UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
[X] |
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For
the quarterly period ended: December 31, 2020
[ ] |
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For
the transition period from N/A to N/A
Commission
file number: 000-23446
SUGARMADE,
INC.
(Exact name
of registrant as specified in its charter)
Delaware |
|
94-3008888 |
(State
or other jurisdiction of |
|
(I.R.S.
Employer |
incorporation
or organization) |
|
Identification
No.) |
|
|
|
750
Royal Oaks Dr., Suite 108, Monrovia, CA |
|
91016 |
(Address
of principal executive offices) |
|
(Zip
Code) |
(888)
982-1628
(Registrant’s telephone
number, including area code)
N/A |
(Former
name, former address and former fiscal year, if changed since last
report) |
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class |
|
Trading
Symbol(s) |
|
Name
of each exchange on which registered |
N/A |
|
N/A |
|
N/A |
Indicate
by check mark whether the registrant (1) filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
Indicate
by check mark whether the registrant has submitted electronically,
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for
such shorter period that the registrant was required to submit such
files). Yes [X] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, smaller reporting
company or an emerging growth company. See definitions of “large
accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer |
[ ] |
Accelerated
filer |
[ ] |
Non-accelerated
filer |
[X] |
Smaller
reporting company |
[X] |
|
|
Emerging
growth company |
[ ] |
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act.
[ ]
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No
[X]
At
February 19, 2021, there were 4,137,094,799 shares of common stock
issued and outstanding.
SUGARMADE,
INC.
FORM
10-Q
FOR
THE PERIOD ENDED DECEMBER 31, 2020
TABLE OF CONTENTS
SPECIAL
NOTE REGARDING FORWARD LOOKING STATEMENTS
In
addition to historical information, this Quarterly Report on Form
10-Q includes forward-looking statements. Forward-looking
statements are those that predict or describe future events or
trends and that do not relate solely to historical matters. You can
generally identify forward-looking statements as statements
containing the words “believe,” “expect,” “will,” “anticipate,”
“intend,” “estimate,” “project,” “plan,” “assume” or other similar
expressions, or negatives of those expressions, although not all
forward-looking statements contain these identifying words. All
statements contained or incorporated by reference in this quarterly
report regarding our future strategy, future operations, projected
financial position, estimated future revenues, projected costs,
future prospects, the future of our industry and results that might
be obtained by pursuing management’s current plans and objectives
are forward-looking statements.
You
should not place undue reliance on our forward-looking statements
because the matters they describe are subject to known and unknown
risks, uncertainties and other unpredictable factors, many of which
are beyond our control. These factors, risks and uncertainties can
be found in Part I, Item 1A, “Risk Factors,” of the Company’s
Annual Report on Form 10-K for the fiscal year ended August 31,
2020, as the same may be updated from time to time, including in
Part II, Item 1A, “Risk Factors,” of this Quarterly Report on Form
10-Q. Although we believe the expectations reflected in our
forward-looking statements are based upon reasonable assumptions,
it is not possible to foresee or identify all factors that could
have a material effect on the future financial performance of the
Company. The forward-looking statements in this report are made on
the basis of management’s assumptions and analyses, as of the time
the statements are made, in light of their experience and
perception of historical conditions, expected future developments
and other factors believed to be appropriate under the
circumstances. Except as otherwise required by the federal
securities laws, we disclaim any obligation or undertaking to
publicly release any updates or revisions to any forward-looking
statement contained in this Quarterly Report on Form 10-Q and the
information incorporated by reference in this report to reflect any
change in our expectations with regard thereto or any change in
events, conditions or circumstances on which any statement is
based.
PART
1: Financial Information
Item 1 Financial
Statements
Sugarmade,
Inc. and Subsidiary
Condensed Consolidated Balance Sheets
|
|
For the Period Ended |
|
|
|
December 31, 2020 |
|
|
June 30, 2020 |
|
|
|
(Unaudited) |
|
|
|
|
Assets |
|
|
|
|
|
|
Current
assets: |
|
|
|
|
|
|
|
|
Cash |
|
|
360,550 |
|
|
|
441,004 |
|
Accounts
receivable, net |
|
|
11,546 |
|
|
|
134,517 |
|
Inventory,
net |
|
|
617,855 |
|
|
|
679,471 |
|
Loan receivables,
current |
|
|
– |
|
|
|
1,365 |
|
Loan receivables -
related party, current |
|
|
15,276 |
|
|
|
122,535 |
|
Other current
assets |
|
|
963,261 |
|
|
|
263,404 |
|
Right
of use asset, current |
|
|
231,685 |
|
|
|
270,363 |
|
Total
current assets |
|
|
2,200,173 |
|
|
|
1,912,659 |
|
Noncurrent
assets: |
|
|
|
|
|
|
|
|
Equipment,
net |
|
|
360,345 |
|
|
|
499,047 |
|
Intangible asset,
net |
|
|
9,100 |
|
|
|
9,800 |
|
Other assets |
|
|
54,163 |
|
|
|
54,163 |
|
Loan receivables -
related party, noncurrent |
|
|
196,000 |
|
|
|
196,000 |
|
Right of use
asset, noncurrent |
|
|
610,864 |
|
|
|
835,393 |
|
Investment to Indigo Dye |
|
|
564,818
|
|
|
|
– |
|
Total
noncurrent assets |
|
|
1,795,290 |
|
|
|
1,594,403 |
|
Total assets |
|
|
3,995,463 |
|
|
|
3,507,062 |
|
|
|
|
|
|
|
|
|
|
Liabilities and
Stockholders’ Deficiency |
|
|
|
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
|
|
Note payable due
to bank |
|
|
25,982 |
|
|
|
25,982 |
|
Accounts payable
and accrued liabilities |
|
|
1,390,289 |
|
|
|
1,583,228 |
|
Customer
deposits |
|
|
589,654 |
|
|
|
466,337 |
|
Customer
overpayment |
|
|
61,886 |
|
|
|
47,890 |
|
Unearned
revenue |
|
|
57,157 |
|
|
|
53,248 |
|
Other
payables |
|
|
950,187 |
|
|
|
691,801 |
|
Accrued
interest |
|
|
500,281 |
|
|
|
494,740 |
|
Accrued
compensation and personnel related payables |
|
|
27,028 |
|
|
|
35,361 |
|
Notes payable -
Current |
|
|
20,000 |
|
|
|
20,000 |
|
Notes payable -
Related Parties, Current |
|
|
15,427 |
|
|
|
15,427 |
|
Lease liability -
Current |
|
|
236,527 |
|
|
|
372,285 |
|
Loans payable -
Current |
|
|
450,589 |
|
|
|
319,314 |
|
Loan payable -
Related Parties, Current |
|
|
576,225 |
|
|
|
35,943 |
|
Convertible notes
payable, Net, Current |
|
|
1,651,430 |
|
|
|
1,740,122 |
|
Derivative
liabilities, net |
|
|
1,595,186 |
|
|
|
5,597,095 |
|
Warrants
liabilities |
|
|
9,521 |
|
|
|
79,910 |
|
Shares to be issued |
|
|
167,577 |
|
|
|
101,577 |
|
Total current
liabilities |
|
|
8,324,947 |
|
|
|
11,680,260 |
|
Non-Current
liabilities: |
|
|
|
|
|
|
|
|
Loans payable |
|
|
269,900 |
|
|
|
197,946 |
|
Lease
liability |
|
|
641,687 |
|
|
|
767,729 |
|
Total liabilities |
|
|
9,236,534 |
|
|
|
12,645,935 |
|
|
|
|
|
|
|
|
|
|
Stockholders’
deficiency: |
|
|
|
|
|
|
|
|
Preferred stock,
$0.001 par value, 10,000,000 shares authorized 1,541,500 and
3,541,500 shares issued outstanding at December 31, 2020 and
June 30, 2020 |
|
|
1,542 |
|
|
|
3,542 |
|
Common stock,
$0.001 par value, 10,000,000,000 shares authorized, 3,616,507,670
and 1,763,277,230 shares issued and outstanding at December 31,
2020 and June 30, 2020, respectively |
|
|
3,616,509 |
|
|
|
1,763,278 |
|
Additional paid-in
capital |
|
|
59,718,392 |
|
|
|
57,307,767 |
|
Common Stock
Subscribed |
|
|
236,008 |
|
|
|
236,008 |
|
Accumulated deficit |
|
|
(68,813,520 |
) |
|
|
(68,438,332 |
) |
Total
stockholders’ deficiency |
|
|
(5,241,070 |
) |
|
|
(9,127,737 |
) |
Non-Controlling
Interest |
|
|
– |
|
|
|
(11,136 |
) |
Total stockholders’ deficiency |
|
|
(5,241,070 |
) |
|
|
(9,138,873 |
) |
Total liabilities and stockholders’ deficiency |
|
|
3,995,463 |
|
|
|
3,507,062 |
|
The
accompanying notes are an integral part of these unaudited
condensed consolidated financial statements
Sugarmade, Inc. and Subsidiary
Consolidated Statements of Operations
(Unaudited)
|
|
For the Three Months Ended, |
|
|
For the Six Months Ended, |
|
|
|
December 31, 2020 |
|
|
December 31, 2019 |
|
|
December 31, 2020 |
|
|
December 31, 2019 |
|
Revenues, net |
|
$ |
300,652 |
|
|
$ |
720,810 |
|
|
$ |
2,446,979 |
|
|
$ |
1,474,784 |
|
Cost of goods
sold |
|
|
242,531 |
|
|
|
435,690 |
|
|
|
1,272,429 |
|
|
|
927,858 |
|
Gross profit |
|
|
58,122 |
|
|
|
285,120 |
|
|
|
1,174,550 |
|
|
|
546,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
expenses |
|
|
271,549 |
|
|
|
523,890 |
|
|
|
875,358 |
|
|
|
859,720 |
|
Advertising and Promotion Expense |
|
|
682 |
|
|
|
16,127 |
|
|
|
278,587 |
|
|
|
57,483 |
|
Marketing and Research Expense |
|
|
93,908 |
|
|
|
74,475 |
|
|
|
316,256 |
|
|
|
79,446 |
|
Professional Expense |
|
|
115,615 |
|
|
|
467,170 |
|
|
|
619,045 |
|
|
|
1,147,266 |
|
Salaries and Wages |
|
|
105,700 |
|
|
|
104,722 |
|
|
|
464,474 |
|
|
|
234,098 |
|
Stock
Compensation Expense |
|
|
47,250 |
|
|
|
6,029,550 |
|
|
|
66,000 |
|
|
|
6,041,550 |
|
Loss from
operations |
|
|
(576,581 |
) |
|
|
(6,930,814 |
) |
|
|
(1,445,170 |
) |
|
|
(7,872,637 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
|
|
3,142 |
|
|
|
1,867 |
|
|
|
3,142 |
|
|
|
3,098 |
|
Gain in loss of
control of VIE |
|
|
313,928 |
|
|
|
- |
|
|
|
313,928 |
|
|
|
- |
|
Interest
expense |
|
|
(728,197 |
) |
|
|
(735,196 |
) |
|
|
(1,194,972 |
) |
|
|
(1,319,800 |
) |
Bad debts |
|
|
(130,467 |
) |
|
|
- |
|
|
|
(132,979 |
) |
|
|
- |
|
Change in fair
value of derivative liabilities |
|
|
496,961 |
|
|
|
1,291,168 |
|
|
|
3,992,108 |
|
|
|
2,314,046 |
|
Warrant
Expense |
|
|
4,174 |
|
|
|
- |
|
|
|
70,389 |
|
|
|
(55,278 |
) |
Loss on notes
conversion |
|
|
- |
|
|
|
(184,626 |
) |
|
|
- |
|
|
|
(184,626 |
) |
Loss on
settlement |
|
|
(5,000 |
) |
|
|
(232,776 |
) |
|
|
(80,000 |
) |
|
|
(382,635 |
) |
Gain on asset
disposal |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7,000 |
|
Amortization of
debt discount |
|
|
(1,031,379 |
) |
|
|
(963,407 |
) |
|
|
(1,845,925 |
) |
|
|
(2,118,407 |
) |
Debt
forgiveness |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(172,096 |
) |
Other
expenses |
|
|
(862 |
) |
|
|
(740 |
) |
|
|
(53,595 |
) |
|
|
(740 |
) |
Total
non-operating expenses, net |
|
|
(1,077,702 |
) |
|
|
(823,710 |
) |
|
|
1,072,095 |
|
|
|
(1,909,438 |
) |
Equity Method Investment Loss |
|
|
(2,114 |
) |
|
|
|
|
|
|
(2,114 |
) |
|
|
|
|
Net loss |
|
$ |
(1,656,397 |
) |
|
$ |
(7,754,524 |
) |
|
$ |
(375,189 |
) |
|
$ |
(9,782,075 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: net loss
attributable to the noncontrolling interest |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Net loss
attributable to SugarMade Inc. |
|
$ |
(1,656,397 |
) |
|
$ |
(7,754,524 |
) |
|
$ |
(375,189 |
