Notes
to Consolidated Financial Statements
1.
Nature of Business
Sugarmade,
Inc. (hereinafter referred to as ''we'', ''us"or "the/our Company'') is a publicly traded company incorporated in the
state of Delaware. Our previous legal name was Diversified Opportunities, Inc. Our Company, Sugarmade, Inc. operates through our
subsidiary, Sugarmade, Inc., a California corporation ("SWC Group, Inc., - CA''). As of the end of the reporting period, June
30, 2018, we were involved in several businesses including the supply of products to the quick service restaurant sub-sector of
the restaurant industry and as a distributor of paper products derived from non-wood sources. We are headquartered in Monrovia,
California, a suburb of Los Angeles, with two (2) additional warehouse locations in Southern California. As of date of this filing,
we employ 7 full-time workers.
Our Board of
Directors believes the legal cannabis-related supply sector could be highly lucrative for the Company, and thus we plan to pursue
a strategy of expanding operations within this area. According to the State of Legal Marijuana Markets Report (4th Edition), published
by Arc View Market Research and produced by New Frontier, California is the largest medical marijuana program in the country among
states where medical marijuana is currently legal. The California market is fueled by the state's large size, longevity as the
first-in-the-nation medical marijuana program, and low barriers to patient access. Even with California's newly passed recreational
marijuana law, which will significantly tighten the program with new restrictions; the market is still projected to reach $2.6
billion in sales in 2020. That is nearly double Colorado's $1.5 billion, and over five times the size of the markets in Arizona,
Oregon, and Michigan for that year. If legalized in 2016, the medical marijuana markets in Ohio and Pennsylvania will become two
of the largest in the country by 2020. According to the data, a handful of states in the western U.S. project to command over 50%
of the medical marijuana market by 2020. As more and more states legalize both medical and recreational cannabis, we believe our
company can benefit from our Internet and e-commerce marketing activities.
As of the
date of this filing, our main business operation, CarryOutSuppies.com, is a producer and wholesaler of custom printed and generic
supplies servicing more than 3,000 quick service restaurants. Our products include double poly paper cups for cold beverage; disposable,
clear, plastic cold cups, paper coffee cups, yogurt cups, ice cream cups, cup lids, cup sleeves, food containers, soup containers,
plastic spoons and many other similar products for this market sector. CarryOutSupplies.com was founded in 2009 when the founders
gained first-hand experience within the restaurant industry of the difficulty for restaurant owners to acquire custom printed supplies
at a reasonable cost. Many quick service restaurants wish to acquire custom printed products, such as those embossed with logos,
but the minimum order size for such customization had been cost prohibitive. With that in mind, carry out supplies was founded
to provide products to this underserved section of the market. Since that time, the company has become a key supplier to many popular
U.S. franchises, particularly in the frozen dessert segments. The company estimates it holds approximately 40% market share of
generic and printed products within the take-out frozen yogurt and ice cream industries. We also hold a product supply and licensing
agreement FreeHand® ThumbTray™ for the western part of the United States.
We are also
a distributor of paper made from 100% reclaimed sugarcane fiber, enhanced with bamboo. Sugarcane fiber, called bagasse, is a discarded
byproduct of sugarcane production. Sugarmade, Inc. was founded in 2010. As is explained below, in 2014, CarryOutSupplies.com was
acquired by Sugarmade, Inc., creating the Company as it is today. Relative to Sugarmade Paper, our third- party contract manufacturer
uses bagasse and bamboo, as opposed to wood products significantly reducing its manufacturing carbon footprint, energy consumption,
and attendant water pollution during the manufacture of its products. This allows us to offer our unique, exclusive, tree-free
paper products at price-parity equal to or less than current recycled fiber products already on the market. Our products are unique
and we believe offer an ideal solution for those consumers (both corporate and individual) seeking to meet their sustainability
mandates or personal environmentally conscious goals, at a price that is equal to or less than current recycled products.
Our primary
focus for this business unit as of filing of this report is the organization and administration of fundraisers and paper drives
for schools, non-profits and other institutions.
During September
of 2016, the Company completed negotiations for and signed a license agreement with HUY FONG FOODS, INC. ("HFFI"), the
maker of Sriracha Hot Chili Sauce. Under the terms of the agreement, the Company is granted license to use the licensed marks of
HFFI on and for products the Company is currently in process of designing and testing. Based on this agreement and a separate license
agreement signed during 2015 with Seasoning Stix International, LLC, the Company plans to introduce a new culinary seasoning product
named Sriracha Seasoning Stix. Sriracha Seasoning Stix are encapsulated Huy Fong Sriracha Sauce and other seasonings in the form
of a stick, which are inserted into meat, fish and poultry prior to cooking. Sriracha Seasoning Stix are a hard solid at room temperature,
but as heat is applied the sticks begin to liquefy allowing the meat fibers to act like a sponge absorbing the seasonings and flavors
that had previously been encapsulated in the stick. The Company launched its SrirachaStix.com web platform using Shopify on October
1, 2017, and aggressive marketing tactic has been implemented via a nationwide advertising and social media campaign. As of the
date of this filing, this newly built website had already generated over $150,000 in online revenue.
2.
Summary of Significant Accounting Policies
Basis of presentation
The accompanying condensed consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.
