects the Company’s financial condition, results of operations and cash flows for the periods
presented and that this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report.
Changes in Internal Controls over Financial Reporting
There have been no changes in our internal
control over financial reporting that occurred during the year ended June 30, 2019, that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
This annual report does not include
an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary
rules of the SEC that permit the Company to provide only management’s report in this annual report.
Item 9B. Other Information
None
PART III
Item 10. Directors, Executive Officers and Corporate Governance
As of the date of this filing, the following individuals
are current officers and directors. Certain information about them, is set forth below:
Name
|
|
Age
|
|
Position
|
Jimmy Chan
|
|
|
40
|
|
|
CEO & Chairman
|
Christopher H. Dieterich
|
|
|
71
|
|
|
Independent Director
|
Khoi D. Dang
|
|
|
45
|
|
|
|
|
Independent Director
|
Biographies
Jimmy Chan, 40, director (Chairman),
has been, since 2008, the Chief Executive officer of CarryOutSupplies.com, located in the City of Industry. From 2005 to 2007,
he served as the Vice-President, for Emergence Capital, operating out of Garden Grove, California, and providing mortgage services
to the general public. From 2003 to 2005, he was the Vice-President in charge of operations for Azusa Mobile, a T-Mobile authorized
dealer, and prior to that he was the president of Cyber Gift, importing toys for distribution as a wholesaler. He is not an officer
nor director of any other public companies.
Christopher H. Dieterich, 71, Independent
Director. Mr. Dieterich is qualified to serve as a Director by way his extensive legal and business experience. He graduated from
Virginia Polytechnic Institute in 1969 (BS Engineering), University of California at Berkeley 1970 (MS Engineering) on full scholarship
by Ford Foundation; and the University of California at Los Angeles in 1979 (JD Law/MS Economics), pursuant to grant from Olin
Foundation. He operates a law firm that specializes in SEC filings and venture capital arrangements, and currently represents 15
reporting public entities. The firm has participated in capital raises for over 50 clients, and hundreds of millions of dollars
for those clients. The Board believes Mr. Dieterich will add significant value to not only corporate governance, but also to operational
and capital acquisition efficiency.
Khoi D. Dang, 45, Independent Director.
Mr. Dang is qualified to serve as a Director by way his extensive legal and business experience. Mr. Dang received his Bachelor
of Arts Degree from the University of California, Los Angeles, a Masters of Pacific International Affairs (now Global Policy and
Strategy) from the University of California, San Diego and a Juris Doctorate Degree from Santa Clara University Law School. Mr.
Dang practices in the areas of corporate law, corporate finance, mergers and acquisitions, commercial transactions and banking.
He has served as outside general counsel for a number of public and private companies and has a particular expertise in representing
regulated entities, including financial institutions and their holding companies.
The Company does not carry key man life
insurance policies on any of the above principals or key personnel.
There has never been a petition under
the Bankruptcy Act, or any State insolvency law filed by or against the Company or its principals or key personnel. Additionally,
there has never been a receiver, fiscal agent, or similar officer appointed by a court for the business or property of any such
persons, or any partnership in which any of such persons was a general partner at or within the past five years, or any corporation
or business association of which any such person was an executive officer at or within the past five years.
Family Relationships
There are no family relationships between
any director or executive officer.
Corporate Governance
During fiscal year 2018 Company’s board
of directors implemented a program to rectify the material weaknesses. During the fiscal year, additional accounting personnel
were engaged by the company in order to improve accounting and reporting functions. Additionally, several programs were implemented
internally to streamline our inventory controls, revenue reporting, and overall acting and reporting infrastructure. During the
fiscal year, the Board of Directors also engaged several outside consultants to assist in our accounting and finance operations.
These personnel worked with our internal staff to identify material weaknesses into implement programs to seek resolutions. These
programs have continued into fiscal year 2019.