) |
|
$ |
(9,782,075 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net
income (loss) per share |
|
$ |
(0.00 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.01 |
) |
Diluted net
income (loss) per share |
|
$ |
(0.00 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted weighted average common shares outstanding * |
|
|
3,233,135,446 |
|
|
|
191,886,785 |
|
|
|
2,864,951,348 |
|
|
|
880,355,944 |
|
* Shares
issuable upon conversion of convertible debts and exercising of
warrants were excluded in calculating diluted loss per
share
The
accompanying notes are an integral part of these unaudited
condensed consolidated financial statements
Sugarmade, Inc. and
Subsidiary
Condensed
Consolidated Statements of Equity
(Unaudited)
|
|
Preferred
Stock |
|
|
Common
stock |
|
|
Additional
paid-in
|
|
|
Shares
to be
cancelled,
preferred
|
|
|
Shares
to be
cancelled,
common
|
|
|
Common
Shares
|
|
|
Accumulated |
|
|
Total
Shareholders’
|
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
capital |
|
|
shares |
|
|
shares |
|
|
Subscribed |
|
|
deficit |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2019 |
|
|
2,000,000 |
|
|
|
2,000 |
|
|
|
697,608,570 |
|
|
|
697,610 |
|
|
|
61,038,875 |
|
|
|
- |
|
|
|
- |
|
|
|
29,000 |
|
|
|
(47,088,950 |
) |
|
|
14,678,534 |
|
Shares
issued for debts settlement |
|
|
- |
|
|
|
- |
|
|
|
1,000,000 |
|
|
|
1,000 |
|
|
|
28,000 |
|
|
|
- |
|
|
|
- |
|
|
|
(29,000 |
) |
|
|
- |
|
|
|
- |
|
Reclass
Derivative liability from conversion |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
659,526 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
659,526 |
|
Shares
issued for conversions |
|
|
- |
|
|
|
- |
|
|
|
71,915,557 |
|
|
|
71,916 |
|
|
|
475,917 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
547,833 |
|
Share
issued for Cash |
|
|
- |
|
|
|
- |
|
|
|
11,348,591 |
|
|
|
11,349 |
|
|
|
88,651 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
100,000 |
|
Shares
issued for Warrant Exercise |
|
|
- |
|
|
|
- |
|
|
|
28,371,818 |
|
|
|
28,382 |
|
|
|
(14,249 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
14,133 |
|
Net
Loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,027,551 |
) |
|
|
(2,027,551 |
) |
Balance
at September 30, 2019 |
|
|
2,000,000 |
|
|
|
2,000 |
|
|
|
810,244,536 |
|
|
|
810,257 |
|
|
|
62,276,720 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(49,116,501 |
) |
|
|
13,972,474 |
|
Share
issued for Cash |
|
|
- |
|
|
|
- |
|
|
|
26,621,610 |
|
|
|
26,622 |
|
|
|
213,378 |
|
|
|
- |
|
|
|
- |
|
|
|
100,000 |
|
|
|
- |
|
|
|
340,000 |
|
Option
for services |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
73,500 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
73,500 |
|
Share
issued for services compensation |
|
|
415,000 |
|
|
|
415 |
|
|
|
500,000 |
|
|
|
500 |
|
|
|
5,941,135 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,942,050 |
|
Reclass
Derivative liability from conversion |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
297,962 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
297,962 |
|
Shares
issued for conversions |
|
|
- |
|
|
|
- |
|
|
|
24,994,341 |
|
|
|
24,994 |
|
|
|
117,170 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
142,164 |
|
Shares
issued for debt settlement |
|
|
- |
|
|
|
- |
|
|
|
18,181,818 |
|
|
|
18,182 |
|
|
|
272,273 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
290,455 |
|
Shares
issued for Award - Bizright |
|
|
750,001 |
|
|
|
750 |
|
|
|
249,373,817 |
|
|
|
249,374 |
|
|
|
14,040,936 |
|
|
|
(10,725,014 |
) |
|
|
(21,566,046 |
) |
|
|
- |
|
|
|
- |
|
|
|
(18,000,000 |
) |
Initial
valuation of BCF |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
239,301 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
239,301 |
|
Net
loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(7,754,524 |
) |
|
|
(7,754,524 |
) |
Balance
at December 31, 2019 |
|
|
3,165,001 |
|
|
|
3,165 |
|
|
|
1,129,916,122 |
|
|
|
1,129,927 |
|
|
|
83,472,375 |
|
|
|
(10,725,014 |
) |
|
|
(21,566,046 |
) |
|
|
100,000 |
|
|
|
(56,871,025 |
) |
|
|
(4,456,617 |
) |
|
|
Preferred
Stock |
|
|
Common
stock |
|
|
Additional
paid-in
|
|
|
Shares
to
be
cancelled,
common
|
|
|
Common
Shares
|
|
|
Accumulated |
|
|
Non
Controlling
|
|
|
Total
Shareholders’
|
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
capital |
|
|
shares |
|
|
Subscribed |
|
|
deficit |
|
|
Interest |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2020 |
|
|
3,541,500 |
|
|
|
3,542 |
|
|
|
1,763,277,230 |
|
|
|
1,763,278 |
|
|
|
57,307,767 |
|
|
|
- |
|
|
|
236,008 |
|
|
|
(68,438,331 |
) |
|
|
(11,136 |
) |
|
|
(9,138,871 |
) |
Reclass
Derivative liability to equity from conversion |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,805,188 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,805,188 |
|
Shares
issued for conversions |
|
|
- |
|
|
|
- |
|
|
|
1,081,411,606 |
|
|
|
1,081,412 |
|
|
|
192,048 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,273,459 |
|
Repayment
of capital to noncontrolling minority |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(24,000 |
) |
|
|
(24,000 |
) |
Net
Loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,278,812 |
|
|
|
1,165 |
|
|
|
1,279,976 |
|
Balance
at September 30, 2020 |
|
|
3,541,500 |
|
|
|
3,542 |
|
|
|
2,844,688,836 |
|
|
|
2,844,690 |
|
|
|
59,305,003 |
|
|
|
- |
|
|
|
236,008 |
|
|
|
(67,159,519 |
) |
|
|
(33,971 |
) |
|
|
(4,804,248 |
) |
Reclass
Derivative liability to equity from conversion |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
531,591 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
531,591 |
|
Shares
issued for conversions |
|
|
- |
|
|
|
- |
|
|
|
411,171,815 |
|
|
|
411,172 |
|
|
|
(90,293 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
320,879 |
|
Preferred
stock conversions |
|
|
(2,000,000 |
) |
|
|
(2,000 |
) |
|
|
360,647,019 |
|
|
|
360,647 |
|
|
|
141,353 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
500,000 |
|
Reclassification due to deconsolidation of VIE |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(169,262 |
) |
|
|
- |
|
|
|
- |
|
|
|
2,396 |
|
|
|
33,971 |
|
|
|
(132,895 |
) |
Net
Loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,656,397 |
) |
|
|
- |
|
|
|
(1,656,397 |
) |
Balance
at December 31, 2020 |
|
|
1,541,500 |
|
|
|
1,542 |
|
|
|
3,616,507,670 |
|
|
|
3,616,509 |
|
|
|
59,718,392 |
|
|
|
- |
|
|
|
236,008 |
|
|
|
(68,813,520 |
) |
|
|
- |
|
|
|
(5,241,070 |
) |
The
accompanying notes are an integral part of these unaudited
condensed consolidated financial statements
Sugarmade, Inc. and
Subsidiary
Condensed
Consolidated Statements of Cash Flows For
The
Six Months Ended December 31, 2020 and 2019
(Unaudited)
|
|
For
The Six Months Ended |
|
|
|
December 31, |
|
|
|
2020 |
|
|
2019 |
|
Cash flows from operating
activities: |
|
|
|
|
|
|
|
|
Net
loss |
|
$ |
(375,189 |
) |
|
$ |
(9,782,075 |
) |
Non-controlling interest |
|
|
|
|
|
|
– |
|
Adjustments to
reconcile net loss to cash flows from operating activities: |
|
|
|
|
|
|
|
|
Iniatial valuation
of debt discount |
|
|
– |
|
|
|
239,300 |
|
Loss on
settlement |
|
|
80,000 |
|
|
|
382,635 |
|
Gain on loss of
control of VIE |
|
|
(313,928 |
) |
|
|
– |
|
Return on EB5
Investment |
|
|
500,000 |
|
|
|
– |
|
Amortization of
debt discount |
|
|
1,845,925 |
|
|
|
330,192 |
|
Stock based
compensation |
|
|
66,000 |
|
|
|
6,041,550 |
|
Change in fair
value of derivative liability |
|
|
(3,992,108 |
) |
|
|
273,299 |
|
Change in exercise
of warrant |
|
|
(70,389 |
) |
|
|
67,387 |
|
Depreciation |
|
|
44,684 |
|
|
|
46,189 |
|
Amortization of
intangible assets |
|
|
700 |
|
|
|
700 |
|
Change in
financing cost |
|
|
316,261 |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
Changes in assets and
liabilities: |
|
|
|
|
|
|
|
|
Accounts
receivable |
|
|
122,971 |
|
|
|
60,145 |
|
Inventory |
|
|
(83,253 |
) |
|
|
(138,801 |
) |
Prepayment,
deposits and other receivables |
|
|
(855,878 |
) |
|
|
261,183 |
|
Other assets |
|
|
– |
|
|
|
(35,000 |
) |
Other
payables |
|
|
404,993 |
|
|
|
37,962 |
|
Accounts payable
and accrued liabilities |
|
|
465,435 |
|
|
|
5,955 |
|
Customer
deposits |
|
|
137,313 |
|
|
|
(62,174 |
) |
Unearned
revenue |
|
|
3,909 |
|
|
|
(19,890 |
) |
Right of use
assets |
|
|
119,483 |
|
|
|
39,169 |
|
Lease
liability |
|
|
(118,078 |
) |
|
|
(36,919 |
) |
Investment to
Indigo Dye |
|
|
(564,818
|
) |
|
|
–
|
|
Interest Payable |
|
|
98,780 |
|
|
|
166,753 |
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(2,167,187 |
) |
|
|
(2,122,441 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
– |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
– |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities: |
|
|
|
|
|
|
|
|
Proceeds from
shares issuance |
|
|
– |
|
|
|
340,000 |
|
Bank
overdraft |
|
|
– |
|
|
|
5,907 |
|
Loan
receivable |
|
|
(13,911 |
) |
|
|
75,033 |
|
Loan receivable -
related parties |
|
|
38,044 |
|
|
|
– |
|
Proceeds from
advanced shares issuance |
|
|
– |
|
|
|
236,000 |
|
Proceeds
(Repayment) from(to) loans payable - related parties |
|
|
540,281 |
|
|
|
105,000 |
|
Proceeds from
convertible notes |
|
|
1,804,900 |
|
|
|
1,451,687 |
|
Repayment of
convertible notes |
|
|
(227,700 |
) |
|
|
– |
|
Reduction of cash
due to Indigo Dye deconsolidation |
|
|
(326,811
|
) |
|
|
–
|
|
Proceeds (Repayment) from(to) loans |
|
|
271,929 |
|
|
|
(22,555 |
) |
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
2,086,732 |
|
|
|
2,191,072 |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in
cash |
|
|
(80,455 |
) |
|
|
68,631 |
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Cash,
beginning of period |
|
|
441,004 |
|
|
|
34,371 |
|
Cash, end
of period |
|
$ |
360,550 |
|
|
$ |
103,002 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash
financing activities — |
|
|
|
|
|
|
|
|
Shares issued for
conversion of convertible debt |
|
|
1,594,338 |
|
|
|
689,997 |
|
Reduction in
derivative liability due to conversion |
|
|
2,336,779 |
|
|
|
957,488 |
|
Debt discount
related to convertible debt |
|
|
2,010,717 |
|
|
|
951,581 |
|
Debts settled
through shares issuance |
|
|
– |
|
|
|
229,000 |
|
Shares issued for
award to Bizright and to be cancelled in future |
|
|
– |
|
|
|
(32,291,060 |
) |
Shares issued for warrant
exercise |
|
|
– |
|
|
|
28,381 |
|
The
accompanying notes are an integral part of these unaudited
condensed consolidated financial statements
Sugarmade,
Inc. and Subsidiary
Notes to Unaudited Condensed
Consolidated Financial Statements
December
31, 2020
Sugarmade,
Inc. (hereinafter referred to as “we,” “us” or “Company”) is a
publicly-traded company incorporated in the state of Delaware. Our
previous legal name was Diversified Opportunities, Inc. Our Company
operates much of its business activities through our subsidiary,
SWC Group, Inc., a California corporation (“SWC”). Sugarmade, Inc.
was founded in 2010. In 2014, CarryOutSupplies.com was acquired by
Sugarmade, Inc., creating the Company as it is today.
