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, Sugarmade, Inc. operates much of its business activities through our
subsidiary, Sugarmade, Inc., a California corporation ("SWC Group, Inc., - CA'').
Sugarmade, Inc. was founded in 2010.
In 2014, CarryOutSupplies.com was acquired by Sugarmade, Inc., creating the Company as it is today. As of the end of the reporting
period, December 31, 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 an importer, distributor and marketer of hydroponic supplies to various agricultural
sectors. We had previously been a marketer of culinary seasoning products Seasoning Stix and Sriracha Seasoning Stix and a marketer
of tree-free paper products. These products were discontinued during 2018 in order to focus the majority of our corporate resources
on the marketing of hydroponic supplies.
The marketplace in which we plan to
be mainly engaged is generally referred to as hydroponic agricultural supplies. While some of our customers are engaged in the
legal cultivation, processing and/or distribution of cannabis or cannabis containing products, our Company neither sells any products
containing cannabis nor do we handle, process, or distribute any products containing cannabis.
Our Board of Directors believes the
legal cannabis-related agricultural supply sector could be highly lucrative for the Company, and thus we plan to pursue a strategy
of expanding operations. According to a January 2019 report issued by Arcview Market Research, the worldwide consumer market for
cannabis during 2018 was valued at approximately $12.8 billion, up significantly from the 2017 estimated value of $9.5 billion.
The market is expected to grow at approximately 27% compounded annually through the year 2022.
While our business is rapidly expanding
across most of the United States and across the west coast, California remains an important marketplace due both the sheer size
of the State’s economy and due to the rapid embrace of legalization. As of the end of the reporting period, there still remains
a significant bottleneck in licensing of California cultivation operations. We are expecting increased business activity as California
regulators begin to issue cultivation licenses in mass, although there can be no assurances that any such increased business activity
from the state will actually occur.
We also believe the Company has strong
revenue expansion opportunities within several sub sectors of the hydroponic agricultural sector, where we are not currently engaged.
Many of these businesses would be complementary to our current business operations. We are currently in process of analyzing several
acquisitions for expansion in this area.
Our legacy business operation, CarryOutSupplies.com,
is a producer and wholesaler of custom printed and generic supplies servicing more than 2,000 quick service restaurants. Our products
include double poly paper cups for cold beverage; disposable, clear, plastic cold cups, paper coffee cups, yogurt cups, ice cream
cups, cup lids, cup sleeves, food containers, soup containers, plastic spoons and many other similar products for this market sector.
CarryOutSupplies.com was founded in 2009 when the founders gained first-hand experience within the restaurant industry of the difficulty
for restaurant owners to acquire custom printed supplies at a reasonable cost. Many quick service restaurants wish to acquire custom
printed products, such as those embossed with logos, but the minimum order size for such customization had been cost prohibitive.
With that in mind, carry out supplies was founded to provide products to this underserved section of the market. Since that time,
the company has become a key supplier to many popular U.S. franchises, particularly in the frozen dessert segments. The company
estimates it holds at least a 20% market share of generic and printed products within the take-out frozen yogurt and ice cream
industries.
In December of 2017, we announced a
Master Marketing Agreement with BizRight, LLC where the Company would market BizRight’s products. The Company also gained
an option to acquire all of BizRight’s operations. We began recognizing revenues under this marketing agreement during late
calendar 2018 and expect to begin recognizing an increasing amount of revenue under the Master Marketing Agreement as we move further
into calendar 2019.
Also during 2017, Sugarmade announced
the signing of an exclusive distribution agreement for California, Oregon and Washington with privately held Plantation Corp. for
its 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. Sugarmade plans to move forward as Plantation’s distribution partner upon availability of the BudLife product
line. As of the end of the reporting period, the Company is awaiting final product availability in order to begin marketing the
products under the Agreement.
During October 2018, the Company signed
a Letter of Intent to acquire Sky Unlimited, LLC doing business as Athena United, a Southern California-based, supplier of hydroponic
cultivation supplies to the wholesale sector and to large commercial cultivators. Athena United operates its ecommerce website
at www.AthenaUnited.com. Under the terms of the Agreement, which contains both binding and non-binding elements, Sugarmade will
acquire all of the outstanding capital stock and the business operations for a combination of cash and common shares of Sugarmade.
Athena United, and its associated operations, is believed to be one of the larger operators in this market sector and is producing
revenues of approximately $40 million per year, is profitable, and cash flow positive. Should the Company be successful in its
acquisition efforts, the operation would be integrated under the Sugarmade corporate umbrella with Sugarmade assuming all operations
and recognizing all revenues and profits.
During January of 2019, the Company
announced its intention to acquire a retail location of Washington State-based Hydro4Less. The operation is expected to produce
approximately $5 million in revenues and to be profitable during calendar 2019. Additionally, via the pending transaction, Sugarmade
will gain an option to purchase two additional Hydro4Less retail operations, which are currently producing in excess of $20 million
annually. Should all three Hydro4Less acquisitions close, Sugarmade will increase its annual revenues by approximately $25 million
per year.
Via the marketing agreement with BizRight,
LLC and the acquisitions of Athena United and Hydro4Less, the Company believes it could become one of the largest and fast growing
market participants in the cannabis and other agricultural supply/hydroponic industries. As has been also outlined and disclosed
in other corporate filings, there can be no assurances these acquisitions will close and that such revenues will be realized by
the Company.
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2.
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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, 2018, 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 year ended June 30, 2018. The interim results
for the period ended December 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 six months ended December 31, 2018 and for the fiscal year ended June 30, 2018. The Company’s
continuation as a going concern is dependent on its ability to generate sufficient cash flows from operations to meet its obligations,
in which it has not been successful, and/or obtaining additional financing from its shareholders or other sources, as may be required.
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
Sugarmade
applies 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.
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 $126,262 as of December 31, 2018
and of $453,623 as of June 30, 2018.
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 December 31, 2018 and June 30, 2018, the balance for the inventory totaled $580,475 and $531,249, respectively. Obsolescence
reserve at December 31, 2018 and June 30, 2018 were $16,177 and $120,486, respectively.
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 $65,625.
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 December 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 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 EPS is computed by dividing net income or net loss by the weighted average number
of common shares outstanding for the period and the weighted average number of dilutive common stock equivalents, such as options
and warrants. Options and warrants are only included in the calculation of diluted EPS when their effect is dilutive.