Principles of consolidation
The consolidated financial statements
include the accounts of our Company and its wholly-owned subsidiaries, Sugarmade-CA and SWC. All significant intercompany transactions
and balances have been eliminated in consolidation.
Going concern
The Company's
continuation as a going concern is dependent on its ability to generate sufficient cash flows from operations to meet its obligations,
in which it has not been successful, and/or obtaining additional financing from its shareholders or other sources, as may be required.
Our consolidated
financial statements have been prepared assuming that we will continue as a going concern. Such assumption contemplates the realization
of assets and satisfaction of liabilities in the normal course of business. These consolidated financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications
of liabilities that may result should the Company be unable to continue as a going concern.
Management
is endeavoring to increase revenue-generating operations. While priority is on generating cash from operations through the sale
of the Company's products, management is also seeking to raise additional working capital through various financing sources, including
the sale of the Company's equity and/or debt securities, which may not be available on commercially reasonable terms to our Company,
or which may not be available at all. If such financing is not available on satisfactory terms, we may be unable to continue our
business as desired and our operating results will be adversely affected. In addition, any financing arrangement may have potentially
adverse effects on us and/or our stockholders. Debt financing (if available and undertaken) will increase expenses, must be repaid
regardless of operating results and may involve restrictions limiting our operating flexibility. If we issue equity securities
to raise additional funds, the percentage ownership of our existing stockholders will be reduced, and the new equity securities
may have rights, preferences or privileges senior to those of the current holders of our common stock.
Use of estimates
The preparation
of financial statements in conformity with accounting principles generally accepted in the United States of America requires our
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ significantly from those estimates.
Revenue recognition
We recognize
revenue in accordance with Financial Accounting Standards Board Accounting Standards Codification ("FASB ASC'') No. 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 and cash
equivalents consist of amounts held as bank deposits and highly liquid debt instruments purchased with an original maturity of
three months or less.
From
time to time, we may maintain bank balances in interest bearing accounts in excess of the $250,000 currently insured by the Federal
Deposit Insurance Corporation for interest bearing accounts (there is currently no insurance limit for deposits in noninterest
bearing accounts). We have not experienced any losses with respect to cash. Management believes our Company is not exposed to any
significant credit risk with respect to its cash.
Accounts receivable
Accounts receivable are carried at their
estimated collectible amounts, net of any estimated allowances for doubtful accounts. We grant unsecured credit to our customer's
deemed credit worthy. Ongoing credit evaluations are performed and potential credit losses estimated by management are charged
to operations on a regular basis. At the time, any particular account receivable is deemed uncollectible, the balance is charged
to the allowance for doubtful accounts. The Company had accounts receivable net allowances of $453,623 as of June 30, 2018 and
of $113,218 as of June 30, 2017.
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 June 30, 2018 and June 30, 2017, the balance for the inventory totaled 531,249 and $568,229, respectively. $120,486
were reserved for obsolescent inventory for the year ended June 30, 2018, and $70,332 were reserved for obsolescent inventory for
the year ended June 30, 2017.
Impairment of Long-Lived
Assets
Long-lived
assets, which include property, plant and equipment and intangible assets, are reviewed for impairment whenever events or changes
in circumstances indicate the carrying amount of an asset may not be recoverable.
Recoverability
of long-lived assets to be held and used is measured by comparing the carrying amount of an asset to the estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted
future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair
value of the assets. Fair value is generally determined using the asset's expected future discounted cash flows or market value,
if readily determinable. Based on its review, the Company, as of June 30, 2018, performed an impairment test of all of its intangible
assets
.
Based on the company’s analysis, the company had an impairment of $65K.
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 not taken any uncertain positions that would necessitate recording of tax related liability as of June 30, 2018
and 2017.
Stock based compensation
Stock based
compensation cost to employees is measured at the date of grant, based on the calculated fair value of the stock-based award, and
will be recognized as expense over the employee's requisite service period (generally the vesting period of the award). We estimate
the fair value of employee stock options granted using the Binomial Option Pricing Model. Key assumptions used to estimate the
fair value of stock options will include the exercise price of the award, the fair value of our common stock on the date of grant,
the expected option term, the risk-free interest rate at the date of grant, the expected volatility and the expected annual dividend
yield on our common stock. We use our company's own data among other information to estimate the expected price volatility and
the expected forfeiture rate. Share-based compensation awards issued to non-employees for services rendered are recorded at either
the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable.
Loss per share
We calculate
basic earnings per share ("EPS") by dividing our net loss by the weighted average number of common shares outstanding
for the period, without considering common stock equivalents. Diluted BPS is computed by dividing net income or net loss by the
weighted average number of common shares outstanding for the period and the weighted average number of dilutive common stock equivalents,
such as options and warrants. Options and warrants are only included in the calculation of diluted EPS when their effect is dilutive.
Fair
value of financial instruments
ASC Topic
820 defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure
of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon
the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as
follows:
Level 1-
observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level
2 - include other inputs that are directly or indirectly observable in the marketplace.
Level
3 - unobservable inputs which are supported by little or no market activity.
