Notes to Unaudited Condensed 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, Sept 30, 2016, 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 City of Industry, California, a suburb of Los Angeles, with two additional
warehouse locations in Southern California. As of date of this filing, we employ 21 full and part-time workers and contractors.
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 Stixs International, LLC, the Company plans to introduce a new culinary seasoning
product named Sriracha Seasoning Stixs. Sriracha Seasoning Stixs are encapsulated Huy Fong Sriracha Sauce and other seasonings
in the form of a stick, which are inserted into meat, fish and poultry prior to cooking. Sriracha Seasoning Stixs 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 plans to introduce this product via
a nationwide advertising and social media campaign during the December quarter of 2016.
2. 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, 2015,
which contains our audited consolidated financial statements and notes thereto, together with the Management’s Discussion
and Analysis of Financial Condition and Results of Operation, for the period ended June 30, 2015, filed on or about August 6, 2016.
The interim results for the period ended September 30, 2015 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 three months ended September 30, 2016 and for the fiscal year ended June 30, 2016. The
Company's continuation as a going concern is dependent on its ability to generate sufficient cash flows from operations to
meet its obligations, in which it has not been successful, and/or obtaining additional financing from its shareholders or
other sources, as may be required.
Our
condensed
consolidated financial statements have
been
prepared
assuming that
we
will
continue as
a
going
concern. Such assumption contemplates the
realization of assets
and satisfaction of
liabilities in the normal course of business. These
condensed
consolidated
financial
statements
do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and classifications of liabilities that may
result should the Company
be unable
to
continue as
a going concern.
Management is endeavoring to increase revenue-generating
operations. While priority is on generating cash from operations through the sale of the Company’s products, management is
also seeking to raise additional working capital through various financing sources, including the sale of the Company’s
equity and/or debt securities, which may not be available on commercially reasonable terms to our Company, or which may not be
available at all. If such financing is not available on satisfactory terms, we may be unable to continue our business as desired
and our operating results will be adversely affected. In addition, any financing arrangement may have potentially adverse effects
on us and/or our stockholders. Debt financing (if available and undertaken) will increase expenses, must be repaid regardless of
operating results and may involve restrictions limiting our operating flexibility. If we issue equity securities to raise additional
funds, the percentage ownership of our existing stockholders will be reduced and the new equity securities may have rights, preferences
or privileges senior to those of the current holders of our common stock.
Use of estimates
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires our management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ significantly from those estimates.
Revenue recognition
We recognize revenue in accordance with Financial
Accounting Standards Board Accounting Standards Codification (“FASB ASC”) No. 605,
Revenue Recognition
. Revenue
is recognized when an arrangement and a determinable fee occur, and when collection is considered to be probable and products are
delivered or title has been transferred. This generally occurs upon shipment of the merchandise, which is when legal transfer of
title occurs. In the event that final acceptance of our product by the customer is uncertain, revenue is deferred until all acceptance
criteria have been met. We currently have a consignment arrangement with two of our customers. We record revenue on consignment
goods when the consigned goods are sold by the consignee and all other above mentioned revenue recognition criteria have been satisfied.
Cash deposits received in connection with the sales of our products prior to their being delivered or acceptance if applicable
is recorded as deferred revenue.
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 $57,341
as of September 30, 2016 and of $117,866
as of June
30, 2016.
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 September 30, 2016 and June 30, 2016, the balance for the inventory totaled $341,346 and $468,262, respectively. No amounts
were recognized as an obsolescence reserve at September 30, 2016 and June 30, 2016.
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 September
30, 2015.
Stock based compensation
Stock based compensation cost to employees
is measured at the date of grant, based on the calculated fair value of the stock-based award, and will be recognized as expense
over the employee’s requisite service period (generally the vesting period of the award). We estimate the fair value of employee
stock options granted using the Black-Scholes-Merton Option Pricing Model. Key assumptions used to estimate the fair value of stock
options will include the exercise price of the award, the fair value of our common stock on the date of grant, the expected option
term, the risk free interest rate at the date of grant, the expected volatility and the expected annual dividend yield on our common
stock. We use our company’s own data among other information to estimate the expected price volatility and the expected forfeiture
rate. Share-based compensation awards issued to non-employees for services rendered are recorded at either the fair value of the
services rendered or the fair value of the share-based payment, whichever is more readily determinable.
Loss per share
We calculate basic earnings per share (“EPS”)
by dividing our net loss by the weighted average number of common shares outstanding for the period, without considering common
stock equivalents. Diluted EPS is computed by dividing net income or net loss by the weighted average number of common shares
outstanding for the period and the weighted average number of dilutive common stock equivalents, such as options and warrants.
Options and warrants are only included in the calculation of diluted EPS when their effect is dilutive. 5,819,105 potential
shares issuable upon conversion of convertible debts and 0 potential shares
issuable upon exercising of warrants were excluded in calculating diluted loss per share for the three months ended September 30,
2016 due to the fact that issuance of the shares is anti-dilutive as a result of the Company’s net loss
Fair value of
financial instruments
ASC Topic 820 defines
fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair
value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency
of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
Level 1 - observable
inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - include
other inputs that are directly or indirectly observable in the marketplace.