As of
December 31, 2020, we operated our business in the following three
segments:
|
1) |
Paper and paper-based products: The supply
of consumable products to the quick-service restaurant sub-sector
of the restaurant industry, and as an importer and distributor of
non-medical personal protection equipment to business and
consumers, via our CarryOutSupplies.com subsidiary (“Carryout
Supplies”). Carryout Supplies is a producer and wholesaler of
custom printed and generic supplies, servicing more than 2,000
quick-service restaurants. The primary products are plastic cold
cups, paper coffee cups, yogurt cups, ice cream cups, cup lids, cup
sleeves, edible packaging, food containers, soup containers,
plastic spoons, and similar products for this market sector. This
subsidiary, which was formed in 2009, was recently expanded to also
offer non-medical personal protective equipment. |
|
|
|
|
2) |
Non-medical supplies: Beginning in 2020,
we sell non-medical personal protective equipment through Carryout
Supplies. |
|
|
|
|
3) |
Cannabis products delivery service and
sales: As a joint owner in the Budcars licensed cannabis
delivery service brand (“Budcars” or the “Budcars Brand”). Budcars
operates a licensed cannabis delivery service in the Sacramento,
California area. During early 2020, the Company gained a 40% stake
in the Budcars Brand and in the Sacramento delivery operations via
acquiring a 40% stake in Indigo Dye Group (“Indigo”). Under the
terms of the agreement with Indigo, Sugarmade acquired an option to
purchase an additional 30% interest in Budcars. Upon exercise of
this option, the Company would acquire a controlling interest in
Indigo. As of December 31, 2020, the option has not yet been
exercised and the Company’s stake in Budcars was at 40%. Starting
on October 1, 2020, the Company plans to open new locations via
purchasing equity in other Brand/Franchises to cover delivery for
the entire California. Therefore, the Company is not likely at this
time to exercise its option to acquire the additional 30% interest
in Indigo. In addition, the Company is no longer involved in
day-to-day operations of Indigo and going forward, the Company
intends to pursue cannabis delivery independent of Indigo. As of
October 1, 2020, the Company ceased to have control over the
day-to-day business of Indigo and it was deconsolidated and
recorded as an investment in nonconsolidated affiliate at its
$505,449 estimated fair value and changed to equity method of
accounting. Pursuant to the terms of the Indigo agreement, if the
Company determines, in its discretion not to continue to make
monthly payments, its 40% ownership interest in Indigo will be
decreased according to the payment then made. During the quarter
ended December 31 ,2020, if the Company makes no additional
payments, it will hold approximately 33% of the ownership of
Indigo. See Note 5 and Note 6. |
Subsequent to the end of the December
reporting period, Sugarmade became a joint owner of Nug Avenue,
Inc., a California corporation (“Nug Avenue”), which operates a
licensed and regulated cannabis delivery service out of Lynwood,
California, serving the greater Los Angeles Metropolitan area (the
“Lynwood Operations”). The Company currently owns a majority stake
of seventy percent (70%) of Nug Avenue’s Lynwood Operations and
holds first rights of refusal on Nug Avenue’s business expansion
relative to the cannabis marketplace.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial
Statements
December
31, 2020
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 (“GAAP”) and the
rules and regulations of the United States Securities and Exchange
Commission (the “SEC”) 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, 2020, 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 fiscal year ended June 30, 2020. The
interim results for the period ended December 31, 2020 are not
necessarily indicative of the results for the full fiscal
year.
Principles of consolidation
The unaudited condensed consolidated financial statements include
the accounts of our Company and SWC, the Company’s wholly-owned
subsidiary. All significant intercompany transactions and balances
have been eliminated in consolidation.
Going concern
The
Company’s continuation as a going concern is dependent on its
ability to generate sufficient cash flows from operations to meet
its obligations, in which it has not been successful, and/or
obtaining additional financing from its shareholders or other
sources, as may be required.
Our
unaudited 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 unaudited
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
endeavors to increase revenue-generating operations. While the
Company’s priority is on generating cash from operations,
management also seek 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.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial
Statements
December
31, 2020
2. |
Summary of Significant Accounting Policies
(continued) |
Use of estimates
The
preparation of financial statements in conformity with GAAP
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 (“FASB”) Accounting Standards Codification (“ASC’’) No. 606,
Revenue Recognition. Sugarmade applied 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 the Company’s revenue is recognized at the time control of
the products transfers to the customer.
Property and equipment
Property
and equipment is stated at the historical cost, less accumulated
depreciation. Depreciation on property and equipment is provided
using the straight-line method over the estimated useful lives of
the assets for both financial and income tax reporting purposes as
follows:
Machinery
and equipment |
|
|
3-5
years |
|
Furniture
and equipment |
|
|
7
years |
|
Vehicles |
|
|
5
years |
|
Leasehold
improvements |
|
|
5
years |
|
Expenditures
for renewals and betterments are capitalized while repairs and
maintenance costs are normally charged to the statement of
operations in the year in which they are incurred. In situations
where it can be clearly demonstrated that the expenditure has
resulted in an increase in the future economic benefits expected to
be obtained from the use of the asset, the expenditure is
capitalized as an additional cost of the asset.
Upon
sale or disposal of an asset, the historical cost and related
accumulated depreciation or amortization of such asset were removed
from their respective accounts and any gain or loss is recorded in
the statements of income.
The
Company reviews the carrying value of property, plant, and
equipment for impairment whenever events and circumstances indicate
that the carrying value of an asset may not be recoverable from the
estimated future cash flows expected to result from its use and
eventual disposition. In cases where undiscounted expected future
cash flows are less than the carrying value, an impairment loss is
recognized equal to an amount by which the carrying value exceeds
the fair value of assets. The factors considered by management in
performing this assessment include current operating results,
trends and prospects, the manner in which the property is used, and
the effects of obsolescence, demand, competition and other economic
factors. Based on this assessment, no impairment expenses for
property, plant, and equipment was recorded in operating expenses
during the six months ended December 31, 2020 and 2019.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial
Statements
December
31, 2020
2. |
Summary of Significant Accounting Policies
(continued) |
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,
2020, performed an impairment test of all of its intangible assets.
Based on the Company’s analysis, the company had an amortization of
intangible assets of $700 for the six months ended December 31,
2020 and 2019, respectively.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial
Statements
December
31, 2020
2. |
Summary of Significant Accounting Policies
(continued) |
Leases
In
February 2016, the FASB established Topic 842, Leases, by issuing
Accounting Standards Update (“ASU”) No. 2016-02, which requires
lessees to recognize the rights and obligations created by leases
on the balance sheet and disclose key information about leasing
arrangements. Topic 842 was subsequently amended by ASU No.
2018-11, Targeted Improvements, ASU No. 2018-10, Codification
Improvements to Topic 842, and ASU No. 2018-01, Land Easement
Practical Expedient for Transition to Topic 842. The new standard
establishes a right-of-use model (“ROU”) that requires a lessee to
recognize a ROU asset and lease liability on the balance sheet for
all leases with a term longer than 12 months. Leases will be
classified as finance or operating, with classification affecting
the pattern and classification of expense recognition in the
statement of operations.
The
new standard became effective April 1, 2019. A modified
retrospective transition approach is required, applying the new
standard to all leases existing at the date of initial application.
An entity may choose to use either (1) its effective date or (2)
the beginning of the earliest comparative period presented in the
financial statements as its date of initial application. If an
entity chooses the second option, the transition requirements for
existing leases also apply to leases entered into between the date
of initial application and the effective date. The entity must also
recast its comparative period financial statements and provide the
disclosures required by the new standard for the comparative
periods. The Company adopted the new standard on July 1, 2019 using
the modified retrospective transition approach as of the effective
date of the initial application. The new standard provides a number
of optional practical expedients in transition. The Company elected
the “package of practical expedients”, which permits entities not
to reassess under the new lease standard prior conclusions about
lease identification, lease classification and initial direct
costs. The Company does not expect to elect the use-of-hindsight or
the practical expedient pertaining to land easements.
The
most significant effects of the adoption of the new standard relate
to the recognition of new ROU assets and lease labilities on our
balance sheet for office operating leases and providing significant
new disclosures about our leasing activities.
The
new standard also provides practical expedients for an entity’s
ongoing accounting. The Company has also elected the short-term
leases recognition exemption for all leases that qualify. This
means that the Company will not recognize ROU assets or lease
liabilities, and this includes not recognizing ROU assets and lease
liabilities, for existing short-term leases of those assets in
transition. The Company also currently expects to elect the
practical expedient to not separate lease and non-lease components
for its leases. All existing leases are reported under this
rule.
Under
ASC 840, leases were classified as either capital or operating, and
the classification significantly impacted the effect the contract
had on the company’s financial statements. Capital lease
classification resulted in a liability that was recorded on a
company’s balance sheet, whereas operating leases did not impact
the balance sheet. After the new adoption, $1,105,755 of operating
lease right-of-use asset and $1,140,041 of operating lease
liabilities were reflected on the Company’s June 30, 2020 financial
statements and $842,549 of operating lease right-of-use asset and
$878,214 of operating lease liabilities were reflected on the
Company’s December 31, 2020 financial statements.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial
Statements
December
31, 2020
2. |
Summary of Significant Accounting Policies
(continued) |
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.
Earnings
(Loss) per share
We
calculate basic earnings (loss) per share (“EPS”) by dividing our
net income (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 3 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,
2020.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial
Statements
December
31, 2020
2. |
Summary of Significant Accounting Policies
(continued) |
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.
As of December 31, 2020 substantially all of the Company’s
operations were conducted in three industry segments – (1) paper
and paper-based products such as paper cups, cup lids, food
containers, etc., which accounted for approximately 24% of the
Company’s revenues as of December 31, 2020; (2) non-medical
supplies such as non-medical fascial masks, which accounted for
approximately 3% of the Company’s total revenues as of December 31,
2020; (3) cannabis products delivery service and sales, which
accounted for approximately 73% of the Company’s total revenues as
of December 31, 2020.
New accounting pronouncements
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842).
The new standard establishes an 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 have adopted this ASU
on the consolidated financial statements in the quarter ended
September 30, 2019.
In
December 2019, the FASB issued ASU 2019-12, “Simplifying the
Accounting for Income Taxes”. The pronouncement simplifies the
accounting for income taxes by removing certain exceptions to the
general principles in ASC Topic 740, “Income Taxes”. The
pronouncement also improves consistent application of and
simplifies GAAP for other areas of Topic 740 by clarifying and
amending existing guidance. ASU 2019-12 will be effective for us
beginning in the first quarter of fiscal 2021, with early adoption
permitted. We are still evaluating the impact this guidance will
have on our consolidated financial statements.
In January 2020, the FASB
issued ASU No. 2020-01, Investments - Equity Securities (Topic
321), Investments - Equity Method and Joint Ventures (Topic 323),
and Derivative and Hedging (Topic 815), which clarifies the
interaction of rules for equity securities, the equity method of
accounting, and forward contracts and purchase options on certain
types of securities. The guidance clarifies how to account for the
transition into and out of the equity method of accounting when
considering observable transactions under the measurement
alternative. The ASU is effective for annual reporting periods
beginning after December 15, 2020, including interim reporting
periods within those annual periods, with early adoption permitted.
We are currently evaluating the impact of the new guidance on our
consolidated financial statements.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial
Statements
December
31, 2020
Customers
For
the six months ended December 31, 2020 and 2019, our Company earned
net revenues of $2,446,979 and $1,474,784 respectively. The vast
majority of these revenues for the period ended December 31, 2020
were derived from a large number of customers, whereas the vast
majority of these revenues for the period ended December 31, 2019
were derived from a limited number of customers. There was one
customer that accounted for approximately 13.9% of the Company’s
total revenues for the period ended December 31, 2020.
Suppliers
For
the period ended December 31, 2020, we purchased products for sale
by the Company’s subsidiary from several contract manufacturers
located in Asia and the U.S. A substantial portion of the Company’s
inventory was purchased from two (2) suppliers. The two suppliers
accounted for 25.5% and 16.20%, respectively, of the Company’s
total inventory purchase for the period ended December 31,
2020.
For
the period ended December 31, 2019, we purchased products for sale
by the company’s subsidiaries from several contract manufacturers
located in Asia and the U.S. A substantial portion of the Company’s
inventory is purchased from two (2) suppliers. The two (2)
suppliers accounted as follows: Two suppliers accounted for 31.21%
and 17.80% of the Company’s total inventory purchase for the period
ended December 31, 2019, respectively.
On
February 7, 2020, the Company entered into a share sale and
purchase agreement (the “Indigo Agreement”) with Indigo Dye Group
Corp. (“Indigo”), a corporation located in Sacramento, California.
Indigo carries on business as a cannabis seller and delivery
business under the name BudCars. The major Cannabis Products
include Flower, Edibles, Vape Cartridges, Pre-Rolls, &
Concentrates, etc. All the products are finished goods. In
addition, Indigo is operating a non-store front retail delivery
business (Type-9 License# C9-0000286) in California.
Pursuant
to the terms of the Indigo Agreement, the Company agree to invest
$700,000 (the “Investment”) into Indigo for inventory, equipment,
and marketing expenses. The Investment shall be made in twelve
monthly equal installments of $58,333 with the acceleration of the
payment schedule possible depending on business growth, cash flow
needs and capital availability.