The Company used Level 2 inputs for
its valuation methodology for the derivative liabilities for conversion feature of the convertible notes and warrants in determining
the fair value using Lattice Binomial model with the following assumption inputs:
|
|
Carrying Value
|
|
Fair Value Measurements at June 30, 2018 Using Fair Value Hierarchy
|
|
|
June 30, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Derivative Liabilities
|
|
|
3,069,616
|
|
|
|
|
|
|
|
—
|
|
|
3,069,616
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
|
|
|
|
June 30, 2018
|
Expected Life (Years)
|
|
|
|
|
|
|
0.74
|
|
|
|
—
|
|
|
0.5
|
Risk Free Interest Rate
|
|
|
|
|
|
|
1.68
|
%
|
|
|
—
|
|
|
2.06%
|
Expected Volatility
|
|
|
|
|
|
|
161
|
%
|
|
|
—
|
|
|
151%
|
Derivative instruments
The fair value
of derivative instruments is recorded and shown separately under liabilities. Changes in the fair value of derivatives liability
are recorded in the consolidated statement of operations under non-operating income (expense).
Our Company
evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as
embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is
initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the
consolidated statements of operations. For stock-based derivative financial instruments, the Company uses a weighted average Black-Scholes-
Merton option-pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification
of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the
end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based
on whether or not net-cash settlement of the derivative instrument could be required within 12months of the balance sheet date.
Segment
Reporting
FASB ASC Topic 280, "Segment
Reporting'', requires use of the ''management approach" model for segment reporting. The management approach model is based
on the way a company's management organizes segments within the Company for making operating decisions and assessing performance.
Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in
which management disaggregates a company.
FASB ASC Topic 280 has no effect
on the Company's financial statements as substantially all of its operations are conducted in one industry segment -paper and paper-based
products such as paper cups, cup lids, food containers, etc.
New accounting
pronouncements not yet adopted
In February
2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (“ROU”) model
that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12
months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition
in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods
within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases
existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with
certain practical expedients available. The Company 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 has implemented 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 has implemented ASU 2016-16 on its financial statements
and related disclosures.
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 has implemented ASU 2016-18 on its financial statements
and related disclosures.
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.
Prior period reclassification
Certain prior
period balance sheet accounts have been reclassified in conformity with current period presentation including reclassification
of $4,000 from derivative liability to warrant liability. The reclassification had no effect to the company's consolidated statement
of operations, statement of cash flow or statement of shareholder's equity.
3.
Concentration
Customer
For the year ended June 30, 2018, our
Company earned net revenues of $4,439,324. The company does not have any concentration of revenue with any customer that represent
over 10% of overall revenue. The highest revenue from (2) customers accounted for 8.51% and 6.96% respectively, as percentage of
overall revenue for the year ended June 30, 2018.
For the year
ended June 30, 2017, our Company earned net revenues of $4,100,560. The vast majority of these revenues for the periods were derived
from a large number of customers, with no customers accounted for over 10% of the Company's total revenues in either period. The
highest revenue from (2) customers accounted for 8.37% and 5.75% respectively, as percentage of overall revenue for the year ended
June 30, 2017.
Suppliers
For the year ended June 30, 2018,
we purchased products for sale by the company's subsidiaries from several contract manufacturers located in Asia and the U.S. A
substantial portion of the Company's inventory is purchased from two (2) suppliers. The two (2) suppliers accounted as follows:
Two suppliers accounted for 36% and 17.50% of the Company's total inventory purchase for the year ended June 30, 2018, respectively.
For the year
ended June 30, 2017, two (2) suppliers accounted for 36.71% and 39.03% of the Company's total inventory purchase, respectively.
4.
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.
As of June 30, 2018, the shares to be
issued in connection with the acquisition of exclusive license rights has not been issued therefore the transaction has not been
completed. $350,000 in cash has been paid and reflected as a prepaid deposit in other current assets on our balance sheet, see
Note 6.
5.
Litigation
From time
to time and in the course of business, we may become involved in various legal proceedings seeking monetary damages and other relief.
The amount of the ultimate liability, if any, from such claims cannot be determined. As of June 30, 2018, there were no legal claims
pending or threatened against the Company; the opinion of our management would be likely to have a material adverse effect on our
financial position, results of operations or cash flows. However, as of the date of this filing, we were involved in the following
legal proceedings.
On February 4, 2014, the Company filed
suit in Contra Costa County, California, alleging breach of fiduciary duty, conspiracy to commit breach of fiduciary duty, fraud,
conspiracy to commit fraud, conversion, breach of contract, and interference with contractual relations against, Diversified Products
Group Inc. (DPG), Stephen Pinto, Lewis Cohen and Heidi Estiva, who were former sales agents for the Company. Stephen Pinto is
the Company's former Chairman of the board of directors. The Company plans to actively pursue this case. During November of 2014,
the Company received notice that a cross complaint had been filed against the Company. The complaint alleges the parties were
induced to make a series of investments in the Company by the material misrepresentations and omissions made by the Company. The
Company believes the allegations are without merit The Company plans to vigorously defend against such claims. The parties have
attended mediation on the matters on September 7, 2018, and executed a stipulation for a settlement agreement. However, the final
settlement agreement is currently pending. The Company has reserved a contingent liability of $47,660 related to this proposed
settlement.
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, 2018, 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 June 30, 2018 and 2017, other current
assets consisted of the following:
|
|
For the years ended June 30,
|
|
|
2018
|
|
2017
|
Prepaid Deposit
|
|
$
|
355,500
|
|
|
$
|
57,500
|
|
Prepaid Inventory
|
|
|
92,737
|
|
|
|
84,065
|
|
Employees Advance
|
|
|
41,303
|
|
|
|
30,078
|
|
Prepaid Expenses
|
|
|
246,260
|
|
|
|
4,894
|
|
Others
|
|
|
20,765
|
|
|
|
13,801
|
|
Total
|
|
$
|
756,565
|
|
|
$
|
190,338
|
|
7.