Level 3 - unobservable
inputs which are supported by little or no market activity.
The Company used Level 2 inputs for its valuation
methodology for the derivative liabilities in determining the fair value using the Black-Scholes option-pricing model with the
following assumption inputs:
|
|
September 30, 2016
|
Annual dividend yield
|
|
|
—
|
|
Expected life (years)
|
|
|
0.45
|
|
Risk-free interest rate
|
|
|
0.18
|
%
|
Expected volatility
|
|
|
398
|
%
|
|
|
June 30, 2016
|
Annual dividend yield
|
|
|
—
|
|
Expected life (years)
|
|
|
0.01
|
|
Risk-free interest rate
|
|
|
0.21
|
%
|
Expected volatility
|
|
|
449
|
%
|
|
|
Carrying Value
|
|
Fair Value Measurements at
|
|
|
As of
|
|
September 30, 2016
|
|
|
September 30,
|
|
Using Fair Value Hierarchy
|
|
|
2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
458,000
|
|
|
$
|
—
|
|
|
$
|
458,000
|
|
|
$
|
—
|
|
Total
|
|
$
|
458,000
|
|
|
$
|
—
|
|
|
$
|
458,000
|
|
|
$
|
—
|
|
|
|
June 30, 2016
|
Annual dividend yield
|
|
|
—
|
|
Expected life (years)
|
|
|
0.01
|
|
Risk-free interest rate
|
|
|
0.21
|
%
|
Expected volatility
|
|
|
449
|
%
|
|
|
Carrying Value
|
|
Fair Value Measurements at
|
|
|
As of
|
|
June 30, 2016
|
|
|
June 30,
|
|
Using Fair Value Hierarchy
|
|
|
2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
701,000
|
|
|
$
|
—
|
|
|
$
|
701,000
|
|
|
$
|
—
|
|
Total
|
|
$
|
701,000
|
|
|
$
|
—
|
|
|
$
|
701,000
|
|
|
$
|
—
|
|
Derivative instruments
The fair
value of derivative instruments is recorded and shown separately under current liabilities. Changes in the fair value of derivatives
liability are recorded in the consolidated statement of operations under non-operating income (expense).
Our Company
evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as
embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is
initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the
consolidated statements of operations. For stock-based derivative financial instruments, the Company uses a weighted average Black-Scholes-Merton
option-pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of
derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the
end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based
on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
Refer to Note 6 for details.
Segment Reporting
FASB ASC Topic 280, “Segment Reporting”,
requires use of the “management approach” model for segment reporting. The management approach
model
is based on the way a company’s management organizes segments within the Company for making operating decisions and assessing
performance. Reportable segments are based on products and services, geography, legal structure, management structure,
or any other manner in which management disaggregates a company.
FASB ASC Topic 280 has no effect on the Company’s financial
statements as substantially all of its operations are conducted in one industry segment – paper and paper-based products
such as paper cups, cup lids, food containers, etc.
New accounting pronouncements not yet
adopted
In August
2014, the FASB issued ASU 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties
about an Entity’s Ability to Continue as a Going Concern. The amendments is ASU 2014-15 are intended to define management’s
responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern
and to provide related footnote disclosures. The amendments in this standard are effective for annual periods ending after December
15, 2016, and interim periods within annual periods beginning after December 15, 2016. We are evaluating the effect, if any; adoption
of ASU No. 2014-15 will have on our condensed consolidated financial statements.
In November
2014, the FASB issued ASU 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial
Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity. The amendments in ASU 2014-16 clarifies how current
U.S. GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument
that is issued in the form of a share. The amendments clarify that an entity should consider all relevant terms and features, including
the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. The amendments
in this standard are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2015. We are evaluating the effect, if any; adoption of ASU No. 2014-16 will have on our condensed consolidated
financial statements.
In November
2014, the FASB issued ASU No. 2014-17, Business Combinations (Topic 805): Pushdown Accounting. The amendments in ASU 2014-17 provide
an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event
in which an acquirer obtains control of the acquired entity. The amendment in this standard is effective on November 18, 2014.
After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control events or to
its most recent change-in-control event. We are evaluating the effect, if any; adoption of ASU No. 2014-17 will have on our condensed
consolidated financial statements.
In February
2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The amendments in ASU
2015-02 are intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited
liability corporations, and securitization structures. The amendment in this standard is effective for public business entities
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. We are evaluating the effect,
if any, adoption of ASU No. 2015-02 will have on our condensed consolidated financial statements.