Fair value of financial instruments
ASC Topic 820 defines fair value, establishes
a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and
enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs
to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
Level 1 - observable inputs that reflect quoted prices (unadjusted)
for identical assets or liabilities in active markets.
Level 2 - include other inputs that are directly or indirectly
observable in the marketplace.
Level 3 - unobservable inputs which are supported by little
or no market activity.
The Company used Level 2 inputs for
its valuation methodology for the derivative liabilities in determining the fair value using the Binomial option-pricing model
for the six months ended December 31, 2018.
|
|
Carrying Value
|
|
Fair Value Measurements at
|
|
|
As of
|
|
December 31, 2018
|
|
|
December 31,
|
|
Using Fair Value Hierarchy
|
|
|
2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
1,734,338
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,734,338
|
|
Total
|
|
$
|
1,734,338
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,734,338
|
|
|
|
June 30, 2018
|
|
December 31, 2018
|
Expected life (years)
|
|
|
0.5
|
|
|
|
0.5
|
|
Risk-free interest rate
|
|
|
2.06
|
%
|
|
|
2.56
|
%
|
Expected volatility
|
|
|
151
|
%
|
|
|
154
|
%
|
|
|
Carrying Value
|
|
Fair Value Measurements at
|
|
|
As of
|
|
June 30, 2018
|
|
|
June 30,
|
|
Using Fair Value Hierarchy
|
|
|
2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
3,069,616
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,069,616
|
|
Total
|
|
$
|
3,069,616
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,069,616
|
|
Derivative instruments
The fair value of derivative instruments
is recorded and shown separately under current liabilities. Changes in the fair value of derivatives liability are recorded in
the consolidated statement of operations under non-operating income (expense).
Our Company evaluates all of its financial
instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative
financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value
and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations.
For stock-based derivative financial instruments, the Company uses a weighted average Binomial option-pricing model to value the
derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including
whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative
instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement
of the derivative instrument could be required within 12 months of the balance sheet date.
Segment Reporting
FASB ASC Topic 280, “Segment Reporting”,
requires use of the “management approach” model for segment reporting. The management approach model is based on the
way a company’s management organizes segments within the Company for making operating decisions and assessing performance.
Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in
which management disaggregates a company.
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 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.
In March 2016, the FASB issued ASU 2016-09, Compensation
- Stock Compensation (Topic 718): Improvement to Employee Share-Based Payment Accounting. The new standard contains several amendments
that will simplify the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures,
statutory tax withholding requirements, classification of awards as either equity or liabilities, and classification on the statement
of cash flows. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.
ASC 606, Revenue from Contracts with
Customers, was issued jointly by the FASB and IASB on May 28, 2014. It was originally effective for annual reporting periods (including
interim reporting periods within those periods) beginning after December 15, 2016, for public entities. Early application was not
permitted (however, early adoption was optional for entities reporting under IFRSs). On August 12, 2015, the FASB issued an ASU,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred for one year the effective date
of the new revenue standard for public and nonpublic entities reporting under U.S. GAAP. The Company is currently evaluating
the impact of this guidance on its financial statements and related disclosures.
Customers
For the six months ended December 31,
2018 and 2017, our Company earned net revenues of $2,886,885 and $2,115,968 respectively. The vast majority of these revenues for
the period ending December 31, 2018 were derived from a large number of customers, whereas the vast majority of these revenues
for the period ending December 31, 2017 were derived from a limited number of customers. No customers accounted for over 10% of
the Company’s total revenues for the period ended December 31, 2018.
Suppliers
For the six months ended December 31,
2018, we purchased products for sale 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 26.19% and 25.96% of the Company's total inventory purchase for the six months ended December 31, 2018, respectively.
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4.
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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 supplier 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 December 31, 2018, the shares
to be issued in connection with the acquisition of exclusive license rights has been issued and the transaction has not been fully
completed. $550,000 in cash has been paid and reflected as a prepaid deposit in other current assets on our balance sheet.
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 date of this filing, there were no legal claims currently
pending or, to our knowledge, threatened against our Company that, in the opinion of our management, would be likely to have a
material adverse effect on our financial position, results of operations or cash flows, except as follows:
-
The Company has filed a lawsuit
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. The defendants have filed a counterclaim alleging that they were induced to make a series of investments in the
Company by material misrepresentations and/or omissions made by the Company. As of the date of this filing, the parties have settled
all issues.
-
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 plaintiffs. Under the
terms of the settlement agreement, the Company agreed to pay the plaintiffs $227,000 to settle all claims against the Company,
which included the payoff of the two notes outstanding within one (1) week. Upon receipt of all payments, plaintiffs will surrender
for cancellation 230,000 of the Company's shares within ten (10) days. The parties agreed that all claims against the Company would
be satisfied through such payments and that the matter would be fully resolved. 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, plus interest until the date of complete payoff.
-
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. As of December 31, 2018,
the shares have not been issued yet.
There can be no assurances the ultimate
liability relative to these law suits will not exceed what is outlined above.
As of December 31, 2018 and June 30,
2018, other current assets consisted of the following:
|
|
For the periods ended
|
|
|
December 31, 2018
|
|
June 30, 2018
|
Prepaid Deposit
|
|
$
|
1,725,000
|
|
|
$
|
355,500
|
|
Prepaid Inventory
|
|
|
103,213
|
|
|
|
92,737
|
|
Employees Advance
|
|
|
46,303
|
|
|
|
41,303
|
|
Prepaid Expenses
|
|
|
89,726
|
|
|
|
246,260
|
|
Other
|
|
|
22,201
|
|
|
|
20,765
|
|
Total:
|
|
$
|
1,986,443
|
|
|
$
|
756,565
|
|
On August 21, 2017, the Company entered
into an intellectual property assignment agreement with Sound Decisions to revamp the company’s shoplifty website to generate
and attract more traffic from potential customers. The Company made a payment of $14,000 for the website (intellectual property).
The Company amortized this use right as intangible asset over ten years, and recorded amortization expense of $700 and $1,400 as
of December 31, 2018 and June 30, 2018, respectively.
As of December 31, 2018 and June 30,
2018, the balance owing on convertible notes, net of debt discount, with terms as described below was $876,386 and $2,399,941,
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 December 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 December 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 December 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. As of December 31, 2018, the note
has been fully converted.