In
exchange, the Company received 40% of Indigo’s issued shares. upon
execution of the final agreement. The value used for this
transaction is $1,750,000 and each percentage (1%) of the company
is worth $17,500. In the event that the Company is not able to make
a payment of $58,333 in any month, it will have 90 days to cure the
default. On the 91st day the investment plan will cease and the
amount of invested capital will be calculated based on an
enterprise value of $1,750,000 or $17,500 per 1% of owned
equity.
In
addition, subject to the terms and conditions of the Indigo
Agreement, the Company has the option to acquire an additional 30%
interest in Indigo. Upon exercise of the option, the Company would
obtain control over Indigo.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial
Statements
December
31, 2020
From
late May
2020 until September 30, 2020, the Company was actively involved in
development of Indigo’s operations with power to direct the
activities and significantly impact Indigo’s economic performance.
The Company also has obligations to absorb losses and right to
receive benefits from Indigo. As such, in accordance with ASC
810-10-25-38A through 25-38J, Indigo is consolidated as an VIE of
the Company.
Starting on October 1, 2020, the Company plans to open new
locations via purchasing equity into other Brand/Franchises to
cover delivery for the entire California. Therefore, the Company
likely not to proceeds the option to acquire the additional 30%
interest in Indigo at the moment. In addition, the Company is no
longer involve in day-to-day operations and the Company will be
pursuing cannabis delivery moving forward, independently of Indigo
Dye Group. Sugarmade is no longer involve in day-to-day operations.
As of October 1, 2020, the Company continues to hold approximately
29% of the ownership of Indigo but ceased to have a controlling
interest in the partnership and it was deconsolidated and recorded
as an investment in nonconsolidated affiliate at its $505,449
estimated fair value and changed to equity method of accounting.
See footnote #6 Noncontrolling interest and deconsolidation of VIE
for details.
6. |
Noncontrolling Interest and Deconsolidation of
VIE |
Starting
in fiscal year ended June 30, 2020, the Company had a variable
interest entity, Indigo Dye Group, for accounting purposes. The
Company owned approximately 29% of Indigo’s outstanding equity and
as of September 30, 2020, involved its day-to-day operations, which
gave the Company the power to direct the activities of Indigo that
most significantly impact its economic performance. Accordingly,
the Company recognized the carrying value of the noncontrolling
interest as a component of total shareholders’ equity, and the
consolidated financial statements included the financial position
and results of operations of Indigo as of and for the periods ended
June 30, 2020 and September 30, 2020.
Starting on October 1, 2020, the Company plans to open new
locations via purchasing equity in other Brand/Franchises to cover
delivery for the entire California. Therefore, the Company is not
likely at this time to exercise its option to acquire the
additional 30% interest in Indigo. In addition, the Company is no
longer involved in day-to-day operations of Indigo and going
forward, the Company intends to pursue cannabis delivery
independent of Indigo. As of October 1, 2020, the Company ceased to
have control over the day-to-day business of Indigo and it was
deconsolidated and recorded as an investment in nonconsolidated
affiliate at its $505,449 estimated fair value and changed to
equity method of accounting. Pursuant to the terms of the Indigo
agreement, if the Company determines, in its discretion not to
continue to make monthly payments, its 40% ownership interest in
Indigo will be decreased according to the payment then made. During
the quarter ended December 31 ,2020, if the Company makes no
additional payments, it will hold approximately 33% of the
ownership of Indigo. See Note 5 and Note 6.
The
net asset value of the Company’s variable interest in Indigo Dye
Group was approximately $326,812 as of October 1, 2020, the date of
deconsolidation. The value of the Company’s variable interest on
the date of deconsolidation was based on management’s estimate of
the fair value of Indigo at that time. The Company concluded that
the market approach was the most appropriate method to determine
the fair value of the entity on the date of deconsolidation, given
that Indigo raised equity funding from third-party investors around
the same period (i.e., level 2 inputs). The Company recognized a
gain on deconsolidation of approximately $313,928 with no related
tax impact, which is included in other income, net on the
consolidated statement of operations. As the Company is not
obligated to fund future losses of Indigo, the carrying amount is
the Company’s maximum risk of loss.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial
Statements
December
31, 2020
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 December 31, 2020, there were no
legal claims pending or threatened against the 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. However, as of December 31, 2020, we were involved in
the following legal proceedings:
|
● |
On
December 11, 2013, the Company was served with a complaint from two
convertible note holders and investors in the Company. On February
21, 2017, the Company signed a settlement agreement with the
plaintiffs in the matter of Hannan vs. Sugarmade. Under the terms
of the settlement agreement, the company agreed to pay the
plaintiffs an aggregate of $227,000 to settle all claims against
the Company, which included the payoff of two notes outstanding.
The parties had estimated the value of the notes at approximately
$80,000. As of June 30, 2020, third parties had purchased two (2)
notes of approximately $80,000. As of December 31, 2020, there
remains a balance, plus accrued interest on the $227,000 and on the
$80,000 due under the notes. |
There
can be no assurances the ultimate liability relative to these
lawsuits will not exceed what is outlined above.
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.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial
Statements
December
31, 2020
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
$11,546 as of December 31, 2020 and of $134,517 as of June 30,
2020.
Loans
receivable amounted $0 and $1,365 as of December 31, 2020 and June
30, 2020, respectively. Loan receivables are mainly advanced
payments to the other companies.
11. |
Loans Receivable – Related Parties |
Loan
receivables – related parties amounted $211,276 and $318,535 as of
December 31, 2020 and June 30, 2020, respectively. Loan receivables
– related parties are mainly advanced payments to the related party
companies for business expense.
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 are 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,
2020 and June 30, 2020, the balance for the inventory totaled
$617,855 and $679,471, respectively. Obsolescence reserve at
December 31, 2020 and June 30, 2020 were $185,312 and $15,445,
respectively.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial
Statements
December
31, 2020
As of
December 31, 2020 and June 30, 2020, other current assets consisted
of the following:
|
|
For the
periods ended |
|
|
|
December 31,
2020 |
|
|
June 30,
2020 |
|
Prepaid Deposit |
|
$ |
8,483 |
|
|
$ |
48,483 |
|
Prepaid Inventory |
|
|
938,422 |
|
|
|
65,449 |
|
Employees Advance |
|
|
1,786 |
|
|
|
324 |
|
Prepaid Expenses |
|
|
2,859 |
|
|
|
35,157 |
|
Undeposited Funds |
|
|
11,711 |
|
|
|
71,550 |
|
Other |
|
|
— |
|
|
|
42,441 |
|
Total: |
|
$ |
963,261 |
|
|
$ |
263,404 |
|
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 for the six months ended December 31, 2020 and
2019, respectively.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial
Statements
December
31, 2020
15. |
Property and Equipment, net |
As of
December 31, 2020 and June 30, 2020, property, plant and equipment
consisted of the following:
Fixed Assets |
|
December 31, 2020 |
|
|
June 30, 2020 |
|
Office
and equipment |
|
$ |
732,062 |
|
|
$ |
739,447 |
|
Motor
vehicles |
|
|
63,954 |
|
|
|
164,244 |
|
Leasehold Improvement |
|
|
21,970 |
|
|
|
24,470 |
|
Total |
|
|
817,986 |
|
|
|
928,161 |
|
Less:
accumulated depreciation |
|
|
(457,641 |
) |
|
|
(429,116 |
) |
Plant and Equipment, net |
|
$ |
360,345 |
|
|
$ |
499,045 |
|
For
the periods ended December 31, 2020 and June 30, 2020, depreciation
expenses amounted to $44,684 and $110,032, respectively.
The
Company reviews the carrying value of property and equipment for
impairment whenever events and circumstances indicate that the
carrying value of an asset may not be recoverable from the
estimated future cash flows expected to result from its use and
eventual disposition. In cases where undiscounted expected future
cash flows are less than the carrying value, an impairment loss is
recognized equal to an amount by which the carrying value exceeds
the fair value of assets. The factors considered by management in
performing this assessment include current operating results,
trends and prospects, the manner in which the property is used, and
the effects of obsolescence, demand, competition and other economic
factors. Based on this assessment, no impairment expenses for
property, plant, and equipment was recorded in operating expenses
during the periods ended December 31, 2020 and June 30,
2020.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial
Statements
December
31, 2020
Unearned
revenue amounted to $57,157 and $53,248 as of December 31, 2020 and
June 30, 2020, respectively. Unearned revenues are mainly due to
contracts with extended payment terms, acceptance provisions and
future delivery obligation.
Other
payable amounted to $950,187 and $691,801 as of December 31, 2020
and June 30, 2020, respectively. Other payables are mainly credit
card payables and taxes payables. As of December 31, 2020, the
Company had 8 credit cards, one American Express is a charge card
with no limit and zero interest. The remaining 7 cards had total
credit limit of $85,000, and APR from 11.24% to 29.99%.
As of
December 31, 2020 and June 30, 2020, the balance owing on
convertible notes, net of debt discount, with terms as described
below was $1,651,430 and $1,740,122, respectively.
Convertible
note 1: On August 24, 2012, the Company entered into a convertible
promissory note with an accredited investor for $25,000. The note
has a term of six (6) months with an interest rate of 10% and is
convertible to common shares at a 25% discount of the average of 30
days prior to the conversion date. As of December 31, 2020, 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, 2020, 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, 2020, the note is in default.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial
Statements
December
31, 2020
18. |
Convertible Notes (continued) |
Convertible
note 4: 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.
As of December 31, 2020, the note is in default.
Convertible
note 5: 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. As of December 31, 2020, the note is in
default.
Convertible
note 6: 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. As of December 31, 2020, the note is in
default.
Convertible
note 7: 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.
As of December 31, 2020, the note is in default.
Convertible
note 8: On September 27, 2019, the Company entered a convertible
promissory note with an accredited investor for a total amount of
$165,000 (includes $16,250 OID). 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. During the year ended June 30, 2020, the note
holder converted $50,000 principal with $2,992 interest expense
into 56,007,062 shares of the Company’s common stock. As of
December 31, 2020, the note has been fully converted.
Convertible
note 9: On October 28, 2019, the Company entered a convertible
promissory note with an accredited investor for a total amount of
$225,500 (includes $23,000 OID). The note is due 360 days and bear
an interest rate of 8%. The conversion price for the note is 60% of
the lowest closing bid for the 20 consecutive trading days prior to
the conversion date. As of December 31, 2020, the note has been
fully converted.
Convertible
note 10: On October 28, 2019, the Company entered a convertible
promissory note with an accredited investor for a total amount of
$225,500 (includes $23,000 OID). The note is due 360 days and bear
an interest rate of 8%. The conversion price for the note is 60% of
the lowest closing bid for the 20 consecutive trading days prior to
the conversion date. As of December 31, 2020, the note has been
fully converted.
Convertible
note 11: On November 29, 2019, the Company entered a convertible
promissory note with an accredited investor for a total amount of
$106,150 (includes $11,150 OID). The note is due 360 days and bear
an interest rate of 8%. The conversion price for the note is 60% of
the lowest closing bid for the 20 consecutive trading days prior to
the conversion date. As of December 31, 2020, the note has been
fully converted
Convertible
note 12: On November 29, 2019, the Company entered a convertible
promissory note with an accredited investor for a total amount of
$106,150 (includes $11,150 OID). The note is due 360 days and bear
an interest rate of 8%. The conversion price for the note is 60% of
the lowest closing bid for the 20 consecutive trading days prior to
the conversion date. As of December 31, 2020, the note has been
fully converted.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial
Statements
December
31, 2020
18. |
Convertible Notes (continued) |
Convertible
note 13: On December 10, 2019, the Company entered a convertible
promissory note with an accredited investor for a total amount of
$106,700 (includes $11,700 OID). The note is due 360 days and bear
an interest rate of 8%. The conversion price for the note is 60% of
the lowest closing bid for the 20 consecutive trading days prior to
the conversion date. As of December 31, 2020, the note has been
fully converted.
Convertible
note 14: On December 10, 2019, the Company entered a convertible
promissory note with an accredited investor for a total amount of
$106,700 (includes $11,700 OID). The note is due 360 days and bear
an interest rate of 8%. The conversion price for the note is 60% of
the lowest closing bid for the 20 consecutive trading days prior to
the conversion date. As of December 31, 2020, the note has been
fully converted.
Convertible
note 15: On December 27, 2019, the Company entered a convertible
promissory note with an accredited investor for a total amount of
$112,200 (includes $12,200 OID). The note is due 360 days and bear
an interest rate of 8%. The conversion price for the note is 60% of
the lowest closing bid for the 20 consecutive trading days prior to
the conversion date. As of December 31, 2020, the note has been
fully converted.
Convertible
note 16: On October 31, 2019, the Company entered a convertible
promissory note with an accredited investor for a total amount of
$139,301. The note is due 360 days and bear an interest rate of 8%.
The conversion price for the note is $0.008 per share.
Convertible
note 17: On November 1, 2019, the Company entered a convertible
promissory note with an accredited investor for a total amount of
$100,000. The note is due 360 days and bear an interest rate of 8%.
The conversion price for the note is $0.008 per share.