3. Concentration
Customers
For the three months ended September 30, 2016
and September 30, 2015, our Company earned net revenues of $1,127,554 and $1,402,911 respectively. The vast majority of these revenues
for the period ending September 30, 2016 were derived from a large number of customers, whereas the vast majority of these revenues
for the period ending September 30, 2015 were derived from a limited number of customers. No customers accounted for over 10% of
the Company’s total revenues for the year ended September 30, 2016. The revenues for the period ending September 30, 2015,
only reflect prior to the acquisition of SWC, and were revenues from Sugarmade, Inc.
Suppliers
For the three months end September 30, 2016,
we purchased products for sale by CarryOutSupplies from several contract manufacturers located in Asia. A substantial portion of
the Company’s inventory is purchased from one supplier that functions as an independent foreign procurement agent. One supplier
accounted for 65%
and two suppliers each accounted for 8% of the Company’s
total inventory purchase in the three months ended September 30, 2016 and September 30, 2015 respectively.
4. 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, 2015, there were no legal claims currently pending or threatened
against us 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. However, as of the date of this filing, we were involved in the following legal proceedings.
As of the date of this filing
,
the
Company is a plaintiff, in Contra Costa County, California, in a suit alleging breach of fiduciary duty, conspiracy to commit breach
of fiduciary duty, fraud, conspiracy to commit fraud, conversion, breach of contract, and interference with contractual relations
against, Diversified Products Group Inc. (DPG), Stephen Pinto, Lewis Cohen and Heidi Estiva, who were former sales agents for the
Company. Pinto is the Company’s former Chairman of the board of directors. The Company plans to actively pursue this case.
During November of 2014, the Company received notice that a cross complaint had been filed against the Company. The complaint alleges
the parties were induced to make a series of investments in the Company by the material misrepresentations and omissions made by
the Company. The Company believes the allegations are without merit. The Company plans to vigorously defend against such claims.
No changes have occurred as of the filing date of this report.
On May 24, 2014, the Labor Commissioner, State
of California issued an Order, Decision or Award of the Labor Commissioner against the Company in the amount of $56,365. On October
28, 2014, the Company entered into a settlement agreement, which was effective October 28, 2014, to resolve a judgment against
the Company via the issuance of 502,533 restricted shares and a $30,000 cash payment.
On December 11, 2013, the Company was served
with a complaint from two Convertible Note Holders and investors in the Company, Lovitt & Hannan, Inc. Salary Deferral Plan
FBO J. Thomas Hannan, Attorney at Law 401K Plan and Trust, and Kevin M. Kearney. The Company’s former CEO, Scott Lantz, was
also named in the suit. The complaint alleges Hannan was induced to make a series of investments in the Company by the material
misrepresentations and omissions made by the Company. We believe the Hannan case is now in the middle of depositions and it appears
a trial is scheduled, tentatively, in the second quarter of 2017. We believe the claims in that case are still primarily of two
categories, the first being repayment of the promissory notes and a series of allegations about improper investment solicitations
and other misrepresentations. We believe the Company’s exposure to the claim concerning the Notes may be approximately $125,000.
We also believe there could be some associated legal fees, but we do not believe this amount will be material.
There can be no assurances the ultimate liability
relative to these law suits will not exceed what is outlined above.
5.
Convertible Notes
As of September 30, 2016
and June 30, 2016 the balance owing on convertible notes was $365,000 and 394,167 respectively. The convertible promissory notes
must be repaid by our Company within six months from the date of issuance; accrue interest at the rate of 14%; and are subject
to conversion at the election of the investors at such time as our Company has raised a minimum of $500,000 in a subsequent equity
financing. The conversion price will be the lower of 80% of the per share purchase price paid for by the new investors in the subsequent
financing, or $0.50 per share. Unless these promissory notes are converted or repaid earlier, our Company must pay the note-holders
the amount of the then accrued interest on the three, six, and nine month anniversaries of the issue date. As of September 30,
2016, two convertible promissory in the amount of $29,167 with accrued interest $13,596.28, was converted to 1,503,928 restricted
common shares.