Intangible Asset
On
August 21, 2017, the Company entered into an intellectual property assignment agreement with Sound Decisions to revamp the company’s
shopify website to generate and attract more traffic from potential customers. The Company made a payment of $14,000 for the website
(intellectual property). The Company amortized this use right as intangible asset over ten years, and recorded $1,400 amortization
expense for the year ended June 30, 2018
.
8.
Convertible Notes
As of June 30, 2018 and 2017, the balance
owing on convertible notes, net of debt discount, with terms as described below was $2,399,941 and $1,502,023, respectively.
Convertible notes issued prior the year ended
June 30, 2017 were as follows:
Convertible note 1: On August 24, 2012, the
Company entered into a convertible promissory note with an accredited investor for $25,000. The note has a term of six (6) months
with an interest rate of 10% and is convertible to common shares at a 25% discount of the average of 30 days prior to the conversion
date. As of June 30, 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 June 30, 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 June 30, 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. As of June 30, 2018, the note is in default.
Convertible note
5: On January 17, 2017, the Company entered into a convertible promissory note with an accredited investor for $25,000. The note
has a term of six (6) months with an interest rate of 8% and is convertible to common shares at a 40% discount to the then current
market price of our shares. As of June 30, 2018, the note is in default
.
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.
The note has been fully converted as of June 30, 2018.
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.
As of June 30, 2018, the note is in default.
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 year ended June 30, 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. As of June 30, 2018, the note is in default.
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. As of June 30, 2018, the note is in default.
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. As of June 30, 2018, the note is in default.
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. As of June 30,
2018, the note is in default.
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 June 30, 2018, there were $92,500 has been converted into the Company’s common stock and
the remaining principal balance was $7,500. As of June 30, 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. As of June 30, 2018, the note is in default.
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 year ended June 30, 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. As of June 30, 2018, the note is in default.
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.
As of June 30, 2018, the note is in default.
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 funding. 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 $505,000 from this note during the year ended June 30, 2018. The
fair value of the warrants were $40,400 at grant date. As of June 30, 2018, the Company had outstanding convertible note payable
to this investor for $671,004 (with two major default charge in total of $166,004), the fair value of the warrant liability was
$40,400. As of June 30, 2018, the note is in default and bears a default interest rate of 22% per annum.
Convertible notes issued during the year ended
June 30, 2018 were as follows:
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.
As of June 30, 2018, the note is in default.
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.
As of June 30, 2018, the note is in default.
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 the year ended
June 30, 2018, the Company’s convertible notes consisted of following:
Principal
|
|
Default Penalty
|
|
Conversion in Principal
|
|
Number of Shares
|
|
Balance as of 6/30/2018
|
|
Due Date
|
|
Interest Rate
|
|
Conversion Price
|
$
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,000
|
|
|
2/24/2013
|
|
|
14
|
%
|
|
75% of the average of 30 days prior to the conversion date
|
$
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,000
|
|
|
3/18/2013
|
|
|
14
|
%
|
|
75% of the average of 30 days prior to the conversion date
|
$
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
100,000
|
|
|
6/21/2013
|
|
|
14
|
%
|
|
75% of the average of 30 days prior to the conversion date
|
$
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,000
|
|
|
7/17/2017
|
|
|
8
|
%
|
|
40% discount of average of last 20 trading days
|
$
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,000
|
|
|
7/17/2017
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days
|
$
|
20,000
|
|
|
|
|
|
|
$
|
20,000
|
|
|
|
737,748
|
|
|
|
—
|
|
|
7/17/2017
|
|
|
8
|
%
|
|
Greater of $0.05 or 40% discount to average of 3 lowest trading price during 20 trading days
|
$
|
43,000
|
|
|
|
|
|
|
$
|
43,000
|
|
|
|
2,462,180
|
|
|
|
—
|
|
|
1/24/2018
|
|
|
8