Convertible
note 5: On January 17, 2017, the Company entered into a convertible promissory note with an accredited investor for $25,000. The
note has a term of six (6) months with an interest rate of 8% and is convertible to common shares at a 40% discount to the then
current market price of our shares. As of December 31, 2018, the note has been fully converted
.
Convertible note 6: On January 20, 2017,
the Company entered into a convertible promissory note with an accredited investor for $80,000. The note has a term of 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 December 31, 2018, the note has been fully converted.
Convertible note 7: On February 8, 2017,
the Company entered into a convertible promissory note with an accredited investor for $50,000. The note has a term of six (6)
months with an interest rate of 8% and is convertible to common shares at a 40% discount to the then current market price of our
shares. As of December 31, 2018, the note has been fully converted.
Convertible note 8: On February 24,
2017, the Company entered into a convertible promissory note with an accredited investor for $66,023. The note has a term of six
(6) months with an interest rate of 8% and is convertible to common shares at a 40% discount to the then current market price of
our shares. As of December 31, 2018, the note has been fully converted.
Convertible note 9: On February 9, 2017,
the Company entered into a convertible promissory note with an accredited investor for $50,000. The note has a term of six (6)
months with an interest rate of 8% and is convertible to common shares at a 40% discount to the then current market price of our
shares. As of December 31, 2018, the note has been fully converted.
Convertible note 10: On February 28,
2017, the Company entered into a convertible promissory note with an accredited investor for $75,000. The note has a term of six
(6) months with an interest rate of 8% and is convertible to common shares at a 40% discount. As of December 31, 2018, the note
has been fully converted.
Convertible note 11: On March 1, 2017,
the Company entered into a convertible promissory note with an accredited investor for $100,000. The note has been purchased by
other investor in total amount of $156,067 with a term of nine (9) months with an interest rate of 10% and is convertible to common
shares at a 45% discount to the then current market price of our shares. As of September 30, 2018, there were $92,500 has been
converted into the Company’s common stock and the Company incurred two conversion default penalties in total of $60,751.
As of June 30, 2018, the remaining principal balance was $124,318. As of December 31, 2018, the Company converted $63,567 and the
remaining balance of note was $60,751.
Convertible note 12: On March 23, 2017,
the Company entered into a convertible promissory note with an accredited investor for $70,000. The note has a term of six (6)
months with an interest rate of 8% and is convertible to common shares at a 40% discount to the then current market price of our
shares. As of December 31, 2018, the note has been fully converted.
Convertible note 13: On February 16,
2017, the Company entered into a convertible promissory note with an accredited investor for $30,000. The note has a term of six
(6) months with an interest rate of 8% and is convertible to common shares at a 40% discount to the then current market price of
our shares. As of December 31, 2018, the note has been fully converted.
Convertible note 14: On March 31, 2017,
the Company entered into a convertible promissory note with an accredited investor for $200,000. The note has a term of six (6)
months with an interest rate of 8% and is convertible to common shares at a 40% discount to the then current market price of our
shares. As of December 31, 2018, the note has been fully converted.
Convertible note 15 & 16: On May
17, 2017, the Company entered a convertible promissory note with an investor for a total amount of $1,375,000 (after $10,000 legal
and due diligence fee) with an OID of $125,000, the note will be fulfilled through a series of funding. The note is due 12 months
after each funding date and 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 had outstanding balance of $921,004 as of the year ended June 30, 2018. The
fair value of the warrants were $40,400 as of June 30, 2018. During the six months ended December 31, 2018, the Company converted
$525,000 into the Company’s common stock, the remaining balance of the note was $396,004 as of December 31, 2018 and the
fair value of the warrant liability was $14,480. As of December 31, 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:
Convertible note 17: On July 17, 2017,
the Company entered into a convertible promissory note with an accredited investor for $164,900. The note has a term of one year
with an interest rate of 8% and is convertible to common shares at a fixed conversion price of $0.025. As of December 31, 2018,
the note has been fully converted.
Convertible note 18: On August 3, 2017,
the Company entered into a convertible promissory note with an accredited investor for $150,000. The note has a term of six (6)
months with an interest rate of 10% and is convertible to common shares at a 45% discount to average of 3 lowest trading price
during last 20 trading days. As of December 31, 2018, the note has been fully converted.
Convertible note 19: On August 22, 2017,
the Company entered into a convertible promissory note with an accredited investor for $35,000. The note has a term of six (6)
months with an interest rate of 8% and is convertible to common shares at a 40% discount of average two lowest price of last 20
trading days prices. As of December 31, 2018, the note has been fully converted.
Convertible note 20: On September 15,
2017, the Company entered into a convertible promissory note with an accredited investor for $150,000. The note has a term of six
(6) months with an interest rate of 10% and is convertible to common shares at a 45% discount to average of 3 lowest trading price
during last 20 trading days. As of December 31, 2018, the note has been fully converted.
Convertible note 21: On September 26,
2017, the Company entered into a convertible promissory note with an accredited investor for $15,000. The note has a term of six
(6) months with an interest rate of 8% and is convertible to common shares at a 40% discount of average two lowest price of last
20 trading days prices. As of December 31, 2018, the note has been fully converted.
Convertible note 22: On December 7,
2017, the Company entered into a convertible promissory note with an accredited investor for $50,000. The note has a term of one
year with an interest rate of 8% and is convertible to common shares at a fixed conversion price of $0.05. As of December 31, 2018,
the note has been fully converted.
Convertible notes issued during the
six months ended December 31, 2018 were as follows:
Convertible note 23: On September 20,
2018, the Company entered a convertible promissory note with an investor for a total amount of $267,500 (includes $5,000 legal
fee and an OID of $12,500). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 55%
of the lowest closing bid for the 20 consecutive trading days prior to the conversion date.
Convertible note 24: On October 5, 2018,
the Company entered a convertible promissory note with an investor for a total amount of $250,000 (includes $5,000 OID). The note
is due 360 days and bear an interest rate of 8%. The conversion price for the note is 45% of average three lowest closing bid for
the 20 consecutive trading days prior to the conversion date.
Convertible note 25: On November 1,
2018, the Company entered into a convertible promissory note with an accredited investor for $100,000. The note has a term of one
year with an interest rate of 8% and is convertible to common shares at a fixed conversion price of $0.07.