Leadership Structure
Jimmy Chan, who is also a director and
serves as chairman, CEO, CFO and corporate Secretary. Christopher H. Dieterich became an independent director on April 22, 2019.
Board Committees
We do not have a standing audit committee,
an audit committee financial expert, or any committee or person performing a similar function. We do not have any board committees
including a nominating, compensation, or executive committee. Presently, we have no independent directors.
Code of Ethics
The Company has not formally adopted
a written code of business conduct and ethics that governs the Company’s employees, officers and Directors as the Company
is not required to do so.
Director Independence
We currently have one independent director,
Christopher H. Dieterich. We apply the definition of “independent director” provided under the Listing Rules of The
NASDAQ Stock Market LLC (“NASDAQ”). Under NASDAQ rules, the Board has considered all relevant facts and circumstances
regarding our directors and has affirmatively determined that Christopher H. Dieterich is independent of us under NASDAQ rules.
Section 16(a) Beneficial Ownership
Reporting Compliance
Section 16(a) of the Securities Exchange
Act of 1934 requires our Company’s directors and officers, and persons who own more than ten-percent (10%) of our Company’s
shares of Common Stock, to file with the SEC reports of ownership on Form 3 and reports of changes in ownership on Forms 4 and
5. Such officers, directors and ten-percent shareholders are also required to furnish our Company with copies of all Section 16(a)
reports they file. As of June 14, 2019, we believed such reports were timely filed.
Item 11. Executive Compensation
As of start of January 1, 2019, Mr.
Jimmy Chan will receive annual salary of $96,000 in addition to 5,000,000 shares of Common Stock earned annually. Upon closing
of each acquisition, Mr. Chan will get 10% of the purchase price as special bonus.
As of
the date of this filing, Mr. Christopher Dieterich’s and Mr. Khoi D. Dang’s compensation has not been determined.
Employment Agreements
We do not have contracts in writing
with our officers. As of the date of this filing, Mr. Jimmy Chan served as CEO of the Company and will be compensated $96,000 in
cash and 5,000,000 common shares for each calendar year end. In addition, upon closing of each acquisition, Mr. Chan will get 10%
of the purchase price as special bonus.
As of the date of this filing, these
shares have not been issued. The company is in the process of structuring future compensation plan for all directors, officers
and employees.
Grants of Stock and Other Equity
Awards
On March 30, 2017, the company filed
with the SEC a Form S-8 Plan for 20,000,000 shares issuable to employees and consultants. From March 30, 2017 to June 20, 2019,
approximately 17,403,554 shares were issued under the plan. As of the date of this filing, there are approximately 2,596,446 shares
available under the plan.
Option Exercises
During the fiscal years ending June
30, 2019 and 2018 and the period ended October 14, 2019, there were no option exercises by our named executive officers.
Long-Term Incentive Plans
We currently do not have any Long-Term
Incentive Plans.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
As of the date hereof, here is information
with respect to the securities holdings of (i) our officers and directors, and (ii) all persons (currently none) which, pursuant
to filings with the SEC and our stock transfer records, we have reason to believe may be deemed the beneficial owner of more than
five percent (5%) of the shares of Common Stock.
The securities “beneficially owned”
by an individual are determined in accordance with the definition of “beneficial ownership” set forth in the regulations
promulgated under the Exchange Act and, accordingly, may include securities owned by or for, among others, the spouse and/or minor
children of an individual and any other relative who resides in the same home as such individual, as well as other securities as
to which the individual has or shares voting or investment power or which each person has the right to acquire within 60 days through
the exercise of options or otherwise. Beneficial ownership may be disclaimed as to certain of the securities. The following table
is based on the number of shares outstanding totaling 812,686,536 as of October 9, 2019.
