* Shares issuable upon conversion of convertible debts and
exercising of warrants were excluded in calculating diluted
Notes to Unaudited Condensed Consolidated
Financial Statements
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,
March 31, 2018, we were involved in several businesses including, 1) the supply of products to the quick service restaurant sub-sector
of the restaurant industry, 2) as a distributor of paper products derived from non-wood sources and, 3) as a marketer of culinary
seasoning products Seasoning Stix and Sriracha Seasoning Stix.
As of the date of this filing, we
are involved in several businesses including:
1) Supplying the hydroponic
and indoor/outdoor cultivation agricultural market sectors, including the cannabis cultivation, processing and distribution sectors.
While we supply products to these industries, none of our operations involve the cultivation, processing, distribution or the engagement
in any business operations regarding the cultivation, processing or distribution of any cannabis product or any product containing
cannabis. 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,
3) As a marketer and distributor
of culinary seasoning products Seasoning Stix and Sriracha Seasoning Stix.
During
the first calendar quarter of 2018, our management team and our board of directors determined the business operation of acting
as a distributor of paper products derived from non-wood sources was no longer strategic to the Company and thus, this business
operation was discontinued.
Our board
of directors believes the Company has a significant market opportunity to act as a supplier to the legal cannabis cultivation,
processing and distribution market sectors. We approach these markets as a supplier of products to legal market participants and
do not engage in the business of cultivating, processing or distributing cannabis or any products that contain cannabis. While
our primary focus has been on companies engaged in such business operations on the west coast of the United States, our business
has significantly expanded as legal medical and recreational cannabis business activities have proliferated into many other states.
While our business is rapidly expanding across most of the United States, California remains an important marketplace due both
the sheer size of the State’s economy and due to the rapid embrace of legalization. We also believe the Company has strong
revenue expansion opportunities within the retail hydroponic agricultural sector as these businesses are complementary to our current
business. We are currently in process of analyzing several acquisitions for expansion in this area.
During
2017, Sugarmade announced the signing of an exclusive distribution agreement for California, Oregon and Washington with privately
held Plantation Corp. for its breakthrough BudLife preservation technology based on integration of specialized gases and natural
agents that dramatically extends the useful life of medical marijuana up to six (6) months by actively monitoring the internal
containers environment and automatically adjusting its atmosphere as needed. Sugarmade has conducted initial product prototype
testing of the BudLife product, realizing positive results. Sugamade plans to move forward as Plantation’s distribution partner
upon availability of the BudLife product line.
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. Carryoutsupplies
management estimates it holds and approximately 25% to 40% market share of generic and printed products within the take out frozen
yogurt and ice cream industries.
As of the end of the reporting period,
March 31, 2018, we were also a distributor of paper made from 100% reclaimed sugarcane fiber, enhanced with bamboo. Sugarcane fiber,
called bagasse, is a discarded byproduct of sugarcane production. As of the date of this filing, we have discontinued this business
operation, as our board of directors determined superior revenue growth opportunities existed elsewhere within the marketplace.
Sugarmade is also a distributor
of culinary seasoning products Sriracha Stix and Seasoning Stix. During September of 2016, the Company completed negotiations for
and signed an agreement with HUY FONG FOODS, INC. (“HFFI”), the maker of Sriracha Hot Chili Sauce, under which the
Company became a party to a license with Huy Fong Foods, Inc. gaining permission from Huy Fong Foods, Inc. to use the licensed
marks for the limited products and purposes permitted by the license. Based on this agreement and a separate marketing and sales
agreement signed with Seasoning Stixs International, LLC, the Company markets a culinary seasoning product named Sriracha Seasoning
Stixs. Sriracha Seasoning Stixs are encapsulated Huy Fong Sriracha Sauce and other seasonings in the form of a stick, which are
inserted into meat, fish and poultry prior to cooking. All trademarks, service marks and intellectual property remain the property
of the respective owners.
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 retail sector via
direct acquisitions of participants in that market sector.
2.
|
Restatement
of Financial Statements
|
On August 2,
2018, the Company mistakenly filed a wrong version of Form 10-Q for the period ended March 31, 2018, the Consolidated Statement
of Operations for the three and nine months ended March 31, 2018 and Statement of Cash Flows for the nine-month period ending on
March 31, 2018 was misstated. Below is a summary of the adjustments/restatement of the mistakenly filed 10-Q.
|
|
For the Three Months Ended March 31, 2018
|
|
For the Nine Months Ended March 31, 2018
|
|
|
(Original)
|
|
(Adjustment)
|
|
(Restated)
|
|
(Original)
|
|
(Adjustment)
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net
|
|
$
|
2,965,404
|
|
|
$
|
(2,115,968
|
)
|
|
$
|
849,436
|
|
|
$
|
5,081,372
|
|
|
$
|
(2,115,968
|
)
|
|
$
|
2,965,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold:
|
|
|
2,107,834
|
|
|
|
(1,512,946
|
)
|
|
|
594,888
|
|
|
|
3,618,033
|
|
|
|
(1,510,199
|
)
|
|
|
2,107,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of goods sold
|
|
|
2,107,834
|
|
|
|
(1,512,946
|
)
|
|
|
594,888
|
|
|
|
3,618,033
|
|
|
|
(1,510,199
|
)
|
|
|
2,107,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
857,570
|
|
|
|
(603,021
|
)
|
|
|
254,549
|
|
|
|
1,463,339
|
|
|
|
(605,769
|
)
|
|
|
857,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
2,849,789
|
|
|
|
(2,052,593
|
)
|
|
|
797,196
|
|
|
|
4,901,953
|
|
|
|
(2,052,164
|
)
|
|
|
2,849,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,849,789
|
|
|
|
(2,052,593
|
)
|
|
|
797,196
|
|
|
|
4,901,953
|
|
|
|
(2,052,164
|
)
|
|
|
2,849,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,992,220
|
)
|
|
|
1,449,573
|
|
|
|
(542,647
|
)
|
|
|
(3,438,615
|
)
|
|
|
1,446,396
|
|
|
|
(1,992,219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
14,206
|
|
|
|
(14,206
|
)
|
|
|
—
|
|
|
|
29,281
|
|
|
|
(15,075
|
)
|
|
|
14,206
|
|
Interest expense
|
|
|
(303,484
|
)
|
|
|
206,377
|
|
|
|
(97,107
|
)
|
|
|
(509,813
|
)
|
|
|
206,329
|
|
|
|
(303,484
|
)
|
Change in fair value of derivative liabilities
|
|
|
(1,384,423
|
)
|
|
|
5,064,955
|
|
|
|
3,680,532
|
|
|
|
(6,449,378
|
)
|
|
|
5,064,955
|
|
|
|
(1,384,423
|
)
|
Loss on conversion
|
|
|
—
|
|
|
|
(250,640
|
)
|
|
|
(250,640
|
)
|
|
|
—
|
|
|
|
(250,640
|
)