Convertible
note 18: On January 3, 2020, the Company entered a convertible
promissory note with an accredited investor for a total amount of
$112,200 (includes $12,200 OID). The note is due 360 days and bear
an interest rate of 8%. The conversion price for the note is 60% of
the lowest closing bid for the 20 consecutive trading days prior to
the conversion date. As of December 31, 2020, the note has been
fully converted.
Convertible
note 19: On January 14, 2020, the Company entered a convertible
promissory note with an accredited investor for a total amount of
$150,000 (includes $3,000 OID). The note is due 360 days and bear
an interest rate of 8%. The conversion price for the note is 38%
discount to average of three lowest closing prices for the 10
consecutive trading days prior to the conversion date. During the
three months ended September 30, 2020, the note holder converted
$50,000 principal into 29,868,578 shares of the Company’s common
stock. As of December 31, 2020, the remaining principal and unpaid
interest has been fully repaid by cash.
Convertible
note 20: On January 22, 2020, the Company entered a convertible
promissory note with an accredited investor for a total amount of
$128,000 (includes $3,000 OID). The note is due 360 days and bear
an interest rate of 10%. The conversion price for the note is 35%
discount to average of two lowest closing prices for the 20
consecutive trading days prior to the conversion date. As of
December 31, 2020, the note principal and unpaid interest has been
fully repaid by cash.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial
Statements
December
31, 2020
18. |
Convertible Notes (continued) |
Convertible
note 21: On February 4, 2020, the Company entered a convertible
promissory note with an accredited investor for a total amount of
$110,000 (includes $10,000 OID). The note is due 360 days and bear
an interest rate of 12%. The conversion price for the note is
$0.001 per share. As of December 31, 2020, the note has been fully
converted.
Convertible
note 22: On February 18, 2020, the Company entered a convertible
promissory note with an accredited investor for a total amount of
$100,000 (includes $10,000 OID). The note is due 360 days and bear
an interest rate of 12%. The conversion price for the note is
$0.001 per share.
Convertible
note 23: On March 5, 2020, the Company entered a convertible
promissory note with an accredited investor for a total amount of
$125,000 (includes $3,000 OID). The note is due 360 days and bear
an interest rate of 8%. The conversion price for the note is 38%
discount to average of three lowest closing prices for the 10
consecutive trading days prior to the conversion date. As of
December 31, 2020, the note has been fully converted.
Convertible
note 24: On April 24, 2020, the Company entered a convertible
promissory note with an accredited investor for a total amount of
$75,000 (includes $2,000 OID). The note is due 360 days and bear an
interest rate of 8%. The conversion price for the note is 38%
discount to average of three lowest trading prices for the 10
consecutive trading days prior to the conversion date.
Convertible
note 25: On June 10, 2020, the Company entered a convertible
promissory note with an accredited investor for a total amount of
$36,300 (includes $3,300 OID and $3,000 legal expense). The note is
due 360 days and bear an interest rate of 8%. The conversion price
for the note is 60% of the lowest trading bid for the 20
consecutive trading days prior to the conversion date.
Convertible
note 26: On June 18, 2020, the Company entered a convertible
promissory note with an accredited investor for a total amount of
$36,300 (includes $3,300 OID and $3,000 legal expense). The note is
due 360 days and bear an interest rate of 8%. The conversion price
for the note is 60% of the lowest closing bid for the 20
consecutive trading days prior to the conversion date.
Convertible
note 27: On July 6, 2020, the Company entered a convertible
promissory note with an accredited investor for a total amount of
$77,000 (includes $2,000 OID). The note is due 360 days and bear an
interest rate of 8%. The conversion price for the note is 38%
discount to average of three lowest trading prices for the 10
consecutive trading days prior to the conversion date.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial
Statements
December
31, 2020
18. |
Convertible Notes (continued) |
Convertible
note 28: On July 7, 2020, the Company entered a convertible
promissory note with an accredited investor for a total amount of
$153,000 (includes $3,000 OID). The note is due 360 days and bear
an interest rate of 10%. The conversion price for the note is 35%
discount to average of two lowest trading prices for the 20
consecutive trading days prior to the conversion date.
Convertible
note 29: On July 16, 2020, the Company entered a convertible
promissory note with an accredited investor for a total amount of
$260,700 (includes $23,700 OID and $12,000 legal expense). The note
is due 360 days and bear an interest rate of 8%. The conversion
price for the note is 60% of the lowest trading bid for the 20
consecutive trading days prior to the conversion date.
Convertible
note 30: On July 21, 2020, the Company entered a convertible
promissory note with an accredited investor for a total amount of
$200,200 (includes $18,200 OID and $7,000 legal expense). The note
is due 360 days and bear an interest rate of 8%. The conversion
price for the note is 60% of the lowest trading bid for the 20
consecutive trading days prior to the conversion date.
Convertible
note 31: On September 8, 2020, the Company entered a convertible
promissory note with an accredited investor for a total amount of
$110,000 (includes $10,000 OID). The note is due 180 days and bear
an interest rate of 12%. The conversion price for the note is $0.01
per share. After the six months anniversary of this note, the
conversion price shall be equal to the lower of the fixed price of
$0.01 or 65% of the lowest trading price of the common stock for
the 20 prior trading days including the day upon which a conversion
notice is received by the Company or its transfer agent.
Convertible
note 32: On September 10, 2020, the Company entered a convertible
promissory note with an accredited investor for a total amount of
$227,700 (includes $20,700 OID and $7,000 legal expense). The note
is due 360 days and bear an interest rate of 8%. The conversion
price for the note is 60% of the lowest trading bid for the 20
consecutive trading days prior to the conversion date.
Convertible
note 33: On September 24, 2020, the Company entered a convertible
promissory note with an accredited investor for a total amount of
$212,300 (includes $19,300 OID). The note is due 180 days and bear
an interest rate of 12%. The conversion price for the note is $0.01
per share. After the six months anniversary of this note, the
conversion price shall be equal to the lower of the fixed price of
$0.01 or 65% of the lowest trading price of the common stock for
the 20 prior trading days including the day upon which a conversion
notice is received by the Company or its transfer agent.
Convertible
note 34: On October 8, 2020, the Company entered a convertible
promissory note with an accredited investor for a total amount of
$231,000 (includes $21,000 OID). The note is due 180 days and bear
an interest rate of 12%. The conversion price for the note is $0.01
per share. After the six months anniversary of this note, the
conversion price shall be equal to the lower of the fixed price of
$0.01 or 65% of the lowest trading price of the common stock for
the 20 prior trading days including the day upon which a conversion
notice is received by the Company or its transfer agent.
Convertible
note 35: On October 13, 2020, the Company entered a convertible
promissory note with an accredited investor for a total amount of
$275,000 (includes $25,000 OID). The note is due 180 days and bear
an interest rate of 12%. The conversion price for the note is $0.01
per share. After the six months anniversary of this note, the
conversion price shall be equal to the lower of the fixed price of
$0.01 or 65% of the lowest trading price of the common stock for
the 20 prior trading days including the day upon which a conversion
notice is received by the Company or its transfer agent.
Convertible
note 36: On November 10, 2020, the Company entered a convertible
promissory note with an accredited investor for a total amount of
$58,300 (includes $5,300 OID). The note is due 360 days and bear an
interest rate of 8%. The conversion price for the note is 60% of
the lowest trading bid for the 20 consecutive trading days prior to
the conversion date.
In
connection with the convertible debt, debt discount balance as of
December 31, 2020 and June 30, 2020 were $1,045,671 and $880,879,
respectively, and were being amortized and recorded as interest
expenses over the term of the convertible debt.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial
Statements
December
31, 2020
19. |
Derivative liabilities |
The
derivative liability is derived from the conversion features in
note 8 and stock warrant in note 10. All were valued using the
weighted-average Binomial option pricing model using the
assumptions detailed below. As of December 31, 2020 and June 30,
2020, the derivative liability was $1,595,186 and $5,597,095,
respectively. The Company recorded $3,992,108 and $1,442,295 loss
from changes in derivative liability during the period ended
December 31, 2020 and June 30, 2020, respectively. The Binomial
model with the following assumption inputs:
|
|
|
December
31, 2020 |
|
Annual dividend yield |
|
|
— |
|
Expected life (years) |
|
|
0.2-1.00 |
|
Risk-free interest rate |
|
|
0.09-0.16 |
% |
Expected volatility |
|
|
89-187 |
% |
|
|
|
June
30, 2020 |
|
Annual dividend yield |
|
|
— |
|
Expected life (years) |
|
|
0.5-1.00 |
|
Risk-free interest rate |
|
|
0.16-2.10 |
% |
Expected volatility |
|
|
113-175 |
% |
Fair
value of the derivative is summarized as below:
Beginning Balance, June 30, 2020 |
|
$ |
5,597,095 |
|
Additions |
|
|
2,326,977 |
|
Cancellation of Derivative
Liabilities Due to Cash Repayment |
|
|
(228,489 |
) |
Cancellation of Derivative
liabilities Due to Share Reservation |
|
|
(214,757 |
) |
Mark to Market |
|
|
(3,763,618 |
) |
Reclassification to APIC due to
conversions |
|
|
(2,122,022 |
) |
Ending Balance,
December 31, 2020 |
|
$ |
1,595,186 |
|
Beginning Balance, June 30, 2019 |
|
$ |
2,991,953 |
|
Additions |
|
|
3,538,927 |
|
Mark to Market |
|
|
2,314,089 |
|
Reclassification to APIC due to
conversions |
|
|
(957,488 |
) |
Ending Balance,
December 31, 2019 |
|
$ |
3,259,345 |
|
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial
Statements
December
31, 2020
On
September 7, 2018, the Company entered into a settlement agreement
with several investors to settle all disputes by issues additional
unrestricted shares. In connection with the note each individual
investor will also receive warrants equal to the number of the
shares the investors own as of the effective date of the settlement
agreement. The warrants have a life of five years with an exercise
price as of the date of exchange. The fair value of the warrants at
the grant date was $56,730. As of December 31, 2020 and June 30,
2020, the fair value of the warrant liability was $521 and $1,910,
respectively.
On
February 4, 2020, the Company entered into a warrant agreement with
an accredited investor up to 10,000,000 shares of common stock of
the Company at exercise price of $0.008 per share, subject to
adjustment. The warrants have a life of five years with an exercise
price as of the date of exchange. The fair value of the warrants at
the grant date was $80,000. As of December 31, 2020 and June 30,
2020, the fair value of the warrant liability was $9,000 and
$78,000, respectively.
As of
December 31, 2020 and June 30, 2020, the total fair value of the
warrant liability was $9,521 and $79,910, respectively.
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 (5.5% as
of December 20, 2018). 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,
2020 and June 30, 2020, the loan principal balance was $25,982. As
of December 31, 2020, the note is in default.
Notes
Payable Due to Non-related parties
On
June 15, 2018, the Company entered into a promissory note with one
of the accredited investors. The original principal amount was
$20,000 and the note bears 8% interest per annum. The note was
payable upon demand. As of December 31, 2020 and June 30, 2020,
this note had a balance of $20,000 and $20,000,
respectively.
Notes
Payable Due to Related Parties
On
January 23, 2013, the Company entered into a promissory note with
its former employee of the Company who owns less than 5% of the
Company’s stock. The original principal amount was $40,000 and the
note bears no interest. The note was payable upon demand. As of
December 31, 2020 and June 30, 2020, this note had a balance of
$15,427 and $15,427, respectively.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial
Statements
December
31, 2020
On
October 1, 2017, SGMD entered a straight promissory note with
Greater Asia Technology Limited (Greater Asia) for borrowing
$100,000 with maturity date on June 30, 2018; the note bears an
interest rate of 33.33%. As of December 31, 2020 and June 30, 2020,
the note was in default and the outstanding balance under this note
was $73,844 and $96,401, respectively.
During
the year ended June 30, 2019, 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, 2020 and June 30,
2020, the outstanding balance with Greater Asia loans were $100,000
and $100,000, respectively.
On
January 6, 2015, the Company entered into repayment agreement with
its former employee for a loan of $9,500 at no interest. As of
December 31, 2020 and June 30, 2020, the Company has an outstanding
balance of $4,423 and $3,584.
On
July 1, 2012, CarryOutSupplies entered an equipment loan agreement
with a bank with maturity on June 21, 2024. The monthly payment is
$648. As of December 31, 2020 and June 30, 2020, the outstanding
balance under this loan were $20,665 and $24,524,
respectively.
On
March 18, 2020, the Company entered into a loan agreement for
$150,000 with Celtic Bank with maturity date on March 18, 2020. As
of December 31, 2020 and June 30, 2020, the outstanding balance
under this loan were $1,815 and $117,635, respectively.