Convertible note 26: On November 16,
2018, the Company entered into a convertible promissory note with an accredited investor for $80,000. The note has a term of one
year with an interest rate of 8% and is convertible to common shares at a fixed conversion price of $0.07.
Convertible note 27: On November 16,
2018, the Company entered into a convertible promissory note with an accredited investor for $40,000. The note has a term of one
year with an interest rate of 8% and is convertible to common shares at a fixed conversion price of $0.07.
Convertible note 28: On December 3,
2018, the Company entered into a convertible promissory note with an accredited investor for $35,000. The note has a term of one
year with an interest rate of 8% and is convertible to common shares at a fixed conversion price of $0.07.
Convertible note 29: On December 26,
2018, the Company entered a convertible promissory note with an investor for a total amount of $250,000 (includes $5,000 OID).
The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 45% of average three lowest closing
bid for the 20 consecutive trading days prior to the conversion date.
As of the period ended December 31,
2018, the Company’s convertible notes consisted of following:
Balance
|
|
|
|
|
|
Conversion
|
|
|
|
Balance
|
|
|
|
|
|
|
as of
|
|
Default
|
|
Addition/
|
|
in
|
|
# of
|
|
as of
|
|
|
|
Interest
|
|
Conversion
|
06.30.2018
|
|
Penalty
|
|
(Repayment)
|
|
principal
|
|
shares
|
|
12.31.2018
|
|
Due Date
|
|
Rate
|
|
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
|
|
|
|
1,160,391
|
|
|
|
—
|
|
|
7/17/2017
|
|
|
10
|
%
|
|
40% discount of average price of last 20 trading days prices
|
|
25,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,000
|
|
|
|
1,426,674
|
|
|
|
—
|
|
|
7/17/2017
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days prices
|
|
50,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50,000
|
|
|
|
2,931,188
|
|
|
|
—
|
|
|
8/8/2017
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days prices
|
|
80,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
80,000
|
|
|
|
4,530,846
|
|
|
|
—
|
|
|
7/20/2017
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days prices
|
|
66,023
|
|
|
|
—
|
|
|
|
—
|
|
|
|
66,023
|
|
|
|
3,712,324
|
|
|
|
—
|
|
|
8/24/2017
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days prices
|
|
50,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50,000
|
|
|
|
2,390,805
|
|
|
|
—
|
|
|
8/9/2017
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days prices
|
|
75,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
75,000
|
|
|
|
4,378,547
|
|
|
|
—
|
|
|
7/31/2017
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days prices
|
|
124,318
|
|
|
|
—
|
|
|
|
—
|
|
|
|
63,567
|
|
|
|
3,919,404
|
|
|
|
60,751
|
|
|
12/1/2017
|
|
|
10
|
%
|
|
45% discount of lowest price of last 20 trading days prices
|
|
70,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
70,000
|
|
|
|
4,067,072
|
|
|
|
—
|
|
|
9/23/2017
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days prices
|
|
30,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
30,000
|
|
|
|
1,500,010
|
|
|
|
—
|
|
|
8/16/2017
|
|
|
8
|
%
|
|
Greater of 40% discount to average of 3 lowest trading price during last 20 trading days or $.05
|
|
200,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
200,000
|
|
|
|
11,557,652
|
|
|
|
—
|
|
|
9/30/2017
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days prices
|
|
921,004
|
|
|
|
—
|
|
|
|
—
|
|
|
|
525,000
|
|
|
|
17,521,702
|
|
|
|
396,004
|
|
|
5/12/2018
|
|
|
22
|
%
|
|
45% discount of lowest price of last 20 trading days prices
|
|
150,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
150,000
|
|
|
|
3,745,330
|
|
|
|
—
|
|
|
5/3/2018
|
|
|
10
|
%
|
|
45% discount to average of 3 lowest trading price during last 20 trading days
|
|
164,900
|
|
|
|
—
|
|
|
|
—
|
|
|
|
164,900
|
|
|
|
6,596,000
|
|
|
|
—
|
|
|
7/17/2018
|
|
|
8
|
%
|
|
The conversion price shall be $0.025 per share
|
|
35,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
35,000
|
|
|
|
691,184
|
|
|
|
—
|
|
|
8/22/2018
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days prices
|
|
15,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15,000
|
|
|
|
294,114
|
|
|
|
—
|
|
|
9/26/2018
|
|
|
8
|
%
|
|
40% discount of average two lowest price of last 20 trading days prices
|
|
50,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50,000
|
|
|
|
1,000,000
|
|
|
|
—
|
|
|
12/7/2018
|
|
|
8
|
%
|
|
The conversion price shall be $0.05 per share
|
|
—
|
|
|
|
—
|
|
|
|
267,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
267,500
|
|
|
9/15/2019
|
|
|
8
|
%
|
|
55% discount of lowest price of last 20 trading days prices
|
|
—
|
|
|
|
—
|
|
|
|
250,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
250,000
|
|
|
10/5/2019
|
|
|
8
|
%
|
|
45% discount of average three lowest price of last 20 trading days prices
|
|
—
|
|
|
|
—
|
|
|
|
100,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
100,000
|
|
|
10/31/2019
|
|
|
8
|
%
|
|
The conversion price shall be $0.07 per share
|
|
—
|
|
|
|
—
|
|
|
|
80,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
80,000
|
|
|
11/15/2019
|
|
|
8
|
%
|
|
The conversion price shall be $0.07 per share
|
|
—
|
|
|
|
—
|
|
|
|
40,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
40,000
|
|
|
11/15/2019
|
|
|
8
|
%
|
|
The conversion price shall be $0.07 per share
|
|
—
|
|
|
|
—
|
|
|
|
35,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
35,000
|
|
|
12/2/2019
|
|
|
8
|
%
|
|
The conversion price shall be $0.07 per share
|
|
—
|
|
|
|
—
|
|
|
|
250,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
250,000
|
|
|
12/26/2019
|
|
|
8
|
%
|
|
45% discount of average three lowest price of last 20 trading days prices
|
|
2,426,245
|
|
|
|
|
|
|
|
1,022,500
|
|
|
|
1,819,490
|
|
|
|
75,167,248
|
|
|
|
1,629,255
|
|
|
|
|
|
|
|
|
|
In connection with the convertible debt,
debt discount balance as of December 31, 2018 and June 30, 2018 were $752,869 and $26,303 respectively and were being amortized
and recorded as interest expenses over the term of the convertible debt.