|
|
|
(250,640
|
)
|
Other expense
|
|
|
(612,894
|
)
|
|
|
611,629
|
|
|
|
(1,265
|
)
|
|
|
(979,799
|
)
|
|
|
617,545
|
|
|
|
(362,254
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating income (expense)
|
|
|
(2,286,594
|
)
|
|
|
5,618,114
|
|
|
|
3,331,520
|
|
|
|
(7,909,709
|
)
|
|
|
5,623,114
|
|
|
|
(2,286,595
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(4,278,814
|
)
|
|
|
7,067,686
|
|
|
|
2,788,872
|
|
|
|
(11,348,323
|
)
|
|
|
7,069,509
|
|
|
|
(4,278,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
|
(0.02
|
)
|
|
|
0.03
|
|
|
|
0.01
|
|
|
|
(0.05
|
)
|
|
|
0.03
|
|
|
|
(0.02
|
)
|
Diluted net income (loss) per share
|
|
|
(0.02
|
)
|
|
|
0.03
|
|
|
|
0.01
|
|
|
|
(0.05
|
)
|
|
|
0.03
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
247,395,774
|
|
|
|
—
|
|
|
|
247,395,774
|
|
|
|
237,925,753
|
|
|
|
—
|
|
|
|
237,925,753
|
|
Diluted weighted average common shares outstanding *
|
|
|
247,395,774
|
|
|
|
—
|
|
|
|
247,395,774
|
|
|
|
237,925,753
|
|
|
|
—
|
|
|
|
237,925,753
|
|
|
|
For the Three Months Ended March 31, 2018
|
|
|
(Original)
|
|
(Adjustment)
|
|
(Restated)
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(11,348,323
|
)
|
|
|
7,069,509
|
|
|
|
(4,278,814
|
)
|
Adjustments to reconcile net loss to cash flows from operating activities:
|
|
|
125,642
|
|
|
|
—
|
|
|
|
125,642
|
|
Initial valuation of debt discount
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on settlement
|
|
|
—
|
|
|
|
250,460
|
|
|
|
250,460
|
|
Amortization of debt discount
|
|
|
314,677
|
|
|
|
49,986
|
|
|
|
364,663
|
|
Stock based compensation
|
|
|
926,754
|
|
|
|
(137,525
|
)
|
|
|
789,229
|
|
Change in fair value of derivative liability
|
|
|
9,578,061
|
|
|
|
(8,193,638
|
)
|
|
|
1,384,423
|
|
Depreciation and amortization
|
|
|
—
|
|
|
|
85,807
|
|
|
|
85,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(239,302
|
)
|
|
|
—
|
|
|
|
(239,302
|
)
|
Inventory
|
|
|
100,447
|
|
|
|
—
|
|
|
|
100,447
|
|
Other assets
|
|
|
(374,664
|
)
|
|
|
—
|
|
|
|
(374,664
|
)
|
Bank overdraft
|
|
|
13,260
|
|
|
|
—
|
|
|
|
13,260
|
|
Accounts payable and accrued liabilities
|
|
|
(194,809
|
)
|
|
|
—
|
|
|
|
(194,809
|
)
|
Customer deposits
|
|
|
66,713
|
|
|
|
—
|
|
|
|
66,713
|
|
Unearned revenue
|
|
|
(11,970
|
)
|
|
|
—
|
|
|
|
(11,970
|
)
|
Accrued interest and Other payables
|
|
|
3,317
|
|
|
|
50,000
|
|
|
|
53,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
954,390
|
|
|
|
(2,819,987
|
)
|
|
|
(1,865,597
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of intangible assets
|
|
|
(13,999
|
)
|
|
|
—
|
|
|
|
(13,999
|
)
|
Acquisition of property and equipment
|
|
|
(133,132
|
)
|
|
|
—
|
|
|
|
(133,132
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(147,131
|
)
|
|
|
—
|
|
|
|
(147,131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from shares to be issued
|
|
|
361,478
|
|
|
|
961,207
|
|
|
|
1,322,685
|
|
Proceeds from convertible notes
|
|
|
702,653
|
|
|
|
(50,000
|
)
|
|
|
652,653
|
|
Repayment of notes payable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Payment to Note payable-related parties
|
|
|
(22,666
|
)
|
|
|
—
|
|
|
|
(22,666
|
)
|
Proceeds from loans
|
|
|
30,342
|
|
|
|
—
|
|
|
|
30,342
|
|
Repayment of loan payable-related parties
|
|
|
(158,617
|
)
|
|
|
—
|
|
|
|
(158,617
|
)
|
Repayment of loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Proceeds from advance share issuance
|
|
|
95,094
|
|
|
|
—
|
|
|
|
95,094
|
|
Loan receivable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
1,008,284
|
|
|
|
911,207
|
|
|
|
1,919,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(93,237
|
)
|
|
|
—
|
|
|
|
(93,237
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, beginning of period
|
|
|
101,880
|
|
|
|
—
|
|
|
|
101,880
|
|
Cash, end of period
|
|
|
8,643
|
|
|
|
—
|
|
|
|
8,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Supplemental disclosure of non-cash financing activities Debts settled through shares issuance
|
|
|
993,250
|
|
|
|
—
|
|
|
|
993,250
|
|
|
3.
|
Summary of Significant Accounting
|
Policies Basis of presentation
The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America and the rules and regulations of the United States Securities and Exchange Commission for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and
footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. It is management’s
opinion however, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary
for a fair financial statement presentation.
These interim condensed consolidated
financial statements should be read in conjunction with our Company’s Annual Report on Form 10-K for the year ended June
30, 2017, which contains our audited consolidated financial statements and notes thereto, together with the Management’s
Discussion and Analysis of Financial Condition and Results of Operation, for the period ended June 30, 2017. The interim results
for the period ended March 31, 2018 are not necessarily indicative of the results for the full fiscal year.
Principles of consolidation
The condensed consolidated unaudited
financial statements include the accounts of our Company and its wholly-owned subsidiaries, Sugarmade-CA and SWC. All significant
intercompany transactions and balances have been eliminated in consolidation.
Going concern
The Company sustained continued losses
from operations during the nine months ended March 31, 2018 and for the fiscal year ended June 30, 2017. The Company’s continuation
as a going concern is dependent on its ability to generate sufficient cash flows from operations to meet its obligations, in which
it has not been successful, and/or obtaining additional financing from its shareholders or other sources, as may be required.
Our condensed consolidated financial
statements have been prepared assuming that we will continue as a going concern. Such assumption contemplates the realization of
assets and satisfaction of liabilities in the normal course of business. These condensed consolidated financial statements do not
include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts
and classifications of liabilities that may result should the Company be unable to continue as a going concern.
Management is endeavoring to increase
revenue-generating operations. While priority is on generating cash from operations through the sale of the Company’s products,
management is also seeking to raise additional working capital through various financing sources, including the sale of the Company’s
equity and/or debt securities, which may not be available on commercially reasonable terms to our Company, or which may not be
available at all. If such financing is not available on satisfactory terms, we may be unable to continue our business as desired
and our operating results will be adversely affected. In addition, any financing arrangement may have potentially adverse effects
on us and/or our stockholders. Debt financing (if available and undertaken) will increase expenses, must be repaid regardless of
operating results and may involve restrictions limiting our operating flexibility. If we issue equity securities to raise additional
funds, the percentage ownership of our existing stockholders will be reduced and the new equity securities may have rights, preferences
or privileges senior to those of the current holders of our common stock.