On
June 26, 2020, the Company entered into a government loan agreement
for $8,000 with maturity date on December 26, 2020. As of December
31, 2020 and June 30, 2020, the outstanding balance under this loan
were $8,000.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial
Statements
December
31, 2020
22. |
Loans payable (Continued) |
On
April 27, 2020, we entered into a loan borrowed $110,000 from Bank
of America (“Lender”), pursuant to a Promissory Note issued by
Company to Lender (the “PPP Note”). The loan was made pursuant to
the Payroll Protection Program established as part of the
Coronavirus Aid, Relief, and Economic Security Act (the “CARES
Act”). The PPP Note bears interest at 1.00% per annum and may be
repaid at any time without penalty. The PPP Note contains customary
events of default relating to, among other things, payment
defaults, breach of representations and warranties, or provisions
of the promissory note. The occurrence of an event of default may
result in a claim for the immediate repayment of all amounts
outstanding under the PPP Note.
On
July 28, 2020, we entered into a loan borrowed $159,900 from Bank
of America (“Lender”), pursuant to a Promissory Note issued by
Company to Lender (the “PPP Note”). The loan was made pursuant to
the Payroll Protection Program established as part of the
Coronavirus Aid, Relief, and Economic Security Act (the “CARES
Act”). The PPP Note bears interest at 1.00% per annum and may be
repaid at any time without penalty. The PPP Note contains customary
events of default relating to, among other things, payment
defaults, breach of representations and warranties, or provisions
of the promissory note. The occurrence of an event of default may
result in a claim for the immediate repayment of all amounts
outstanding under the PPP Note.
The
Company accounting for the PPP loan under Topic 470: (a). Initially
record the cash inflow from the PPP loan as a financial liability
and would accrue interest in accordance with the interest method
under ASC Subtopic 835-30; (b). Not impute additional interest at a
market rate; (c). Continue to record the proceeds from the loan as
a liability until either (1) the loan is partly or wholly forgiven
and the debtor has been legally released or (2) the debtor pays off
the loan; (d). Would reduce the liability by the amount forgiven
and record a gain on extinguishment once the loan is partly or
wholly forgiven and legal release is received.
As of
December 31, 2020 and June 30, 2020, the Company had an outstanding
loan balance of $720,489 and $517,260, respectively.
23. |
Loans Payable – Related Parties |
On
July 7, 2016, SWC received a loan from an employee. The amount of
the loan bears no interest and amortized on a monthly basis over
the life of the loan. As of December 31, 2020 and June 30, 2020,
the balance of the loan was $48,143 and $35,943,
respectively.
During
the three months ended September 30, 2020, the Company received
loans from related parties. The amount of the loan bears no
interest. As of December 31, 2020 and June 30, 2020, the balance of
the loan was $528,082 and $0, respectively.
As of December 31, 2020 and June 30, 2020, the Company had an
outstanding loan balance – related parties of $576,225 and $35,943,
respectively.
During
the year ended June 30, 2020, the Company had entered into one
consulting service agreement and one employment agreement, which
had potential shares to be issued in total amount of
$101,577.
During
the six months ended December 31, 2020, the Company had potential
shares to be issued to one employment agreement of
$35,000.
During
the six months ended December 31, 2020, the Company had potential
shares to be issued to one consulting agreement of
$31,000.
As of
December 31, 2020 and June 30, 2020, the Company had balance of
$167,577 and $101,577 share to be issued, respectively.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial
Statements
December
31, 2020
The Company is authorized to issue 10,000,000,000 shares of $.001
par value common stock and 10,000,000 shares of $.001 par value
preferred stock. On April 22, 2020, the Company filed an amendment
to increase the total authorized shares to 10,010,000,000 –
10,000,000,000 of which are designated as common stock, par $0.001
per share and 10,000,000 of which are designated as preferred
stock, par value $0.001 per share.
Share
issuance during the three months ended September 30, 2020
-
During
the three months ended September 30, 2020, the Company issued
1,081,411,606 shares of common stock for debt conversions in total
amount of $1,273,459.
Share
issuance during the three months ended December 31, 2020
-
During
the three months ended December 31, 2020, the Company issued
411,171,815 shares of common stock for debt conversions in total
amount of $320,879.
During
the periods from December 14, 2014 through March 31, 2015, the
Company issued 2,000,000 Series A preferred shares from an EB5
Program Investment. Five years from the date of issue (the
“Conversion Date”), assuming Investor is approved for l-526, and
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. Should the
Investor be unsuccessful in liquidating the Common Shares within 90
days after the Conversion Date, the Company shall buy back total
Common Shares owned by Investor at a fixed amount of $500,000.00
plus 5% ROI per annum.
During
the three months ended December 31, 2020, those shares were
automatically converted into 360,647,019 of common shares with a
fair market value of $2,000,000 of initial investment plus a five
percent annualized return on initial investment (“ROI”), or total
ROI of $500,000.
As of
December 31, 2020 and June 30, 2020, the Company had 1,541,500
shares of its preferred stock issued and outstanding, and
3,616,507,670 and 1,763,277,230 shares of its common stock,
respectively, issued and outstanding.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial
Statements
December
31, 2020
26. |
Commitments and contingencies |
On
February 23, 2018 the Company entered into lease agreement for a
new office space commencing March 1, 2018. The term of the lease is
for a (5) Five Years with 1 month free on the 1st year of the term.
The monthly rent on the 1st year will be $11,770 with a 3% increase
for each subsequent year. Total commitment for the full term of the
lease will be $737,367.
Our
warehouse along with some office space is located at 20529 East
Walnut Drive North, Diamond Bar, California, where we lease
approximately 11,627 square feet of combined space. The lease term
is for five years and two months ending on April 30, 2025. The
current monthly rental payment for the facility is
$13,022.
Six Months
Ended |
|
|
|
December 31, 2020 |
|
|
|
Lease
Cost |
|
|
|
|
Operating lease cost (included in general and administration in the
Company’s unaudited condensed statement of operations) |
|
$ |
154,463 |
|
|
|
|
|
|
Other
Information |
|
|
|
|
Cash paid for amounts included in the
measurement of lease liabilities for the six months ended December
31, 2020 |
|
$ |
107,438 |
|
Remaining lease term – operating
leases (in years) |
|
|
3.25 |
|
Average discount rate – operating
leases |
|
|
10 |
% |
The supplemental balance sheet
information related to leases for the periods are as follows: |
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
|
|
Short-term right-of-use assets |
|
$ |
231,685 |
|
Long-term
right-of-use assets |
|
$ |
610,864 |
|
Total
operating lease assets |
|
$ |
842,549 |
|
|
|
|
|
|
Short-term operating lease
liabilities |
|
$ |
236,528 |
|
Long-term
operating lease liabilities |
|
$ |
641,687 |
|
Total
operating lease liabilities |
|
$ |
878,214 |
|
Maturities of the Company’s lease liabilities are as follows:
|
|
Operating |
|
Period ending June 30, |
|
Lease |
|
2021 |
|
$ |
156,118 |
|
2022 |
|
|
305,040 |
|
2023 |
|
|
273,425 |
|
2024 |
|
|
172,465 |
|
2025 |
|
|
147,446 |
|
Total lease payments |
|
|
1,054,494 |
|
|
|
|
|
|
Less:
Imputed interest/present value discount |
|
|
(176,279 |
) |
Present
value of lease liabilities |
|
$ |
878,214 |
|
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial
Statements
December
31, 2020
Shares
issued for cash
On
February 9, 2021, the Company entered into a stock subscription
agreement to issue 150,000,000 shares of the Company’s common stock
for cash in total amount of $225,000.
Convertible
Notes
On
February 9, 2021, the Company entered a convertible promissory note
with an accredited investor for a total amount of $69,300 (includes
$6,300 OID). The note is due 360 days and bear an interest rate of
8%. The conversion price for the note is 60% of the lowest trading
bid for the 20 consecutive trading days prior to the conversion
date.
Conversions
Subsequent
to February 16, 2021, there were multiple accredited investors
converted approx. $258,300 of the convertible notes into
389,256,291 shares of the Company’s common stocks.
On
February 8, 2021, Sugar Rush, Inc., a Nevada corporation and wholly
owned subsidiary of Sugarmade, Inc., a Delaware corporation entered
into a Common Share Purchase Agreement with Nug Avenue, Inc., a
California corporation (the “Seller”). The Seller provides services
pertaining to the licensed and regulated delivery of cannabis out
of Lynwood, California, serving primarily the greater Los Angeles
Metropolitan area (the “Lynwood Operations”).
Pursuant
to the Agreement, and subject to the satisfaction of the conditions
as set forth therein, the Company agreed to purchase a seventy
percent (70%) stake in the Seller’s Lynwood Operations for a
purchase price of five hundred sixty thousand dollars ($560,000)
(the “Stake Purchase”). Pursuant to the Agreement, the parties
agreed that the Stake Purchase will entitle the Company to receive
70% of the revenues and profits generated by the Seller from its
Lynwood Operations starting from February 8, 2021 (the “Effective
Date”). Under the terms of the Agreement, the Company agreed to
make periodic payments to the Seller to satisfy the $560,000
purchase price over a twelve (12) month period beginning on the
Effective Date. Pursuant to the Agreement, the parties agreed that
the $560,000 resulting from the Stake Purchase is to be used by the
Seller for the expansion of business opportunities for the Lynwood
Operations.
Further,
pursuant to the Agreement, the Seller agreed to grant the Company
an option to invest in all future business opportunities of the
Seller pertaining to any and all legal and regulated cannabis
business operations. The Seller and the Company agreed to negotiate
a formal agreement for this option within ninety (90) days of the
Effective Date. Further, pursuant to the Agreement, Seller agreed
to grant the Company unlimited participation rights in any future
financings of the Seller, and to negotiate a formal agreement for
such participation rights to be entered into by the Seller and the
Company within ninety (90) days of the Effective Date.
On
February 9, 2021 (the “Closing Date”), the Closing occurred, and
the Company acquired a 70% stake in the Seller’s Lynwood Operations
pursuant to the terms of the Agreement.
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 Quarterly Report on Form 10-Q. See “SPECIAL NOTE
REGARDING FORWARD LOOKING STATEMENTS” above.
Overview and Financial Condition
Sugarmade,
Inc. (hereinafter referred to as “we,” “us” or “Company”) operates
much of its business activities through our subsidiary, SWC Group,
Inc., a California corporation (“SWC”). Sugarmade, Inc. was founded
in 2010. In 2014, CarryOutSupplies.com was acquired by Sugarmade,
Inc., creating the Company as it is today.
Shares
of our common stock are quoted on the OTC Market, which is a
quotation system for early-stage and developing companies under the
trading symbol “SGMD”.
As of
December 31, 2020, we operated our business in the following three
segments:
|
1) |
Paper and paper-based products: The supply
of consumable products to the quick-service restaurant sub-sector
of the restaurant industry, and as an importer and distributor of
non-medical personal protection equipment to business and
consumers, via our CarryOutSupplies.com subsidiary (“Carryout
Supplies”). Carryout Supplies is a producer and wholesaler of
custom printed and generic supplies, servicing more than 2,000
quick-service restaurants. The primary products are plastic cold
cups, paper coffee cups, yogurt cups, ice cream cups, cup lids, cup
sleeves, edible packaging, food containers, soup containers,
plastic spoons, and similar products for this market sector. This
subsidiary, which was formed in 2009, was recently expanded to also
offer non-medical personal protective equipment. |
|
|
|
|
2) |
Non-medical supplies: Beginning in 2020,
we sell non-medical personal protective equipment through Carryout
Supplies. |
|
|
|
|
3) |
Cannabis products delivery service and sales: As a joint
owner in the Budcars licensed cannabis delivery service brand
(“Budcars” or the “Budcars Brand”). Budcars operates a licensed
cannabis delivery service in the Sacramento, California area.
During early 2020, the Company gained a 40% stake in the Budcars
Brand and in the Sacramento delivery operations via acquiring a 40%
stake in Indigo Dye Group (“Indigo”). Under the terms of the
agreement with Indigo, Sugarmade acquired an option to purchase an
additional 30% interest in Budcars. Upon exercise of this option,
the Company would acquire a controlling interest in Indigo. As of
December 31, 2020, the option has not yet been exercised and the
Company’s stake in Budcars was at 40%. Starting on October 1, 2020,
the Company plans to open new locations via purchasing equity in
other Brand/Franchises to cover delivery for the entire California.
Therefore, the Company is not likely at this time to exercise its
option to acquire the additional 30% interest in Indigo. In
addition, the Company is no longer involved in day-to-day
operations of Indigo and going forward, the Company intends to
pursue cannabis delivery independent of Indigo.
Starting on October 1, 2020, the Company plans to open new
locations via purchasing equity in other Brand/Franchises to cover
delivery for the entire California. Therefore, the Company is not
likely at this time to exercise its option to acquire the
additional 30% interest in Indigo. In addition, the Company is no
longer involved in day-to-day operations of Indigo and going
forward, the Company intends to pursue cannabis delivery
independent of Indigo. As of October 1, 2020, the Company ceased to
have control over the day-to-day business of Indigo and it was
deconsolidated and recorded as an investment in nonconsolidated
affiliate at its $505,449 estimated fair value and changed to
equity method of accounting. Pursuant to the terms of the Indigo
agreement, if the Company determines, in its discretion not to
continue to make monthly payments, its 40% ownership interest in
Indigo will be decreased according to the payment then made. During
the quarter ended December 31 ,2020, if the Company makes no
additional payments, it will hold approximately 33% of the
ownership of Indigo. See Note 5 and Note 6.
|
Subsequent to the end of the December
reporting period, Sugarmade became a joint owner of Nug Avenue,
Inc., a California corporation (“Nug Avenue”), which operates a
licensed and regulated cannabis delivery service out of Lynwood,
California, serving the greater Los Angeles Metropolitan area (the
“Lynwood Operations”). The Company currently owns a majority stake
of seventy percent (70%) of Nug Avenue’s Lynwood Operations and
holds first rights of refusal on Nug Avenue’s business expansion
relative to the cannabis marketplace.