As of the period ended December 31,
2018, the Company’s debt discount consisted of following:
Note Date
|
Due Date
|
OID
|
Amortization in FY 2018
|
Debt Discount Balance at 6/30/2018
|
Amortization in 6 months ended 12/31/2018
|
Debt Discount Balance at 12/31/2018
|
8/22/2017
|
8/22/2018
|
$35,000
|
$29,918
|
$5,082
|
$5,082
|
$
—
|
9/26/2017
|
9/26/2018
|
15,000
|
11,384
|
3,616
|
3,616
|
—
|
7/17/2017
|
7/17/2018
|
164,900
|
160,445
|
4,455
|
4,455
|
—
|
12/7/2017
|
12/7/2018
|
50,000
|
36,849
|
13,151
|
13,151
|
—
|
9/20/2018
|
9/15/2019
|
12,500
|
—
|
—
|
3,542
|
8,958
|
9/20/2018
|
9/15/2019
|
250,000
|
—
|
—
|
70,833
|
179,167
|
10/5/2018
|
10/5/2019
|
5,000
|
—
|
—
|
1,192
|
3,808
|
10/5/2018
|
10/5/2019
|
245,000
|
—
|
—
|
58,397
|
186,603
|
11/1/2018
|
11/1/2019
|
84,286
|
—
|
—
|
13,855
|
70,431
|
11/16/2018
|
11/16/2019
|
36,571
|
—
|
—
|
4,509
|
32,063
|
11/16/2018
|
11/16/2019
|
18,286
|
—
|
—
|
2,254
|
16,031
|
12/3/2018
|
12/3/2019
|
10,000
|
—
|
—
|
767
|
9,233
|
12/26/2018
|
12/26/2019
|
5,000
|
—
|
—
|
68
|
4,932
|
12/26/2018
|
12/26/2019
|
245,000
|
—
|
—
|
3,356
|
241,644
|
Total:
|
|
|
$41,302
|
$26,303
|
$185,077
|
$752,869
|
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 Binomial option pricing model using
the assumptions detailed below. As of December 31, 2018 and June 30, 2018, the derivative liability was $1,734,338 and $3,069,616,
respectively. The Company recorded $2,019,927 loss and $140,653 loss from changes in derivative liability during the three months
ended September 30, 2018 and 2017, respectively. The Binomial Option Price Model with the following assumption inputs:
|
|
December 31, 2018
|
Annual dividend yield
|
|
|
—
|
|
Expected life (years)
|
|
|
0.5-1.00
|
|
Risk-free interest rate
|
|
|
2.49-2.72
|
%
|
Expected volatility
|
|
|
118-175
|
%
|
|
|
September 30, 2018
|
Annual dividend yield
|
|
|
—
|
|
Expected life (years)
|
|
|
0.5-1.00
|
|
Risk-free interest rate
|
|
|
2.15-2.37
|
%
|
Expected volatility
|
|
|
87-123
|
%
|
|
|
|
June 30, 2018
|
|
Annual dividend yield
|
|
|
—
|
|
Expected life (years)
|
|
|
0.15-1.00
|
|
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, 2018
|
$3,069,616
|
Additions
|
427,076
|
Mark to Market
|
1,641,457
|
Reclassification to APIC due to conversions
|
(2,714,433)
|
Balance, September 30, 2018
|
$2,423,716
|
Additions
|
865,503
|
Mark to Market
|
2,019,927
|
Reclassification to APIC due to conversions
|
(3,574,808)
|
Balance, December 31, 2018
|
$1,734,338
|
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 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 December 31, 2018
and June 30, 2018, the fair value of the warrant liability was $14,480 and $40,400, respectively. The Binomial Option Price Model
with the following assumption inputs:
Warrants liability
|
|
December 31, 2018
|
Annual dividend yield
|
|
|
—
|
|
Expected life (years)
|
|
|
0.5
|
|
Risk-free interest rate
|
|
|
2.45
|
%
|
Expected volatility
|
|
|
138
|
%
|
|
|
|
|
|
Warrants issued in May 2017
|
|
|
June 30, 2018
|
|
Annual dividend yield
|
|
|
—
|
|
Expected life (years)
|
|
|
0.5
|
|
Risk-free interest rate
|
|
|
2.06
|
%
|
Expected volatility
|
|
|
151
|
%
|
Below is the movement of warrants for
the period ending December 31, 2018:
|
|
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
|
|
|
|
4
|
|
Granted
|
|
|
505,000
|
|
|
$
|
0.15
|
|
|
|
3.86
|
|
Outstanding at June 30, 2017
|
|
|
505,000
|
|
|
|
0.20
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
|
505,000
|
|
|
$
|
0.15
|
|
|
|
0.5
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
505,000
|
|
|
$
|
0.15
|
|
|
|
0.5
|
|
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 December 31, 2018 and June 30, 2018, the loan principal balance was $25,982. As of December 31,
2018, the note is in default.
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 December 31, 2018 and June
30, 2018, this note had a balance of $18,000.
On January 14, 2015, the Company entered
into a promissory note with Richard Ko (an employee of the Company, who owns less than 5% of the Company’s stock). The principle
amount was $30,000 and the note bore no interest. The note had a term of one (1) year and was due on January 14, 2016, and became
payable upon demand after January 14, 2016. As of December 31, 2018 and June 30, 2018, this note had a balance of $5,000 and $20,000,
respectively.
As of December 31, 2018 and June 30,
2018, the Company has an outstanding balance of notes payable due to related parties of $23,000, respectively.
11.
|
Stockholder’s Deficiency
|
The Company is authorized to issue 1,990,000,000 shares of
$.001 par value common stock and 10,000,000 shares of $.001 par value preferred stock.
During the year ended June 30, 2018,
the Company issued 1,171,429 shares of common stock for cash in total amount of $82,000.
During the year ended June 30, 2018,
the Company issued 4,736,842 shares of common stock for services in total amount of $180,000.
During the year ended June 30, 2018,
the Company issued 13,492,560 shares of common stock to settle the old debt in total amount of $306,810.
During the three months ended September
30, 2018, the Company issued 27,301,360 shares of common stock to settle debt in total amount of $872,859.