Use of estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America requires our management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ significantly from those estimates.
Revenue recognition
We recognize revenue in accordance with
Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) No. 605,
Revenue Recognition
.
Revenue is recognized when an arrangement and a determinable fee occur, and when collection is considered to be probable and products
are delivered or title has been transferred. This generally occurs upon shipment of the merchandise, which is when legal transfer
of title occurs. In the event that final acceptance of our product by the customer is uncertain, revenue is deferred until all
acceptance criteria have been met. We currently have a consignment arrangement with two of our customers. We record revenue on
consignment goods when the consigned goods are sold by the consignee and all other above mentioned revenue recognition criteria
have been satisfied. Cash deposits received in connection with the sales of our products prior to their being delivered or acceptance
if applicable is recorded as deferred revenue.
Adoption of ASC Topic 606, "Revenue
from Contracts with Customers"
Sugarmade,
Inc. is planning on implementing Topic 606. Results for reporting periods beginning within the next fiscal year will be presented
under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting
under Topic 605.
Sugarmade
experienced no impact to the opening balance of the accumulated deficit or revenues for any quarterly period as a result of applying
Topic 606.
Sugarmade
will apply 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 Sugarmade’s revenue is recognized at the time control of the products transfers to the customer.
Additionally,
Sugarmade has substantially increased its accounting and financial staffs and enhanced its information technology and accounting
systems software to ensure proper and effective implementation of Topic 606.
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 $352,520 as of March 31, 2018
and of $113,218 as of June 30, 2017.
Inventory
Inventory consists of finished goods
paper and paper-based products such as paper cups and food containers ready for sale and is stated at the lower of cost or market.
We value our inventory using the weighted average costing method. Our Company’s policy is to include as a part of inventory
any freight incurred to ship the product from our contract manufacturers to our warehouses. Outbound freights costs related to
shipping costs to our customers are considered period costs and reflected in selling, general and administrative expenses. We regularly
review inventory and consider forecasts of future demand, market conditions and product obsolescence.
If the estimated realizable value of
our inventory is less than cost, we make provisions in order to reduce its carrying value to its estimated market value. On a consolidated
basis, as of March 31, 2018 and June 30, 2017, the balance for the inventory totaled $467,782 and $568,229, respectively. Obsolescence
reserve at March 31, 2018 and June 30, 2017 were $134,526 and $70,332, respectively.
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.
Income taxes
We account for income taxes under the
asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their perspective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date. Valuation allowances are recorded, when necessary, to reduce
deferred tax assets to the amount expected to be realized.
As a result of the implementation of
certain provisions of ASC 740, Income Taxes (“ASC 740”), which clarifies the accounting and disclosure for uncertainty
in tax position, as defined, ASC 740 seeks to reduce the diversity in practice associated with certain aspect of the recognition
and measurement related to accounting for income taxes. We adopted the provisions of ASC 740 as of October 2, 2008, and have analyzed
filing positions in each of the federal and state jurisdictions where we are required to file income tax returns, as well as open
tax years in these jurisdictions. We have identified the U.S. federal and California as our “major” tax jurisdictions
and generally, we remain subject to Internal Revenue Service examination of our 2013 U.S. federal income tax returns. However,
we have certain tax attribute carryforwards, which will remain subject to review and adjustment by the relevant tax authorities
until the statute of limitations closes with respect to the year in which such attributes are utilized.
We believe that our income tax filing
positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material change
to our financial position. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740. In
addition, we did not record a cumulative effect adjustment related to the adoption of ASC 740. Our policy for recording interest
and penalties associated with income-based tax audits is to record such items as a component of income taxes. We have no interest
or penalties as of March 31, 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 Black-Scholes-Merton Option Pricing Model. Key assumptions used to estimate the fair value of stock
options will include the exercise price of the award, the fair value of our common stock on the date of grant, the expected option
term, the risk free interest rate at the date of grant, the expected volatility and the expected annual dividend yield on our common
stock. We use our company’s own data among other information to estimate the expected price volatility and the expected forfeiture
rate. Share-based compensation awards issued to non-employees for services rendered are recorded at either the fair value of the
services rendered or the fair value of the share-based payment, whichever is more readily determinable.
Loss per share
We calculate basic earnings per share
(“EPS”) by dividing our net loss by the weighted average number of common shares outstanding for the period, without
considering common stock equivalents. Diluted EPS is computed by dividing net income or net loss by the weighted average number
of common shares outstanding for the period and the weighted average number of dilutive common stock equivalents, such as options
and warrants. Options and warrants are only included in the calculation of diluted EPS when their effect is dilutive. As of March
31, 2018, there are approximately 31,915,377 potential shares issuable upon conversion of convertible debts and 505,000 shares
of warrants were excluded in calculating diluted loss per share for the six-months ended March 31, 2018 due to the fact that issuance
of the shares is anti-dilutive as a result of the Company’s net loss.
Fair value of financial instruments
ASC Topic 820 defines fair value, establishes
a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and
enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs
to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
Level 1 - observable inputs that reflect quoted prices (unadjusted)
for identical assets or liabilities in active markets.
Level 2 - include other inputs that are directly or indirectly
observable in the marketplace.
Level 3 - unobservable inputs which are supported by little
or no market activity.
The Company used Level 2 inputs for
its valuation methodology for the derivative liabilities in determining the fair value using the Black-Scholes option-pricing model
for the nine months ended March 31, 2018.
|
|
Carrying Value
|
|
Fair Value Measurements at
|
|
|
As of
|
|
March 31, 2018
|
|
|
March 31,
|
|
Using Fair Value Hierarchy
|
|
|
2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
846,571
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
846,571
|
|
Total
|
|
$
|
846,571
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
846,571
|
|
|
|
June 30, 2017
|
|
March 31, 2018
|
Expected life (years)
|
|
|
0.74
|
|
|
|
0.34
|
|
Risk-free interest rate
|
|
|
1.68
|
%
|
|
|
1.60%~1.88
|
%
|
Expected volatility
|
|
|
161
|
%
|
|
|
205
|
%
|
|
|
Carrying Value
|
|
Fair Value Measurements at
|
|
|
As of
|
|
June 30, 2017
|
|
|
June 30,
|
|
Using Fair Value Hierarchy
|
|
|
2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
1,134,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,134,000
|
|
Total
|
|
$
|
1,134,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,134,000
|
|
Derivative instruments
The fair value of derivative instruments
is recorded and shown separately under current liabilities. Changes in the fair value of derivatives liability are recorded in
the consolidated statement of operations under non-operating income (expense).
Our Company evaluates all of its financial
instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative
financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value
and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations.
For stock-based derivative financial instruments, the Company uses a weighted average Black-Scholes- Merton option-pricing model
to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments,
including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period.
Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash
settlement of the derivative instrument could be required within 12 months of the balance sheet date. Refer to Note 7 for details.
Segment Reporting
FASB ASC Topic 280, “Segment Reporting”,
requires use of the “management approach” model for segment reporting. The management approach model is based on the
way a company’s management organizes segments within the Company for making operating decisions and assessing performance.
Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in
which management disaggregates a company.
FASB ASC Topic 280 has no effect on the Company’s financial
statements as substantially all of its operations are conducted in one industry segment – paper and paper-based products
such as paper cups, cup lids, food containers, etc.
New accounting pronouncements not yet adopted
In 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 is in the process of evaluating the impact of adoption of this ASU on the consolidated financial statements.
In May 2014, the FASB issued No. 2014-09,
Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in Accounting Standards Codification
605 - Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity
recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the company expects to be entitled in exchange for those goods or services. In August 2015, the FASB approved a one-year
deferral of the effective date of the new revenue recognition standard. Public business entities, certain not-for-profit entities,
and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December
15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual
reporting periods beginning after December 31, 2016, including interim reporting periods within that reporting period. 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.
On March 30, 2016, the FASB issued ASU
No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which includes amendments to accounting for income taxes
at settlement, forfeitures, and net settlements to cover withholding taxes. The amendments in ASU 2016-09 are effective for public
companies for fiscal years beginning after December 31, 2016, and interim periods within those annual periods. The Company adopted
this new guidance on January 1, 2017 and this standard does not have a material impact on the Company’s consolidated
financial statements.
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 August 2016, the FASB issued ASU
No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 clarifies the presentation and classification
of certain cash receipts and cash payments in the statement of cash flows. This ASU is effective for public business entities for
fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. The Company
is currently assessing the potential impact of ASU 2016-15 on its financial statements and related disclosures.
In October 2016, the FASB issued ASU
No. 2016-16—Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This ASU improves the accounting
for the income tax consequences of intra-entity transfers of assets other than invent tory. For public business entities, the amendments
in this update are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods
within those annual reporting periods. Early adoption is permitted. The Company does not anticipate that the adoption of this ASU
will have a significant impact on its consolidated financial statements.
In November 2016, the FASB issued ASU
No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The guidance requires that a statement of cash flows
explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash
or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should
be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the
statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, and interim period
within those fiscal years. Early adoption is permitted, including adoption in an interim period. The standard should be applied
using a retrospective transition method to each period presented. The Company does not anticipate that the adoption of this ASU
will have a significant impact on its consolidated financial statements.
In January 2017, the FASB issued ASU
No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition
of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted
for as acquisitions or disposals of assets or businesses. The standard is effective for fiscal years beginning after December 15,
2017, including interim periods within those fiscal years. Early adoption is permitted. The standard should be applied prospectively
on or after the effective date. The Company will evaluate the impact of adopting this standard prospectively upon any transactions
of acquisitions or disposals of assets or businesses.
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. Early adoption is permitted for
interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating
the impact of adopting this standard on its consolidated financial statements.
Customers
For the three months ended March 31,
2018 and March 31, 2017, our Company earned net revenues of $2,965,404 and $903,950 respectively. For the nine months ended March
31, 2018 and March 31, 2017, our Company earned net revenues of $5,081,372 and $2,759,595 respectively. The vast majority of these
revenues for the period ending March 31, 2018 were derived from a large number of customers, whereas the vast majority of these
revenues for the period ending March 31, 2017 were derived from a limited number of customers. No customers accounted for over
10% of the Company’s total revenues for the year ended March 31, 2018.
Suppliers
For the nine months end March 31, 2018,
we purchased products for sale by CarryOutSupplies from several contract manufacturers located in Asia. A substantial portion of
the Company’s inventory is purchased from one supplier that functions as an independent foreign procurement agent. One supplier
accounted for 65% and two suppliers each accounted for 8% of the Company’s total inventory purchase in the nine- months ended
March 31, 2018 and March 31, 2017 respectively.
|
5.
|
Equity Transaction - Exclusive License Rights
|
On December 13, 2017, we entered
into a Master Marketing Agreement with BizRight Hydroponic, Inc. (“BizRight”), a leading marketer and manufacturer
of cannabis and 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
cannabis-related 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.
The shares to be issued in
connection with the acquisition of exclusive license rights were booked under share to be issued- contra equity account. The shares
to be issued were valued at $16,800,000, or $0.084 per share which was the share price on December 13, 2017, the acquisition date.
As of the date of this filing, the Company
is a plaintiff, in Contra Costa County, California, in a suit alleging breach of fiduciary duty, conspiracy to commit breach of
fiduciary duty, fraud, conspiracy to commit fraud, conversion, breach of contract, and interference with contractual relations
against, Diversified Products Group Inc. (DPG), Stephen Pinto, Lewis Cohen and Heidi Estiva, who were former sales agents for the
Company. Pinto is the Company’s former Chairman of the board of directors. The Company plans to actively pursue this case.
During November of 2014, the Company received notice that a cross complaint had been filed against the Company. The complaint alleges
the parties were induced to make a series of investments in the Company by the material misrepresentations and omissions made by
the Company. The Company believes the allegations are without merit. The Company plans to vigorously defend against such claims.
No changes have occurred as of the filing date of this report.
On May 24, 2014, the Labor Commissioner,
State of California issued an Order, Decision or Award of the Labor Commissioner against the Company in the amount of $56,365.
On October 28, 2014, the Company entered into a settlement agreement, which was effective October 28, 2014, to resolve a judgment
against the Company via the issuance of 502,533 restricted shares and a $30,000 cash payment.
On December 11, 2013, the Company was
served with a complaint from two Convertible Note Holders and investors in the Company, Lovitt & Hannan, Inc. Salary Deferral
Plan FBO J. Thomas Hannan, Attorney at Law 401K Plan and Trust, and Kevin M. Kearney. The Company’s former CEO, Scott Lantz,
was also named in the suit.
On February 21, 2017, the Company signed
a settlement agreement with the plaintiff 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 within one (1) week. The parties had estimated the value of the notes at approximately $80,000. The Company
agreed to pay the plaintiff $97,000 within one hundred and twenty (120) days of the settlement with the remaining balance of $50,000
due within one hundred and eighty (180) days of the settlement. 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. As of June 30, 2017, third-parties had purchased two (2) notes
of approximately $80,000, reducing the Company’s exposure by $80,000. As of the date of this filing the balance for accrued
legal settlement for Hannan vs Sugarmade has been reduced to $227,000.
There can be no assurances the ultimate
liability relative to these law suits will not exceed what is outlined above.
As of March 31, 2018 and June 30, 2017,
the balance owing on convertible notes with term as describe below was $818,797 and $1,502,023, respectively.
Convertible note 1: On August 24, 2012,
the Company entered into a convertible promissory note with an accredited investor for $25,000. The note has a term of six (6)
months with an interest rate of 10% and is convertible to common shares at a 25% discount of the average of 30 days prior to the
conversion date. As of March 31, 2018, 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 March 31, 2018, 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 March 31, 2018, 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.
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. This convertible promissory note has been fully converted in the quarter ended March 31, 2018.
Convertible note 6: On January 17, 2017,
the Company entered into a convertible promissory note with an accredited investor for $20,000. The note has a term of six (6)
months with an interest rate of 8% and is convertible to common shares at a 40% discount to the then current market price of our
shares.
