SGMD Sugarmade Inc (PK)

As of February 7, 2020, in the ordinary course of business, Sugarmade, Inc. (the “Company”) acquired a 40% interest in Indigo Dye Group, Inc (“Indigo’). The Company had entered into a share purchase agreement with Indigo (located in Sacramento, California). Indigo carries on business as a cannabis delivery business under the name BudCars and the Company paid $700,000 for inventory, equipment, and marketing expenses. The Company valued the transaction at $1,750,000 with each one percentage of BudCar allocated to be worth $17,500. Subject to the terms and conditions of the share purchase agreement (option provisions), the Company may acquire an additional 30% interest in Indigo. Upon exercise of the option, the Company will obtain control over Indigo.

Since late May 2020, the Company has been actively involved in development of Indigo’s operations with power to direct the activities and significantly impact Indigo’s economic performance. The Company also has obligation to absorb losses and right to receive benefits from Indigo. As such, in accordance with ASC 810-10-25-38A through 25-38J, Indigo is considered a Variable Interest Entity (“VIE”) of the Company. The Company will consolidate Indigo’s financial statements as an VIE starting from the year ended June 30, 2020.

Presented below are condensed financial position data and operating results of the Indigo’s business segments for the four months ended June 30, 2020. This information was also reported on Form 10-K filed with the Commission on October 21, 2020.

Our revenue growth relating to our indigo investment may not be sustainable, and our percentage growth rates may decrease. Our revenue and operating profit growth depend on the continued growth of demand for the cannabis products and services offered by BudCars and our other business operations. In addition, BudCars and our business are affected by general economic and business conditions. Our sales and operating results fluctuate for many reasons, including BudCars and our ability to retain and increase sales to existing customers, attract new customers, and satisfy our customers’ demands, our ability to offer products and services on favorable terms, manage inventory, and fulfill customer orders, the introduction of competitive services, websites, products, and price decreases and risks described elsewhere in our filing of reports. The business relating to our indigo investment is highly competitive. There can be no assurance we will be able to maintain gross margin levels as the industry evolves and as competition potentially increases.

The business relating to our indigo investment is new and is only in early stages. 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 further develop or that demand will be sustainable. If the market fails to develop as expected, develops more slowly than expected or becomes saturated with competitors, our business, financial condition and operating results, relative to our Indigo investment, would be materially adversely affected.

Our CarryOutSupplies operation has recently expanded its product offerings to include consumable sanitary supplies, such as non-medical gloves, non-medical facemasks, face shields and other non-medical protective equipment. We believe our significant experience in sourcing products from Asian factories and importing goods from Asia makes us well-equipped to operate within the marketplace for non-medical, consumable, protective equipment. Recent worldwide pandemic issues cause us to believe this market sector will continue to grow for the foreseeable future.

We reported revenues from relating consumable sanitary supplies within our income statement for the fiscal year ending June 30, 2020. As is stated on our audited financials and reported on Form 10-K filed with the Commission on October 16, 2020, the Company’s operations are conducted in three industry segments – (1) paper and paper-based products such as paper cups, cup lids, food containers, etc., which accounts approx. 42% of the Company’s revenues; (2) Non-medical supplies such as non-medical fascial mask, which accounts approx. 25% of the Company’s total revenues; (3) Cannabis products delivery service and sales, which accounts approx. 33% of the Company’s total revenues.

Relative to non-medical supplies, we have numerous purchase orders pending and we have identified multiple suppliers and brokers of non-medical protective equipment, but thus far have had only limited success in acquiring the needed products to fill our orders. In several instances, we have placed orders with factories and brokers only to have the products we expected to be delivered to us diverted away from our Company and apparently to other companies that also have pending orders. We expect the supply chain for non-medical protective equipment to remain tight for the foreseeable future. At the same time, our staff continues to search for reliable factories and/or brokers from which we will be able to source products to fulfill customer purchase orders successfully.

There can be no assurance our Company will secure a supplier, or if a selected supplier ultimately delivers the equipment, we have ordered. Due to these supply chain issues, there can be no assurance we will deliver upon any of the pending purchase orders.

Our current customers and prospective customers who have issued purchase orders to our Company are under no legal obligation to consummate a purchase from us. Those companies can acquire the desired goods from other sources. Pending purchase orders are cancellable by the issuing party at any time for any or no reason. Thus, there can be no assurance that even if we can fill the orders, the ordering entity will ultimately purchase the equipment outlined initially in a particular pending purchase order. Upon delivery of equipment from our suppliers to our warehouses, we will notify companies that have issued us purchase orders to confirm the desire to accept the equipment and make payment to us. Upon acceptance and shipment to the ordering entity, we will then recognize the revenue for the shipped equipment and subsequently subtract that amount from the pending purchase orders.