Filed
Pursuant to Rule 253(g)(2)
File
No. 024-11246
SUPPLEMENT
NO. 1 DATED FEBRUARY 24, 2021
TO
THE OFFERING CIRCULAR DATED FEBRUARY 12, 2021
Sugarmade,
Inc.
(Exact
name of issuer as specified in its charter)
Delaware
(State
or other jurisdiction of incorporation or organization)
sugarmade.com
750
Royal Oaks Dr., Suite 108, Monrovia, CA 91016
(888)
982-1628
(Address,
including zip code, and telephone number, including area code of issuer’s principal executive office)
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0000919175
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94-3008888
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(Primary
Standard Industrial Classification Code Number)
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(I.R.S.
Employer Identification Number)
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EXPLANATORY
NOTE
This
document (the “Supplement”) supplements the Offering Circular of Sugarmade, Inc. (“Sugarmade,” the “Company,”
“we,” “us,” or “our”) dated February 12, 2021 (“Offering Circular”). Unless otherwise
defined in this Supplement, capitalized terms used herein shall have the same meanings as set forth in the Offering Circular,
including the disclosures incorporated by reference therein.
The
purpose of this Supplement is to disclose that we have determined to amend the offering price and set it at $0.0018 per share.
We have amended to the offering circular to describe this offering price throughout and adjusted the use of proceeds and dilution
to reflect a maximum offering of $5,400,000.00 and expanded the disclosure regarding the use of proceeds.
Maximum
offering of 3,000,000,000 Shares at $0.0018 per Share
This
is a public offering of up to $5,400,000 in shares of Common Stock of Sugarmade, Inc. at a price of $0.0018 to be determined upon
qualification.
Our
Common Stock currently trades on the OTC Pink market under the symbol “SGMD” and the closing price of our Common Stock
on February 22, 2021 was $0.0085. Our Common Stock currently trades on a sporadic and limited basis.
This
offering is being conducted on a “best efforts” basis, which means that there is no guarantee that any minimum amount will be
sold in this offering. As there is no minimum offering, upon the approval of any subscription to this Offering Circular, the Company
shall immediately deposit said proceeds into the bank account of the Company and may dispose of the proceeds in accordance with
the Use of Proceeds. Offers and sales of our common stock will be made by our management who will not receive any commissions
or other remunerations for their efforts. We reserve the right to engage the services of a registered broker-dealer who will offer,
sell and process the subscriptions for our common stock, although we do not presently expect to engage such selling agent. If
any broker-dealer or other agent/person is engaged to sell our common stock, we will file a post-qualification amendment to the
offering statement of which this offering circular forms a part disclosing the names and compensation arrangements prior to any
sales by such persons. See “Plan of Distribution” in this offering circular. The proceeds of the offering will be disbursed to
us and the purchased shares will be disbursed to the investors. If the offering does not close, for any reason, the proceeds for
the offering will be promptly returned to investors without interest.
We
expect to commence the sale of the shares within two calendar days of the date on which the Offering Statement of which this Offering
Circular is qualified by the Securities and Exchange Commission. The offering will terminate on the earlier of: (i) the date when
the sale of all shares is completed, or (ii) 360 days from the effective date of this document. There is no escrow established
for this Offering.
See
“Risk Factors” to read about factors you should consider before buying shares of Common Stock.
Generally,
no sale may be made to you in this offering if the aggregate purchase price you pay is more than 10% of the greater of your annual
income or net worth. Different rules apply to accredited investors and non-natural persons. Before making
any representation that your investment does not exceed applicable thresholds, we encourage you to review Rule 251(d)(2)(i)(C)
of Regulation A. For general information on investing, we encourage you to refer to www.investor.gov.
The
United States Securities and Exchange Commission does not pass upon the merits of or give its approval to any securities offered
or the terms of the offering, nor does it pass upon the accuracy or completeness of any offering circular or other solicitation
materials. These securities are offered pursuant to an exemption from registration with the Commission; however, the Commission
has not made an independent determination that the securities offered are exempt from registration.
This
Offering Circular is following the offering circular format described in Part II (a)(1)(ii) of Form 1-A.
Offering
Circular dated February 24, 2021
TABLE
OF CONTENTS
No
dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this Offering
Circular. You must not rely on any unauthorized information or representations. This Offering Circular is an offer to sell only
the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained
in this Offering Circular is current only as of its date.
SUMMARY
This
summary highlights information contained elsewhere in this Offering Circular. This summary does not contain all of the information
that you should consider before deciding to invest in our Common Stock. You should read this entire Offering Circular carefully,
including the “Risk Factors” section, our historical consolidated financial statements and the notes thereto, and
unaudited pro forma financial information, each included elsewhere in this Offering Circular. Unless the context requires
otherwise, references in this Offering Circular to “the Company,” “we,” “us” and “our”
refer to Sugarmade, Inc.
Our Company
Sugarmade,
Inc. (hereinafter referred to as “we’’, “us”, “the/our Company’’, or “Sugarmade”)
is a publicly-traded company incorporated in the state of Delaware. Our previous legal name was Diversified Opportunities, Inc.
Our Company, Sugarmade, Inc. operates much of its business activities through our subsidiary, 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 OTCQB Venture Market, which is a quotation system for early-stage and developing companies.
Our trading symbol is “SGMD”. Our corporate website is www.Sugarmade.com.
As
of the date of this offering circular, we are involved in two main business areas including:
1)
The supply of consumable products to the quick-service restaurant sub-sector of the restaurant industry, and as an importer of
non-medical personal protection equipment to business and consumers, and,
2)
As an investor in the Budcars licensed cannabis delivery service brand (“Budcars” or the “Budcars Brand”)
and as a joint owner and joint operator in Budcar’s first operating location in Sacramento, California. 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 which will provide the Company with a controlling interest. As of the date of this offering circular,
the option has not yet been exercise and the Company’s stake in Budcars is at 40%.
Our
legacy business operation, CarryOutSupplies.com, is a producer and wholesaler of custom printed and generic supplies, servicing
more than 2,000 quick-service restaurants (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
have recently expanded the CarryOutSupplies.com operation to include non-medical personal protective equipment, which we also
offer via our website. Additional information on CarryOutSupplies.com is provided in the “Business” section, beginning
on Page 21, of this offering circular.
Sugarmade
is an investor in the Budcars Brand and in the brand’s first operating location in Sacramento, California. During February
2020, the Company entered into a definitive agreement with Indigo to acquire the 40% stake in the Budcars Brand and in the Sacramento
operation location (the “Indigo Agreement). As is noted above, and is outlined in the Indigo Agreement, and is attached
hereto, the Company also gained an option to acquire and additional 30% of the Budcars Brand and Sacramento operation. Since that
time, Sugarmade shares in the operational responsibilities of the both the brand and in the operating location.
Cannabis
is already one of the fastest-growing markets in the world and in the United States. According to cannabis industry research
firms Archview Market Research (“Archview”) and BDS Analytics, worldwide legal cannabis spending hit $14.9 billion in
2019, up from $10.2 billion in 2018 and is projected to grow to $42.7 billion by 2024. According Archview,
the legal cannabis market grew by 46% in 2019 despite challenges caused by overregulation and overtaxing in the two biggest markets; California and Canada.
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. Additional
information on our delivery service operation is provided in the “Business” section, beginning on Page 21, of this
offering circular.
THE
OFFERING
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Common
Stock we are offering
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3,000,000,000
shares at $0.0018 per share
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Common
Stock outstanding before this Offering
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3,103,636,740
Common Stock, par value $0.001
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Use
of proceeds
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The
funds raised through this offering will be utilized to cover the costs of this offering and to provide working capital for:
1) the expansion of new locations for the regulated and licensed delivery of cannabis within the State of California; 2) obtainment
of cannabis-related licenses and permits from the State of California and local municipalities for cultivation, manufacturing,
and distribution, including delivery services; and 3) purchases of real estate for cannabis cultivation, manufacturing, and
distribution. See “Use of Proceeds” for more details.
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Risk
Factors
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See
“Risk Factors” and other information appearing elsewhere in this Offering Circular for a discussion of factors
you should carefully consider before deciding whether to invest in our Common Stock.
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This
offering is being made on a self-underwritten basis without the use of an exclusive placement agent, although the Company may
choose to engage a placement agent at its sole discretion. As there is no minimum offering, upon the approval of any subscription
to this Offering Circular, the Company shall immediately deposit said proceeds into the bank account of the Company and may dispose
of the proceeds in accordance with the Use of Proceeds.
Management
will make its best effort to fill the subscription in the state of New York. However, in the event that management is unsuccessful
in raising the required funds in New York, the Company may file a post qualification amendment to include additional jurisdictions
that management has determined to be in the best interest of the Company for the purpose of raising the maximum offer.
In
the event that the Offering Circular is fully subscribed, any additional subscriptions shall be rejected and returned to the subscribing
party along with any funds received.
In
order to subscribe to purchase the shares, a prospective investor must complete a subscription agreement and send payment by check,
wire transfer or ACH. Investors must answer certain questions to determine compliance with the investment limitation
set forth in Regulation A Rule 251(d)(2)(i)(C) under the Securities Act of 1933, which states that in offerings such as this one,
where the securities will not be listed on a registered national securities exchange upon qualification, the aggregate purchase
price to be paid by the investor for the securities cannot exceed 10% of the greater of the investor’s annual income or
net worth. In the case of an investor who is not a natural person, revenues or net assets for the investors’
most recently completed fiscal year are used instead.
The
Company has not currently engaged any party for the public relations or promotion of this offering.
As
of the date of this offering circular, there are no additional offers for shares, nor any options, warrants, or other rights for
the issuance of additional shares except those described herein.
RISK
FACTORS
Investing
in our Common Stock involves a high degree of risk. You should carefully consider each of the following risks, together with
all other information set forth in this Offering Circular, including the consolidated financial statements and the related
notes, before making a decision to buy our Common Stock. If any of the following risks actually occurs, our business could be
harmed. In that case, the trading price of our Common Stock could decline, and you may lose all or part of your investment.
This
offering contains forward-looking statements. Forward-looking statements relate to future events or our future financial performance.
We generally identify forward-looking statements by terminology such as “may,” “will,” “should,”
“expects,” “plans,” “anticipates,” “could,” “intends,” “target,”
“projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential”
or “continue” or the negative of these terms or other similar words. These statements are only predictions. The outcome
of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors
that may cause our customers’ or our industry’s actual results, levels of activity, performance or achievements expressed
or implied by these forward-looking statements, to differ. “Risk Factors,” “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and “Business,” as well as other sections in this
prospectus, discuss the important factors that could contribute to these differences.
The
forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake
no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement
is made or to reflect the occurrence of unanticipated events.
This
prospectus also contains market data related to our business and industry. This market data includes projections that are based
on a number of assumptions. If these assumptions turn out to be incorrect, actual results may differ from the projections based
on these assumptions. As a result, our markets may not grow at the rates projected by these data, or at all. The failure of these
markets to grow at these projected rates may have a material adverse effect on our business, results of operations, financial
condition and the market price of our Common Stock.
Risk
Related to our Company and our Business
The
report of our independent registered public accounting firm expresses substantial doubt about the Company’s ability to continue
as a going concern.
The
report of our independent registered public accounting firm expresses substantial doubt about the Company’s ability to continue
as a going concern. Our auditors, L&L CPAs, have indicated in their report on the Company’s financial statements for
the fiscal year ended June 30, 2020, that conditions exist that raise substantial doubt about our ability to continue as a going
concern due to our recurring losses from operations and substantial decline in our working capital. A “going concern”
opinion could impair our ability to finance our operations through the sale of equity, incurring debt, or other financing alternatives.
Our ability to continue as a going concern will depend upon the availability and terms of future funding, continued growth, improved
operating margins and our ability to profitably meet service commitments. If we are unable to achieve these goals, our business
would be jeopardized and the Company may not be able to continue. If we ceased operations, it is likely that all of our investors
would lose their investment.
We
face risks associated with strategic acquisitions.
Our
business strategy includes strategically acquisitions of businesses and assets, some of which may be material. We plan to investigate
and acquire strategic businesses with the potential to be accretive to earnings, increase our market penetration, brand strength
and our market position or enhancement our existing product offerings. There can be no assurance that we will be able to identify
or successfully complete transactions with suitable acquisition candidates in the future.
These
acquisitions may involve a number of financial, accounting, managerial, operational, legal, compliance and other risks and challenges,
including the following, any of which could adversely affect our results of operations:
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Any
acquired business could under-perform relative to our expectations and the price that we paid for it, or not perform in accordance
with our anticipated timetable;
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We
may incur or assume significant debt in connection with our acquisitions;
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Acquisitions
could cause our results of operations to differ from our own or the investment community’s expectations in any given
period, or over the long term; and
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Acquisitions
could create demands on our management that we may be unable to effectively address, or for which we may incur additional
costs.