Convertible note 9: On January 20, 2017,
the Company entered into a convertible promissory note with an accredited investor for $80,000. The note has a term of seven (6)
months with an interest rate of 8% and is convertible to common shares at a 40% discount to the then current market price of our
shares.
Convertible note 7: On January 24, 2017,
the Company entered into a convertible promissory note with an accredited investor for $43,000. The note has a term of twelve (12)
months with an interest of 8% and is convertible to common shares at a 45% discount to the then current market price of our shares.
This convertible promissory note has been fully converted in the quarter ended March 31, 2018.
Convertible note 8: 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. This convertible promissory note has been fully converted in the quarter ended March 31, 2018.
Convertible note 11: 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.
Convertible note 15: On February 15,
2017, the Company entered into a convertible promissory note with an accredited investor for $63,000. The note has a term of nine
(9) months with an interest rate of 8% and is convertible to common shares at 40% discount to the then current market price of
our shares. This convertible promissory note has been fully converted in the quarter ended March 31, 2018.
Convertible note 16: 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. This convertible promissory note has been fully converted in the quarter ended March 31, 2018.
Convertible note 10: 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.
Convertible note 12: 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.
Convertible note 13: On March 1, 2017,
the Company entered into a convertible promissory note with an accredited investor for $100,000. The note has a term of nine (9)
months with an interest rate of 10% and is convertible to common shares at a 45% discount to the then current market price of our
shares. As of March 31, 2018, the note is in default.
Convertible note 14: 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.
Convertible note 17: 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.
Convertible note 18 & 19: 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 fundings. The note is due 12 months
after each funding date and bear 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 received $460,000 (net with OID of $45,000) from this note during the year
ended June 30, 2017. The fair value of the warrants were $40,400 at grant date. As of June 30, 2017, the Company had outstanding
convertible note payable to this investor for $460,000 (net with OID of $45,000), the fair value of the warrant liability was $25,250.
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.
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.
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.
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.
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.
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 March 31, 2018, the Company’s convertible notes
consisted of following:
|
|
|
|
|
|
Conversion
|
|
|
|
Balance
|
|
|
|
|
|
|
Principal
|
|
Default
|
|
|
|
in
|
|
# of
|
|
as of
|
|
|
|
Interest
|
|
Conversion
|
Amount
|
|
Penalty
|
|
Repayment
|
|
principal
|
|
shares
|
|
12.31.17
|
|
Due Date
|
|
Rate
|
|
Price
|
|
25,000.00
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,000.00
|
|
|
7/1/2016
|
|
|
10
|
%
|
|
75% of the average of 30 days prior to the conversion date.
|
|
25,000.00
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,000.00
|
|
|
7/1/2016
|
|
|
10
|
%
|
|
75% of the average of 30 days prior to the conversion date.
|
|
100,000.00
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
100,000.00
|
|
|
7/1/2016
|
|
|
10
|
%
|
|
75% of the average of 30 days prior to the conversion date.
|
|
20,000.00
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20,000.00
|
|
|
|
737,748
|
|
|
|
—
|
|
|
7/17/2017
|
|
|
8
|
%
|
|
Greater of 40% discount to average of 3 lowest trading price during last 20 trading days or $.05
|
|
50,000.00
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50,000.00
|
|
|
|
2,931,188
|
|
|
|
—
|
|
|
8/8/2017
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days prices
|
|
80,000.00
|
|
|
|
—
|
|
|
|
—
|
|
|
|
80,000.00
|
|
|
|
4,530,846
|
|
|
|
—
|
|
|
7/20/2017
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days prices
|
|
66,023.00
|
|
|
|
—
|
|
|
|
—
|
|
|
|
66,023.00
|
|
|
|
3,712,324
|
|
|
|
—
|
|
|
8/24/2017
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days prices
|
|
75,000.00
|
|
|
|
—
|
|
|
|
—
|
|
|
|
75,000.00
|
|
|
|
4,378,547
|
|
|
|
—
|
|
|
7/31/2017
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days prices
|
|
100,000.00
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
100,000.00
|
|
|
12/1/2017
|
|
|
10
|
%
|
|
Greater of 40% discount to average of 3 lowest trading price during last 20 trading days or $.05
|
|
70,000.00
|
|
|
|
—
|
|
|
|
—
|
|
|
|
70,000.00
|
|
|
|
4,067,072
|
|
|
|
—
|
|
|
9/23/2017
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days prices
|
|
200,000.00
|
|
|
|
—
|
|
|
|
—
|
|
|
|
200,000.00
|
|
|
|
11,557,652
|
|
|
|
—
|
|
|
9/30/2017
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days prices
|
|
340,000.00
|
|
|
|
—
|
|
|
|
—
|
|
|
|
125,000
|
|
|
|
11,320,929
|
|
|
|
215,000.00
|
|
|
5/12/2018
|
|
|
10
|
%
|
|
45% discount of lowest price of last 20 trading days prices
|
|
150,000.00
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
150,000.00
|
|
|
5/3/2018
|
|
|
10
|
%
|
|
45% discount to average of 3 lowest trading price during last 20 trading days
|
|
150,000.00
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
150,000.00
|
|
|
6/15/2018
|
|
|
10
|
%
|
|
42% discount to average of 3 lowest trading price during last 20 trading days
|
|
164,900.00
|
|
|
|
—
|
|
|
|
—
|
|
|
|
164,900
|
|
|
|
6,596,000
|
|
|
|
—
|
|
|
7/17/2018
|
|
|
8
|
%
|
|
The conversion price shall be $0.025 per share
|
|
35,000.00
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
35,000.00
|
|
|
8/22/2018
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days prices
|
|
15,000.00
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15,000.00
|
|
|
9/26/2018
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days prices
|
|
50,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50,000
|
|
|
12/7/2018
|
|
|
8
|
%
|
|
The conversion price shall be $0.05 per share
|
|
1,788,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
865,000
|
|
|
|
|
|
|
|
|
|
In connection with the convertible
debt, debt discount balance as of March 31, 2018 and June 30, 2017 were $96,203 and $45,000 respectively and were being
amortized and recorded as interest expenses over the term of the convertible debt.