|
%
|
|
45% discount of average two lowest price of last 20 trading days
|
$
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50,000
|
|
|
8/8/2017
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days
|
$
|
80,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
80,000
|
|
|
7/20/2017
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days
|
$
|
66,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
66,023
|
|
|
8/24/2017
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days
|
$
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50,000
|
|
|
8/9/2017
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days
|
$
|
75,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
75,000
|
|
|
7/31/2017
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days
|
$
|
100,000
|
|
|
|
|
|
|
$
|
92,500
|
|
|
|
5,246,524
|
|
|
$
|
7,500
|
|
|
12/1/2017
|
|
|
10
|
%
|
|
50% discount of average three lowest price of last 20 trading days
|
|
|
|
|
$
|
56,067
|
|
|
|
|
|
|
|
|
|
|
$
|
56,067
|
|
|
12/1/2017
|
|
|
10
|
%
|
|
50% discount of average three lowest price of last 20 trading days
|
|
|
|
|
$
|
7,273
|
|
|
|
|
|
|
|
|
|
|
$
|
31,097
|
|
|
12/1/2017
|
|
|
10
|
%
|
|
50% discount of average three lowest price of last 20 trading days
|
|
|
|
|
$
|
7,270
|
|
|
|
|
|
|
|
|
|
|
$
|
29,654
|
|
|
12/1/2017
|
|
|
10
|
%
|
|
50% discount of average three lowest price of last 20 trading days
|
$
|
70,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
70,000
|
|
|
9/23/2017
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days
|
$
|
63,000
|
|
|
|
|
|
|
$
|
63,000
|
|
|
|
3,081,746
|
|
|
|
—
|
|
|
11/20/2017
|
|
|
8
|
%
|
|
42% discount of average three lowest price of last 10 trading days
|
$
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,000
|
|
|
8/16/2017
|
|
|
8
|
%
|
|
Greater of $0.05 or 40% discount to average of 3 lowest trading price during 20 trading days
|
$
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
200,000
|
|
|
9/30/2017
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days
|
$
|
340,000
|
|
|
$
|
78,482
|
|
|
|
|
|
|
|
|
|
|
$
|
418,482
|
|
|
5/12/2018
|
|
|
22
|
%
|
|
45% discount of lowest price of last 20 trading days
|
$
|
165,000
|
|
|
$
|
87,522
|
|
|
|
|
|
|
|
|
|
|
$
|
252,522
|
|
|
5/12/2018
|
|
|
22
|
%
|
|
45% discount of lowest price of last 20 trading days
|
|
|
|
|
$
|
80,000
|
|
|
|
|
|
|
|
|
|
|
$
|
80,000
|
|
|
5/12/2018
|
|
|
22
|
%
|
|
45% discount of lowest price of last 20 trading days
|
|
|
|
|
$
|
170,000
|
|
|
|
|
|
|
|
|
|
|
$
|
170,000
|
|
|
5/12/2018
|
|
|
22
|
%
|
|
45% discount of lowest price of last 20 trading days
|
$
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
150,000
|
|
|
5/3/2018
|
|
|
10
|
%
|
|
45% discount of average three lowest price of last 20 trading days
|
$
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
150,000
|
|
|
6/15/2018
|
|
|
10
|
%
|
|
45% discount of average three lowest price of last 20 trading days
|
$
|
164,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
164,900
|
|
|
7/17/2018
|
|
|
8
|
%
|
|
$0.025
|
$
|
35,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
35,000
|
|
|
8/22/2018
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days
|
$
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,000
|
|
|
9/26/2018
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days
|
$
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50,000
|
|
|
12/7/2018
|
|
|
8
|
%
|
|
$0.025
|
|
Total:
|
|
|
|
|
|
|
$
|
218,500
|
|
|
|
|
|
|
$
|
2,426,245
|
|
|
|
|
|
|
|
|
|
As of the year ended June 30, 2018,
the Company’s debt discount consisted of following:
Date of
|
|
Due Date
|
|
Related Debt OID
|
|
Debt Discount at 6/30/2017
|
|
Amortization during 6/30/2018
|
|
Debt Discount at 6/30/2018
|
8/3/2017
|
|
5/3/2018
|
|
$
|
150,000
|
|
|
$
|
—
|
|
|
$
|
150,000
|
|
|
|
|
|
9/15/2017
|
|
6/15/2018
|
|
|
150,000
|
|
|
|
—
|
|
|
|
150,000
|
|
|
|
|
|
8/22/2017
|
|
8/22/2108
|
|
|
35,000
|
|
|
|
—
|
|
|
|
29,918
|
|
|
|
5,082
|
|
9/26/2017
|
|
9/26/2018
|
|
|
15,000
|
|
|
|
—
|
|
|
|
11,384
|
|
|
|
3,616
|
|
5/12/2017
|
|
5/12/2018
|
|
|
30,000
|
|
|
|
13,232
|
|
|
|
13,232
|
|
|
|
|
|
6/12/2017
|
|
6/12/2018
|
|
|
15,000
|
|
|
|
28,263
|
|
|
|
28,263
|
|
|
|
|
|
9/28/2017
|
|
5/12/2018
|
|
|
78,482
|
|
|
|
—
|
|
|
|
78,482
|
|
|
|
|
|
11/14/2017
|
|
5/12/2018
|
|
|
87,522
|
|
|
|
—
|
|
|
|
87,522
|
|
|
|
|
|
8/8/2017
|
|
12/1/2017
|
|
|
56,067
|
|
|
|
—
|
|
|
|
56,067
|
|
|
|
|
|
10/13/2017
|
|
12/1/2017
|
|
|
15,298
|
|
|
|
—
|
|
|
|
15,298
|
|
|
|
|
|
11/14/2017
|
|
12/1/2017
|
|
|
42,280
|
|
|
|
—
|
|
|
|
42,280
|
|
|
|
|
|
11/17/2017
|
|
5/12/2018
|
|
|
80,000
|
|
|
|
—
|
|
|
|
80,000
|
|
|
|
|
|
11/25/2017
|
|
5/12/2018
|
|
|
170,000
|
|
|
|
—
|
|
|
|
170,000
|
|
|
|
|
|
7/17/2017
|
|
7/17/2018
|
|
|
164,900
|
|
|
|
—
|
|
|
|
160,445
|
|
|
|
4,455
|
|
12/7/2017
|
|
12/7/2018
|
|
|
50,000
|
|
|
|
—
|
|
|
|
36,849
|
|
|
|
13,151
|
|
Total debt discount
|
|
|
|
$
|
1,139,549
|
|
|
$
|
41,495
|
|
|
$
|
912,446
|
|
|
$
|
26,303
|
|
9.