As of September 30, 2016, the Company’s
convertible notes consisted of following:
|
|
|
|
As of September 30, 2016
|
|
|
|
|
|
|
|
|
|
Note Type and Investor
|
|
Due Date
|
|
Balance
|
|
Discount
|
|
Carrying Value
|
|
|
|
|
|
|
|
|
|
Convertible Note
|
|
|
7
|
/1/2016
|
|
|
25,000
|
|
|
|
—
|
|
|
|
25,000
|
|
Convertible Note
|
|
|
7
|
/1/2016
|
|
|
40,000
|
|
|
|
—
|
|
|
|
40,000
|
|
Convertible Note
|
|
|
7
|
/1/2016
|
|
|
50,000
|
|
|
|
—
|
|
|
|
50,000
|
|
Convertible Note
|
|
|
7
|
/1/2016
|
|
|
25,000
|
|
|
|
—
|
|
|
|
25,000
|
|
Convertible Note
|
|
|
7
|
/1/2016
|
|
|
25,000
|
|
|
|
—
|
|
|
|
25,000
|
|
Convertible Note
|
|
|
7
|
/1/2016
|
|
|
25,000
|
|
|
|
—
|
|
|
|
25,000
|
|
Convertible Note
|
|
|
7
|
/1/2016
|
|
|
25,000
|
|
|
|
—
|
|
|
|
25,000
|
|
Convertible Note
|
|
|
7
|
/1/2016
|
|
|
25,000
|
|
|
|
—
|
|
|
|
25,000
|
|
Convertible Note
|
|
|
7
|
/1/2016
|
|
|
25,000
|
|
|
|
—
|
|
|
|
25,000
|
|
Convertible Note
|
|
|
7
|
/1/2016
|
|
|
100,000
|
|
|
|
—
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Convertible Promissory Notes
|
|
|
|
|
|
$
|
365,000
|
|
|
|
|
|
|
$
|
365,000
|
|
As of June 30, 2016, the Company’s convertible
notes consisted of following:
|
|
|
|
As of June 30, 2016
|
|
|
|
|
|
|
|
|
|
Note Type and Investor
|
|
Due Date
|
|
Balance
|
|
Discount
|
|
Carrying Value
|
|
|
|
|
|
|
|
|
|
Convertible Note
|
|
|
7
|
/1/2016
|
|
|
25,000
|
|
|
|
—
|
|
|
|
25,000
|
|
Convertible Note
|
|
|
7
|
/1/2016
|
|
|
40,000
|
|
|
|
—
|
|
|
|
40,000
|
|
Convertible Note
|
|
|
7
|
/1/2016
|
|
|
50,000
|
|
|
|
—
|
|
|
|
50,000
|
|
Convertible Note
|
|
|
7
|
/1/2016
|
|
|
25,000
|
|
|
|
—
|
|
|
|
25,000
|
|
Convertible Note
|
|
|
7
|
/1/2016
|
|
|
25,000
|
|
|
|
—
|
|
|
|
25,000
|
|
Convertible Note
|
|
|
7
|
/1/2016
|
|
|
25,000
|
|
|
|
—
|
|
|
|
25,000
|
|
Convertible Note
|
|
|
7
|
/1/2016
|
|
|
25,000
|
|
|
|
—
|
|
|
|
25,000
|
|
Convertible Note
|
|
|
7
|
/1/2016
|
|
|
25,000
|
|
|
|
—
|
|
|
|
25,000
|
|
Convertible Note
|
|
|
7
|
/1/2016
|
|
|
25,000
|
|
|
|
—
|
|
|
|
25,000
|
|
Convertible Note
|
|
|
7
|
/1/2016
|
|
|
100,000
|
|
|
|
—
|
|
|
|
100,000
|
|
Convertible Note
|
|
|
7
|
/1/2016
|
|
|
20,834
|
|
|
|
—
|
|
|
|
20,834
|
|
Convertible Note
|
|
|
7
|
/1/2016
|
|
|
8,333
|
|
|
|
—
|
|
|
|
8,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Convertible Promissory Notes
|
|
|
|
|
|
$
|
394,167
|
|
|
|
|
|
|
$
|
394,167
|
|
6. Derivative liabilities
The derivative liability
is derived from the conversion features in note 5 and stock warrant in note 7. All were valued
using the weighted-average
Black-Scholes-Merton option pricing model using the assumptions detailed below. As of September 30, 2016 and June 30, 2016, the
derivative liability was $458,000 and $701,000, respectively. The Company recorded $243,000 gain and $498,000 loss from changes
in derivative liability during the three months ended September 30, 2016 and 2015, respectively. The Black-Scholes model with the
following assumption inputs:
|
|
September 30, 2016
|
Annual dividend yield
|
|
|
—
|
|
Expected life (years)
|
|
|
0.45
|
|
Risk-free interest rate
|
|
|
0.18
|
%
|
Expected volatility
|
|
|
398
|
%
|
|
|
June 30, 2016
|
Annual dividend yield
|
|
|
—
|
|
Expected life (years)
|
|
|
0.01
|
|
Risk-free interest rate
|
|
|
0.21
|
%
|
Expected volatility
|
|
|
449
|
%
|
7. Stock warrants
In connection with the issuance
of the promissory notes, the investors in the aggregate received two-year warrants to purchase up to a total of 50,000 shares of
common stock at $0.50 per share, and two-year warrants purchasing up to a total of 81,250 shares of common stock at $0.01 per share.
