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

 

PART I:   Financial Information  
       
Item 1   Financial Statements 1
    Condensed Consolidated Balance Sheets as of December 31, 2020 (unaudited) and June 30, 2020 (audited) 1
    Condensed Consolidated Statements of Operations for three and six months ended December 31, 2020 and 2019 (unaudited) 2
    Condensed Consolidated Statements of Equity for the three and six months ended December 31, 2020 and 2019 (unaudited) 3
    Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2020 and 2019 (unaudited) 4
    Notes to Condensed Consolidated Financial Statements (unaudited) 5
Item 2   Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
Item 3   Quantitative and Qualitative Disclosures about Market Risk 39
Item 4   Controls and Procedures 39
       
PART II:   Other Information  
       
Item 1   Legal Proceedings 40
Item 1A   Risk Factors 40
Item 2   Unregistered Sales of Equity Securities and Use of Proceeds 40
Item 3   Defaults upon Senior Securities 40
Item 4   Mine Safety Disclosures 40
Item 5   Other Information 40
Item 6   Exhibits 41
       
Signatures 42

 

     

 

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

 

  - 1 -  

 

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

 

  - 2 -  

 

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

 

  - 3 -  

 

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

 

  - 4 -  

 

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2020

 

1. Nature of Business

 

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.

 

  - 5 -  

 

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.

 

  - 6 -  

 

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.

 

  - 7 -  

 

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.

 

  - 8 -  

 

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.

 

  - 9 -  

 

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.

 

  - 10 -  

 

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.

 

  - 11 -  

 

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2020

 

3. Concentration

 

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.

 

4. VIE

 

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.

 

  - 12 -  

 

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2020

 

5. VIE (continued)

 

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.

 

  - 13 -  

 

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2020

 

7. 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 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.

 

8. Cash

 

Cash and cash equivalents consist of amounts held as bank deposits and highly liquid debt instruments purchased with an original maturity of three months or less.

 

From time to time, we may maintain bank balances in interest bearing accounts in excess of the $250,000 currently insured by the Federal Deposit Insurance Corporation for interest bearing accounts (there is currently no insurance limit for deposits in noninterest bearing accounts). We have not experienced any losses with respect to cash. Management believes our Company is not exposed to any significant credit risk with respect to its cash.

 

  - 14 -  

 

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2020

 

9. Accounts Receivable

 

Accounts receivable are carried at their estimated collectible amounts, net of any estimated allowances for doubtful accounts. We grant unsecured credit to our customer’s deemed credit worthy. Ongoing credit evaluations are performed and potential credit losses estimated by management are charged to operations on a regular basis. At the time any particular account receivable is deemed uncollectible, the balance is charged to the allowance for doubtful accounts. The Company had accounts receivable net of allowances of $11,546 as of December 31, 2020 and of $134,517 as of June 30, 2020.

 

10. Loans Receivable

 

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.

 

12. Inventory

 

Inventory consists of finished goods paper and paper-based products such as paper cups and food containers ready for sale and is stated at the lower of cost or market. We value our inventory using the weighted average costing method. Our Company’s policy is to include as a part of inventory any freight incurred to ship the product from our contract manufacturers to our warehouses. Outbound freights costs related to shipping costs to our customers are considered period costs and 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.

 

  - 15 -  

 

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2020

 

13. Other Current Assets

 

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  

 

14. Intangible Asset

 

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.

 

  - 16 -  

 

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.

 

  - 17 -  

 

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2020

 

16. Unearned Revenues

 

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.

 

17. Other Payables

 

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%.

 

18. Convertible Notes

 

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.

 

  - 18 -  

 

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.

 

  - 19 -  

 

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.

 

  - 20 -  

 

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.

 

  - 21 -  

 

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.

 

  - 22 -  

 

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  

 

  - 23 -  

 

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2020

 

20. Stock warrants

 

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.

 

21. Note payable

 

Note Payable Due to Bank –

 

During October 2011, we entered into a revolving demand note (line of credit) arrangement with HSBC Bank USA, with a revolving borrowing limit of $150,000. The line of credit bears a variable interest rate of one quarter percent (0.25%) above the prime rate (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.

 

  - 24 -  

 

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2020

 

22. Loans payable

 

On October 1, 2017, SGMD entered a straight promissory note with Greater Asia Technology Limited (Greater Asia) for borrowing $100,000 with maturity date on June 30, 2018; the note bears an interest rate of 33.33%. As of 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.

 

  - 25 -  

 

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.

 

24. Shares to Be Issued

 

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.

 

  - 26 -  

 

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2020

 

25. Stockholder’s Equity

 

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.

 

  - 27 -  

 

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  

 

  - 28 -  

 

Sugarmade, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2020

 

27. Subsequent events

 

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.

 

  - 29 -  

 

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.

 

  - 30 -  

 

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.

 

  - 31 -  

 

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.

 

  - 32 -  

 

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.

 

  - 33 -  

 

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.

 

  - 34 -  

 

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.

 

  - 35 -  

 

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.

 

  - 36 -  

 

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.

 

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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.

 

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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.

 

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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.

 

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ITEM 6 – EXHIBITS

 

Exhibit No.   Description
31.1 (1) Certification of Chief Executive Officer and Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1 (1) Certifications of Chief Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
101.INS* (1) XBRL Instance Document
     
101.SCH* (1) XBRL Taxonomy Extension Schema
     
101.CAL* (1) XBRL Taxonomy Extension Calculation Linkbase
     
101.DEF* (1) XBRL Taxonomy Extension Definition Linkbase
     
101.LAB* (1) XBRL Taxonomy Extension Label Linkbase
     
101.PRE* (1) XBRL Taxonomy Extension Presentation Linkbase

 

 

(1) Filed as an exhibit to this Report.

 

  - 41 -  

 

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)

 

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