Derivative Liabilities
The derivative liability is derived
from the conversion features in note 8 and stock warrant in note 10. All were valued using the weighted-average Binomial option
pricing model using the assumptions detailed below. As of June 30, 2018 and 2017, the derivative liability was $3,069,616
and $1,134,000, respectively. The Company recorded $525,394 and $437,000 loss from changes in derivative liability during
the year ended June 30, 2018 and 2017, respectively. During the year ended June 30, 2018, the Company changed the method to value
the fair market value from Black-Scholes to Binomial Option model. The Binomial model with the following assumption inputs:
|
|
June 30, 2018
|
Annual Dividend Yield
|
|
|
—
|
|
Expected Life (Years)
|
|
|
0.15-1.00
|
|
Risk-Free Interest Rate
|
|
|
1.13-2.06
|
%
|
Expected Volatility
|
|
|
94-212
|
%
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
Annual Dividend Yield
|
|
|
—
|
|
Expected Life (Years)
|
|
|
0.47-1.00
|
|
Risk-Free Interest Rate
|
|
|
1.08-2.12
|
%
|
Expected Volatility
|
|
|
103-202
|
%
|
Fair value of the derivative is summarized
as below:
Beginning Balance, June 30, 2017
|
|
$
|
1,134,000
|
|
Additions
|
|
$
|
1,913,992
|
|
Mark to Market
|
|
|
525,394
|
|
Reclassification to APIC Due to Conversions
|
|
$
|
( 503,770
|
)
|
Ending Balance, June 30, 2018
|
|
|
3,069,616
|
|
10.
Stock Warrants
In connection with the issuance of the promissory
notes in 2012, the investors in the aggregate received two-year warrants to purchase up to a total of 50,000 shares of common stock
at an exercise price of $0.50 per share, and two-year warrants purchasing up to a total of 81,250 shares of common stock at an
exercise price of $0.01 per share. For purposes of accounting for the detachable warrants issued in connection with the convertible
notes, the fair value of the warrants was estimated using the Binomial option pricing formula. The value of all warrants granted
at the date of issuance totaled $508,413 and was recorded as a discount to the notes payable. The amount was amortized over the
nine (9) month term of the respective convertible note as additional interest expense.
On various dates during June 2014 and December
2014 the Company and holders of certain convertible notes agreed to cancel warrants to purchase common shares in the Company and
to extend the due dates on the Notes to July l, 2016. $0.50 warrants and "Bonus Warrants" priced at $0.01, as defined
in the original Convertible Note Purchase Agreements we cancelled pertaining to the Note and warrants acquired on the following
dates for the following Convertible Notes and amounts. These warrants were expired on July 1, 2016.
On May 17, 2017, the Company entered
a promissory note with an investor for a total amount of $1,375,000 (after $10,000 legal and due diligence fee) with an OID of
$125,000, the note will be fulfilled through a series of funding. In connection with the note, the investor will also receive warrants
and is calculated based on 15% of the maturity amount. The warrants have a life of four years with an exercise price of $0.15 per
share and have cashless exercise option. The fair value of the warrants at the grant date was $40,400. As of June 30, 2018 and
2017, the fair value of the warrant liability was $40,400 and $25,250, respectively. The Binomial model with the following assumption
inputs:
Warrants liability:
|
|
|
June 30, 2018
|
|
Annual dividend yield
|
|
|
—
|
|
Expected life (years)
|
|
|
0.5
|
|
Risk-free interest rate
|
|
|
2.06
|
%
|
Expected volatility
|
|
|
151
|
%
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in May 2017:
|
|
|
June 30, 2017
|
|
Annual dividend yield
|
|
|
—
|
|
Expected life (years)
|
|
|
3.86
|
|
Risk-free interest rate
|
|
|
1.89
|
%
|
Expected volatility
|
|
|
440
|
%
|
|
|
Number of Shares
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining contractual life
|
|
Outstanding at June 30, 2016
|
|
|
|
131,250
|
|
|
|
0.20
|
|
|
|
|
|
|
Expired
|
|
|
|
131,250
|
|
|
|
0.20
|
|
|
|
|
|
|
Granted
|
|
|
|
505,000
|
|
|
$
|
0.15
|
|
|
|
4
|
|
|
Outstanding at June 30, 2017
|
|
|
|
505,000
|
|
|
$
|
0.15
|
|
|
|
3.86
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
|
|
505,000
|
|
|
$
|
0.15
|
|
|
|
0.5
|
|
11.
Note Payable
Note payable due to bank
During October 2011, we entered into
a revolving demand note (line of credit) arrangement with HSBC Bank USA, with a revolving borrowing limit of $150,000. The line
of credit bears a variable interest rate of one quarter percent (0.25%) above the prime rate (3.25% as of September 30, 2013).
In the event the deposit account is not established or minimum balance maintained, HSBC can charge a higher rate of interest of
up to 4.0% above prime rate. As of June 30, 2018 and 2017, the loan principal balance was $25,982. As of June 30, 2018, the note
is in default.