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Additionally,
if we were to undertake a substantial acquisition, the acquisition would likely need to be financed in part through additional
financing from banks, through possible public offerings or private placements of debt or equity securities or through other arrangements.
There can be no assurance that the necessary acquisition financing would be available to us on acceptable terms if and when required.
Acquisitions
could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating
results. We may also unknowingly inherit liabilities from acquired businesses or assets that arise after the acquisition and that
are not adequately covered by indemnities. Following any business acquisition, we could experience difficulty in integrating personnel,
operations, financial and other systems, and in retaining key employees and customers. In addition, if an acquired business fails
to meet our expectations, our operating results, business and financial position may suffer.
In
addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill and other
intangible assets, which must be assessed for impairment at least annually. We may record goodwill and other intangible assets
on our consolidated balance sheet in connection with our acquisitions. If we are not able to realize the value of these assets,
we may be required to incur charges relating to the impairment of these assets, which could materially impact our financial condition
and results of operations.
We
may have difficulties integrating acquisitions or identifying new acquisitions.
A
major part of our strategy is to grow through acquisition. However, we may be unable to identify and consummate additional acquisitions
or may be unable to successfully integrate and manage the product lines or businesses that we have recently acquired or may acquire
in the future. In addition, we may be unable to achieve a substantial portion of any anticipated cost savings from acquisitions
or other anticipated benefits in the timeframe we anticipate, or at all. Moreover, any acquired product lines or businesses may
require a greater than anticipated amount of trade, promotional and capital spending. Acquisitions involve numerous risks, including
difficulties in the assimilation of the operations, technologies, services and products of the acquired companies, personnel turnover
and the diversion of management’s attention from other business concerns. Any inability by us to integrate and manage any
product lines or businesses that we have recently acquired or may acquire in the future in a timely and efficient manner, any
inability to achieve a substantial portion of any anticipated cost savings or other anticipated benefits from these acquisitions
in the time frame we anticipate or any unanticipated required increases in trade, promotional or capital spending could adversely
affect our business, consolidated financial condition, results of operations or liquidity. Moreover, future acquisitions by us
could result in our incurring substantial additional indebtedness, being exposed to contingent liabilities or incurring the impairment
of goodwill and other intangible assets, all of which could adversely affect our financial condition, results of operations and
liquidity.
We
may need additional capital in the future, which could dilute the ownership of current shareholders or we may be unable to secure
additional funding in the future or to obtain such funding on favorable terms.
Historically,
we have raised equity capital, including debt convertible into equity capital, to support and expand our operations. To the extent
that we raise additional equity capital, existing shareholders will experience a dilution in the voting power and ownership of
their shares of Common Stock, and earnings per share, if any, would be negatively impacted. Our inability to use our equity securities
to finance our operations could materially limit our growth. Any borrowings made to finance operations could make us more vulnerable
to a downturn in our operating results, a downturn in economic conditions, or increases in interest rates on borrowings that are
subject to interest rate fluctuations. The amount and timing of such additional financing needs will vary principally depending
on the timing of new product launches, investments and/or acquisitions, and the amount of cash flow from our operations. If our
resources are insufficient to satisfy our cash requirements, we may seek to issue additional equity or debt securities or obtain
a credit facility. If our cash flow from operations is insufficient to meet any debt service requirements, we could be required
to sell additional equity securities, refinance our obligations, or dispose of assets in order to meet debt service requirements.
There can be no assurance that any financing will be available to us when needed or will be available on terms acceptable to us.
Our failure to obtain sufficient financing on favorable terms and conditions could have a material adverse effect on our growth
prospects and our business, financial condition and results of operations.
Uncertainty
of profitability
Our
business strategy may result in increased volatility of revenues, loses and/or earnings. As we will only develop a limited number
of products at a time, our overall success will depend on a limited number of products, which may cause variability and unsteady
profits and losses depending on the products and/or services offered and their market acceptance.
Our
revenues and our profitability may be adversely affected by economic conditions and changes in the market for our products. Our
business is also subject to general economic risks that could adversely impact the results of operations and financial condition.
Because
of the anticipated nature of the products that we offer and attempt to develop, it is difficult to accurately forecast revenues
and operating results and these items could fluctuate in the future due to a number of factors. These factors may include, among
other things, the following:
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Our
ability to raise sufficient capital to take advantage of opportunities and generate sufficient revenues to cover expenses.
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Our
ability to source strong opportunities with sufficient risk adjusted returns.
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Our
ability to manage our capital and liquidity requirements based on changing market conditions.
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The
amount and timing of operating and other costs and expenses.
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The
nature and extent of competition from other companies that may reduce market share and create pressure on pricing and investment
return expectations.
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We
cannot guarantee that we will succeed in achieving our goals, and our failure to do so would have a material adverse effect on
our business, prospects, financial condition and operating results
Some
of business initiatives in the hydroponic sector are new and are only in early stages of commercialization. As is typical in a
new and rapidly evolving industry, demand and market acceptance for recently introduced products and services are subject to a
high level of uncertainty and risk. Because the market for our Company is new and evolving, it is difficult to predict with any
certainty the size of this market and its growth rate, if any. We cannot guarantee that a market for our Company will develop
or that demand for our products will emerge or be sustainable. If the market fails to develop, develops more slowly than expected
or becomes saturated with competitors, our business, financial condition and operating results would be materially adversely affected.
We
have incurred losses since our inception, have yet to achieve profitable operations and anticipate that we will continue to incur
losses for the foreseeable future.
Even
if we obtain more customers or increase sales to our existing customers, there is no guarantee we will be able to generate a profit.
Because we are a small company and have limited capital, we must limit our products and services. Because we will be limiting
our marketing activities, we may not be able to attract enough customers to buy our products to operate profitably. Further, we
are subject to raw material pricing which can erode the profitability of our products and put additional negative pressure on
profitability. If we cannot operate profitably, we may have to suspend or cease operations.
For
the period ended September 30, 2020, we incurred a net income of $1,278,812 and had an accumulated deficit of $67,159,520. For
the fiscal year ended June 30, 2020 we incurred a net loss of $21,534,562 and had an accumulated deficit
of $68,438,332. For the fiscal year ended June 30, 2019, we incurred a net loss of $12,229,151
and had an accumulated deficit of $47,088,950. Although we have generated substantial revenues, these are insufficient
to make the Company profitable. We plan to increase our expenses associated with the development of our business. There is no
assurance we will be able to derive revenues from the development of our business to successfully achieve positive cash flow or
that our business will be successful. If we achieve profitability, we may be unable to sustain or increase profits on a quarterly
or annual basis.
We
do not have sufficient cash on hand.
As
of September 30, 2020 and June 30, 2020, we had $681,093 and $441,004 cash on hand, respectively. These cash resources are
not sufficient for us to execute our business plan. If we do not generate sufficient cash from our intended financing activities
and sales, we will be unable to continue our operations. We estimate that within the next 12 months we will need at least
$1,476,500 in cash from either investors or operations. While we intend to engage in several equity or debt financings, there
is no assurance that these will actually occur. Nor can we assure our shareholders that we will not be required to obtain
additional financing on terms that are dilutive of their interests. You should recognize that if we are unable to generate
sufficient revenues or obtain debt or equity financing, we will not be able to earn profits and may not be able to continue operations.
The
success of our new and existing products and services is uncertain.
We
expect to continue to commit significant resources and capital to develop and market existing and new products, services and enhancements.
These products and services are relatively untested, and there is no assurance that we will achieve market acceptance for these
products and services, or other new products and services that we may offer in the future. Moreover, these and other new products
and services may face significant competition with new and existing competitors. In addition, new products, services and enhancements
may pose a variety of technical challenges and require us to attract additional qualified employees. The failure to successfully
develop and market these new products, services or enhancements could seriously harm our business, financial condition and results
of operations. In addition, we are subject to raw material pricing which can erode the profitability of our products and put additional
negative pressure on profitability. Moreover, if we fail to accurately project demand for our new or existing products, we may
encounter problems of overproduction or underproduction which would materially and adversely affect our business, financial condition
and results of operations, as well as damage our reputation and brand.
Third-party
suppliers could fail to fulfill our orders for parts used to assemble our products, which would disrupt our business, increase
our costs, harm our reputation, and potentially cause us to lose our market.
We
depend on international third-party suppliers, including in The People’s Republic of China, for materials used to assemble
our products. Changing federal tariffs could adversely affect our international third-party suppliers. We cannot predict the nature
of any future tariffs, laws, regulations, interpretations or applications, nor can we determine what effect additional governmental
regulations or administrative policies and procedures, when and if promulgated, could have on our suppliers and our business.
These suppliers could increase prices to us, fail to produce products to our specifications or in a workmanlike manner and may
not deliver the material or products on a timely basis. Our suppliers may also have to obtain inventories of the necessary parts
and tools for production. Any change in our suppliers’ approach to tariffs or resolving production issues could disrupt
our ability to fulfill orders and could also disrupt our business due to delays in finding new suppliers, providing specifications
and testing initial production. Such disruptions in our business and/or delays in fulfilling orders would materially and adversely
affect our business, financial condition and results of operations, as well as damage our reputation and brand.
Even
if we expand our customer base, there is no assurance that we will continue to make a profit.
Our
revenue growth has been derived from the sale of our products. Our success and the planned growth and expansion of our business
depend on us achieving greater and broader acceptance of our products and expanding our customer base. There can be no assurance
that customers will purchase our products or that we will continue to expand our customer base. If we are unable to effectively
market or expand our product offerings, we will be unable to grow and expand our business or implement our business strategy.
Even if we obtain more customers, there is no guarantee that we will be able to continue to generate a profit. Because we have
limited capital, we may be required to limit our products and services. Because we will be limiting our marketing activities,
we may not be able to attract enough customers to buy our products to operate profitably. If we cannot market our new and existing
products and services profitably, we may have to limit or suspend or cease operations.
Even
if we are able to expand our business operations, we may be unable to successfully manage our future growth.
If
we are able to continue expanding our operations, we may experience periods of rapid growth that will require additional resources.
Any such growth could place increased strain on our management, operational, financial and other resources, and we will need to
train, motivate, and manage employees, as well as attract management, sales, finance and accounting, international, technical,
and other professionals. In addition, we will need to expand the scope of our infrastructure and develop further physical resources.
Any failure to expand these areas and implement appropriate procedures and controls in an efficient manner and at a pace consistent
with the business objectives could have a material adverse effect on our business and results of operations.
Our
inability to effectively manage our growth could harm our business and materially and adversely affect our operating results and
financial condition.
Our
strategy envisions growing our business. We plan to expand our product, sales, administrative and marketing operations. Any growth
in or expansion of our business is likely to continue to place a strain on our management and administrative resources, infrastructure
and systems. As with other growing businesses, we expect that we will need to further refine and expand our business development
capabilities, our systems and processes and our access to financing sources. We also will need to hire, train, supervise, and
manage new employees. These processes are time consuming and expensive, will increase management responsibilities and will divert
management attention.
If
we do not successfully generate additional products and services, or if such products and services are developed but not successfully
commercialized, we could lose revenue opportunities.
Our
future success depends, in part, on our ability to expand our product and service offerings. To that end we have engaged in the
process of identifying new product opportunities to provide additional products and related services to our customers. The processes
of identifying and commercializing new products is complex and uncertain, and if we fail to accurately predict customers’
changing needs and emerging trends, our business could be harmed. We have already and may have to continue to commit significant
resources to commercializing new products before knowing whether our investments will result in products the market will accept.
Furthermore, we may not execute successfully on commercializing those products because of errors in product planning or timing,
technical hurdles that we fail to overcome in a timely fashion, or a lack of appropriate resources. This could result in competitors
providing those solutions before we do and a reduction in net sales and earnings.
The
success of new products depends on several factors, including proper new product definition, timely completion, and introduction
of these products, differentiation of new products from those of our competitors, and market acceptance of these products. There
can be no assurance that we will successfully identify additional new product opportunities, develop and bring new products to
market in a timely manner, or achieve market acceptance of our products or that products and technologies developed by others
will not render our products or technologies obsolete or noncompetitive.
If
we are not able to raise enough funds through the Investment Agreement or other sources, we may not be able to successfully develop
and market our products and our business may fail.
We
do not have any commitments for financing other than the Investment Agreement, and we will need additional financing to meet our
obligations and to continue our business. Although we plan to raise funds through the Investment Agreement, due to the conditions
of the Investment Agreement we cannot guarantee that we will be able to raise money through the use of the Investment Agreement
or that we will be able to utilize the full Investment Agreement.
Our
business may suffer if we are unable to attract or retain talented personnel.
Our
success will depend in large measure on the abilities, expertise, judgment, discretion, integrity and good faith of Management,
as well as other personnel. We have a small management team, and the loss of a key individual or our inability to attract suitably
qualified replacements or additional staff could adversely affect our business. Our success also depends on the ability of Management
to form and maintain key commercial relationships within the marketplace. No assurance can be given that key personnel will continue
their association or employment with us or that replacement personnel with comparable skills will be found. If we are unable to
attract and retain key personnel and additional employees, our business may be adversely affected. We do not maintain key-man
life insurance on any of our executive employees.