Officers and Directors
|
|
Amount and Nature of Beneficial Ownership
|
|
Percentage of Class Beneficially Owned
|
Jimmy Chan, CEO and Director
|
|
|
19,063,502
|
|
|
|
2.346
|
%
|
Chenlong Tan, CTO
|
|
|
70,274,568
|
|
|
|
8.647
|
%
|
|
|
|
|
|
|
|
|
|
All Directors and Executive Officers as a Group
|
|
|
89,338,070
|
|
|
|
10.993
|
%
|
|
|
|
|
|
|
|
|
|
Greater than 5% Shareholders
|
|
|
|
|
|
|
|
|
Allan Huang
|
|
|
70,274,568
|
|
|
|
8.647
|
%
|
Amy Thai / LMK Capital
|
|
|
18,644,733
|
|
|
|
2.294
|
%
|
As of the date of this filing, Jimmy
Chan’s holdings represented 2.346% of the company. He is currently employed by LMK Capital LLC as management consultant and is
therefore a beneficial owner of shares owned by LMK Capital LLC. As a result, Mr. Chan beneficially owned 4.64% of the Company’s
issued and outstanding shares of Common Stock.
Chen Long Tan’s holdings represent
8.647% of the Company’s issued and outstanding shares of Common Stock.
Amy Thai and LMK Capital LLC.’s holdings
are 7,378,066 and 11,266,667 respectively; as of the date of this filing the aggregated amount represents 2.294% of the Company’s
issued and outstanding shares of Common Stock.
Allan Huang owns 70,274,568 shares,
representing 8.647% of the Company’s issued and outstanding shares of Common Stock.
Subsequent to June 30, 2019, Jimmy Chan
is owed 5,000,000 restricted shares of Shares of Common Stock, earned as services shares.
Changes in Control
As of
the date of this filing, we are not aware of any arrangement that may result in a change in control of our company.
Item 13 Certain Relationships and Related Party Transactions
and Director Independence
Transactions with Related Persons
Our Company reviews transactions between
our Company and persons or entities considered to be related parties (collectively “related parties”). Our Company
considers entities to be related parties where an executive officer, director or a 5% or more beneficial owner of our shares of
Common Stock (or an immediate family member of these persons) has a direct or indirect material interest. Transactions of this
nature require the approval of our Board.
Other Transactions with Related
Persons, Promoters and Certain Control Persons
The following includes a summary of
any transaction occurring since July 1, 2016, or any proposed transaction, in which we were or are to be a participant and the
amount involved exceeded or exceeds the lesser of $120,000 or one percent of our average total assets at year-end for the two most
recently completed fiscal years, and in which any related person had or will have a direct or indirect material interest (other
than compensation described under “Executive Compensation” above). We believe the terms obtained or consideration that
we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the
amounts that would be paid or received, as applicable, in arm’s-length transactions.
From time to time, SWC Group would receive
short-term loans from LMK Capital, LLC (“LMK’’) for its working capital needs. As of June 30, 2018, the Company’s outstanding
balance to LMK is zero.
On January 23, 2013, the Company entered into
a promissory note with its former employee 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 June 30, 2019 and June 30, 2018, this note had a
balance of $18,000.
On January 14, 2015, the Company entered into
a promissory note with Richard Ko (an employee of the Company, who owns less than 5% of the Company’s stock). The principle
amount was $30,000 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 June 30, 2019 and June 30, 2018, this note had a balance of $0 and $5,000, respectively.
As of June 30, 2019 and June 30, 2018, the
Company had an outstanding balance of notes payable due to related parties of $18,000 and $23,000, respectively.
On July 7, 2016, SWC received a loan in total
amount of $30,000 from an employee. The amount of the loan bears no interest and due on demand. As of June 30, 2019 and June 30,
2018, the balance of the loan due to related party was $30,000 and $30,000, respectively.