For purposes of accounting for the detachable warrants issued in connection with the convertible notes, the fair value of the warrants
was estimated using the Black-Scholes-Merton option pricing formula. The value of all warrants granted at the date of issuance
totaled $508,413 and was recorded as a discount to the notes payable. The amount will be amortized over the nine 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. During the three months ended September 30, 2016, all the warrants were
expired. There were no warrants outstanding at September 30, 2016.
|
|
Number of
Shares
|
|
Weighted Average
Exercise Price
|
|
Outstanding at June 30, 2014
|
|
|
$
|
180,000
|
|
|
$
|
0.20
|
|
|
Granted
|
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited September 30, 2014
|
|
|
|
38,750
|
|
|
|
0.09
|
|
|
Forfeited December 31, 2014
|
|
|
|
10,000
|
|
|
|
0.04
|
|
|
Outstanding at June 30, 2015
|
|
|
|
131,250
|
|
|
|
0.20
|
|
|
Outstanding at June 30, 2016
|
|
|
|
131,250
|
|
|
|
0.20
|
|
|
Expired
|
|
|
|
131,250
|
|
|
|
0.20
|
|
|
Outstanding at September 30, 2016
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Following is a summary of the status of warrants
outstanding at June 30, 2016:
Date Issued
|
|
Exercise Price
|
|
Number of Shares
|
|
Expiration Date
|
|
8/17/12
|
|
|
$
|
0.01
|
|
|
|
6,250
|
|
|
|
7/1/2016
|
|
|
8/20/12
|
|
|
$
|
0.01
|
|
|
|
6,250
|
|
|
|
7/1/2016
|
|
|
9/10/12
|
|
|
$
|
0.01
|
|
|
|
10,000
|
|
|
|
7/1/2016
|
|
|
9/13/12
|
|
|
$
|
0.01
|
|
|
|
12,500
|
|
|
|
7/1/2016
|
|
|
9/18/12
|
|
|
$
|
0.01
|
|
|
|
6,250
|
|
|
|
7/1/2016
|
|
|
10/5/12
|
|
|
$
|
0.01
|
|
|
|
2,500
|
|
|
|
7/1/2016
|
|
|
10/25/12
|
|
|
$
|
0.01
|
|
|
|
6,250
|
|
|
|
7/1/2016
|
|
|
1/31/13
|
|
|
$
|
0.01
|
|
|
|
6,250
|
|
|
|
7/1/2016
|
|
|
10/22/12
|
|
|
$
|
0.01
|
|
|
|
25,000
|
|
|
|
7/1/2016
|
|
|
8/24/12
|
|
|
$
|
0.50
|
|
|
|
50,000
|
|
|
|
8/24/16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total warrants as of June 30, 2016
|
|
|
|
|
|
|
|
131,250
|
|
|
|
|
|
8. 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
September 30, 2016 and June 30, 2015, the loan principal balance was $25,982.
Note payable to others
On January 23, 2013, the Company entered into
a promissory note with Mira Ablaza (a former employee of the Company 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 September 30, 2016, this note had
a balance of $23,000.
On December 31, 2013, the Company entered into
a promissory note with Kalvin Kwong (an employee of the Company, whom 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 months. However, this note was now payable
upon demand per the oral agreement with the lender. As of September 30, 2016, this note had a balance of $20,000.
On January 13, 2014, the Company entered into
a promissory note with Tsz Ming Wong (an employee of the Company, whom owns less than 5% of the Company’s stock). The principal
amount was $25,000 and the note bore no interest. The note had a term of 24 months and was due on January 13, 2016, and became
payable upon demand after January 13, 2016. As of September 30, 2016, this note had a balance of $12,666.
On January 14, 2015, the Company entered into
a promissory note with Richard Ko (an employee of the Company, whom 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 year and was due on January 14, 2016, and became payable
upon demand after January 14, 2016. As of September 30, 2016, this note had a balance of $30,000.
On July 11, 2016, the Company received a loan
from Greater Asia Technology for $150,000. There were loan fees of $8,000 associated with origination of the loan, which bears
40% annual interest and is due on January 15, 2017. As of September 30, 2016, this note had a balance of $150,000.
On September 26, 2016, the Company received
a loan from Greater Asia Technology for $100,000. The loan bears 40% annual interest and is due on November 25, 2017. As of September
30, 2016, this note had a balance of $100,000.
On September 26, 2016, the Company received
a loan from Greater Asia Technology for $12,500. The loan bears 100% annual interest and is due on November 23, 2017. As of September
30, 2016, this note had a balance of $12,500.
9.
Shares issued for services
On June 30, 2016, the Company granted a consultant,
Yang Zuo, 1,527,778 restricted shares with fair value of $50,000 for compensation for services provided to the Company.
On June 30, 2016, the Company granted a consultant,
Tony Thai, 1,527,778 restricted shares with fair value of $50,000 for compensation for services provided to the Company.
On June 30, 2016, the Company granted a CEO,
Jimmy Chan, 5,000,000 restricted shares with fair value of $450,000 in lieu of salary.
On June 30, 2016, the Company granted Director,
Waylon Huang, 3,000,000 restricted shares with fair value of $90,000 in lieu of salary.
On June 30, 2016, the Company granted Director,
Richard Ko, 3,000,000 restricted shares with fair value of $270,000 in lieu of salary.
On April 1, 2016, the Company granted a consulting
agreement with Katherine Zuniga and/or K Marie Marketing, LLC, 8,000,000 restricted shares with fair value of $320,000 for marketing
and sales related services. These shares were fully vested as of April 1, 2016.