The
loss of key Management personnel could adversely affect our business
We
depend on the continued services of our executive officers and senior management team as they work closely with independent associate
leaders and are responsible for our day-to-day operations. Our success depends in part on our ability to retain our executive
officers, to compensate our executive officers at attractive levels, and to continue to attract additional qualified individuals
to our management team. Although we have entered into employment agreements with our senior management team, and do not believe
that any of them are planning to leave or retire in the near term, we cannot assure you that our senior managers will remain with
us. The loss or limitation of the services of any of our executive officers or members of our senior management team, or the inability
to attract additional qualified management personnel, could have a material adverse effect on our business, financial condition,
results of operations, or independent associate relations.
The
lack of available and cost-effective directors and officer’s insurance coverage in our industry may cause us to be unable
to attract and retain qualified executives, and this may result in our inability to further develop our business
Our
business depends on attracting independent directors, executives and senior management to advance our business plans. We currently
do not have directors and officer’s insurance to protect our directors, officers and the company against to possible third-party
claims. This is due to the significant lack availability of such policies in the cannabis industry at reasonably competitive prices.
As a result, the Company and our executive directors and officers are susceptible to liability claims arising by third parties,
and as a result, we may be unable to attract and retain qualified independent directors and executive management causing the development
of our business plans to be impeded as a result.
If
we fail to maintain satisfactory relationships with our larger customers, our business may be harmed.
We
do not have and are unlikely to enter into long-term fixed quantity supply agreements with our customers. Due to competition or
other factors, we could lose future business from our customers, either partially or completely. The future loss of one or more
of our significant customers or a substantial future reduction of orders by any of our significant customers could harm our business
and results of operations. Moreover, our customers may vary their order levels significantly from period to period and customers
may not continue to place orders with us in the future at the same levels as in prior periods. In the event that in the future
we lose any of our larger customers, we may not be able to replace that revenue source. This could harm our financial results.
Management
of growth will be necessary for us to be competitive
Successful
expansion of our business will depend on our ability to effectively attract and manage staff, strategic business relationships,
and shareholders. Specifically, we will need to hire skilled management and technical personnel as well as manage partnerships
to navigate shifts in the general economic environment. Expansion has the potential to place significant strains on financial,
management, and operational resources, yet failure to expand will inhibit our profitability goals.
We
import many of our products from Asian counties, including the People’s Republic of China. Disruptions or a change in the
tariff situation may negatively affect our business
Many
of the products we market are manufactured in Asian countries and are then imported to our facilities in the United States and
ultimately sold to our customers. There can be no assurance of the reliability of such channels and disruption would likely have
a significant impact on our business operations, our ability to retain customers and on our ability to generate profits. A significant
change in trade tariffs could also negatively affect our business operations.
If
product liability lawsuits are successfully brought against us, we will incur substantial liabilities.
From
time to time, we may receive complaints from customers regarding our goods and services. We may become subject to product liability
lawsuits from customers alleging injury because of a purported defect in our products or services, claiming substantial damages
and demanding payments from us. Liability claims may include allegations of defects in manufacturing, defects in design, a failure
to warn of dangers inherent in the product, negligence, strict liability and a breach of warranties. Claims could also be asserted
under state consumer protection acts. We may be in the chain of ownership when we supply or distributes products, and therefore
is subject to the risk of being held legally responsible for such products. Given the nature of these products (including their
relation to cannabis or for other reasons), these claims may not be subject to insurance coverage or covered by insurance policies.
Any resulting litigation, regardless of the merits or eventual outcome, could decrease demand for our products, result in product
recalls or withdrawals, be costly, divert management attention, result in increased costs of doing business, or otherwise have
a material adverse effect on our business, results of operations, and financial condition. Any litigation or even negative publicity
generated as a result of customer frustration or disagreement with the products or services could damage our reputation and diminish
the value of our brand name, which could have a material adverse effect on our business, results of operations, and financial
condition.
We
cannot guarantee that we will succeed in achieving our goals, and our failure to do so would have a material adverse effect on
our business, prospects, financial condition and operating results
Some
of business initiatives in the hydroponic sector are new and are only in early stages of commercialization. As is typical in a
new and rapidly evolving industry, demand and market acceptance for recently introduced products and services are subject to a
high level of uncertainty and risk. Because the market for our Company is new and evolving, it is difficult to predict with any
certainty the size of this market and its growth rate, if any. We cannot guarantee that a market for our Company will develop
or that demand for our products will emerge or be sustainable. If the market fails to develop, develops more slowly than expected
or becomes saturated with competitors, our business, financial condition and operating results would be materially adversely affected.
RISKS
OF GOVERNMENT ACTION AND REGULATORY UNCERTAINTY
Our
recent investment into Budcars, which operates in the regulated market for cannabis, could subject the Company to federal regulation
and enforcement of medical and adult use cannabis products, thus negatively impacting our ability to generate profits.
The
Company, and its investment in Budcars, could be impacted by government regulation of cannabis products. As a result of our current
ownership position in Budcars, and the possibility of expanding this ownership position, several state and federal regulations
could impact our business operations and our ability to generate both revenues and profits.
As
of December 2019, there are a total of 33 states, plus the District of Columbia, with legislation passed as it relates to medicinal
cannabis. Of these states, 11 have decriminalized adult use cannabis legislation. These state laws are in direct conflict with
the United States Federal Controlled Substances Act (21 U.S.C. § 811) (“CSA”), which places controlled substances,
including cannabis, in a schedule. Cannabis is classified as a Schedule I drug, which is viewed as having a high potential for
abuse, has no currently accepted use for medical treatment in the U.S., and lacks accepted safety for use under medical supervision.
Although
the possession, cultivation, and distribution of marijuana for medical and adult use is permitted in California and Nevada, provided
compliance with applicable state and local laws, rules, and regulations, marijuana is illegal under federal law. We believe we
operate our business in compliance with applicable California laws and regulations. Any changes in federal, state or local law
enforcement regarding marijuana may affect our ability to operate our business. Strict enforcement of federal law regarding marijuana
would likely result in the inability to proceed with our business plans, could expose us to potential criminal liability, and
could subject our properties to civil forfeiture.
The
U.S. Department of Justice (the “DOJ”) has not historically devoted resources to prosecuting individuals whose conduct
is limited to possession of small amounts of marijuana for use on private property but has relied on state and local law enforcement
to address marijuana activity. In the event the DOJ reverses its stated policy and begins strict enforcement of the CSA in states
that have laws legalizing medical marijuana and recreational marijuana in small amounts, there may be a direct and adverse impact
to our business and our revenue and profits.
In
an effort to provide guidance to federal law enforcement, the DOJ has issued Guidance Regarding Marijuana Enforcement to all United
States Attorneys in a memorandum from Deputy Attorney General David Ogden on October 19, 2009, in a memorandum from Deputy Attorney
General James Cole on June 29, 2011 and in a memorandum from Deputy Attorney General James Cole on August 29, 2013. Each memorandum
provides that the DOJ is committed to the enforcement of the CSA but, the DOJ is also committed to using its limited investigative
and prosecutorial resources to address the most significant threats in the most effective, consistent, and rational way. On January
4, 2018, Attorney General Jeff Sessions revoked the Ogden Memo and the Cole Memos.
In
November 2016, California voters approved Proposition 64, which is also known as the Adult Use of Marijuana Act (“the AUMA”),
in a ballot initiative. Among other things, the AUMA makes it legal for adults over the age of 21 to use marijuana and to possess
up to 28.5 grams of marijuana flowers and 8 grams of marijuana concentrates. Individuals are also permitted to grow up to six
marijuana plants for personal use. In addition, the AUMA establishes a licensing system for businesses to, among other things,
cultivate, process, and distribute marijuana products under certain conditions. On January 1, 2018, the California Bureau of Marijuana
Control enacted regulations to implement the AUMA. We have obtained the necessary permits and licenses to expand our existing
business to distribute marijuana in compliance with the laws in the State of California. Despite the changes in state laws, marijuana
remains illegal under federal law. On January 1, 2018, the California Bureau of Marijuana Control enacted regulations to implement
the AUMA.
We
are monitoring the Trump administration’s, the DOJ’s and Congress’ positions on federal marijuana law and policy.
Since the start of the new Congress in January 2019, there have been positive discussions about the Federal Government’s
approach to cannabis. The DOJ has not signaled any change in its enforcement efforts. Based on public statements and reports,
we understand that certain aspects of those laws and policies are currently under review, but no official changes have been announced.
It is possible that certain changes to existing laws or policies could have a negative effect on our business and results of operations.
Variations
in state and local regulation may negatively impact our revenues and prospective profits. We are subject to various state and
local regulations.
State
and local laws do not always conform to the federal standard. In November 2016, California voters approved Proposition 64, also
known as the Adult Use of Marijuana Act (“AUMA”), in a ballot initiative. Among other things, the AUMA makes it legal
for adults over the age of 21 to use marijuana and to possess up to 28.5 grams of marijuana flowers and 8 grams of marijuana concentrates.
Individuals are also permitted to grow up to six marijuana plants for personal use. In addition, the AUMA establishes a licensing
system for businesses to, among other things, cultivate, process, and distribute marijuana products under certain conditions.
On January 1, 2018 the California Bureau of Cannabis Control enacted regulations to implement the AUMA.
If
we are unable to obtain and maintain the permits and licenses required to operate our business in compliance with state and local
regulations in California, we may experience negative effects on our business and results of operations.
Laws
and regulations affecting the medical and adult use marijuana industry are constantly changing, which could detrimentally affect
our investment into the Budcars operations and the ability for Budcars to generate revenues and profits.
Local,
state, and federal medical and adult use marijuana laws and regulations are broad in scope and subject to evolving interpretations,
which could require us or the Budcars operation to incur substantial costs associated with compliance or alter certain aspects
of our business plan. In addition, violations of these laws, or allegations of such violations, could disrupt certain aspects
of our business plan and result in a material adverse effect on certain aspects of our planned operations and/or those of Budcars.
We cannot predict the nature of any future laws, regulations, interpretations, or applications, nor can we determine what effect
additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business.
We
are not able to deduct some of our business expenses.
Section
280E of the Internal Revenue Code prohibits marijuana businesses from deducting their ordinary and necessary business expenses,
forcing us to pay higher effective federal tax rates than similar companies in other industries. The effective tax rate on a marijuana
business depends on how large its ratio of nondeductible expenses is to its total revenues. Therefore, our marijuana business
may be less profitable than it could otherwise be.
California’s
Phase-In of Laboratory Testing Requirements could impact the availability of the products sold by Budcars, which could affect
its future revenues and thus our ability to report profits.
Beginning
July 1, 2018, cannabis goods must meet all statutory and regulatory requirements. A licensee can only sell cannabis goods that
have been tested by a licensed testing laboratory and have passed all statutory and regulatory testing requirements. In order
to be sold, cannabis goods harvested or manufactured prior to January 1, 2018, must be tested by a licensed testing laboratory
and must comply with all testing requirements in section 5715 of the Bureau of Cannabis Control (“BCC”) regulations.
Cannabis goods that do not meet all statutory and regulatory requirements must be destroyed in accordance with the rules pertaining
to destruction. Adherence to these regulations may affect the revenues and profits of the Budcars operation and our ability to
recognize profits from our investment in Budcars.
RISKS
ASSOCIATED WITH BANK AND INSURANCE LAWS AND REGULATIONS
We
and our customers may have difficulty accessing the service of banks, which may make it difficult to sell our products and services and
manage our cashflows.
Since
the commerce in cannabis, as not strictly defined in the 2018 Farm Bill, is illegal under federal law, federally most chartered
banks will not accept for deposit funds from businesses involved with cannabis. Consequently, businesses involved in the cannabis
industry often have trouble finding a bank willing to accept their business. The inability to open bank accounts may make it difficult
for our customers to operate. There does appears to be recent movement to allow state-chartered banks and credit unions to provide
banking to the industry, but as of the date of this report there are only nominal entities that have been formed that offer these
services. Further, in a February 6, 2018, Forbes article, United States Secretary of the Treasury, Steven Mnuchin, is reported
to have testified that his department is “reviewing the existing guidance.” But he clarified that he doesn’t
want to rescind it without having an alternate policy in place to address public safety concerns.
Financial
transactions involving proceeds generated by cannabis-related conduct can form the basis for prosecution under the federal money
laundering statutes, unlicensed money transmitter statute and the U.S. Bank Secrecy Act. Despite guidance from the U.S. Department
of the Treasury suggesting it may be possible for financial institutions to provide services to cannabis-related businesses consistent
with their obligations under the Bank Secrecy Act, banks remain hesitant to offer banking services to cannabis-related businesses.