Item 14. Principal Accountant Fees and Services
Principal Accountant Fees and Services
The aggregate fees for
professional services rendered to us by L&L CPAS, PA, our independent registered public accounting firm, for said fiscal years
then ended June 30, 2019 and 2018, were as follows:
|
|
Year Ended June 30,
|
|
|
2019
|
|
2018
|
Audit fees (1)
|
|
$
|
56,658
|
|
|
$
|
48,769
|
|
Audit-Related fees (2)
|
|
$
|
10,000
|
|
|
|
—
|
|
Tax fees
|
|
|
—
|
|
|
|
—
|
|
Other fees
|
|
|
—
|
|
|
|
—
|
|
Total fees
|
|
$
|
66,658
|
|
|
$
|
48,769
|
|
_____________________
(1)
|
Includes fees for (i) audits of our consolidated financial statements for the fiscal years ended June 30, 2019 and 2018; and (ii) fees related to services
normally provided by the accountant in connection with statutory and regulatory filings or engagements.
|
(2)
|
Includes fees for review of our registration statements filed with U.S. Securities and Exchange Commission.
|
Audit and Non-Audit Service Preapproval
Policy
In accordance with the
requirements of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder, our board of directors has
adopted an informal approval policy that it believes will result in an effective and efficient procedure to preapprove services
performed by the independent registered public accounting firm.
Audit Services.
Audit services include the annual financial statement audit (including quarterly reviews) and other procedures required to be performed
by the independent registered public accounting firm to be able to form an opinion on our consolidated financial statements. The
board of directors preapproves specified annual audit services engagement terms and fees and other specified audit fees. All other
audit services must be specifically preapproved by the board of directors. The board of directors monitors the audit services engagement
and may approve, if necessary, any changes in terms, conditions, and fees resulting from changes in audit scope or other items.
Audit-Related Services.
Audit-related services are assurance and related services that are reasonably related to the performance of the audit or review
of our consolidated financial statements, which historically have been provided to us by the independent registered public accounting
firm and are consistent with the SEC’s rules on auditor independence. The board of directors has approved specified audit-related
services within preapproved fee levels. All other audit-related services must be preapproved by the board of directors.
Tax Services. The
board of directors preapproves specified tax services that the it believes would not impair the independence of the independent
registered public accounting firm and that are consistent with Securities and Exchange Commission’s rules and guidance. The
board of directors must specifically approve all other tax services.
All Other Services.
Other services are services provided by the independent registered public accounting firm that do not fall within the established
audit, audit-related, and tax services categories. The board of directors preapproves specified other services that do not fall
within any of the specified prohibited categories of services.
Procedures. All
proposals for services to be provided by the independent registered public accounting firm, which must include a detailed description
of the services to be rendered and the amount of corresponding fees, are submitted to the chairman of the board of directors and
the chief financial officer. The chief financial officer authorizes services that have been preapproved by the board of directors.
The chief financial officer submits requests or applications to provide services that have not been preapproved by the board of
directors, which must include an affirmation by the chief financial officer and the independent registered public accounting firm
that the request or application is consistent with the Securities and Exchange Commission’s rules on auditor independence,
to the board of directors (or its chair or any of its other members pursuant to delegated authority) for approval.
PART IV
Item 15. Exhibits, Financial Statement Schedules
_____________________________________________________
(1) Filed
as an exhibit to this Report.
1. Financial Statement. See Consolidated Financial Statement
in part II, Item 7 of this Annual report on form 10-K.
In accordance with Section 13 or 15(d)
of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Sugarmade, Inc., a Delaware corporation
Date: October 15, 2019
By /s/ Jimmy Chan
Jimmy Chan
CEO and Director
POWER
OF ATTORNEY
We, the undersigned
directors and/or officers of Sugarmade, Inc. hereby severally constitute and appoint Jimmy Chan, acting individually, his true
and lawful attorney-in-fact and agent, with full power of substitution and re-substitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this registration statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
In accordance with
the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities
and on the dates stated.
Signature
/s/Jimmy Chan
Jimmy Chan
CEO and Chairman
Dated: October 15, 2019
|