8.
|
Derivative liabilities
|
The derivative liability is derived
from the conversion features in note 5 and stock warrant in note 7. All were valued using the weighted-average Black-Scholes-Merton
option pricing model using the assumptions detailed below. As of March 31, 2018 and June 30, 2017, the derivative liability was
$846,571 and $1,134,000, respectively. The Company recorded $6,449,378 loss and $1,449,000 loss from changes in derivative liability
during the nine months ended March 31, 2018 and 2017, respectively. The Black- Scholes model with the following assumption inputs:
|
|
March 31, 2018
|
Annual dividend yield
|
|
|
—
|
|
Expected life (years)
|
|
|
0.01 – 1 year
|
|
Risk-free interest rate
|
|
|
1.29% – 1.76%
|
|
Expected volatility
|
|
|
103% - 206%
|
|
|
|
|
June 30, 2017
|
|
Annual dividend yield
|
|
|
—
|
|
Expected life (years)
|
|
|
0.01
|
|
Risk-free interest rate
|
|
|
0.21
|
%
|
Expected volatility
|
|
|
449
|
%
|
Fair value of the derivative is summarized as below:
Beginning Balance, December 31, 2017
|
5,039,978
|
Additions
|
-
|
Mark to Market
|
(3,680,532)
|
Reclassification to APIC due to conversions
|
(512,875)
|
Balance,
March 31, 2018
|
846,571
|
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 Black-Scholes-Merton option pricing formula. The
value of all warrants granted at the date of issuance totaled $508,413 and was recorded as a discount to the notes payable. The
amount 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 1, 2016. $0.50 warrants and “Bonus Warrants” priced at $0.01, as defined
in the original Convertible Note Purchase Agreements we cancelled pertaining to the Note and warrants acquired on the following
dates for the following Convertible Notes and amounts. 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 March 31, 2018 and
June 30, 2017, the fair value of the warrant liability was $15,653 and $25,250, respectively. The Black-Scholes model with the
following assumption inputs:
Warrants liability
|
|
March 31, 2018
|
Annual dividend yield
|
|
|
—
|
|
Expected life (years)
|
|
|
3.61
|
|
Risk-free interest rate
|
|
|
1.89
|
%
|
Expected volatility
|
|
|
424
|
%
|
|
|
|
|
|
Warrants issued in May 2017
|
|
|
June 30, 2017
|
|
Annual dividend yield
|
|
|
—
|
|
Expected life (years)
|
|
|
3.86
|
|
Risk-free interest rate
|
|
|
1.89
|
%
|
Expected volatility
|
|
|
440
|
%
|
|
|
|
|
|
Warrants issued in 2012 with extension to July 1, 2016
|
|
|
June 30, 2016
|
|
Annual dividend yield
|
|
|
—
|
|
Expected life (years)
|
|
|
0.01
|
|
Risk-free interest rate
|
|
|
0.21
|
%
|
Expected volatility
|
|
|
449
|
%
|
Below is the movement of warrants for
the period ending March 31, 2018:
|
|
Number of
Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average Remaining
contractual life
|
|
Outstanding at June 30, 2015
|
|
|
131,250
|
|
|
$
|
0.20
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
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
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2018
|
|
|
505,000
|
|
|
$
|
0.15
|
|
|
|
3.61
|
|
Note pa
y
able 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 December 31, 2013). In
the event the deposit account is not established or minimum balance maintained, HSBC can charge a higher rate of interest of up
to 4.0% above prime rate. As of March 31, 2018 and June 30, 2017, the loan principal balance was $25,982.
Note pa
y
able due to related party
On January 23, 2013, the Company entered
into a promissory note with its former employee of the Company who owns less than 5% of the Company’s stock. The original
principal amount was $40,000 and the note bore no interest. The note was payable upon demand. As of March 31, 2018 and June 30,
2017, this note had a balance of $18,000.
On December 31, 2013, the Company entered
into a promissory note with Kalvin Kwong (an employee of the Company, who owns less than 5% of the Company’s stock). The
principal amount was $20,000 and the interest rate on the note was 10%. The note had a term of six (6) months. However, this note
was now payable upon demand per the oral agreement with the lender. As of March 31, 2018 and June 30, 2017, this note had a balance
of $20,000.
On January 13, 2014, the Company entered
into a promissory note with an employee (an employee of the Company, who owns less than 5% of the Company’s stock). The principal
amount was $25,000 and the note bore no interest. The note had a term of twenty-four (24) months and was due on January 13, 2016,
and became payable upon demand after January 13, 2016. As of March 31, 2018 and June 30, 2017, this note had a balance of $0 and
$12,666, respectively.
On January 14, 2015, the Company entered
into a promissory note with Richard Ko (an employee of the Company, who owns less than 5% of the Company’s stock). The principle
amount was $30,000 and the note bore no interest. The note had a term of one (1) year and was due on January 14, 2016, and became
payable upon demand after January 14, 2016. As of March 31, 2018 and June 30, 2017, this note had a balance of $10,000 and $20,000,
respectively.
As of March 31, 2018 and June 30, 2017,
the Company has an outstanding balance of notes payable due to related parties of 48,000 and $70,666, respectively.
10.
|
Stockholder’s Deficiency
|
The Company is authorized to issue 300,000,000 shares of
$.001 par value common stock and 10,000,000 shares of$.001 par value preferred stock.
As of March 31 and June 30, 2017, the Company had 247,395,774
and 226, 734, 372 shares of its common stock issued and outstanding.
11.
|
Common shares to be issued for services
|
In September 2017, the Company issued 4,736,842 shares of
commons stock for services. The fair value of the shares were valued at $0.04, the closing price of the grant date.
In December 2017, the Company issued 7,860,000 shares of
commons stock for services. The fair value of the shares were valued at $0.04, the closing price of the grant date.
In March 2018, the Company issued 1,075,000 shares of commons
stock for services. The fair value of the shares were valued at $0.197, the closing price of the grant date.
12.
|
Related party transactions
|
As of March 31, 2018, the Company had
outstanding balance of $117,795 owed to various related parties. See note 8 and 13 for the details.
On January 25, 2017, SWC entered into
an agreement with a lending company for $100,000 for its working capital needs. As of March 31, 2018 and June 30, 2017, the Company
has an outstanding balance of $0 and $10,036, respectively.
During the year ended June 30, 2017,
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 March 31, 2018 and June 30, 2017, the outstanding balance with
Greater Asia loans were $175,590 and $140,125, respectively.
On July 1, 2016, the Company entered
into a repayment agreement with its employee for $20,280 at no interest. As of March 31, 2018 and June 30, 2017, the Company has
an outstanding balance of $6,285
.
Repayment on this loan will be repaid at a later date with
no interest being accrued.
On January 6, 2015, the Company entered
into repayment agreement with its former employee for a loan of $9,500 at no interest. As of March 31, 2018 and June 30, 2017,
the Company has an outstanding balance of $4,076.
On July 2, 2015, the Company entered
into a repayment agreement with an individual for $22,583 at no interest. As of March 31, 2018 and June 30, 2017, the Company has
an outstanding balance of $13,936.
On March 5, 2013, the Company entered
an equipment loan agreement with Toyota financial services with maturity date of April 4, 2018. As of March 31, 2018 and June 30,
2017, the balance under this loan were $1,077 and $4,308, respectively.
On July 1, 2012, CarryOutSupplies entered
an equipment loan agreement with a bank with maturity on June 1, 2017. The monthly payment is $255. As of March 31, 2018 and June
30, 2017, the outstanding balance under this loan were $0 and $261, respectively.
As of March 31, 2018 and June 30, 2017,
the Company had an outstanding loan balance of $1,599 from one (1) vendor of the Company.
14.
|
Loan 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 $150,820 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. As of June 30, 2017, the outstanding balance
under this note was $150,820 with $6,033 interest discount to loan payable. As of March 31, 2018 and June 30, 2017, the outstanding
balance under this note was $150,820, 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 March
31, 2018 and June 30, 2017, the balance of the loan were $0 and $34,015, respectively.