During the three months ended September
30, 2018, the Company issued 2,971,154 shares of common stock for services in total amount of $197,500.
During the three months ended September
30, 2018, the Company issued 3,700,000 shares of common stock for cash in total amount of $185,000.
During the three months ended December
31, 2018, the Company issued 6,632,605 shares of common stock to settle the old debt in total amount of $346,982, net with $263,616
share to be issued, common stock.
During the three months ended December
31, 2018, the Company issued 47,865,888 shares of common stock for debt conversions in total amount of $1,015,391.
During the three months ended December
31, 2018, the Company issued 4,142,857 shares of common stock for cash in total amount of $220,000.
During the three months ended December
31, 2018, the Company issued 89,111,251 shares of common stock for service in total amount of $6,082,851, net with $390,830 share
to be issued, common stock.
During the three months ended December
31, 2018, the Company issued 10,000,000 shares of common stock for a LOI deposit in total amount of $11,175,000.
During the three months ended December
31, 2018, the Company issued 200,000,000 shares of common stock for award to the certain master purchase agreement in total amount
of $18,000,000. The acquisition has not been fully completed as of December 31, 2018.
As of December 31, 2018 and June 30,
2018, the Company had 637,860,318 and 246,135,203 shares of its common stock issued and outstanding.
12.
|
Related party transactions
|
As of December 31, 2018 and June 30,
2018, the Company had outstanding balance of $23,000 owed to various 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 October 2017, they are no long a
related party. As of June 30, 2018, the outstanding balance under this note was $150,820. As of December 31, 2018, the note has
been fully settled into 1,508,200 shares of the Company’s common stock.
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 December 31, 2018 and June 30, 2018, the outstanding balance with
Greater Asia loans were $168,008 and $140,125, respectively. As of December 31, 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 December 31, 2018 and June 30, 2018, the Company
has an outstanding balance of $4,084 and $4,285.
On January 30, 2018, SGMD entered a
straight promissory note with an individual with one or more on demand loan with maturity date on January 30, 2019 and no interest
shall be charged to the Company. As of December 31, 2018, the outstanding balance under this note was $10,000.
As of December 31, 2018 and June 30,
2018, the Company had an outstanding loan balance of $172,948 and $329,029, respectively.
14.
|
Loan payable – related parties
|
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 December
31, 2018 and June 30, 2018, the balance of the loan were $30,000 and $30,000, respectively.
From
time to time, SWC would receive short-term loans from company former director for its working capital needs.
As
of
December 31
, 2018 and June 30, 2018, the Company had outstanding balance of $25,634 and
$0, respectively.
As
of December 31, 2018 and June 30, 2018, the total loan payable to related party was $55,634 and $30,000, respectively.
15.
|
Shares to be issued – liability
|
During the year ended June 30, 2018,
the Company had entered into multiple private placement agreements and had increased potential shares to be issued under liability
in total amount of $1,798,000.
During the three months ended September
30, 2018, the Company issued 3,700,000 shares of the Company’s common stock for cash in total amount of $185,000. Share to
be issued is reduced by $185,000 due to such issuance.
During the three months ended September
30, 2018, the Company had entered into a multiple private placement agreement and had increased potential shares under liability
by 1,000,000 shares, for total amount of $50,000.
During the three months ended December
31, 2018, the Company issued 45,307,142 shares of the Company’s common stock for cash & services in total amount of $2,506,000.
Share to be issued is reduced by $2,506,000 due to such issuance.
As of December 31, 2018 and June 30,
2018, the Company had balance of $50,000 and $2,691,000 share to be issued.
16.
|
Shares to be issued –equity
|
As of the year ended June 30, 2018,
the Company had entered into multiple private placement agreements and had increased potential shares to be issued under common
stock in total amount of $467,996.
During the three months ended September
30, 2018, the Company had entered into multiple private placement agreements and had increased potential shares to be issued under
common stock in total amount of $95,000. The shares have been issued as of December 31, 2018.
During the three months ended September
30, 2018, the Company had entered into multiple service agreements and had increased potential shares to be issued for service
compensation in total amount of $137,000. The shares have been issued as of December 31, 2018.
During the three months ended September
30, 2018, the Company had entered into debt settlement and had increased potential shares to be issued for debt settlement under
common stock in total amount of $174,450. The shares have been issued as of December 31, 2018.
As of the three months ended September
30, 2018 and year ended June 30, 2018, the Company had entered into multiple private placement agreements and had increased potential
shares to be issued under preferred stock in total amount of $2,000,000, respectively. The shares have been issued as of December
31, 2018.
As of December 31, 2018, the Company
had total potential shares to be issued under common stock and preferred stock in total amount of $0.
17.
|
Commitments and contingencies
|
On February 23, 2018 the Company entered
into lease agreement for a new office space as part of the plan to expand operation, the lease is set to commence Commencing March
1, 2018. The term of the lease is for a (5) Five Years with 1 month free on the 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 January 8, 2019, the Company issued
a convertible note to an accredited investor for proceeds to the Company in the amount of $105,000.
On January 22, 2019, the Company issued
a convertible note to an accredited investor for proceeds to the Company in the amount of $100,000.
On January 23, 2019, the Company issued
2,364,066 shares of the Company’s common stock for debt conversions in total amount of $75,000.
On January 24, 2019, the Company issued
a convertible note to an accredited investor for proceeds to the Company in the amount of $53,000.
On February 6, 2019, the Company issued
4,995,084 shares of the Company’s common stock for debt conversions in total amount of $127,000.
On February 21, 2019, the Company entered
into an acknowledgement and representation letter with BizRight LLC under the terms and consideration of the master marketing agreement
dated December 13, 2017. BizRight LLC has executed an asset purchase agreement with BZRCH, Inc., a Nevada corporation to retain
all or part of BizRight’s assets.