Notes payable due to related parties
On January 23, 2013, the Company
entered into a promissory note with its former employee of the Company who owns less than 5% of the Company's stock. The original
principal amount was $40,000 and the note bears no interest. The note was payable upon demand. As of June 30, 2018 and 2017, this
note had a balance of $18,000 and $18,000, respectively.
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 June 30, 2018 and 2017, this note had a balance of $0
and $20,000, respectively.
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 bears 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 June 30, 2018 and 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 June 30, 2018 and 2017, this note had a balance of $5,000 and $20,000,
respectively.
As of June 30, 2018 and 2017, the
Company has an outstanding balance of notes payable due to related parties of $23,000 and $70,666, respectively.
12.
Stockholders’ Deficit
The Company is authorized to issue 1,990,000,000
shares of $.001 par value common stock and 10,000,000 shares of $.001 par value preferred stock.
During the year ended June 30, 2018,
the Company issued 1,171,429 shares of common stock for cash in total amount of $82,000.
During the year ended June 30, 2018,
the Company issued 4,736,842 shares of common stock for services in total amount of $180,000.
During the year ended June 30, 2018,
the Company issued 13,492,560 shares of common stock to settle the old debt in total amount of $306,810.
As of June 30, 2018 and June 30, 2017,
the Company had 246,135,203 and 247,395,774 shares of its common stock issued and outstanding.
13.
Common Shares 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.
14.
Related Party Transactions
As of June 30, 2018, the Company had
outstanding balance of $23,000 owed to various related parties. See note 11 and 16 for the details.
From time to time, SWC would receive
short-term loans from LMK. Capital, LLC ("LMK.") for its working capital needs. As of June 30, 2018, the Company's outstanding
balance to LMK is zero.
On December l, 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 was due on December 1, 2017. As of
June 30, 2018, the balance is zero.
On July 7, 2016, SWC received a
loan from the same employee indicated above for $15,000 and during the fiscal year the total advance to the company was $29,255.87.
The amount of the loan bears no interest. As of June 30, 2018, the balance of the loan is $30,000.
On November 21, 2016, SGMD received
a loan from the Company's director for $1,260 and during the fiscal year the highest balance owed was $79,092. The amount of the
loan bears no interest. As of June 30, 2018, the balance of the loan from Sugarmade is zero.
15.
Loans Payable
On October 1, 2017, SGMD entered a straight
promissory note with Greater Asia Technology Limited (Greater Asia) for borrowing $100,000 with maturity date on June 30, 2018;
the note bears an interest rate of 33.33%. As of June 30, 2018, the note was in default and the outstanding balance under this
note was $79,524.
On January 25, 2017, SWC entered into
an agreement with a lending company for $100,000 for its working capital needs. As of June 30, 2018 and 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 June 30, 2018 and 2017, the outstanding balance with Greater Asia
loans were $84,400 and $140,125, respectively. As of June 30, 2018. the note was in default.
On July 1, 2016, the Company entered
into a repayment agreement with its employee for $20,280 at no interest. As of June 30, 2018 and 2017, the Company has an outstanding
balance of $4,285 and $6,285.
On January 6, 2015, the Company
entered into repayment agreement with its former employee for a loan of $9,500 at no interest. As of June 30, 2018 and 2017, the
Company has an outstanding balance of $0 and $4,076, respectively.
On July 2, 2015, the Company entered
into a repayment agreement with an individual for $22,583 at no interest. As of June 30, 2018 and 2017, the Company has an outstanding
balance of $0 and $13,936, respectively.
On March 5,
2013, the Company entered an equipment loan agreement with Toyota financial services with maturity date of April 4, 2018. As of
June 30, 2018 and 2017, the balance under this loan were $0 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 June 30, 2018 and 2017, the outstanding balance under this loan were $0 and $261, respectively.
As of June 30, 2018 and 2017, the Company
had an outstanding loan balance of $329,029 and $1,599, respectively from one (1) vendor of the Company.
16.
Loans Payable – Related Parties
On June 26, 2017, SGMD entered a straight
promissory note with a company (whose major shareholder is the former director of the Company) for borrowing $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, 2018 and 2017, the outstanding
balance under this note was $150,820. As of June 30, 2018. the note was in default. As of October 2017, they are no long a related
party.
On July 7, 2016, SWC received a loan
from an employee. The amount of the loan bore no interest and amortized on a monthly basis over the life of the loan. As of June
30, 2018 and 2017, the balance of the loan were $30,000 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 June 30, 2018 and 2017, the balance of the loan from Sugarmade were $0 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 June 30,
2018 and 2017, the balance is $0 and $6,250, respectively.
From time to time, SWC would receive
short-term loans from LMK Capital, LLC (“LMK”) for its working capital needs. As of June 30, 2018 and 2017, the Company
had outstanding balance of $0 and $34,107, respectively, borrowed from LMK Capital., LLC, a company affiliated with CEO Chan.
17.
Shares to Be Issued
During the year ended June 30,
2018, the Company had entered into multiple private placement agreements and had increased potential shares to be issued in total
amount of $1,798,000.
As of June 30, 2018 and 2017, the
Company had balance of $2,691,000 and $893,000 share to be issued.
18.
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 Company has 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 1st year of the term. The monthly rent
on the 1st year will be $11,770 with a 3% increase for each subsequent year. Total commitment for the full term of the lease
will be $737,367. As of the date of this filing, this property became the headquarter of the company.