On September 25, 2015, the Company entered
into a consulting agreement with Tony Thai & George Zuo, respectively. The term is from the date of the agreement through June
30, 2016. Stock compensation to each shall be 10% of all revenue generated by a Restaurant Supplies website as of June 30, 2016,
which will equal the restricted stock award (“Stock Award”). The consultant shall receive restricted common shares
of the Company in the amount of the Stock Award, unless the amount of the Stock Award is less than $50,000, in which case the amount
of the Restricted Stock Award shall be assumed to be $50,000. The share price at which the stock will be awarded shall be the average
closing trading price of the common shares on the 22 trading days preceding June 30, 2016. As of June 30, 2016, the consultant
shall receive a bonus amount equaling 7.5% of the net profitability of the website if the profitability margins of the business
exceed 5% on a full year.
10. Common shares issued for equity financing
On September 28, 2016, the Company sold 250,000 shares of restricted
common stock to an investor for $12,500 pursuant to an exemption from registration relying on Section 4(a)(2) and Rule 506bof Regulation
D, under the Securities Act of 1933, as amended. Shares have not been issued.
On September 22, 2016, the Company sold 250,000
shares of restricted common stock to an accredited investors for $12,500 pursuant to an exemption from registration relying on
Section 4(a)(2) and Rule 506bof Regulation D, under the Securities Act of 1933, as amended. Shares have not been issued.
On October 15, 2015, the Company sold 833,333
shares of restricted common stock to two accredited investors for $25,000 pursuant to an exemption from registration relying on
Section 4(a)(2) and Rule 506b of Regulation D, under the Securities Act of 1933, as amended.
On October 7, 2015, the Company sold 1,250,000
shares of restricted common stock to an accredited investor for $25,000 pursuant to an exemption from registration relying on Section
4(a)(2) and Rule 506b
of Regulation D, under the Securities Act of 1933, as amended.
On October 2, 2015, the Company sold 1,000,000
shares of restricted common stock to an accredited investor for $30,000 pursuant to an exemption from registration relying on Section
4(a)(2) and Rule 506b
of Regulation D, under the Securities Act of 1933, as amended.
On August 27, 2015, the Company sold 2,500,000
shares of restricted common stock to each of two accredited investors for $50,000 each pursuant to an exemption from registration
relying on Section 4(a)(2) and Rule 506b
of Regulation D, under the Securities
Act of 1933, as amended.
On July 14, 2015, the Company sold 1,666,667
shares of restricted common stock to an accredited investor for $50,000 pursuant to an exemption from registration relying on Section
4(a)(2) and Rule 506b
of Regulation D, under the Securities Act of 1933, as amended.
11.
Common shares reserved for future
issuances
The following table summarizes shares of our common stock reserved
for future issuance at September 30, 2016:
Common shares to be issued under conversion feature
|
|
|
5,819,105
|
|
Common shares to be issued under $0.01 warrants
|
|
|
—
|
|
Common shares to be issued under $0.50 warrants
|
|
|
—
|
|
|
|
|
|
|
Total common shares reserved for future issuance
|
|
|
5,819,105
|
|
The following table summarizes shares of our common stock reserved
for future issuance at June 30, 2016:
Common shares to be issued under conversion feature
|
|
|
11,702,118
|
|
Common shares to be issued under $0.01 warrants
|
|
|
81,250
|
|
Common shares to be issued under $0.50 warrants
|
|
|
50,000
|
|
|
|
|
|
|
Total common shares reserved for future issuance
|
|
|
11,833,368
|
|
12. Related party transactions
As of September 30,
2016, the Company had outstanding balance of $276,013 borrowed from LMK Capital.,
LLC a company affiliated with CEO Chan. In addition, Mr. Richard Ko, a Director is owed $30,000 and Director Waylon Huang $16,546.
These borrowings have no interest, and were payable upon demand.
On September 28, 2016, the Company sold
250,000 shares of restricted common stock to an investor for $12,500 pursuant to an exemption from registration relying on Section
4(a)(2) and Rule 506bof Regulation D, under the Securities Act of 1933, as amended. Who is currently working for the company as
Senior accountant. Shares have not been issued.
13. Loans payable
On March 1, 2012, SWC entered an
equipment loan agreement with a bank with maturity on January 1, 2017. The monthly payment is $435. At September 30, 2016,
the outstanding balance under this loan was $1,777.
On July 1, 2012, SWC entered an equipment
loan agreement with a bank with maturity on June 1, 2017. The monthly payment is $255. At September 30, 2016, the
outstanding balance under this loan was $2,393.
On March 5, 2013, the company entered an
equipment loan agreement with Toyota financial services with maturity date of April 4, 2018. As of September 30, 2016 the
balance under this loan is $9,155
At September 30, 2016, the Company had
outstanding balance of $276,013 borrowed from LMK Capital., LLC a company affiliated with CEO Chan.
On January 5, 2016, the Company received
a loan for $100,000 from an investor. The note bears 0% annual interest and is due on December 31, 2017. As of September 30,
2016 the balance under this loan is $90,000.