Consequently, those businesses involved in the cannabis industry continue to encounter difficulty establishing banking relationships.
Our inability to maintain our current bank accounts would make it difficult for us to operate our business, increase our operating
costs, and pose additional operational, logistical and security challenges and could result in our inability to implement our
business plan. Similarly, many of our customers are directly involved in cannabis sales and further restriction to their ability
to access banking services may make it difficult for them to purchase our products, which could have a material adverse effect
on our business, financial condition and results of operations.
We
are subject to certain federal regulations relating to cash reporting.
The
Bank Secrecy Act, enforced by FinCEN, requires us to report currency transactions in excess of $10,000, including identification
of the customer by name and social security number, to the IRS. This regulation also requires us to report certain suspicious
activity, including any transaction that exceeds $5,000 that we know, suspect or have reason to believe involves funds from illegal
activity or is designed to evade federal regulations or reporting requirements and to verify sources of funds. Substantial penalties
can be imposed against us if we fail to comply with this regulation. If we fail to comply with these laws and regulations, the
imposition of a substantial penalty could have a material adverse effect on our business, financial condition and results of operations.
Due
to our involvement in the cannabis industry, we may have a difficult time obtaining the various insurances that are desired to
operate our business, which may expose us to additional risk and financial liability
Insurance
that is otherwise readily available, such as general liability, and directors and officer’s insurance, is more difficult
for us to find, and more expensive, because we are service providers to companies in the cannabis industry. There are no guarantees
that we will be able to find such insurances in the future, or that the cost will be affordable to us. If we are forced to go
without such insurances, it may prevent us from entering into certain business sectors, may inhibit our growth, and may expose
us to additional risk and financial liabilities.
RISK
ASSOCIATED WITH OUR INDUSTRY
Our
business and financial performance may be adversely affected by downturns in the target markets that we serve or reduced demand
for the types of products we sell.
Demand
for our products is often affected by general economic conditions as well as product-use trends in our target markets. These changes
may result in decreased demand for our products. The occurrence of these conditions is beyond our ability to control and, when
they occur, they may have a significant impact on our sales and results of operations. The inability or unwillingness of our customers
to pay a premium for our products due to general economic conditions or a downturn in the economy may have a significant adverse
impact on our sales and results of operations.
Changes
within the cannabis industry may adversely affect our financial performance.
Changes
in the identity, ownership structure and strategic goals of our competitors and the emergence of new competitors in our target
markets may harm our financial performance. New competitors may include foreign-based companies and commodity-based domestic producers
who could enter our specialty markets if they are unable to compete in their traditional markets. The paper industry has also
experienced consolidation of producers and distribution channels. Further consolidation could unite other producers with distribution
channels through which we intend to sell our products, thereby limiting access to our target markets.
We
are subject to certain tax risks and treatments that could negatively impact our results of operations.
Section
280E of the Internal Revenue Code, as amended, prohibits businesses from deducting certain expenses associated with trafficking-controlled
substances (within the meaning of Schedule I and II of the Controlled Substances Act). The IRS has invoked Section 280E in tax
audits against various cannabis businesses in the U.S. that are permitted under applicable state laws. Although the IRS issued
a clarification allowing the deduction of certain expenses, the scope of such items is interpreted very narrowly, and the bulk
of operating costs and general administrative costs are not permitted to be deducted. While there are currently several pending
cases before various administrative and federal courts challenging these restrictions, there is no guarantee that these courts
will issue an interpretation of Section 280E favorable to cannabis businesses.
The
Company’s industry is highly competitive, and we have less capital and resources than many of our competitors which may
give them and advantage in developing and marketing products similar to ours or make our products obsolete.
We
are involved in a highly competitive industry where we may compete with numerous other companies who offer alternative methods
or approaches, who may have far greater resources, more experience, and personnel perhaps more qualified than we do. Such resources
may give our competitors an advantage in developing and marketing products similar to ours or products that make our products
less desirable to consumers or obsolete. There can be no assurance that we will be able to successfully compete against these
other entities.
We
may be unable to respond to the rapid technological change in the industry and such change may increase costs and competition
that may adversely affect our business
Rapidly
changing technologies, frequent new product and service introductions and evolving industry standards characterize our market.
The continued growth of the Internet and intense competition in our industry exacerbates these market characteristics. Our future
success will depend on our ability to adapt to rapidly changing technologies by continually improving the performance features
and reliability of our products. We may experience difficulties that could delay or prevent the successful development, introduction
or marketing of our products. In addition, any new enhancements must meet the requirements of our current and prospective customers
and must achieve significant market acceptance. We could also incur substantial costs if we need to modify our products and services
or infrastructures to adapt to these changes.
We
also expect that new competitors may introduce products or services that are directly or indirectly competitive with us. These
competitors may succeed in developing, products and services that have greater functionality or are less costly than our products
and services and may be more successful in marketing such products and services. Technological changes have lowered the cost of
operating communications and computer systems and purchasing software. These changes reduce our cost of selling products and providing
services, but also facilitate increased competition by reducing competitors’ costs in providing similar products and services.
This competition could increase price competition and reduce anticipated profit margins.
RISKS
RELATED TO THE SECURITIES MARKETS AND OWNERSHIP OF OUR EQUITY SECURITIES
The
Common Stock is thinly traded, so you may be unable to sell at or near ask prices or at all if you need to sell your shares to
raise money or otherwise desire to liquidate your shares.
The
Common Stock has historically been sporadically traded on the OTC Pink Sheets, meaning that the number of persons interested in
purchasing our shares at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable
to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers,
institutional investors and others in the investment community that generate or influence sales volume, and that even if we came
to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours
or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there
may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned
issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse
effect on share price. We cannot give you any assurance that a broader or more active public trading market for our common shares
will develop or be sustained, or that current trading levels will be sustained.
The
market price for the Common Stock is particularly volatile given our status as a relatively unknown company with a small and thinly
traded public float, limited operating history and lack of revenue, which could lead to wide fluctuations in our share price.
The price at which you purchase our shares may not be indicative of the price that will prevail in the trading market. You may
be unable to sell your common shares at or above your purchase price, which may result in substantial losses to you.
The
market for our shares of Common Stock is characterized by significant price volatility when compared to seasoned issuers, and
we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. The volatility
in our share price is attributable to a number of factors. First, as noted above, our shares are sporadically traded. Because
of this lack of liquidity, the trading of relatively small quantities of shares may disproportionately influence the price of
those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large
number of our shares is sold on the market without commensurate demand, as compared to a seasoned issuer which could better absorb
those sales without adverse impact on its share price. Secondly, we are a speculative investment due to, among other matters,
our limited operating history and lack of revenue or profit to date, and the uncertainty of future market acceptance for our potential
products. As a consequence of this enhanced risk, more risk-averse investors may, under the fear of losing all or most of their
investment in the event of negative news or lack of progress, be more inclined to sell their shares on
the market more quickly and at greater discounts than would be the case with the securities of a seasoned issuer. The following
factors may add to the volatility in the price of our shares: actual or anticipated variations in our quarterly or annual operating
results; acceptance of our inventory of games; government regulations, announcements of significant acquisitions, strategic partnerships
or joint ventures; our capital commitments and additions or departures of our key personnel. Many of these factors are beyond
our control and may decrease the market price of our shares regardless of our operating performance. We cannot make any predictions
or projections as to what the prevailing market price for our shares will be at any time, including as to whether our shares will
sustain their current market prices, or as to what effect the sale of shares or the availability of shares for sale at any time
will have on the prevailing market price.
Shareholders
should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns
of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often
related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and
misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by
inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5)
the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level,
along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware of the
abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the
behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical
limitations to prevent the described patterns from being established with respect to our securities. The occurrence of these patterns
or practices could increase the volatility of our share price.
The
market price of our common stock may be volatile and adversely affected by several factors.
The
market price of our common stock could fluctuate significantly in response to various factors and events, including, but not limited
to:
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our
ability to integrate operations, technology, products and services;
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our
ability to execute our business plan;
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operating
results below expectations;
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our
issuance of additional securities, including debt or equity or a combination thereof;
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announcements
of technological innovations or new products by us or our competitors;
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loss
of any strategic relationship;
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industry
developments, including, without limitation, changes in healthcare policies or practices;
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economic
and other external factors;
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period-to-period
fluctuations in our financial results; and
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whether
an active trading market in our common stock develops and is maintained.
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In
addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated
to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market
price of our common stock. Issuers using the Alternative Reporting standard for filing financial reports with OTC Markets are
often subject to large volatility unrelated to the fundamentals of the company.
Our
issuance of additional shares of Common Stock, or options or warrants to purchase those shares, would dilute your proportionate
ownership and voting rights.
We
are entitled under our articles of incorporation to issue up to 10,000,000,000 shares of Common Stock. We have issued and outstanding,
as of the date of this prospectus, 3,103,636,740 shares of Common Stock. Our board may generally issue shares of Common Stock,
preferred stock or options or warrants to purchase those shares, without further approval by our shareholders based upon such
factors as our board of directors may deem relevant at that time. It is likely that we will be required to issue a large amount
of additional securities to raise capital to further our development. It is also likely that we will issue a large amount of additional
securities to directors, officers, employees and consultants as compensatory grants in connection with their services, both in
the form of stand-alone grants or under our stock plans. We cannot give you any assurance that we will not issue additional shares
of Common Stock, or options or warrants to purchase those shares, under circumstances we may deem appropriate at the time.
The
elimination of monetary liability against our directors, officers and employees under our Articles of Incorporation and the existence
of indemnification rights to our directors, officers and employees may result in substantial expenditures by our company and may
discourage lawsuits against our directors, officers and employees.
Our
Articles of Incorporation contains provisions that eliminate the liability of our directors for monetary damages to our company
and shareholders. Our bylaws also require us to indemnify our officers and directors. We may also have contractual indemnification
obligations under our agreements with our directors, officers and employees. The foregoing indemnification obligations could result
in our company incurring substantial expenditures to cover the cost of settlement or damage awards against directors, officers
and employees that we may be unable to recoup. These provisions and resultant costs may also discourage our company from bringing
a lawsuit against directors, officers and employees for breaches of their fiduciary duties, and may similarly discourage the filing
of derivative litigation by our shareholders against our directors, officers and employees even though such actions, if successful,
might otherwise benefit our company and shareholders.
Anti-takeover
provisions may impede the acquisition of our company.
Certain
provisions of the Delaware General Statutes have anti-takeover effects and may inhibit a non-negotiated merger or other business
combination. These provisions are intended to encourage any person interested in acquiring us to negotiate with, and to obtain
the approval of, our board of directors in connection with such a transaction. However, certain of these provisions may discourage
a future acquisition of us, including an acquisition in which the shareholders might otherwise receive a premium for their shares.
As a result, shareholders who might desire to participate in such a transaction may not have the opportunity to do so.
We
may become involved in securities class action litigation that could divert management’s attention and harm our business.
The
stock market in general, and the shares of early stage companies in particular, have experienced extreme price and volume fluctuations.
These fluctuations have often been unrelated or disproportionate to the operating performance of the companies involved. If these
fluctuations occur in the future, the market price of our shares could fall regardless of our operating performance. In the past,
following periods of volatility in the market price of a particular company’s securities, securities class action litigation
has often been brought against that company. If the market price or volume of our shares suffers extreme fluctuations, then we
may become involved in this type of litigation, which would be expensive and divert management’s attention and resources
from managing our business.
As
a public company, we may also from time to time make forward-looking statements about future operating results and provide some
financial guidance to the public markets. Our management has limited experience as a management team in a public company and as
a result, projections may not be made timely or set at expected performance levels and could materially affect the price of our
shares. Any failure to meet published forward-looking statements that adversely affect the stock price could result in losses
to investors, stockholder lawsuits or other litigation, sanctions or restrictions issued by the SEC.
Our
Common Stock is currently deemed a “penny stock,” which makes it more difficult for our investors to sell their shares.
The
SEC has adopted Rule 15g-9 which establishes the definition of a “penny stock,” for the purposes relevant to us, as
any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. For any transaction involving
a penny stock, unless exempt, the rules require that a broker or dealer approve a person’s account for transactions in penny
stocks, and the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity
and quantity of the penny stock to be purchased.
In
order to approve a person’s account for transactions in penny stocks, the broker or dealer must obtain financial information
and investment experience objectives of the person and make a reasonable determination that the transactions in penny stocks are
suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating
the risks of transactions in penny stocks.
The
broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating
to the penny stock market, which, in highlight form sets forth the basis on which the broker or dealer made the suitability determination,
and that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
Generally,
brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make
it more difficult for investors to dispose of our Common Stock if and when such shares are eligible for sale and may cause a decline
in the market value of its stock.
Disclosure
also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the
commission payable to both the broker-dealer and the registered representative, current quotations for the securities and the
rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to
be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny
stock.