Item 8. Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure
As reported on Form 8-K filed on April
10, 2018 with the Securities and Exchange Commission, or SEC, BF Borgers CPA (“Borgers”) was dismissed as the independent
registered public accounting firm for the Company effective as of March 21, 2018. The dismissal of Borgers was approved by the
Company’s Board of Directors. Other than an explanatory paragraph included in Borgers’ audit report for the Company's
fiscal year ended December 31, 2017, 2016 and 2015 relating to the uncertainty of the Company's ability to continue as a “going
concern”, the audit report of Borgers on the Company's financial statements for the last three fiscal years ended December
31, 2017, 2016 and 2015, did not contain an adverse opinion or a disclaimer of opinion, nor was it qualified or modified as to
uncertainty, audit scope or accounting principles. During the Company's 2017, 2016 and 2015 fiscal years and through March 21,
2018, (1) there were no disagreements with Borgers on any matter of accounting principles or practices, financial statement disclosure,
or auditing scope or procedure, which, if not resolved to the satisfaction of Borgers, would have caused Borgers to make reference
to the subject matter of the disagreements in connection with their report, and (2) there were no “reportable events”
as that term is defined in Item 304(a)(1)(v) of Regulation S-K.
As a result of the dismissal of Borgers
as the independent registered public accounting firm for the Company, on April 2, 2018, the Company engaged L&L CPAS, PA, a
PCAOB and CPAB registered firm (“L&L”). Neither we, nor anyone on our behalf, has consulted with L&L 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 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.
ITEM 2 – MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis may include
statements regarding our expectations with respect to our future performance, liquidity, and capital resources. Such statements,
along with any other non-historical statements in the discussion, are forward-looking. These forward-looking statements are subject
to numerous risks and uncertainties, including, but not limited to, factors listed in other documents we file with the Securities
and Exchange Commission (SEC). We do not assume an obligation to update any forward- looking statement. Our actual results may
differ materially from those contained in or implied by any of the forward-looking statements in this Form 10-Q. See “SPECIAL
NOTE REGARDING FORWARD LOOKING STATEMENTS” above.
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,
December 31, 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 an importer, distributor and marketer of hydroponic supplies to various agricultural sectors.
We had previously been a marketer of culinary seasoning products Seasoning Stix and Sriracha Seasoning Stix and a marketer of tree-free
paper products. These products were discontinued during 2018 in order to focus the majority of our corporate resources on the marketing
of hydroponic supplies.
As of the date of this filing and
moving into the future, our primary focus we be on supplying the hydroponic and indoor/outdoor cultivation agricultural
market sectors, including the cannabis cultivation, processing and distribution sectors. While our entrance into this
business sector was announced during late November 2017, we did not begin to recognize revenues from these operation until
later in calendar 2018.
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 and across the west coast, 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.
In December of 2017, we announced a
Master Marketing Agreement with BizRight, LLC where the Company would market BizRight’s products. The Company also gained
an option to acquire all of BizRight’s operations. We began recognizing revenues under this marketing agreement during late
calendar 2018 and expect to begin recognizing an increasing amount of revenue under the Master Marketing Agreement as we move further
into calendar 2019.
Also during 2017, Sugarmade announced
the signing of an exclusive distribution agreement for California, Oregon and Washington with privately held Plantation Corp. for
its 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. Sugarmade plans to move forward as Plantation’s distribution partner upon availability of the BudLife product
line. As of the end of the reporting period, the Company is awaiting final product availability in order to begin marketing the
products under the Agreement.
During October 2018, the Company signed
a Letter of Intent to acquire Sky Unlimited, LLC doing business as Athena United, a Southern California-based, supplier of hydroponic
cultivation supplies to the wholesale sector and to large commercial cultivators. Athena United operates its ecommerce website
at www.AthenaUnited.com. Under the terms of the Agreement, which contains both binding and non-binding elements, Sugarmade will
acquire all of the outstanding capital stock and the business operations for a combination of cash and common shares of Sugarmade.
Athena United, and its associated operations, is believed to be one of the larger operators in this market sector and is producing
revenues of approximately $40 million per year, is profitable, and cash flow positive. Should the Company be successful in its
acquisition efforts, the operation would be integrated under the Sugarmade corporate umbrella with Sugarmade assuming all operations
and recognizing all revenues and profits.
During January of 2019, the Company
announced its intention to acquire a retail location of Washington State-based Hydro4Less. The operation is expected to produce
approximately $5 million in revenues and to be profitable during calendar 2019. Additionally, via the pending transaction, Sugarmade
will gain an option to purchase two additional Hydro4Less retail operations, which are currently producing in excess of $20 million
annually. Should all three Hydro4Less acquisitions close, Sugarmade will increase its annual revenues by approximately $25 million
per year.
Via the marketing agreement with BizRight,
LLC and the acquisitions of Athena United and Hydro4Less, the Company believes it could become one of the largest and fast growing
market participants in the cannabis and other agricultural supply/hydroponic industries. As has been also outlined and disclosed
in other corporate filings, there can be no assurances these acquisitions will close and that such revenues will be realized by
the Company.
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 20% to 30% market share of generic and printed products within the take out frozen yogurt and ice cream
industries.
Employees and consultants
The company employees approximately
15 full-time and part-time workers, and consultants, most of whom work within the City of Monrovia, California headquarters location,
while small numbers are in our distribution warehouse located in Duarte, California.
Overview and Financial Condition
Discussions with respect to our Company’s
operations included herein refer to our operating subsidiary, Sugarmade-CA. Our Company purchased Sugarmade-CA on May 9, 2011.
As of the date of this filing, we had no other operations other than those of Sugarmade-CA. Information with respect to our Company’s
nominal operations prior to the Sugarmade Acquisition is not included herein.
Results of Operations
The following table sets forth the results
of our operations for the three months ended December 31, 2018 and 2017.
|
|
For the three months ended
|
|
|
December 31,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
Net Sales
|
|
|
1,445,269
|
|
|
|
938,754
|
|
Cost of Goods Sold:
|
|
|
1,071,033
|
|
|
|
657,249
|
|
Gross profit
|
|
|
374,236
|
|
|
|
281,505
|
|
Operating Expenses
|
|
|
3,823,085
|
|
|
|
1,033,316
|
|
Loss From Operations
|
|
|
(3,448,849
|
)
|
|
|
(751,811
|
)
|
Other non-operating Income (Expense):
|
|
|
(2,584,531
|
)
|
|
|
(5,223,504
|
)
|
Net Income (Loss)
|
|
|
(6,033,380
|
)
|
|
|
(5,975,315
|
)
|
Revenues
For the three-months ended December
31, 2018 and 2017, revenues were $1,445,269 and $938,754, respectively. The increase was primarily due to seasonality changes within
the yogurt and restaurant supply industry.