On November 21, 2016, SGMD received
a loan from the Company’s director. The amount of the loan bore no interest and amortized on a monthly basis over the life
of the loan. As of March 31, 2018 and June 30, 2017, the balance of the loan from Sugarmade were $16,336 and $9,252, respectively.
On December 1, 2016, SGMD received a
loan from an employee for $12,500 with an interest charge of $12,500. This amount was recorded as interest owed to the loan payable
amount and is to be amortized on a monthly basis over the life of the loan. The loan is due on December 1, 2017. As of March 31,
2018 and June 30, 2017, the balance is $52,293 and 40,265, respectively.
From time to time, SWC would receive
short-term loans from LMK Capital, LLC (“LMK”) for its working capital needs. As of March 31, 2018 and June 30, 2017,
the Company had outstanding balance of $13,952 and 34,107, respectively, borrowed from LMK Capital., LLC, a company affiliated
with CEO Chan.
On October 1, 2017, the Company entered
a consulting agreement with a consultant for services related in fulfillment and customer services in relation to Sriracha Seasoning
Stix project. The service term is twelve months, the company will issue 660,000 restricted common shares to the consultant in lieu
of $21,120. The fair value of the 660,000 shares at grant date was $19,800.
On October 1, 2017, the Company entered
a consulting agreement with a consultant for services related to analytic of e-commerce sales and intelligent reports in relation
to Sriracha Seasoning Stix project. The service term is twelve months, the company will issue 1,200,000 restricted common shares
to the consultant in lieu of $38,400. The fair value of the 1,200,000 shares at grant date was $36,000.
On October 1, 2017, the Company entered
into a promissory note agreement with principle of $100,000 and a fixed interest of $25,000. Amortized over nine months, the monthly
principle and interest payment is $13,888.88. Maturity date of the note is June 30, 2018.
On October 26, 2017, the Company was
committed to issue 1,638,819 common shares from the company’s 2017 employee benefit plan to a consultant for e-commerce marketing
and media production services, in relations to Sriracha Stix and Seasoning Stix project. The fair value of 1,638,819 common shares
at grant date was $54,081. As of the date of this filing, these were have not been issued.
On November 8, 2017, the Company received
a notice from a convertible note holder informing the Company the note originally dated March 1, 2017 was in default due to the
Company’s lack of timely reporting. The note began accruing interest on August 8, 2017, after it was exchanged in an agreement
on that date. As a result of the default, the interest rate on the note was raised from 10% to the default rate of 22% per annum
and the outstanding balance due increased by 15%. As of the date of the notice on November 8, 2017, and after the adjustments outlined
herein, the balance on the note will increase by $9,461.
On November 14, 2017, the company sold
400,000 restricted common shares to an investor for $20,000, at a price per share equal $0.05.
On November 30, 2017, the Company issued
737,748 common shares in exchange for the conversion of $20,000 of convertible debt and accrued interest of $1,394.
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 twelve (12) months with an interest
rate of 8% and is convertible into common shares at a fixed price per share equal to $0.05.
On December 7, 2017, The Company received
a notice from a convertible note holder informing the Company the note dated May 12, 2017 was in default due to the Company’s
lack of timely reporting. As a result of the default, the interest rate on the note was raised from 10% to 22%. As a result of
the late filing of the Company’s fiscal year ending June 30, 2017 on Form 10-K, the balance due on the note increased by
15%. As a result of the late filing of the Company’s fiscal quarter ending March 31, 2018 on Form 10-Q, the balance due on
the note is increased by an additional 15%. After the accrual of interest and the increases outlined herein, the balance on the
note may be increase by $86,876.
On December
12, 2017, the Company entered a consulting agreement with a consultant for services related to audit procedures, tax consultant,
identifying and consummation of strategic alliances, merger and acquisitions that benefit the company. The service term is twelve
months, the company will issue 1,000,000 restricted common shares to the consultant in lieu of $40,000. The fair value of the 1,000,000
shares at grant date was $80,000.
On December
12, 2017, the Company entered a consulting agreement with a consultant for services related to identifying and consummation of
strategic alliances, merger and acquisitions that benefit the company. The service term is twelve months, the company will issue
5,000,000 restricted common shares to the consultant in lieu of $200,000. The fair value of the 5,000,000 shares at grant date
was $400,000.
On December 13, 2017, the company signed
a definitive exclusive master marketing agreement with BizRight Hydroponics Inc. the term of the agreement for the period of 20
years. BizRight will be compensated with both cash and restricted common shares. Effective date of the contract Bizright will be
compensated with 200,000,000 restricted common shares in lieu of first initial payment of $2,000,000 and $2,000,000 cash upon first
major funding and $4,000,000 due upon second major funding, the maximum share earn out is 450,000,000 total based on monthly revenue
of $2,500,000 or $30,000,000 annualized. The fair market value of 200,000,000 restricted common shares at grant date was $16,800,000.
On December 14, 2017, the Company sold
1,000,000 restricted common shares to an investor for $50,000, at a price per share equal to $0.05.
On December 21, 2017, the Company sold
5,000,000 restricted common shares to an accredited investor for $250,000, at a price per share equal to $0.05.
At December 31, 2017, the Company was
obligated to issue 2,000,000 shares of Series B Convertible Preferred Stock for three EB-5 investments with the total amount of
$1,500,000. The Company received $2,000,000 proceeds during the year ended June 30, 2017 with fair value of $2,000,000. On April
1, 2015, the Company completed a series of transactions and amended its Articles of Incorporation creating a series of preferred
stock of 10,000,000 shares, which shall be designated Series B Convertible Preferred Stock, par value $0.001 per share (the “Series
B Preferred Stock”). Series B will not be eligible for dividends. Five years from the date of issue (the “Conversion
Date”), assuming the Series B investor is approved for l-526 under the U.S Government’s EB-5 Investment Program, each
Preferred Share will automatically convert into that number of Common Shares having a “fair market value” of the Initial
Investment plus a five (5) percent annualized return on Initial Investment. Fair market value will be determined by averaging the
closing sale price of a Common Share for the 40 trading days immediately preceding the date of conversion on the U.S. stock exchange
on which Common Shares are publicly traded. The offering was made pursuant to SEC Rule 506 Section 4(2), which provides exemption
from registration for transactions, which are not public offerings. The funds received were used for general working capital purposes
and to accelerate order deliveries to customers.
Subsequent to , 2017, the Company was
obligated to issue 6,400,000 restricted common shares for equity financing of $95,000.
Subsequent to December 31, 2017, the
company was obligated to issue 3,117,629 restricted common shares for debt conversion.
On December 1, 2016, the Company modified
its agreement with Bao Coc International Paper and BAO COC INTERNATIONAL PAPER AND PLASTIC COMPANY LIMITED ("Bao Cao"),
of the Socialist Republic of Vietnam. Under the terms of the revised agreement, the Company shall purchase products manufactured
by the current contract manufacturers and distribute such products to various quick service restaurant and institutions in the
United States. Revenues from such products shall belong to Sugarmade. The price of these products will be determined from time
to time in mutual agreement between the Parties. Sugarmade shall be responsible for compensating the contract manufacturer and
collection of monies from the end customer with all revenues belonging to the Company. The company is obligated to issue 5,000,000
restricted common shares, the fair market value of the 5,000,000 shares was $400,000. As of March 31, 2018, these shares had yet
to be issued and were recorded as a liability for stock to be issued – common shares.