As
an issuer of “penny stock,” the protection provided by the federal securities laws relating to forward-looking statements
does not apply to us.
Although
federal securities laws provide a safe harbor for forward-looking statements made by a public company that files reports under
the federal securities laws, this safe harbor is not available to issuers of penny stocks. As a result, we will not have the benefit
of this safe harbor protection in the event of any legal action based upon a claim that the material provided by us contained
a material misstatement of fact or was misleading in any material respect because of our failure to include any statements necessary
to make the statements not misleading. Such an action could hurt our financial condition.
As
an issuer not required to make reports to the Securities and Exchange Commission under Section 13 or 15(d) of the Securities Exchange
Act of 1934, holders of restricted shares may not be able to sell shares into the open market as Rule 144 exemptions may not apply.
Under
Rule 144 of the Securities Act of 1933 holders of restricted shares, may avail themselves of certain exemption from registration
is the holder and the issuer meet certain requirements. As a company that is not required to file reports under Section 13 or
15(d) of the Securities Exchange Act, referred to as a non-reporting company, we may not, in the future, meet the requirements
for an issuer under 144 that would allow a holder to qualify for Rule 144 exemptions. In such an event, holders of restricted
stock would have to utilize another exemption from registration or rely on a registration statement to be filed by the Company
registered the restricted stock. Currently, the Company has no plans of filing a registration statement with the Commission.
Securities
analysts may elect not to report on our Common Stock or may issue negative reports that adversely affect the stock price.
At
this time, no securities analysts provide research coverage of our Common Stock, and securities analysts may not elect not to
provide such coverage in the future. It may remain difficult for our company, with its small market capitalization, to attract
independent financial analysts that will cover our Common Stock. If securities analysts do not cover our Common Stock, the lack
of research coverage may adversely affect the stock’s actual and potential market price. The trading market for our Common
Stock may be affected in part by the research and reports that industry or financial analysts publish about our business. If one
or more analysts elect to cover our company and then downgrade the stock, the stock price would likely decline rapidly. If one
or more of these analysts cease coverage of our company, we could lose visibility in the market, which, in turn, could cause our
stock price to decline. This could have a negative effect on the market price of our Common Stock.
We
have not paid cash dividends in the past and do not expect to pay cash dividends in the foreseeable future. Any return on investment
may be limited to the value of our Common Stock.
We
have never paid cash dividends on our capital stock and do not anticipate paying cash dividends on our capital stock in the foreseeable
future. The payment of dividends on our capital stock will depend on our earnings, financial condition and other business and
economic factors affecting us at such time as the board of directors may consider relevant. If we do not pay dividends, our Common
Stock may be less valuable because a return on your investment will only occur if the Common Stock price appreciates.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
We
make forward-looking statements under the “Summary,” “Risk Factors,” “Business,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and in other sections of this Offering Circular. In
some cases, you can identify these statements by forward-looking words such as “may,” “might,” “should,”
“expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,”
“potential” or “continue,” and the negative of these terms and other comparable terminology. These forward-looking
statements, which are subject to known and unknown risks, uncertainties and assumptions about us, may include projections of our
future financial performance based on our growth strategies and anticipated trends in our business. These statements are only
predictions based on our current expectations and projections about future events. There are important factors that could cause
our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance
or achievements expressed or implied by the forward-looking statements. In particular, you should consider the numerous risks
and uncertainties described under “Risk Factors.”
While
we believe we have identified material risks, these risks and uncertainties are not exhaustive. Other sections of this Offering
Circular describe additional factors that could adversely impact our business and financial performance. Moreover, we operate
in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible
to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Although
we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level
of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or
completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of
future events. We are under no duty to update any of these forward-looking statements after the date of this Offering Circular
to conform our prior statements to actual results or revised expectations, and we do not intend to do so.
Forward-looking
statements include, but are not limited to, statements about:
|
|
●
|
our
business’ strategies and investment policies;
|
|
|
●
|
our
business’ financing plans and the availability of capital;
|
|
|
●
|
potential
growth opportunities available to our business;
|
|
|
●
|
the
risks associated with potential acquisitions by us;
|
|
|
●
|
the
recruitment and retention of our officers and employees;
|
|
|
●
|
our
expected levels of compensation;
|
|
|
●
|
the
effects of competition on our business; and
|
|
|
●
|
the
impact of future legislation and regulatory changes on our business.
|
We
caution you not to place undue reliance on the forward-looking statements, which speak only as of the date of this Offering Circular.
USE
OF PROCEEDS
The
following Use of Proceeds is based on estimates made by management. The Company planned the Use of Proceeds after deducting estimated
offering expenses estimated to be $23,500. Management prepared the milestones based on three levels of offering raise success:
25% of the Maximum Offering proceeds raised ($1,350,000), 50% of the Maximum Offering proceeds raised ($2,700,000), 75% of the
Maximum Offering proceeds raised ($4,050,000) and the Maximum Offering proceeds raised of ($5,4000,000) through the offering.
The costs associated with operating as a public company are included in all our budgeted scenarios and management is responsible
for the preparation of the required documents to keep the costs to a minimum.
Although
we have no minimum offering, we have calculated used of proceeds such that if we raise 25% of the offering is budgeted to sustain
operations for a twelve-month period. 25% of the Maximum Offering is sufficient to keep the Company current with its public listing
status costs with prudently budgeted funds remaining which will be sufficient to complete the development of our marketing package.
If the Company were to raise 50% of the Maximum Offering, then we would be able to expand our marketing outside the US. Raising
the Maximum Offering will enable the Company to implement our full business. If we begin to generate profits, we plan to increase
our marketing and sales activity accordingly.
The
Company intends to use the proceeds from this offering as follows:
|
|
|
If
25% of the
Offering is Raised
|
|
|
If
50% of the
Offering is Raised
|
|
|
If
75% of the
Offering is Raised
|
|
|
If
100% of the
Offering is Raised
|
|
|
Net
Proceeds
|
|
$
|
1,326,500
|
|
|
$
|
2,676,500
|
|
|
$
|
4,026,500
|
|
|
$
|
5,376,500
|
|
|
Acquisition
of Real Estate and Cannabis Licenses*
|
|
$
|
321,429
|
|
|
$
|
1,285,715
|
|
|
$
|
1,963,537
|
|
|
$
|
2,571,429
|
|
|
Capital
Expenditures
|
|
$
|
482,143
|
|
|
$
|
964,286
|
|
|
$
|
1,446,429
|
|
|
$
|
1,928,572
|
|
|
Working
Capital
|
|
$
|
522,928
|
|
|
$
|
426,499
|
|
|
$
|
616,534
|
|
|
$
|
876, 499
|
|
*We
are planning to use the proceeds from this Offering will be utilized for the expansion of cannabis-related business opportunities,
where permitted and licensed within the State of California. These opportunities could include: 1) the purchase of real estate
where cultivation and manufacturing of cannabis and cannabis products are permissible, 2) investment in cannabis cultivation,
manufacturing and distribution license, including licenses that will permit the operation of delivery services, 3) acquisition
of companies currently operating cannabis delivery services, 4) investment in partnerships with companies presently operating
cannabis delivery services, and 5) investment in related infrastructure to create vertical integration and synergies between cultivation,
manufacturing and distribution business to facilitate across the board cost reductions with the aim to boost profit margins and
maximize shareholder value.
We
don’t have plan to purchase an extraction facility at this time, however we may consider purchasing one in the future and
including a Cannabis Microbusiness License.
A
Cannabis Microbusiness is a business that engages in at least 3 of the following 4 activities:
|
|
●
|
Cultivation
(area less than 10,000 square feet)
|
|
|
|
|
|
|
●
|
Manufacturing
(level 1), Manufacturing (level 6)
|
|
|
|
|
|
|
●
|
Distribution
|
|
|
|
|
|
|
●
|
Retail
|
DIVIDEND
POLICY
We
have not declared or paid any dividends on our Common Stock. We intend to retain earnings for use in our operations and to finance
our business. Any change in our dividend policy is within the discretion of our board of directors and will depend, among other
things, on our earnings, debt service and capital requirements, restrictions in financing agreements, if any, business conditions,
legal restrictions and other factors that our board of directors deems relevant.
DILUTION
Purchasers
of our Common Stock in this offering will experience an immediate dilution of net tangible book value per share from the public
offering price. Dilution in net tangible book value per share represents the difference between the amount per share
paid by the purchasers of shares of Common Stock and the net tangible book value per share immediately after this offering.
The
following table sets forth the estimated net tangible book value per share after the offering and the dilution to persons purchasing
Common Stock based on the foregoing minimum and maximum offering assumptions based on an offering price of $0.0018 per share for
a maximum raise of $5,400,000. The numbers are based on the total issued and outstanding shares of Common Stock as of October
31, 2020 and the balance sheet as of September 30, 2020.
|
|
|
|
25 %
|
|
|
|
50.00 %
|
|
|
|
75 %
|
|
|
|
100 %
|
|
|
Net
Value
|
|
$
|
(7,801,237.00
|
)
|
|
$
|
(6,451,237.00
|
)
|
|
$
|
(5,101,237.00
|
)
|
|
$
|
(3,751,237.00
|
)
|
|
#
Total Shares
|
|
|
3,597,120,836
|
|
|
|
4,347,120,836
|
|
|
|
5,097,120,836
|
|
|
|
5,847,120,836
|
|
|
Net
Book Value Per Share
|
|
$
|
(0.0022
|
)
|
|
$
|
(0.0015
|
)
|
|
$
|
(0.0010
|
)
|
|
$
|
(0.0006
|
)
|
|
Increase
in NBV/Share
|
|
$
|
0.0010
|
|
|
$
|
0.0017
|
|
|
$
|
0.0022
|
|
|
$
|
0.0026
|
|
|
Dilution
to new shareholders
|
|
$
|
0.0040
|
|
|
$
|
0.0033
|
|
|
$
|
0.0028
|
|
|
$
|
0.0024
|
|
|
Percentage
Dilution to New
|
|
|
220.49
|
%
|
|
|
182.45
|
%
|
|
|
155.60
|
%
|
|
|
135.64
|
%
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion of our financial condition and results of operations should be read in conjunction with the unaudited financial
statements and the notes thereto of the Company included in this Offering Circular. The following discussion contains forward-looking
statements. Actual results could differ materially from the results discussed in the forward-looking statements. See “Risk
Factors” and “Cautionary Note Regarding Forward-Looking Statements” above.
Overview
Discussions
with respect to our Company’s operations included herein refer to our operating subsidiary, SWC. As of the date of this
filing, we had no other operations other than those of SWC.
Results
of Operations
The
following table sets forth the results of our operations for the three months ended September 30, 2020 and 2019.
|
|
|
For
the three months ended
|
|
|
|
September
30,
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
Net
Sales
|
|
$
|
2,146,326
|
|
|
$
|
753,974
|
|
|
Cost
of Goods Sold:
|
|
|
1,028,815
|
|
|
|
492,168
|
|
|
Gross
profit
|
|
|
1,117,512
|
|
|
|
261,806
|
|
|
Operating
Expenses
|
|
|
1,987,763
|
|
|
|
1,203,629
|
|
|
Loss
from Operations
|
|
|
(870,251
|
)
|
|
|
(941,823
|
)
|
|
Other
non-operating Income (Expense):
|
|
|
2,150,227
|
|
|
|
(1,085,728
|
)
|
|
Net
Income (Loss)
|
|
|
1,279,977
|
|
|
|
(2,027,551
|
)
|
|
Less:
net income attributable to the noncontrolling interest
|
|
|
1,165
|
|
|
|
—
|
|
|
Net
Income (Loss) attributed to Sugarmade, Inc.
|
|
$
|
1,278,812
|
|
|
$
|
(2,027,551
|
)
|
Revenues
For
the three months ended September 30, 2020 and 2019, revenues were $2,146,326 and $753,974, respectively. The increase was primarily
due to the new cannabis delivery business.
Cost
of goods sold
For
the three months ended September 30, 2020 and 2019, costs of goods sold were $1,028,815 and $492,168 respectively. The increase
was primarily due to the cost of the new cannabis delivery business.
Gross
profit
For
the three months ended September 30, 2020 and 2019, gross profit was $1,117,512 and $261,806, respectively. The increase was primarily
due to the new cannabis delivery business.
Operating
expenses
For
the three months ended September 30, 2020 and 2019, operating expenses were $1,987,763 and $1,203,629, respectively. The increase
was due to the cannabis delivery business incurred more expenses.
Other
non-operating income (expense)
The
Company had total other non-operating income (expense) of $2,150,227 and $(1,085,728) for the three months ended September 30,
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
income (loss)
Net
income totaled $1,279,977 for the three months ended September 30, 2020, compared to a net loss totaling $2,027,551 for the three-month
ended September 30, 2019. The increase was mainly due to the accounting for the changes in derivative liabilities due to conversions.