Cost of goods sold
For the three-month ended December 31,
2018 and 2017, costs of goods sold were $1,071,033 and $657,249 respectively. The increase was primarily due to the frozen yogurt
sector expanding and preparing for the industry’s pick-up in its seasonal trend.
Gross profit
For the three-month ended December 31,
2018 and 2017, gross profit was $374,236 and $281,505, respectively. The increase was primarily due to a combination of refocus
on the types of products sold by the Company and pivot and expansion into a new industry.
Operating expenses
For the three-month ended December 31,
2018 and 2017, operating expenses were $3,823,085 and $1,033,316, respectively. The increase was attributable to issuing all of
the stock compensation expenses for employees, legal, and consulting fees.
Other non-operating income (expense)
The Company had total other non-operating
expense of $2,584,531 and expense of $5,223,504 for the three months ended December 31, 2018 and 2017, respectively. The decrease
in non-operating income is related to the accounting for derivative liabilities.
Net income (loss)
Net loss totaled $6,033,380 for the
three month ended December 31, 2018, compared to a net loss totaling $5,975,315 for the three-month ended December 31, 2017. The
increase was attributable to issuing all of the stock compensation expenses for employees, legal, and consulting fees.
The following table sets forth the results
of our operations for the six months ended December 31, 2018 and 2017.
|
|
For the six months ended
|
|
|
December 31,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
Net Sales
|
|
|
$2,886,885
|
|
|
|
2,115,968
|
|
Cost of Goods Sold:
|
|
|
2,130,452
|
|
|
|
1,510,199
|
|
Gross profit
|
|
|
756,433
|
|
|
|
605,769
|
|
Operating Expenses
|
|
|
4,736,957
|
|
|
|
2,052,304
|
|
Loss From Operations
|
|
|
(3,980,524
|
)
|
|
|
(1,446,535
|
)
|
Other non-operating Income (Expense):
|
|
|
(4,661,909
|
)
|
|
|
(5,618,114
|
)
|
Net Income (Loss)
|
|
|
(8,642,433
|
)
|
|
|
(7,064,649
|
)
|
Revenues
For the six-months ended December 31,
2018 and 2017, revenues were $2,886,885 and $2,115,968, respectively. The increase was primarily due to seasonality changes within
the yogurt and restaurant supply industry.
Cost of goods sold
For the six-month ended December 31,
2018 and 2017, costs of goods sold were $2,130,452 and $1,510,199 respectively. The increase was primarily due to the frozen yogurt
sector expanding and preparing for the industry’s pick-up in its seasonal trend.
Gross profit
For the six-month ended December 31,
2018 and 2017, gross profit was $756,433 and $605,769, respectively. The increase was primarily due to a combination of refocus
on the types of products sold by the Company and pivot and expansion into a new industry.
Operating expenses
For the six-month ended December 31,
2018 and 2017, operating expenses were $4,736,957 and $2,052,304, respectively. The increase was attributable to issuing all of
the stock compensation expenses for employees, legal, and consulting fees.
Other non-operating income (expense)
The Company had total other non-operating
expense of $4,661,909 and expense of $5,618,114 for the six months ended December 31, 2018 and 2017, respectively. The decrease
in non-operating income is related to the accounting for derivative liabilities.
Net income (loss)
Net loss totaled $8,642,433 for the
six month ended December 31, 2018, compared to a net loss totaling $7,064,649 for the six-month ended December 31, 2017. The increase
was attributable to issuing all of the stock compensation expenses for employees, legal, and consulting fees.
Liquidity and Capital Resources
We have primarily financed our operations
through the sale of unregistered equity and convertible notes payable. As of December 31, 2018, our Company had cash balance of
$159,671 current assets totaling $3,238,056 and total assets of $3,544,462. We had current and total liabilities totaling $5,659,587.
Stockholders’ equity reflected a deficiency of $2,115,125.
The following is a summary of cash provided
by or used in each of the indicated types of activities during the six-months ended December 31, 2018 and 2017:
|
|
2018
|
|
2017
|
Cash (used in) provided by:
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(1,060,982)
|
|
|
$
|
(1,111,362
|
)
|
Investing activities
|
|
|
87,154
|
|
|
|
(144,906
|
)
|
Financing activities
|
|
|
856,278
|
|
|
|
1,187,801
|
|
Net cash used in operating activities
was $1,060,982 for the six months ended December 31, 2018, and $1,111,362 for the six months ended December 31, 2017.
There were $87,154 fixed assets and
intangible assets purchased during the six months ended December 31, 2017 relating to investing activities.
Net cash provided by financing activities
was $856,278 for the six months ended December 31, 2018 and $1,187,801 for the six months ended December 31, 2017.
Our capital requirements going forward
will consist of financing our operations until we are able to reach a level of revenues and gross margins adequate to equal or
exceed our ongoing operating expenses. Other than the notes payable discussed above, borrowings from our bank and the production
credit facility with our suppliers, we do not have any credit agreement or source of liquidity immediately available to us.
Given estimates of our Company’s
future operating results and our credit arrangements with our suppliers, we are currently forecasting that we will need to secure
additional financing to obtain adequate financial resources to reach profitability. As of the date of this report, we estimate
that the cash necessary to implement our current business plan for the next twelve months is approximately $2,000,000.
Based on our need to raise additional
funds to implement our business plans for the next twelve months, we have included a discussion concerning the presentation of
our financial statements on a going concern basis in the notes to our financial statements and our independent public accountants
have included a similar discussion in their opinion on our financial statements through June 30, 2018. We will be required in the
near future to issue debt or sell our Company’s equity securities in order to raise additional cash, although there are no
firm arrangements in place for any such financing at this time. We cannot provide any assurances as to whether we will be able
to secure the necessary financing, or the terms of any such financing transaction if one were to occur. The failure to secure such
financing could severely curtail our plans for future growth or in more severe scenarios, the continued operations of our Company.
Capital Expenditures
Our current plans do not call for our
Company to expend significant amounts for capital expenditures for the foreseeable future beyond relatively insignificant expenditures
for office furniture and information technology related equipment as we add employees to our Company. We are however continually
evaluating the production processes of our third party contract manufacturers to determine if there are investments we could make
in their processes to achieve manufacturing improvements and significant cost savings. Any such desired investments would require
additional cash above our current forecast requirements.
Critical Accounting Policies Involving Management Estimates
and Assumptions
Please see the notes to our financial statements.