On July 9, 2016, the Company entered into loan agreements for $150,000. Under the terms of the agreements the Company will make 6 months principal and interest payments. The loan bear a fixed interest of $30,000. As of September 30, 2016 the balance under this loan is $105,763.
On September 26, 2016, the Company entered
into loan agreements for $12,500 and $100,000. Under the terms of the agreements the Company will make 52 weekly principal and
interest payments totaling $25,000 and $140,000 for the loans, respectively, beginning on October 31, 2016 and November 2, 2016,
respectively.
14. Shares to be issued
At September 30, 2016, the Company was obligated
to issue 2,000,000 shares of Series B Convertible Preferred Stock for three EB-5 investments with the total amount of $1,500,000.
The Company received $2,000,000 proceeds during the year ended June 30, 2016 with fair value of $2,000,000. On April 1, 2015, the
Company completed a series of transactions and amended its Articles of Incorporation creating a series of preferred stock of 10,000,000
shares, which shall be designated Series B Convertible Preferred Stock, par value $0.001 per share (the “Series B Preferred
Stock”). Series B will not be eligible for dividends. Five years from the date of issue (the “Conversion Date”),
assuming the Series B investor is approved for l-526 under the U.S Government’s EB-5 Investment Program, each Preferred Share
will automatically convert into that number of Common Shares having a “fair market value” of the Initial Investment
plus a five (5) percent annualized return on Initial Investment. Fair market value will be determined by averaging the closing
sale price of a Common Share for the 40 trading days immediately preceding the date of conversion on the U.S. stock exchange on
which Common Shares are publicly traded. The offering was made pursuant to SEC Rule 506 Section 4(2), which provides exemption
from registration for transactions, which are not public offerings. The funds received were used for general working capital purposes
and to accelerate order deliveries to customers.
Subsequent to September 30, 2016, the Company
was obligated to issue 2,500,000 restricted common shares for equity financing of $125,000.
Subsequent to September 30, 2016, the company
was obligated to issue 2,486,547 restricted common shares for debt conversion.
15. 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 years. The Company renewed the
lease to March 31, 2017. Monthly rent was $11,884 up to March 31, 2016, and increased to $13,238 from April 1, 2016 to March 31,
2017. Monthly rent increased to $13,238 from April 1, 2016 to March 31, 2017.
Future minimum annual rental payments required
under operating leases as of September 30, 2016 were as below (by year):
2016
|
|
$
|
79,428
|
|
Total
|
|
$
|
79,428
|
|
16. Acquisition
of SWC Group, Inc.
On July 16, 2014 the Company entered into an
agreement to acquire City of Industry, California based SWC Group, Inc., a California Corporation, which does business as CarryOutSupplies.com. CarryOutSupplies.com is
a producer and wholesaler of custom printed and generic takeout supplies. CarryOutSupplies.com, which services more than 32,500
takeout establishments, restaurants and other food service operators, is headquartered at 167 N Sunset Ave, City of Industry, CA
91744, with two additional warehouse locations in Southern California. The acquisition closed on October 28, 2014. On this date,
the Board of Directors of the Company executed the final Acquisition and Share Exchange Agreement (the “Share Exchange Agreement”)
ratifying the Pending Acquisition. Under the terms of the Share Exchange Agreement, the Company will issue Thirty Five Million
(35,000,000) common shares of the Company to the holders of CarryOutSupplies.com in exchange for all of the outstanding shares
in CarryOutSupplies.com. The number of Company shares exchanged shall be modified to Forty Million (40,000,000) shares Thirty (30)
days after the effective date of this Share Exchange Agreement should CarryOutSupplies.com demonstrate revenues for the three (3)
month period ending June 30, 2014 did not fall below a level equal to 70% of the revenues for the three (3) month period ending
June 30, 2013. The number of shares exchanged shall be modified to Seventy One Million (71,000,000) Seventy Five (75) days after
the effective date of this Share Exchange Agreement should CarryOutSupplies.com demonstrate revenues for the three (3) month period
ending September 30, 2014 did not fall below a level equal to 70% of the revenues for the three (3) month period ending September
30, 2013. As of the date of this filing, all of the 71,000,000 shares had been issued to the owners of CarryOutSupplies.com.
With the merger behind the Company now, we
are in the process of rolling out three new verticals under the corporate umbrella; state side manufacturing and printing, ad support
products, and online restaurant supplies catalogue. All of which is leveraging the strength of Sugarmade’s core business.