As of December 31, 2017, the Company
was obligated to issue 1,638,819 restricted common shares for past services. The market value of the shares issued was $0.033 per
share. The fair market value of the 1,628,819 shares was $54,081, and was recorded as a liability for stock to be issued –
common shares.
As of December 31, 2017, the Company
was obligated to issue 7,860,000 shares to its employees as year-end bonus, the fair value of the 7,860,000 shares was $494,648,
and was recorded as a liability for stock to be issued – common shares.
Subsequent to March 31, 2018, the Company
was obligated to issue 15,850, 000 restricted common shares for equity financing of $780,000.
Subsequent to March 31, 2018, the company
was obligated to issue 8,104,200 restricted common shares for debt conversion.
As of March 31, 2018, the Company was
obligated to issue 1,075,000 shares to its employees as year-end bonus, the fair value of the 1,075,000 shares was $198,025, and
was recorded as a liability for stock to be issued – common shares.
16.
|
Commitments and contingencies
|
On April 1, 2015, the Company entered
into a lease for general office and warehouse in City of Industry, California with a lease term of one year. The monthly rent was
$11,884. The Company renewed the lease to March 31, 2016, effective April 1, 2016 to March 31, 2017, increasing the rent from $11,884
to $13,238. On March 6, 2017, the Company executed a Fifth Amendment to the Lease, in which the Monthly rent increased from $13,238
to $15,043 effective from April 1, 2017 to March 31, 2018. As of March 31, 2018, the Monthly rent is $15,043. As of April 1, 2018,
the have vacated and return the property to the property owner and have no further lease commitment associated with this property.
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 1
st
year of the term. The monthly
rent on the 1
st
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.
On June 26,
2018, the Company entered into a straight promissory note with a Nevada Company that is managed by one of our former director Mr.
Yu for $150,820. The note has a term of six (6) months with an interest rate of 12%. On March 19, 2018, the Nevada Company agreed
to settle the outstanding principle and interest balance of $150,820 for 1,508,200 shares of restricted common shares. The fair
value of the 1,508,200 shares at settlement date was $0.175 per share x share counts.
On July 17, 2018, the Company entered
into a convertible promissory note with a Nevada Company that is managed by one of our former director Mr. Yu for $164,900. The
note has a term of twelve (12) months with an interest rate of 8% and is convertible into common shares at a fixed price of $0.025.
On March 20, 2018, the Company issued 4,530,846 common shares in exchange for the conversion of $164,900 of convertible debt and
accrued interest of $5,225.
On March 20,
2018, the Company entered a consulting agreement with a consultant for services related to sourcing and quality control. The service
term is nine months, the company will issue 1,000,000 restricted common shares to the consultant in lieu of $50,000. The fair value
of the 1,000,000 shares at grant date was $184,900.
On April 2, 2018 the Company sold 1,000,000
restricted common shares to an accredited investor for $50,000, at a price per share equal to $0.05.
On August 3, 2018, the Company entered
into a convertible promissory note with an accredited investor for $150,000. The note has a term of nine (9) months with an interest
rate of 10% and is convertible into common shares at a 45% discount. On April 3, 2018, the Company issued 2,234,696 common shares
in exchange for the conversion of $159,781 of convertible debt and accrued interest of $9,781.
On April 18, 2018 the Company sold 1,428,571
restricted common shares to an accredited investor for $100,000, at a price per share equal to $0.07.
On April 19, 2018 the Company sold 1,171,429
restricted common shares to an accredited investor for $82,000, at a price per share equal to $0.07.
On April 20, 2018 the Company sold 1,828,571
restricted common shares to an accredited investor for $128,000, at a price per share equal to $0.07.
On May 8, 2018 the Company sold 2,400,000
restricted common shares to an accredited investor for $120,000, at a price per share equal to $0.05.
On May 10, 2018 the Company sold 1,000,000
restricted common shares to an accredited investor for $50,000, at a price per share equal to $0.05.
On May 11, 2018 the Company sold 300,000
restricted common shares to an accredited investor for $15,000, at a price per share equal to $0.05.
On May 14, 2018 the Company sold 1,000,000
restricted common shares to an accredited investor for $50,000, at a price per share equal to $0.05.
On May 14, 2018 the Company sold 1,000,000
restricted common shares to an accredited investor for $50,000, at a price per share equal to $0.05.
On May 28, 2018 the Company sold 1,000,000
restricted common shares to an accredited investor for $50,000, at a price per share equal to $0.05.
On June 8, 2018 the Company entered
into a consulting agreement for services to assist the Company in exploring and identifying corporate acquisitions and other strategies
to accelerate the Company’s growth. In return for the consultant’s services, the Company will issue 500,000 restricted
common shares for $500.00 at a discounted price per share equal to $0.001. The fair value of the 500,000 shares at the grant date
was $70,000. Additionally, consultant will be compensated $10,000 per month for the period of Six (6) months, consultant may choose
to convert any portion of this cash compensation to common shares; such shares will be value at 15% discount to the lowest closing
price for the seven (7) trading days before such election is made.
On June 8, 2018 the Company entered
into a consulting agreement for services to assist the Company in exploring and identifying corporate acquisitions and other strategies
to accelerate the Company’s growth. In return for the consultant’s services, the Company will issue 500,000 restricted
common shares for $1,000.00 at a discounted price per share equal to $0.001. The fair value of the 500,000 shares at the grant
date was $70,000. Additionally, consultant will be compensated $15,000 per month for the period of Six (6) months, consultant may
choose to convert any portion of this cash compensation to common shares; such shares will be value at 15% discount to the lowest
closing price for the seven (7) trading days before such election is made.
Item 8. Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure
On April 2,
2018, the Registrant engaged L&L CPAS, PA as Registrant’s independent registered public accounting firm. Neither the
Registrant, nor anyone on its behalf, has consulted with L&L CPAS, PA regarding (i) the type of final audit opinion that might
be rendered on the Company’s financial statements and neither a written report nor oral advice was provided to the Company
that L&L CPAS, PA concluded was an important factor considered by the Company in reaching a decision as to any accounting,
auditing, or financial reporting issue, (ii) any matter that was the subject of a disagreement within the meaning of Item 304(a)(1)(iv)
of Regulation S-K, or (iii) any reportable event within the meaning of Item 304(a)(1)(v) of Regulation S-K.
On March 21,
2018, the Board of Directors of Sugarmade, Inc. (the “Company”) dismissed BF Borgers CPA (“Borgers”) as
the principal auditor for the Company. The Company’s Board of Directors approved the dismissal of Borgers. The principal
accountant’s report on the financial statements for the period from June 30, 2014 to and as of June 30, 2017 did not contain
an adverse opinion or a disclaimer of opinion, nor did such statements contain qualifiers or modifiers as to uncertainty, audit
scope, or accounting principles. There were no disagreements with Borgers whether or not resolved, on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to Borgers satisfaction,
would have caused it to make reference to the subject matter of the disagreement in connection with its report on the Company’s
financial statements.