Our
CarryOutSupplies.com Operation
Our
legacy business operation, CarryOutSupplies.com, is a producer and
wholesaler of custom printed and generic supplies, servicing more
than 2,000 businesses in the Quick Service Restaurant Sector. 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, edible packaging, food
containers, soup containers, plastic spoons, and many other similar
products for this market sector. CarryOutSupplies.com was founded
in 2009. Our products are viewable on our website:
www.CarryOutSupplies.com.
We
believe we occupy a defensible space within the Quick Service
Restaurant Sector by way of our significant experience in serving
this customer base, our knowledge of the industry fundamentals, and
our significant experience in Asia factory sourcing and importing
goods from Asian factories. Our niche within the market pertains to
serving the many quick-service restaurants that 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, CarryOutSupplies.com was
founded to provide products to this underserved section of the
market. Since that time, the Company has become a key supplier to
more than 2,000 establishments, particularly within the frozen
dessert segment.
The
business of supplying such products to the quick-service restaurant
sector remains highly competitive. Over the past few years,
operating margins have compressed as a result of increased
competition, the emergence of relatively inexpensive digital
printing processes, and the larger printing and paper product
manufacturers lowering minimum order quantities. Sugarmade expects
the sector to remain highly competitive and is responding to the
industry changes by realigning staff, eliminating less profitable
products, and introducing new product areas.
The
CarryOutSupplies operation has recently expanded its product
offerings to include consumable sanitary supplies, such as
non-medical gloves, non-medical facemasks, face shields, and other
non-medical protective equipment. We believe our significant
experience in sourcing products from Asian factories and the
importation of goods from Asia makes us well-equipped to operate
within the marketplace for non-medical, consumable, protective
equipment.
We
plan to continue our business pursuits relative to our
CarryOutSuppies.com business, and have significantly restructured
the operations over the past year. We plan to continue to modify
our strategies and product lines to remain competitive in these
niche market sectors.
BudCars
Cannabis Delivery Service
In
early 2020, our Company entered into an agreement to purchase Bud
Cars, Inc., a California corporation, which is engaged in the
licensed, and legal under California state law, delivery of
cannabis and cannabis-containing products. Under the terms of the
acquisition agreement, Sugarmade acquired a 33% stake in the
operation and an option to gain a controlling interest in the
delivery service.
Cannabis
is already one of the fastest-growing markets in the U.S. According
to Fortune Business Insights, during 2019, the cannabis market
produced approximately $100 billion in U.S sales. Growth over the
next few years is expected to top 32% compounded annually. The U.S.
cannabis segment has clearly been one of the fastest-growing
markets within the American economy over the past 50 years. The
California market clearly leads the U.S. market, with the legal
California market worth at least $13 billion annually with strong
growth continuing. The illegal market is likely even more
extensive.
As
the market shifts from the black to white markets, the legal
providers are expected to benefit further. We urge investors to
consider this trend in their investment decisions. One of the
primary reasons many legal providers across several states have
developed business issues is flawed state government policies that
have allowed illegal operators to continue in business at the
expense of the licensed and heavily taxed industry.
According
to BDS Analytics and Arcview Market Research, two firms that
closely monitor the cannabis marketplace, California’s total
cannabis market is expected to produce about $12.8 billion this
year, with $8.7 billion going to illicit operators and $3.1 billion
to the state-authorized market.
For
the first time, the white market/black market balance is beginning
to shift as authorities crackdown on unlicensed business. This is
starting to benefit legal operators. For example, California
regulators and law enforcement agencies have recently announced
hundreds of enforcement actions across California seizing millions
of dollars of black market cannabis products. We believe this trend
toward enforcement against illegal operators will directly benefit
companies like the BudCars cannabis delivery service.
The
outbreak of COVID-19, new social unrest in the United States, and
the general movement toward retail home delivery have resulted in
radical shifts in the cannabis marketplace. As a result, the
general market for delivery services is proliferating.
Budcars operates its delivery service in strict adherence to all
state, local and municipal regulations and is fully licensed for
operations by California regulators.
Discussions with respect to our Company’s operations included those
of, SWC and Indigo Dye Group Corp., a variable interest entity
(“VIE”). During the quarter ended December 31, 2020, the Company
plans to open new locations via purchasing equity into other
Brand/Franchises to cover delivery for the entire California.
Therefore, the Company likely not to proceeds the option to acquire
the additional 30% interest in Indigo at the moment. In addition,
the Company is no longer involve in day-to-day operations and the
Company will be pursuing cannabis delivery moving forward,
independently of Indigo Dye. Therefore, the Company losses the
control over Indigo since October 1, 2020. As of December 31, 2020,
we had no other operations other than SWC.
Our
Ownership in Nug Avenue, Inc. Relative to Licensed and Permitted
Cannabis Delivery in the Los Angeles Metropolitan
Area
On
February 8,
2020, Sugarmade became a joint owner of Nug Avenue, Inc., a
California corporation (“Nug Avenue”), which is party to a
management services agreement relating to the licensed and
regulated delivery of cannabis out of Lynwood, California, serving
primarily the greater Los Angeles Metropolitan area (the “Lynwood
Operations”).
As of
February 8, 2020, the Company acquired a majority stake of seventy
percent (70%), allowing for full financial statement consolidation
of the Nug Avenue, Inc. Lynwood Operations. As part of the February
8, 2020, agreement, the Company also gained an option to invest in
Nug Avenue’s future business opportunities pertaining to any and
all legal and regulated cannabis business operations. Further,
under the February 8, 2002 agreement, Nug Avenue agreed to grant
the Company unlimited participation rights in future
financings.
The
Company believes the Los Angeles cannabis delivery market offers
substantial opportunities for growth. By all measures, the
California cannabis market continues to gain strength, with the
Southern California sub-market representing the world’s largest
single cannabis marketplace. According to the California Department
of Tax and Fee Administration, the most recently reported quarterly
period posted an almost 80% increase in cannabis tax compared to
the year-ago period. Much of this growth was driven by increased
use of delivery services, as consumers are increasingly relying on
home delivery for many goods, including cannabis.
Discussions with respect to our Company’s operations included those
of, SWC and Indigo Dye Group Corp., a variable interest entity
(“VIE”). During the quarter ended December 31, 2020, the Company
plans to open new locations via purchasing equity into other
Brand/Franchises to cover delivery for the entire California.
Therefore, the Company is not likely at this time to exercise its
option to acquire the additional 30% interest in Indigo. In
addition, the Company is no longer involved in Indigo’s day-to-day
operations and going forward, the Company intends to pursue
cannabis delivery, independent of Indigo. As of October 1, 2020,
the Company continues to hold approximately 29% of the ownership of
Indigo but ceased to have a controlling interest in the partnership
and it was deconsolidated and recorded as an investment in
nonconsolidated affiliate at its $505,449 estimated fair value and
changed to equity method of accounting. During the quarter ended
December 31 ,2020, the Company invested additional $61,484 in
Indigo, or 3.5% of Indigo’s issued shares. As of December 31, 2020,
the Company continues to hold approximately 33% of the ownership of
Indigo. As of December 31, 2020, we had no other operations other
than SWC.
Results
of Operations
The
following table sets forth the results of our operations for the
three months ended December 31, 2020 and 2019.
|
|
For
the three months ended |
|
|
|
December 31, |
|
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
|
Net Sales |
|
$ |
300,652 |
|
|
$ |
720,810 |
|
Cost of Goods
Sold: |
|
|
242,531 |
|
|
|
435,690 |
|
Gross profit |
|
|
58,122 |
|
|
|
285,120 |
|
Operating
Expenses |
|
|
634,703 |
|
|
|
7,215,934 |
|
Loss from Operations |
|
|
(576,581 |
) |
|
|
(6,930,814 |
) |
Other
non-operating Expense: |
|
|
(1,077,702 |
) |
|
|
(823,710 |
) |
Equity Method
Investment Loss |
|
|
(2,144 |
) |
|
|
|
|
Less: net
income attributable to the noncontrolling interest |
|
|
— |
|
|
|
— |
|
Net Loss |
|
$ |
(1,656,397 |
) |
|
$ |
(7,754,524 |
) |
Revenues
For
the three months ended December 31, 2020 and 2019, revenues were
$300,652 and $720,810, respectively. The decrease was primarily due
to the loss of control of Indigo.
Cost
of goods sold
For the three months ended December 31, 2020 and 2019, costs of
goods sold were $242,531 and $435,690 respectively. The decrease
was primarily due to the loss of control of Indigo.
Gross
profit
For
the three months ended December 31, 2020 and 2019, gross profit was
$58,122 and $285,120, respectively. The decrease was primarily due
to the loss of control of Indigo.
Operating
expenses
For the three months ended December 31, 2020 and 2019, operating
expenses were $634,703 and $7,215,934, respectively. The decrease
was primarily due to the decrease in stock based compensations.
Other
non-operating income (expense)
The
Company had total other non-operating income (expense) of
$(1,077,702) and $(823,710) for the three months ended December 31,
2020 and 2019, respectively. The increase in non-operating expense
is related to the accounting for the changes in derivative
liabilities due to conversions.
Net
income (loss)
Net
loss totaled $1,656,397 for the three months ended December 31,
2020, compared to a net loss totaling $7,754,524 for the
three-month ended December 31, 2019. The decrease was mainly due to
a reduction in stock-based compensation and accounting for the
changes in derivative liabilities due to conversions.
The
following table sets forth the results of our operations for the
six months ended December 31, 2020 and 2019.
|
|
For
the six months ended |
|
|
|
December 31, |
|
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
|
Net Sales |
|
$ |
2,446,979 |
|
|
$ |
1,474,784 |
|
Cost of Goods
Sold: |
|
|
1,272,429 |
|
|
|
927,858 |
|
Gross profit |
|
|
1,174,550 |
|
|
|
546,925 |
|
Operating
Expenses |
|
|
2,619,720 |
|
|
|
8,419,563 |
|
Loss from Operations |
|
|
(1,445,170 |
) |
|
|
(7,872,637 |
) |
Other non-operating Income (Expense):
|
|
|
1,072,095 |
|
|
|
(1,909,438 |
) |
Equity Method
Investment Loss |
|
|
(2,114 |
) |
|
|
— |
|
Less: net
income attributable to the noncontrolling interest |
|
|
— |
|
|
|
— |
|
Net Loss
attributed to Sugarmade, Inc. |
|
$ |
(375,189 |
) |
|
$ |
(9,782,075 |
) |
Revenues
For
the six months ended December 31, 2020 and 2019, revenues were
$2,446,979 and $1,474,784, respectively. The increase was primarily
due to the new cannabis delivery business.
Cost
of goods sold
For
the six months ended December 31, 2020 and 2019, costs of goods
sold were $1,272,429 and $927,858 respectively. The increase was
primarily due to the acquisition of a 40% interest in
Indigo.
Gross
profit
For
the six months ended December 31, 2020 and 2019, gross profit was
$1,174,550 and $546,925, respectively. The increase was primarily
due to the acquisition of a 40% interest in Indigo.
Operating
expenses
For
the six months ended December 31, 2020 and 2019, operating expenses
were $2,619,720 and $8,419,563, respectively. The decrease was due
to the decrease in stock-based compensation.
Other non-operating income (expense)
The
Company had total other non-operating income (expense) of
$1,072,095 and $(1,909,438) for the six months ended December 31,
2020 and 2019, respectively. The increase in non-operating income
is related to the accounting for the changes in derivative
liabilities due to conversions.
Net
loss
Net
loss totaled $375,189 for the six months ended December 31, 2020,
compared to a net loss totaling $9,782,075 for the three-month
ended December 31, 2019. The decrease was mainly due to the
decrease in stock-based compensation and the accounting for the
changes in derivative liabilities due to conversions.
Liquidity
and Capital Resources
We
have primarily financed our operations through the sale of
unregistered equity and convertible notes payable. As of December
31, 2020, our Company had cash balance of $360,550, current assets
totaling $2,200,173 and total assets of $3,995,463. We had current
and total liabilities totaling $8,324,947 and $9,236,534,
respectively. Stockholders’ equity reflected a deficiency of
$5,241,070.
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, 2020 and 2019:
|
|
2020 |
|
|
2019 |
|
Cash (used in) provided by: |
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
(2,167,187 |
) |
|
$ |
(2,122,441 |
) |
Investing activities |
|
|
— |
|
|
|
— |
|
Financing activities |
|
|
2,086,732 |
|
|
|
2,191,072 |
|
Net
cash used in operating activities was $(2,167,187) for the six
months ended December 31, 2020, and $(2,122,441) for the six months
ended December 31, 2019.