The acquisition was accounted as transactions
between entities under common control in accordance with ASC Topic 805-50-25 since both Sugarmade and CarryOutSupplies.com
had one common major shareholder and officer. When accounting for a transfer of assets or exchange of shares between entities
under common control, the entity that receives the net assets or the equity interests, shall initially measure the recognized assets
and liabilities transferred at their carrying amounts in the accounts of the transferring entity at the date of transfer. The following
table summarizes the carrying values of the assets acquired and liabilities assumed at the date of acquisition (or transfer):
Cash
|
|
$
|
209,214
|
|
Accounts receivable
|
|
|
388,399
|
|
Inventory
|
|
|
565,287
|
|
Other current assets
|
|
|
44,033
|
|
Security deposit
|
|
|
23,281
|
|
Loan receivables
|
|
|
312,521
|
|
Fixed assets
|
|
|
143,916
|
|
Intangible assets
|
|
|
3,039
|
|
Accounts payable
|
|
|
(1,727,870
|
)
|
Credit card payable
|
|
|
(420,773
|
)
|
Due to Sugarmade
|
|
|
(685,000
|
)
|
Customer deposits
|
|
|
(234,197
|
)
|
Loans payable
|
|
|
(529,064
|
)
|
Other payables
|
|
|
(297,047
|
)
|
Long term notes payables
|
|
|
(460,000
|
)
|
Net assets at carrying value:
|
|
$
|
(2,664,261
|
)
|
17. Subsequent events
On November 15, 2016, the Company issued a convertible note with
warrants to an investor for $75,000. The convertible promissory note must be repaid by our Company within 6 months from the date
of issuance; accrues interest at the rate of 10%; The conversion price will be the lower of 50% of the lowest sale price for the
Common Stock on the Principal Market during the twenty (20) consecutive trading days immediately preceding the conversion date.
On November 3, 2016, the Company issued a convertible
note with warrants to an investor for $75,000. The convertible promissory note must be repaid by our Company within 6 months from
the date of issuance; accrues interest at the rate of 10%; The conversion price will be the lower of 50% of the lowest sale price
for the Common Stock on the Principal Market during the twenty (20) consecutive trading days immediately preceding the conversion
date.
On October 11, 2016, the Company entered into
a financing agreement with the Autumn Group LLC (“Autumn”). Under the terms of the agreement Autumn provided a total
of $200,000 in financing. $100,000 of this amount was for the purchase of 2,000,000 restricted common shares pursuant to an exemption
from registration relying on Section 4(a)(2) and Rule 506b of Regulation D, under the Securities Act of 1933, as amended. An additional
$100,000 was provided to the Company as promissory notes to be paid back in 12 monthly payments of $16,666.67 beginning December
1, 2016.
As of September 30, 2016,
two convertible promissory in the amount of $29,167 with accrued interest $13,596.28, was converted to 1,503,928 restricted common
shares. These shares were issued on Oct 3, 2016.
On November 9, 2016, the company issued 982,620
shares to reduce $50,000 of convertible debt with accrued interest of $24,955.
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
On November 2, 2015, the Company dismissed
its independent registered public accounting firm, MJF & Associates, APC. The Registrant’s Board of Directors made the
decision to dismiss MJF & Associates, APC and engage Anton & Chia, LLC. as Registrant’s independent registered public
accounting firm, as described below. During Registrant’s two most recent fiscal years and any subsequent interim period before
such dismissal, there were no substantial disagreements with MJF & Associates, APC on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which remain unresolved. On November 2, 2015 the Registrant
engaged Anton & Chia, LLC. as Registrant’s independent registered public accounting firm.
On November 11, 2014, the Company dismissed
its independent registered public accounting firm, Anton & Chia, LLC. The Registrant’s Board of Directors made the decision
to dismiss Anton & Chia, LLC and engage MJF & Associates, APC as Registrant’s independent registered public accounting
firm, as described below. During Registrant’s two most recent fiscal years and any subsequent interim period before such
dismissal, there were no substantial disagreements with Anton & Chia, LLC on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which remain unresolved. On November 11, 2014 the Registrant engaged
MJF & Associates, APC as Registrant’s independent registered public accounting firm.
On July 20, 2011, our Company engaged Anton
& Chia, LLP (“A&C”) as its independent registered public accounting firm effective July 20, 2011. The
decision to engage A&C was approved by our Company’s audit committee. A&C previously audited the financial
statements of our wholly owned subsidiary Sugarmade, Inc. (incorporated in California – “Sugarmade-CA”)
as of December 31, 2010 and 2009 and for the year ended December 31, 2010 and the period March 2, 2009 (inception) to December
31, 2009.
Michael Cronin, Certified Public Accountant
was the independent registered public accountant of Diversified Opportunities, Inc. and resigned as the independent registered
public accountant effective July 20, 2011. The reports of Mr. Cronin on our Company’s consolidated financial statements
for the past two fiscal years did not contain an adverse opinion or disclaimer of opinion, nor were they modified as to uncertainty,
audit scope, or accounting principles, other than to state that there is substantial doubt as to the ability of our Company to
continue as a going concern.
During our Company’s two most recent
fiscal years and the subsequent interim period up to the resignation of Mr. Cronin, there have not been any disagreements between
our Company and Mr. Cronin, on any matter of accounting principles or practices, financial statement disclosure, or auditing scope
or procedures, which disagreements if not resolved to the satisfaction of Mr. Cronin would have caused Mr. Cronin to make reference
thereto in its reports on our Company’s audited financial statements.