19.
Income Tax
The deferred tax asset as of June
30, 2018 and 2017 consisted of the following:
|
|
2018
|
|
2017
|
Net Operating Loss Carryforwards
|
|
$
|
11,849,081
|
|
|
$
|
9,711,559
|
|
Less Valuation Allowance
|
|
|
(11,849,081
|
)
|
|
|
(9,711,559
|
)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Management
provided a deferred tax asset valuation allowance equal to the potential benefit due to the Company’s loss. When the Company
demonstrates the ability to generate taxable income, management will re-evaluate the allowance.
As of June 30, 2018, the Company
has net operating loss carryforward of $34,859,799 which is available to offset future taxable income that expires by year 2034.
Reconciliation
between the provision for income taxes and the expected tax benefit using the federal statutory rate of 34% for 2018 and 2017 is
as follows:
|
|
2018
|
|
2017
|
Income tax benefit at federal statutory rate
|
|
|
(34
|
)%
|
|
|
(34
|
)%
|
Increase in valuation allowance
|
|
|
34
|
%
|
|
|
34
|
%
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
20.
Subsequent Events
On July 15, 2018, the Company signed a settlement
agreement and consulting contract with a services provider. Under the terms of the agreement, the consultant performed specific
functions pertaining the wind down of business operations for products previously marketed by the Company, receiving 1,500,000
registered common shares.
On July 20, 2018, the Company sold 1,000,000
common shares to an accredited investor at $0.05 per common share for a total of $50,000.
On July 30, 2018, a consultant paid the Company
$1,000 for an option exercised on June 8, 2018. The strike price of the option was $0.002 per share. As of this date, the 500,000
common shares from the option exercise have yet to be issued.
On August 1, 2018, the Company signed a services
contract with a consultant for 2,307,693 registered common shares, valued at $150,000 or $0.065 per share.
On August 1, 2018, the Company signed a services
contract with a consultant for 538,461 registered common shares, valued at $70,000 or $0.065 per share.
On August 2, 2018, the Company converted a
note for $50,000 dated August 3, 2017, into 1,114,491 common shares.
On August 13, 2018, the Company issued 2,500,000
common shares to an accredited investor. The shares were purchased on December 21, 2017 at $0.05 per share for a total of $125,000.
On August 14, 2018, the Company converted a
note dated September 27, 2017 into common shares. The original face value of the note was $15,000, which converted into 294,114
common shares.
On August 14, 2018, the Company converted a
note dated August 22, 2017 into common shares. The original face value of the note was $35,000, which converted into 691,184 common
shares.
On August 23, 2018, the Company converted a
note for $115,698.63 dated August 3, 2017 in the amount of $50,000 into 1,114,491 common shares.
On August 28, 2018, the Company converted a
note dated May 12, 2017 into common shares. The original face value of the note was $150,000, which converted into 3,921,569 common
shares.
On September 1, 2018, the Company issued a
consultant 125,000 common shares for services, based on an agreement with the consultant dated April 5, 2018.
On September 13, 2018, the Company converted
a note dated September 15, 2017 into common shares. The original face value of the note was $150,000, which converted into 3,745,330
common shares.
On September 19, 2018, the Company issued a
convertible note to an accredited investor for proceeds to the Company in the amount of $250,000. The Company reserved 15,000,000
common shares for future maximum issuance for the eventual conversion.
On September 27, 2018, the Company sold 642,857
common shares to an accredited investor at $0.07 per common share for a total of $45,000.
On October 7, 2018, a consultant paid the Company
$500 for an option exercised on June 8, 2018. The strike price of the option was $0.001 per share. As of this date, the 500,000
common shares from the option exercise have yet to be issued.
On October 9, 2018, the Company issued shares
in a debt settlement. A total of 500,000 shares were issued at a price of $0.10 per shares, which settled the $39,000 and interest
owed by the Company.
On October 10, 2018, the Company issued a convertible
note to an accredited investor for proceeds to the Company in the amount of $250,000. The Company reserved 26,000,000 common shares
for future maximum issuance for the eventual conversion.
On October 15, 2018, the Company signed a Letter
of Intent to acquire Sky Unlimited, LLC doing business as Athena United (“Sky Unlimited”), a Southern California-based,
supplier of hydroponic cultivation supplies to the wholesale sector and to large commercial cultivators. Upon execution of LOI,
the Company will pay Sky Unlimited $1,000,000 in common shares of Sugarmade at $0.10 per share equal 10,000,000 shares, which will
immediately vest as a non-refundable fee. Sugarmade will be granted 180 days to close on acquisition, If the acquisition is completed,
Sky Unlimited will be compensated with cash and Sugarmade shares having a total value equaling one times annualized revenues realized
by Sky Unlimited during last 2 quarters of 2018 calendar year. At the projected $40,000,000 annualized revenue realization for
Sky Unlimited for the period agreed, it is contemplated Sky Unlimited will be paid a total of $8,000,000 in cash and $32,000,000
in Sugarmade common shares at $0.10 per share.
On October 16, 2018, the Company issued 2,500,000
common shares due to an accredited investor for an investment on December 21, 2017 in the amount of $250,000 at $0.05 per share.
On October 16, 2018, the Company issued 10,00,000
common shares due to an accredited investor for an investment on December 21, 2017 in the amount of $1,000,000 at $0.10 per share.