Net
cash used in investing activities was $nil for the six months ended
December 31, 2020, and $nil for the six months ended December 31,
2019.
Net
cash provided by financing activities was $2,086,732 for the six
months ended December 31, 2020 and $2,191,072 for the six months
ended December 31, 2019.
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 December 31,
2020, 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 unaudited condensed consolidated
financial statements and our independent public accountants have
included a similar discussion in their opinion on our financial
statements through June 30, 2020. 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
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 (“GAAP”) and the
rules and regulations of the United States Securities and Exchange
Commission (the “SEC”) 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 unaudited 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, 2020, 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 fiscal year ended June
30, 2020. The interim results for the period ended December 31,
2020 are not necessarily indicative of the results for the full
fiscal year.
Principles of consolidation
The consolidated financial statements include the accounts of our
Company, its wholly owned subsidiary, SWC Group Inc., and Indigo
Dye Group Corp., an investment in nonconsolidated affiliate
(formerly a variable interest entity as of September 30, 2020). All
significant intercompany transactions and balances have been
eliminated in consolidation.
Going concern
The
Company’s continuation as a going concern is dependent on its
ability to generate sufficient cash flows from operations to meet
its obligations, in which it has not been successful, and/or
obtaining additional financing from its shareholders or other
sources, as may be required.
Our
consolidated financial statements have been prepared assuming that
we will continue as a going concern. Such assumption contemplates
the realization of assets and satisfaction of liabilities in the
normal course of business. These consolidated financial statements
do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the
amounts and classifications of liabilities that may result should
the Company be unable to continue as a going concern.
Management
is endeavoring to increase revenue-generating operations. While
priority is on generating cash from operations through the sale of
the Company’s products, management is also seeking to raise
additional working capital through various financing sources,
including the sale of the Company’s equity and/or debt securities,
which may not be available on commercially reasonable terms to our
Company, or which may not be available at all. If such financing is
not available on satisfactory terms, we may be unable to continue
our business as desired and our operating results will be adversely
affected. In addition, any financing arrangement may have
potentially adverse effects on us and/or our stockholders. Debt
financing (if available and undertaken) will increase expenses,
must be repaid regardless of operating results and may involve
restrictions limiting our operating flexibility. If we issue equity
securities to raise additional funds, the percentage ownership of
our existing stockholders will be reduced, and the new equity
securities may have rights, preferences or privileges senior to
those of the current holders of our common stock.
Use of estimates
The
preparation of financial statements in conformity with GAAP
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 (“FASB”) Accounting Standards Codification (“ASC’’) No. 606,
Revenue Recognition. Sugarmade applied 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 the Company’s revenue is recognized at the time control of
the products transfers to the customer.
Property and equipment
Property
and equipment are stated at the historical cost, less accumulated
depreciation. Depreciation on property and equipment is provided
using the straight-line method over the estimated useful lives of
the assets for both financial and income tax reporting purposes as
follows:
Machinery
and equipment |
|
3-5
years |
Furniture
and equipment |
|
7
years |
Vehicles |
|
5
years |
Leasehold
improvements |
|
5
years |
Expenditures
for renewals and betterments are capitalized while repairs and
maintenance costs are normally charged to the statement of
operations in the year in which they are incurred. In situations
where it can be clearly demonstrated that the expenditure has
resulted in an increase in the future economic benefits expected to
be obtained from the use of the asset, the expenditure is
capitalized as an additional cost of the asset.
Upon
sale or disposal of an asset, the historical cost and related
accumulated depreciation or amortization of such asset were removed
from their respective accounts and any gain or loss is recorded in
the statements of income.
The Company reviews the carrying value of property, plant, and
equipment for impairment whenever events and circumstances indicate
that the carrying value of an asset may not be recoverable from the
estimated future cash flows expected to result from its use and
eventual disposition. In cases where undiscounted expected future
cash flows are less than the carrying value, an impairment loss is
recognized equal to an amount by which the carrying value exceeds
the fair value of assets. The factors considered by management in
performing this assessment include current operating results,
trends and prospects, the manner in which the property is used, and
the effects of obsolescence, demand, competition and other economic
factors. Based on this assessment, no impairment expenses for
property, plant, and equipment was recorded in operating expenses
during the six months ended December 31, 2020 and 2019.
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,
2020, performed an impairment test of all of its intangible assets.
Based on the Company’s analysis, the company had an amortization of
intangible assets of $700 for the six months ended December 31,
2020 and 2019, respectively.
Leases
In
February 2016, the FASB established Topic 842, Leases, by issuing
Accounting Standards Update (“ASU”) No. 2016-02, which requires
lessees to recognize the rights and obligations created by leases
on the balance sheet and disclose key information about leasing
arrangements. Topic 842 was subsequently amended by ASU No.
2018-11, Targeted Improvements, ASU No. 2018-10, Codification
Improvements to Topic 842, and ASU No. 2018-01, Land Easement
Practical Expedient for Transition to Topic 842. The new standard
establishes a right-of-use model (“ROU”) that requires a lessee to
recognize a ROU asset and lease liability on the balance sheet for
all leases with a term longer than 12 months. Leases will be
classified as finance or operating, with classification affecting
the pattern and classification of expense recognition in the
statement of operations.
The
new standard became effective April 1, 2019. A modified
retrospective transition approach is required, applying the new
standard to all leases existing at the date of initial application.
An entity may choose to use either (1) its effective date or (2)
the beginning of the earliest comparative period presented in the
financial statements as its date of initial application. If an
entity chooses the second option, the transition requirements for
existing leases also apply to leases entered into between the date
of initial application and the effective date. The entity must also
recast its comparative period financial statements and provide the
disclosures required by the new standard for the comparative
periods. The Company adopted the new standard on July 1, 2019 using
the modified retrospective transition approach as of the effective
date of the initial application. The new standard provides a number
of optional practical expedients in transition. The Company elected
the “package of practical expedients”, which permits entities not
to reassess under the new lease standard prior conclusions about
lease identification, lease classification and initial direct
costs. The Company does not expect to elect the use-of-hindsight or
the practical expedient pertaining to land easements.
The
most significant effects of the adoption of the new standard relate
to the recognition of new ROU assets and lease labilities on our
balance sheet for office operating leases and providing significant
new disclosures about our leasing activities.
The
new standard also provides practical expedients for an entity’s
ongoing accounting. The Company has also elected the short-term
leases recognition exemption for all leases that qualify. This
means that the Company will not recognize ROU assets or lease
liabilities, and this includes not recognizing ROU assets and lease
liabilities, for existing short-term leases of those assets in
transition. The Company also currently expects to elect the
practical expedient to not separate lease and non-lease components
for its leases. All existing leases are reported under this
rule.
Under
ASC 840, leases were classified as either capital or operating, and
the classification significantly impacted the effect the contract
had on the company’s financial statements. Capital lease
classification resulted in a liability that was recorded on a
company’s balance sheet, whereas operating leases did not impact
the balance sheet. After the new adoption, $1,105,755 of operating
lease right-of-use asset and $1,140,041 of operating lease
liabilities were reflected on the Company’s June 30, 2020 financial
statements and $842,549 of operating lease right-of-use asset and
$878,214 of operating lease liabilities were reflected on the
Company’s December 31, 2020 financial statements.
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.
Earnings (Loss) per share
We
calculate basic earnings (loss) per share (“EPS”) by dividing our
net income (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 3 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,
2020.
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.
The
Company’s financial statements as of December 31, 2020
substantially all of its operations are conducted in three industry
segments – (1) paper and paper-based products such as paper cups,
cup lids, food containers, etc., which accounts for approximately
24% of the Company’s revenues; (2) non-medical supplies such as
non-medical fascial mask, which accounts for approximately 3% of
the Company’s total revenues; and cannabis products delivery
service and sales.
New accounting pronouncements
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842).
The new standard establishes an 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 have adopted this ASU
on the consolidated financial statements in the quarter ended
September 30, 2019.
In
December 2019, the FASB issued ASU 2019-12, “Simplifying the
Accounting for Income Taxes”. The pronouncement simplifies the
accounting for income taxes by removing certain exceptions to the
general principles in ASC Topic 740, “Income Taxes”. The
pronouncement also improves consistent application of and
simplifies GAAP for other areas of Topic 740 by clarifying and
amending existing guidance. ASU 2019-12 will be effective for us
beginning in the first quarter of fiscal 2021, with early adoption
permitted. We are still evaluating the impact this guidance will
have on our consolidated financial statements.
In January 2020, the FASB
issued ASU No. 2020-01, Investments - Equity Securities (Topic
321), Investments - Equity Method and Joint Ventures (Topic 323),
and Derivative and Hedging (Topic 815), which clarifies the
interaction of rules for equity securities, the equity method of
accounting, and forward contracts and purchase options on certain
types of securities. The guidance clarifies how to account for the
transition into and out of the equity method of accounting when
considering observable transactions under the measurement
alternative. The ASU is effective for annual reporting periods
beginning after December 15, 2020, including interim reporting
periods within those annual periods, with early adoption permitted.
We are currently evaluating the impact of the new guidance on our
consolidated financial statements.
ITEM 3 – QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Not
applicable.
ITEM 4 – CONTROLS AND
PROCEDURES
Disclosure
Controls and Procedures
We
maintain disclosure controls and procedures that are designed to
provide reasonable assurance that information required to be
disclosed in our Exchange Act reports is recorded, processed,
summarized, and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms and that such
information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only
reasonable, and not absolute, assurance of achieving the desired
control objectives. In reaching a reasonable level of assurance,
management necessarily was required to apply its judgment in
evaluating the cost benefit relationship of possible controls and
procedures. Our disclosure controls and procedures are designed to
provide reasonable assurance of achieving their
objectives.
As
required by the SEC Rule 13a-15(e) and Rule 15d-15(e), we carried
out an evaluation, under the supervision of and with the
participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as
of the end of the period covered by this report. Based on the
foregoing, our Chief Executive Officer and Chief Financial Officer
concluded that as of December 31, 2020, our disclosure controls and
procedures were not effective because the Company is relatively
inexperienced with certain complexities within USGAAP and SEC
reporting.
We
have taken, and are continuing to take, certain actions to
remediate the material weakness related to our lack of U.S. GAAP
experience. We plan to hire additional credentialed professional
staff and consulting professionals with greater knowledge and
experience of U.S. GAAP and related regulatory requirements to
oversee our financial reporting process in order to ensure our
compliance with U.S. GAAP and other relevant securities laws. In
addition, we plan to provide additional training to our accounting
personnel on U.S. GAAP, and other regulatory requirements regarding
the preparation of financial statements.
Notwithstanding
the above identified material weakness, the Company’s management
believes that its unaudited condensed consolidated financial
statements included in this report fairly present in all material
respects the Company’s financial condition, results of operations
and cash flows for the periods presented and that this report does
not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this
report.
Changes
in Internal Controls over Financial Reporting
There
have not been any changes in our internal controls over financial
reporting during the quarter ended December 31, 2020 that have
materially affected, or are reasonably likely to materially affect,
our internal controls over financial reporting.
PART II: Other
Information
ITEM 1 – LEGAL
PROCEEDINGS
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 December 31, 2020, there were no
legal claims pending or threatened against the 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. However, as of December 31, 2020, we were involved in
the following legal proceedings:
|
● |
On
December 11, 2013, the Company was served with a complaint from two
convertible note holders and investors in the Company. On February
21, 2017, the Company signed a settlement agreement with the
plaintiffs in the matter of Hannan vs. Sugarmade. Under the terms
of the settlement agreement, the Company agreed to pay the
plaintiffs an aggregate of $227,000 to settle all claims against
the Company, which included the payoff of two notes outstanding.
The parties estimated the value of the notes at approximately
$80,000. As of June 30, 2020, third parties had purchased two (2)
notes of approximately $80,000. As of December 31, 2020, there
remains a balance, plus accrued interest on the $227,000 and on the
$80,000 due under the notes. |
ITEM 1A – RISK FACTORS
Not
required for smaller reporting companies.
ITEM 2 – UNREGISTERED SALES OF
SECURITIES AND USE OF PROCEEDS
During
the six months ended December 31, 2020, the Company
issued/cancelled shares as followings:
|
● |
1,492,583,421
shares of common stock upon conversion of convertible notes of
$1,594,337. |
All
of the aforementioned securities were issued pursuant to Section
4(a)(2) of the Securities Act of 1933, as amended, and Rule 506
thereunder.
ITEM 3 – DEFAULTS UPON SENIOR
SECURITIES
Not
applicable.
ITEM 4 – MINE SAFETY
DISCLOSURES
None.
ITEM 5 – OTHER
INFORMATION
None.
ITEM 6 – EXHIBITS
(1) |
Filed
as an exhibit to this Report. |
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
|
Sugarmade,
Inc. |
|
|
|
February
22, 2021 |
By: |
/s/
Jimmy Chan |
|
|
Jimmy
Chan |
|
|
Chief
Executive Officer (principal executive officer, principal financial
officer and principal accounting officer) |