Net
income attributable to Sugarmade, Inc. totaled $1,278,812 for the three months ended September 30, 2020, compared to a net loss
attributable to Sugarmade, Inc. totaled $2,027,551 for the three-month ended September 30, 2019. The increase was mainly due to
the accounting for the changes in derivative liabilities due to conversions.
Liquidity
and Capital Resources
We
have primarily financed our operations through the sale of unregistered equity and convertible notes payable. As of September
30, 2020, our Company had cash balance of $681,093, current assets totaling $2,724,653 and total assets of $4,243,737. We had
current and total liabilities totaling $7,895,692 and $9,047,986, respectively. Stockholders’ equity reflected a deficiency
of $4,804,249.
The
following is a summary of cash provided by or used in each of the indicated types of activities during the three months ended
September 30, 2020 and 2019:
|
|
|
2020
|
|
|
2019
|
|
|
Cash (used in) provided by:
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(1,429,333
|
)
|
|
$
|
(913,850
|
)
|
|
Investing activities
|
|
|
(38,594
|
)
|
|
|
—
|
|
|
Financing activities
|
|
|
1,708,015
|
|
|
|
1,106,312
|
|
Net
cash (used in) provided by operating activities was $(1,429,333) for the three months ended September 30, 2020, and $(913,850)
for the three months ended September 30, 2019.
Net
cash (used in) provided by investing activities was $(38,594) for the three months ended September 30, 2020, and $nil for the
three months ended September 30, 2019.
Net
cash (used in) provided by financing activities was $1,708,015 for the three months ended September 30, 2020 and $1,106,312 for
the three months ended September 30, 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 the date
of this report, we estimate that the cash necessary to implement our current business plan for the next twelve months is approximately
$2,000,000.
Based
on our need to raise additional funds to implement our business plans for the next twelve months, we have included a discussion
concerning the presentation of our financial statements on a going concern basis in the notes to our financial statements and
our independent public accountants have included a similar discussion in their opinion on our financial statements through June
30, 2020. We will be required in the near future to issue debt or sell our Company’s equity securities in order to raise
additional cash, although there are no firm arrangements in place for any such financing at this time. We cannot provide any assurances
as to whether we will be able to secure the necessary financing, or the terms of any such financing transaction if one were to
occur. The failure to secure such financing could severely curtail our plans for future growth or in more severe scenarios, the
continued operations of our Company.
Capital
Expenditures
Our
current plans do not call for our Company to expend significant amounts for capital expenditures for the foreseeable future beyond
relatively insignificant expenditures for office furniture and information technology related equipment as we add employees to
our Company. We are however continually evaluating the production processes of our third-party contract manufacturers to determine
if there are investments we could make in their processes to achieve manufacturing improvements and significant cost savings.
Any such desired investments would require additional cash above our current forecast requirements.
The
following table sets forth the results of our operations for the years ended June 30, 2020 and 2019. Certain columns may not add
due to rounding.
|
|
|
For the years ended June 30
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Revenues, net
|
|
|
4,362,585
|
|
|
|
4,367,644
|
|
|
Cost of goods sold:
|
|
|
2,851,940
|
|
|
|
3,368,659
|
|
|
Gross margin
|
|
|
1,510,645
|
|
|
|
1,268,985
|
|
|
Operating Expense
|
|
|
13,636,221
|
|
|
|
6,184,062
|
|
|
Loss from operations
|
|
|
(12,125,567
|
)
|
|
|
(4,915,077
|
)
|
|
Non-operating income (expense):
|
|
|
(9,408,994
|
)
|
|
|
(7,314,073
|
)
|
|
Net Income (Loss)
|
|
|
(21,534,562
|
)
|
|
|
(12,229,151
|
)
|
|
Less: net loss attributable to the noncontrolling interest
|
|
|
(195,416
|
)
|
|
|
—
|
|
|
Net Loss attributable to SugarMade Inc.
|
|
|
(21,339,146
|
)
|
|
|
(12,229,151
|
)
|
Revenues
For
the years ended June 30, 2020 and 2019, revenues were $4,362,585 and $4,637,644 respectively. The decrease was primarily due to
COVID 19 crisis which had significant impact on the restaurant supply industry.
Cost
of goods sold
For
the years ended June 30, 2020 and 2019, cost of goods sold were $2,851,940 and $3,368,659 respectively. The decrease was primarily
due to COVID 19 crisis which had significant impact on the restaurant supply industry.
Gross
profit
For
the years ended June 30, 2020 and 2019, gross profit was $1,510,645 and $1,268,985, respectively. The increase was primarily due
to the higher margin from Indigo dye business. The gross profit margin was 34.63% and 27.36%, respectively, for the years ended
June 30, 2020 and 2019.
Operating
expenses
For
the years ended June 30, 2020 and 2019, selling, general and administrative expenses were $13,636,221 and $6,184,062 respectively.
The increase was attributable to issuing of the common stock compensation expenses for employees, legal, and consulting fees.
Other
non-operating expense
The
Company had total non-operating expense of $9,408,994 and $7,314,073 for the years ended June 30, 2020 and 2019, respectively.
The increase in non-operating income is related to the accounting for derivative liabilities.
Net
loss
Net
loss totaled $21,534,562 for the year ended June 30, 2020, compared to a net loss of $12,229,151 for the year ended June 30, 2019.
The increase was attributable to issuing all of the stock compensation expenses for employees, legal, and consulting fees.
Liquidity
and Capital Resources
We
have primarily financed our operations through the sale of unregistered equity, loans and convertible notes payable. As of June
30, 2020, our Company had a cash balance of $441,004, current assets of $1,912,659 and total assets of $3,507,062. We had current
liability of $11,680,260 and total liabilities of $12,645,935. Stockholders’ deficit reflected of $9,138,875.
The
following is a summary of cash provided by or used in each of the indicated types of activities during the years ended June 30,
2020 and 2019:
|
Cash (used in) provided by:
|
|
2020
|
|
|
2019
|
|
|
Operating activities
|
|
$
|
(1,984,876
|
)
|
|
$
|
(2,323,231
|
)
|
|
Investing activities
|
|
|
(132,494
|
)
|
|
|
(351,395
|
)
|
|
Financing activities
|
|
|
2,524,003
|
|
|
|
2,666,876
|
|
Net
cash used in operating activities was $1,984,876 for the year ended June 30, 2020, and $2,232,231 for the year ended June 30,
2019. The decrease was attributable to the increased net loss, increased cash outflow on stock compensations, and change in fair
value of derivative liability.
Net
cash used in investing activities for the year ended June 30, 2020 and 2019 was $132,494 and $351,395, which was for the purchase
of fixed assets.
Net
cash provided by financing activities totaled $2,524,003 for the year ended June 30, 2020. Net cash provided by financing activities
totaled $2,666,876 for the year ended June 30, 2019. The decrease in cash inflow in 2020 was mainly due to decreased proceeds
from selling of common shares.
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 agreements or other sources of
liquidity immediately available to us.
Given
estimates of our Company’s future operating results and our credit arrangements with our suppliers, we are currently forecasting
that we will need to secure additional financing to obtain adequate financial resources to reach profitability. As of the
date of this report, we estimate that the cash necessary to implement our current business plan for the next twelve (12) months
is approximately $5,000,000.
Based
on our need to raise additional funds to implement our business plans for the next twelve months, we have included a discussion
concerning the presentation of our financial statements on a going concern basis in the notes to our financial statements and
our independent public accountants have included a similar discussion in their opinion on our financial statements through June
30, 2019. We will be required in the near future to issue debt or sell our Company’s equity securities in order to raise
additional cash, although there are no firm arrangements in place for any such financing at this time. We cannot provide any assurances
as to whether we will be able to secure the necessary financing, or the terms of any such financing transaction if one were to
occur. The failure to secure such financing could severely curtail our plans for future growth or in more severe scenarios, the
continued operations of our Company.
Capital
Expenditures
Our
current plans do 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 and employees as it is
part of the requirement to build the infrastructure needed to support the current growth. At the same time, we will continually
evaluating the production processes of our third (3rd) 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.
FOR
THE YEAR ENDED JUNE 30, 2020 AND 2019:
Critical
Accounting Policies Involving Management Estimates and Assumptions
Use
of Fair Value
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
l - 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 activities.
Use
of Estimates
The
preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United
States of America requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue
Recognition
Background
on FASB’s Development of New Revenue Recognition Standard
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 requires
an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services
to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits
the use of either the retrospective or cumulative effect transition method. The guidance also requires additional disclosure about
the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In August 2015, the FASB
issued ASU No. 2015-14, “Deferral of the Effective Date” (“ASU 2015-14”), which defers the effective date
for ASU 2014-09 by one year. For public entities, the guidance in ASU 2014-09 will be effective for annual reporting periods beginning
after December 15, 2017 (including interim reporting periods within those periods), and for all other entities, ASU 2014-09 will
be effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting
periods beginning after December 15, 2019. In March 2016, the FASB issued ASU No. 2016-08, “Principal versus Agent Considerations
(Reporting Revenue versus Net)” (“ASU 2016-08”), which clarifies the implementation guidance on principal versus
agent considerations in the new revenue recognition standard. In April 2016, the FASB issued ASU No. 2016-10, “Identifying
Performance Obligations and Licensing” (“ASU 2016-10”), which reduces the complexity when applying the guidance
for identifying performance obligations and improves the operability and understandability of the license implementation guidance.
In May 2016, the FASB issued ASU No. 2016-12 “Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”),
which amends the guidance on transition, collectability, noncash consideration and the presentation of sales and other similar
taxes. In December 2016, the FASB further issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue
from Contracts with Customers” (“ASU 2016-20”), which makes minor corrections or minor improvements to the Codification
that are not expected to have a significant effect on current accounting practice or create a significant administrative cost
to most entities. The amendments are intended to address implementation and provide additional practical expedients to reduce
the cost and complexity of applying the new revenue standard. These amendments have the same effective date as the new revenue
standard.
Cash
Cash
and cash equivalents consist of amounts held as bank deposits and highly liquid debt instruments purchased with an original maturity
of three months or less.
From
time to time, we may maintain bank balances in interest bearing accounts in excess of the $250,000 currently insured by the Federal
Deposit Insurance Corporation for interest bearing accounts (there is currently no insurance limit for deposits in noninterest
bearing accounts). We have not experienced any losses with respect to cash. Management believes our Company is not exposed to
any significant credit risk with respect to its cash.
Accounts
receivable
Accounts
receivable are carried at their estimated collectible amounts, net of any estimated allowances for doubtful accounts. We grant
unsecured credit to our customer’s deemed credit worthy. Ongoing credit evaluations are performed and potential credit losses
estimated by management are charged to operations on a regular basis. At the time any particular account receivable is deemed
uncollectible, the balance is charged to the allowance for doubtful accounts. The Company had accounts receivable net of allowances
of $134,517 as of June 30, 2020 and of $218,145 as of June 30, 2019.
Inventory
Inventory
consists of finished goods paper and paper-based products ready for sale and is stated at the lower of cost or market. We value
inventories using the weighted average costing method (approximate FIFO costing method). 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.
Property
and Equipment
Property
and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization of property and
equipment are computed principally using accelerated and straight-line methods using lives of 5 years for machine and equipment,
2-5 years for vehicles, 3-5 years for production, and 1.5-5 years for land improvements.
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 years ended June 30, 2020 and 2019.
Intangible
assets, net
Intangible
assets with finite lives are amortized over their estimated useful life. The Company monitors conditions related to these assets
to determine whether events and circumstances warrant a revision to the remaining amortization period. The Company tests its intangible
assets with finite lives for potential impairment whenever management concludes events or changes in circumstances indicate that
the carrying amount may not be recoverable. The original estimate of an asset’s useful life and the impact of an event or
circumstance on either an asset’s useful life or carrying value involve significant judgment.
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 Lattice Binomial
model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments,
including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period.
Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash
settlement of the derivative instrument could be required within 12 months of the balance sheet date. Refer to note 9 for details.
Stock
Based Compensation
Stock
based compensation cost is measured at the date of grant, based on the calculated fair value of the stock-based award, and will
be recognized as expense over the employee’s requisite service period (generally the vesting period of the award). We estimate
the fair value of employee stock options granted using the Black-Scholes-Merton Option Pricing Model. Key assumptions used to
estimate the fair value of stock options will include the exercise price of the award, the fair value of our common stock on the
date of grant, the expected option term, the risk-free interest rate at the date of grant, the expected volatility and the expected
annual dividend yield on our common stock.
Loss
Per Share
We
calculate basic earnings per share (“EPS”) by dividing our net loss by the weighted average number of common shares
outstanding for the period, without considering common stock equivalents. Diluted EPS is computed by dividing net income or net
loss by the weighted average number of common shares outstanding for the period and the weighted average number of dilutive common
stock equivalents, such as options and warrants. Options and warrants are only included in the calculation of diluted EPS when
their effect is dilutive. As of June 30, 2020, there are approximately 1,974,584,090 potential shares issuable upon conversion
of convertible debts and PPM, and 10,578,880 shares of warrants were excluded in calculating diluted loss per share for the year
ended June 30, 2020 due to the fact that issuance of the shares is anti-dilutive as a result of the Company’s net loss.
Income
taxes
We
account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and
their perspective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances
are recorded, when necessary, to reduce deferred tax assets to the amount expected to be realized.
As
a result of the implementation of certain provisions of ASC 740, Income Taxes (“ASC 740”), which clarifies the accounting
and disclosure for uncertainty in tax position, as defined, ASC 740 seeks to reduce the diversity in practice associated with
certain aspect of the recognition and measurement related to accounting for income taxes. We adopted the provisions of ASC 740
as of October 2, 2008 and have analyzed filing positions in each of the federal and state jurisdictions where we are required
to file income tax returns, as well as open tax years in these jurisdictions. We have identified the U.S. federal and California
as our “major” tax jurisdictions and generally, we remain subject to Internal Revenue Service examination of our 2013
U.S. federal income tax returns. However, we have certain tax attribute carryforwards, which will remain subject to review and
adjustment by the relevant tax authorities until the statute of limitations closes with respect to the year in which such attributes
are utilized.
We
believe that our income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that
will result in a material change to our financial position. Therefore, no reserves for uncertain income tax positions have been
recorded pursuant to ASC 740. In addition, we did not record a cumulative effect adjustment related to the adoption of ASC 740.
Our policy for recording interest and penalties associated with income-based tax audits is to record such items as a component
of income taxes. We have no interest or penalties as of June 30, 2020.
Recent
Accounting Pronouncements
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (“ROU”)
model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer
than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense
recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including
interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and
operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial
statements, with certain practical expedients available. The Company will adopt this standard with an effective date of July 1,
2019 using the prospective adoption approach.
In
January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. The guidance removes Step 2 of the goodwill
impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which
a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance should
be adopted on a prospective basis for the annual or any interim goodwill impairment tests beginning after December 15, 2019.
The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.
In
June 2018, the FASB issued ASU 2018-07, Stock-based Compensation: Improvements to Nonemployee Share-based Payment Accounting,
which amends the existing accounting standards for share-based payments to nonemployees. This ASU aligns much of the guidance
on measuring and classifying nonemployee awards with that of awards to employees. Under the new guidance, the measurement of nonemployee
equity awards is fixed on the grant date. This ASU becomes effective in the first quarter of fiscal year 2019 and early adoption
is permitted but no earlier than an entity’s adoption date of ASC 606. Entities will apply the ASU by recognizing a cumulative-effect
adjustment to retained earnings as of the adoption date. The Company adopted this update on July 1, 2018 and the adoption had
no material impact to the Company’s consolidated financial statements.
In
December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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.
The
FASB recently issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging
– Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s
Own Equity, to reduce complexity in applying GAAP to certain financial instruments with characteristics of liabilities and equity.
The guidance in ASU 2020-06 simplifies the accounting for convertible debt instruments and convertible preferred stock by removing
the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options, that requires entities to account for beneficial
conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock. The
guidance in ASC 470-20 applies to convertible instruments for which the embedded conversion features are not required to be bifurcated
from the host contract and accounted for as derivatives.
In
addition, the amendments revise the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments
and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing
certain criteria required for equity classification. These amendments are expected to result in more freestanding financial instruments
qualifying for equity classification (and, therefore, not accounted for as derivatives), as well as fewer embedded features requiring
separate accounting from the host contract.
The
amendments in ASU 2020-06 further revise the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted
earnings per share (EPS) for convertible instruments by using the if-converted method. In addition, entities must presume share
settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares. The amendments in ASU
2020-06 are effective for public entities that meet the definition of an SEC filer, excluding smaller reporting companies as defined
by the SEC, for fiscal years beginning after December 15, 2021. For all other entities, the amendments are effective for fiscal
years beginning after December 15, 2023. Early adoption is permitted, but no earlier than fiscal years beginning after December
15, 2020. Entities should adopt the guidance as of the beginning of the fiscal year of adoption and cannot adopt the guidance
in an interim reporting period. We are still evaluating the impact this guidance will have on our consolidated financial statements.
Related
Party Transactions
On
January 23, 2013, the Company entered into a promissory note with its former employee who owns less than 5% of the Company’s
stock. The original principal amount was $40,000 and the note bore no interest. The note was payable upon demand. As of June 30,
2020 and June 30, 2019, this note had a balance of $15,427.
On
January 14, 2015, the Company entered into a promissory note with Richard Ko (an employee of the Company, who owns less than 5%
of the Company’s stock). The principle amount was $30,000 and the note bore no interest. The note had a term of one (1)
year and was due on January 14, 2016, and became payable upon demand after January 14, 2016. As of June 30, 2020 and June 30,
2019, this note had a balance of $0 and $20,000, respectively.
As
of June 30, 2020 and June 30, 2019, the Company had an outstanding balance of notes payable due to related parties of $15,427
and $38,000, respectively.
On
July 7, 2016, SWC received a loan in total amount of $30,000 from an employee. During the three months ended December 31, 2019,
SWC received additional loan in total amount of $105,000 from a related party. The amount of the loan bear no interest and due
on demand. During the three months ended March 31, 2020, the Company repaid $55,000 to the related party. As of June 30, 2020
and June 30, 2019, the balance of the loan due to related party was $50,000 and $30,000, respectively.
Going
Concern
The
Company sustained continued operating losses during the years ended June 30, 2020 and 2019. 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.
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern;
however, the above condition raises substantial doubt about the Company’s ability to do so. The 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, if 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.
BUSINESS
This
Prospectus includes market and industry data that we have developed from publicly available information; various industry publications
and other published industry sources and our internal data and estimates. Although we believe the publications and reports are
reliable, we have not independently verified the data. Our internal data, estimates and forecasts are based upon information obtained
from trade and business organizations and other contacts in the market in which we operate and our management’s understanding
of industry conditions.
As
of the date of the preparation of this Prospectus, these and other independent government and trade publications cited herein
are publicly available on the Internet without charge. Upon request, the Company will also provide copies of such sources cited
herein.
Company
Overview
Sugarmade,
Inc. (hereinafter referred to as “we’’, “us” or “the/our Company’’) is a publicly-traded
company incorporated in the state of Delaware. Our previous legal name was Diversified Opportunities, Inc. Our Company
operates much of its business activities through our subsidiary, SWC Group, Inc., a California corporation (“SWC’’).
Shares
of our common stock are quoted on the OTCQB Venture Market, which is a quotation system for early-stage and developing companies
under the trading symbol “SGMD”.
Our
corporate website is www.Sugarmade.com.
Sugarmade,
Inc. was founded in 2010. In 2014, CarryOutSupplies.com was acquired by Sugarmade, Inc., creating the Company as it is today.
As of the date of this offering circular, we are involved in two main business areas
including:
1)
the supply of products to the quick-service restaurant sub-sector of the restaurant industry, and, as an importer and distributor
of non-medical protection equipment, and
2)
as an operator of the Sacramento, California based Budcars Cannabis Delivery Service (“Budcars”) Early in 2020,
the Company acquired a 40% stake in the Budcars operations and an option to gain a controlling interest.
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 quick-service restaurants (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 the
importation of goods from Asian factories. Our niche within the market pertains to serving the many quick-service restaurants
that wish to acquire custom printed products, such as those embossed with logos, but the minimum order size for such customization
had been cost-prohibitive. With that in mind, CarryOutSupplies.com was founded to provide products to this underserved section
of the market. Since that time, the Company has become a key supplier to more than 2,000 establishments, particularly within the
frozen dessert segment.
The
business of supplying such products to the quick-service restaurant sector remains highly competitive. Over the past few years,
operating margins have compressed as a result of increased competition, the emergence of relatively inexpensive digital printing
processes, and the larger printing and paper product manufacturers lowering minimum order quantities. Sugarmade expects the sector
to remain highly competitive and is responding to the industry changes by realigning staff, eliminating less profitable products,
and introducing new product areas. Please reference “Risk Factors” beginning on Page 3, for further information and
an outline of the risks associated with this business operation.
Expansion
into Non-Medical Protective Equipment.
Our
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 importing goods from Asia makes us well-equipped to operate within the marketplace
for non-medical, consumable, protective equipment. Recent worldwide pandemic issues cause us to believe this market sector will
continue to grow for the foreseeable future.
As
of June 30, 2020, we have fulfilled $922,350 of the purchase orders, which in total are in excess of $10,000,000. There are more
than $9,000,000 of pending orders and demands for mostly nitrile gloves. Supplies of non-medical protective equipment on the world-wide
market remain extremely tight, and bidding for available supplies is highly competitive with larger and better-financed companies
often prevailing in the bidding process. This has limited our ability to fill a significant portion of the outstanding purchase
orders.
We
have identified multiple suppliers and brokers of non-medical protective equipment, but thus far have had only limited success
in acquiring the needed products to fill our orders. In several instances, we have placed orders with factories and brokers only
to have the products we expected to be delivered to us diverted away from our Company and apparently to other companies that also
have pending orders. We expect the supply chain for non-medical protective equipment to remain tight for the foreseeable future.
At the same time, our staff continues to search for reliable factories and/or brokers from which we will be able to source products
to fulfill customer purchase orders successfully. Thus, there can be no assurance our Company will secure a supplier, or if a
selected supplier ultimately delivers the equipment, we have ordered. Due to these supply chain issues, there can be no assurance
we will deliver upon any of the pending purchase orders.
Our
current customers and prospective customers who have issued purchase orders to our Company are under no legal obligation to consummate
a purchase from us. Those companies can acquire the desired goods from other sources. Pending purchase orders are cancellable
by the issuing party at any time for any or no reason. Thus, there can be no assurance that even if we can fill the orders, the
ordering entity will ultimately purchase the equipment outlined initially in a particular pending purchase order. Upon delivery
of equipment from our suppliers to our warehouses, we will notify companies that have issued us purchase orders to confirm the
desire to accept the equipment and make payment to us. Upon acceptance and shipment to the ordering entity, we will then recognize
the revenue for the shipped equipment and subsequently subtract that amount from the pending purchase orders.
We
plan to continue our business pursuits relative to our CarryOutSuppies.com business, including the business relative to non-medical
protective equipment. We have significantly restructured the operations over the past year in order to reduce costs and improve
efficiencies. We plan to continue to modify our strategies and product lines to remain competitive in these niche market sectors.
Please reference “Risk Factors” beginning on Page 3, for further information and an outline of the risks associated
with this business operation.
BudCars
Cannabis Delivery Service
During
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 40% 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 larger.
As
the market shifts from the black to white markets, the legal providers are expected to further benefit. 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.
The
white market/black market balance is now for the first time beginning to shift as authorities crack down on unlicensed business.
This is beginning 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 such as Sugaramade’s 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 growing rapidly.
Under
the terms of the acquisition agreement, the Company is to pay Indigo Dye Group Corp., the owners of Budcars $700,000, and in turn
received an option to acquire an additional 30%, which upon exercise will provide a controlling stake in the operation for the
Company. The $700,000 investment is to be exclusively utilized for business expansion and operational purposes with zero
funds used as consideration for the share purchase to the owners of BudCars or Indigo. Sugarmade plans to apply its operational
expertise to enhance the business operations of Budcars, including geographic delivery expansion.
The
specific terms of the agreement included the following:
1.
Seven Hundred Thousand Dollars ($700,000) into Indigo for inventory, equipment, and marketing expenses.
2. Sugarmade will make the Investment 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.
3. Sugarmade will receive a Forty Percent (40%) equity in Indigo Dye 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.
4. The Parties agree the Investment will primarily be used for business expansion with the exact details of the spending to be further
discussed and outlined in a final agreement. The Parties have discussed the additional amount required to open new locations.
The estimated investments of each new location will require between $175,000 and $350,000, details of which will be agreed to
at a later date.
5. An incentive being offered to Sugarmade as an inducement of the Seven Hundred Thousand Dollars ($700,000), Sugarmade and or its
assigned will be granted an option to purchase additional Thirty Percent (30%) the equity of Indigo Dye. This option is being
granted by Clinton Walker, therefore for the amount of $525,000 to be paid to Clinton Walker for the 30% of Indigo that he owns.
This option will be valid for 36 months.
Since
late May 2020, the Company has been 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 considered an VIE of the Company.
For more details regarding Indigo financials please refer to the footnotes to our financial statements, specifically Note#5.
The
operators of Budcars and the Company have recently announced the expansion of delivery services into additional areas of Northern
California and most recently into the substantially sized Los Angeles marketplace. We are in the process of analyzing the
entry in other California markets.
Budcars
operates its delivery service in strict adherence to all state, local and municipal regulations and is fully licensed for operations
by the State of California regulators.
The
Company plans to expand into licensed cannabis cultivation and has secured an option to lease a property containing a 5,000 square-foot
cultivation facility located near Sacramento, California. Finalizing the lease is contingent on gaining appropriate State of California
licenses, and local permits and licenses. At this time, such licenses and permits are pending, and there can be no assurances
the Company will be successful in its efforts to complete the permitting and licensing process. While the Company plans to begin
operations upon receipt of licenses and permits, unforeseen circumstances beyond licensing and permitting issues could prevent
the Company from realizing success in beginning operations at the proposed site.
The
Company is in process of expanding its business to include the licensed and regulated cultivation of cannabis. On September 28,
2020, the Company and LMK Capital LLC (“LMK”) entered into a lease agreement where LMK agreed to lease to the Company
five acres located in Northern California. The property is owned by LMK. Jimmy Chan, Chairman of the Board, Chief Executive Officer,
Chief Financial Officer and majority stockholder of the Company, is the majority owner of LMK. This transaction is considered
at Related Party transaction under SEC Regulation SK. The Company plans to cultivate cannabis on the property which it will market
as both white-label and branded cannabis products; also likely to be distributed through the BudCars Cannabis Delivery Service.
Sugarmade is currently Company preparing the required documentation to apply for approval for construction of greenhouses, processing
building, and other licenses as may be required. This new business for the Company, is still in the formative stages and has yet
to produce any revenues.
Competition
within the cannabis delivery market, especially in the major metropolitan areas of California, is intense. Additionally, cannabis
delivery companies face intense regulatory scrutiny, significant recording keeping requirements, strict permitting, significant
taxes rates, and a host of other regulatory and operational issues, and licensing and other related operational hurdles. Please
reference “Risk Factors” beginning on Page 3, for further information and an outline of the risks associated with
this business operation.
Government
Regulations
As
a result of our current ownership position in Budcars, and the possibility of expanding this ownership position, several state
and federal regulations could impact our business operations and our ability to generate both revenues and profits.
As
of December 2019, there are a total of 33 states, plus the District of Columbia, with legislation passed as it relates to medicinal
cannabis. Of these states, 11 have decriminalized adult use cannabis legislation. These state laws are in direct conflict with
the United States Federal Controlled Substances Act (21 U.S.C. § 811) (“CSA”), which places controlled substances,
including cannabis, in a schedule. Cannabis is classified as a Schedule I drug, which is viewed as having a high potential for
abuse, has no currently accepted use for medical treatment in the U.S., and lacks accepted safety for use under medical supervision.
Although
the possession, cultivation, and distribution of marijuana for medical and adult use is permitted in California and Nevada, provided
compliance with applicable state and local laws, rules, and regulations, marijuana is illegal under federal law. We believe we
operate our business in compliance with applicable California laws and regulations. Any changes in federal, state or local law
enforcement regarding marijuana may affect our ability to operate our business. Strict enforcement of federal law regarding marijuana
would likely result in the inability to proceed with our business plans, could expose us to potential criminal liability, and
could subject our properties to civil forfeiture.
The
U.S. Department of Justice (the “DOJ”) has not historically devoted resources to prosecuting individuals whose conduct
is limited to possession of small amounts of marijuana for use on private property but has relied on state and local law enforcement
to address marijuana activity. In the event the DOJ reverses its stated policy and begins strict enforcement of the CSA in states
that have laws legalizing medical marijuana and recreational marijuana in small amounts, there may be a direct and adverse impact
to our business and our revenue and profits.
In
an effort to provide guidance to federal law enforcement, the DOJ has issued Guidance Regarding Marijuana Enforcement to all United
States Attorneys in a memorandum from Deputy Attorney General David Ogden on October 19, 2009, in a memorandum from Deputy Attorney
General James Cole on June 29, 2011 and in a memorandum from Deputy Attorney General James Cole on August 29, 2013. Each memorandum
provides that the DOJ is committed to the enforcement of the CSA but, the DOJ is also committed to using its limited investigative
and prosecutorial resources to address the most significant threats in the most effective, consistent, and rational way. On January
4, 2018, Attorney General Jeff Sessions revoked the Ogden Memo and the Cole Memos.
In
November 2016, California voters approved Proposition 64, which is also known as the Adult Use of Marijuana Act (“the AUMA”),
in a ballot initiative. Among other things, the AUMA makes it legal for adults over the age of 21 to use marijuana and to possess
up to 28.5 grams of marijuana flowers and 8 grams of marijuana concentrates. Individuals are also permitted to grow up to six
marijuana plants for personal use. In addition, the AUMA establishes a licensing system for businesses to, among other things,
cultivate, process, and distribute marijuana products under certain conditions. On January 1, 2018, the California Bureau of Marijuana
Control enacted regulations to implement the AUMA. We have obtained the necessary permits and licenses to expand our existing
business to distribute marijuana in compliance with the laws in the State of California. Despite the changes in state laws, marijuana
remains illegal under federal law. On January 1, 2018, the California Bureau of Marijuana Control enacted regulations to implement
the AUMA.
We
are monitoring the Trump administration’s, the DOJ’s and Congress’ positions on federal marijuana law and policy.
Since the start of the new Congress in January 2019, there have been positive discussions about the Federal Government’s
approach to cannabis. The DOJ has not signaled any change in its enforcement efforts. Based on public statements and reports,
we understand that certain aspects of those laws and policies are currently under review, but no official changes have been announced.
It is possible that certain changes to existing laws or policies could have a negative effect on our business and results of operations.
State
and local laws do not always conform to the federal standard. In November 2016, California voters approved Proposition 64, also
known as the Adult Use of Marijuana Act (“AUMA”), in a ballot initiative. Among other things, the AUMA makes it legal
for adults over the age of 21 to use marijuana and to possess up to 28.5 grams of marijuana flowers and 8 grams of marijuana concentrates.
Individuals are also permitted to grow up to six marijuana plants for personal use. In addition, the AUMA establishes a licensing
system for businesses to, among other things, cultivate, process, and distribute marijuana products under certain conditions.
On January 1, 2018 the California Bureau of Cannabis Control enacted regulations to implement the AUMA.
If
we are unable to obtain and maintain the permits and licenses required to operate our business in compliance with state and local
regulations in California, we may experience negative effects on our business and results of operations.
Local,
state, and federal medical and adult use marijuana laws and regulations are broad in scope and subject to evolving interpretations,
which could require us or the Budcars operation to incur substantial costs associated with compliance or alter certain aspects
of our business plan. In addition, violations of these laws, or allegations of such violations, could disrupt certain aspects
of our business plan and result in a material adverse effect on certain aspects of our planned operations and/or those of Budcars.
We cannot predict the nature of any future laws, regulations, interpretations, or applications, nor can we determine what effect
additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business.
Section
280E of the Internal Revenue Code prohibits marijuana businesses from deducting their ordinary and necessary business expenses,
forcing us to pay higher effective federal tax rates than similar companies in other industries. The effective tax rate on a marijuana
business depends on how large its ratio of nondeductible expenses is to its total revenues. Therefore, our marijuana business
may be less profitable than it could otherwise be.
Beginning
July 1, 2018, cannabis goods must meet all statutory and regulatory requirements. A licensee can only sell cannabis goods that
have been tested by a licensed testing laboratory and have passed all statutory and regulatory testing requirements. In order
to be sold, cannabis goods harvested or manufactured prior to January 1, 2018, must be tested by a licensed testing laboratory
and must comply with all testing requirements in section 5715 of the Bureau of Cannabis Control (“BCC”) regulations.
Cannabis goods that do not meet all statutory and regulatory requirements must be destroyed in accordance with the rules pertaining
to destruction. Adherence to these regulations may affect the revenues and profits of the Budcars operation and our ability to
recognize profits from our investment in Budcars.
Our
Company closely monitors the potential impact of government regulation on our business operations and on business operations of
Budcars.
Employees
and Consultants
As
of June 15, 2020, the Company had approximately six (6) employees & two (2) contractors.
The
principal executive offices of the Company are located in Monrovia, California, and are leased by the Company. The current lease
expires on February 28, 2023.
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.
We
believe that our existing facilities are adequate for our present purposes. The Company leases all its facilities and believes
that if necessary, it could secure suitable alternative facilities on similar terms without adversely affecting operations.
MANAGEMENT
Directors
of the corporation are elected by the stockholders to a term of one year and serve until a successor is elected and qualified.
Officers of the corporation are appointed by the Board of Directors to a term of one year and serves until a successor is duly
appointed and qualified, or until he or he is removed from office. The Board of Directors has no nominating, auditing or compensation
committees. The Board of Directors also appointed our officers in accordance with the Bylaws of the Company, and per employment
agreements negotiated between the Board of Directors and the respective officer. Currently, there are no such employment agreements.
Officers listed herein are employed at the whim of the Directors and state employment law, where applicable.
The
name, address, age and position of our officer and director is set forth below:
|
Name
|
|
Age
|
|
First Year as a
Director or
officer
|
|
Office(s) held
|
|
Jimmy Chan
|
|
41
|
|
2008 to present
|
|
CEO & Director
|
|
Christopher H. Dietrich
|
|
72
|
|
2019 to present
|
|
Independent Director
|
The
term of office of each director of the Company ends at the next annual meeting of the Company’s stockholders or when such
director’s successor is elected and qualifies. No date for the next annual meeting of stockholders is specified in the Company’s
bylaws or has been fixed by the Board of Directors. The term of office of each officer of the Company ends at the next annual
meeting of the Company’s Board of Directors, expected to take place immediately after the next annual meeting of stockholders,
or when such officer’s successor is elected and qualifies.
Directors
are entitled to reimbursement for expenses in attending meetings but receive no other compensation for services as directors.
Directors who are employees may receive compensation for services other than as director. No compensation has been paid to directors
for services.
Biographical
Information
Jimmy
Chan, director (Chairman), has been, since 2008, the Chief Executive officer of CarryOutSupplies.com, located in the City
of Industry. From 2005 to 2007, he served as the Vice-President, for Emergence Capital, operating out of Garden Grove, California,
and providing mortgage services to the general public. From 2003 to 2005, he was the Vice-President in charge of operations for
Azusa Mobile, a T-Mobile authorized dealer, and prior to that he was the president of Cyber Gift, importing toys for distribution
as a wholesaler. He is not an officer nor director of any other public companies.
Christopher
H. Dieterich, Independent Director. Mr. Dieterich is qualified to serve as a Director by way his extensive legal and business
experience. He graduated from Virginia Polytechnic Institute in 1969 (BS Engineering), University of California at Berkeley 1970
(MS Engineering) on full scholarship by Ford Foundation; and the University of California at Los Angeles in 1979 (JD Law/MS Economics),
pursuant to grant from Olin Foundation. He operates a law firm that specializes in SEC filings and venture capital arrangements,
and currently represents 15 reporting public entities. The firm has participated in capital raises for over 50 clients, and hundreds
of millions of dollars for those clients. The Board believes Mr. Dieterich will add significant value to not only corporate governance,
but also to operational and capital acquisition efficiency.
The
Company does not carry key man life insurance policies on any of the above principals or key personnel.
There
has never been a petition under the Bankruptcy Act, or any State insolvency law filed by or against the Company or its principals
or key personnel. Additionally, there has never been a receiver, fiscal agent, or similar officer appointed by a court for the
business or property of any such persons, or any partnership in which any of such persons was a general partner at or within the
past five years, or any corporation or business association of which any such person was an executive officer at or within the
past five years.
Family
Relationships
There
are no family relationships between any director or executive officer.
Corporate
Governance
During
fiscal year 2018 Company’s board of directors implemented a program to rectify the material weaknesses. During the fiscal
year, additional accounting personnel were engaged by the company in order to improve accounting and reporting functions. Additionally,
several programs were implemented internally to streamline our inventory controls, revenue reporting, and overall acting and reporting
infrastructure. During the fiscal year, the Board of Directors also engaged several outside consultants to assist in our accounting
and finance operations. These personnel worked with our internal staff to identify material weaknesses into implement programs
to seek resolutions. These programs have continued into fiscal year 2020.
Leadership
Structure
Jimmy
Chan, who is also a director and serves as chairman, CEO, CFO and corporate Secretary. Christopher H. Dieterich became an independent
director on April 22, 2019.
Board
Committees
We
do not have a standing audit committee, an audit committee financial expert, or any committee or person performing a similar function.
We do not have any board committees including a nominating, compensation, or executive committee. Presently, we have no independent
directors.
Code
of Ethics
The
Company has not formally adopted a written code of business conduct and ethics that governs the Company’s employees, officers
and Directors as the Company is not required to do so.
Director
Independence
We
currently have one independent director, Christopher H. Dieterich. We apply the definition of “independent director”
provided under the Listing Rules of The NASDAQ Stock Market LLC (“NASDAQ”). Under NASDAQ rules, the Board has considered
all relevant facts and circumstances regarding our directors and has affirmatively determined that Christopher H. Dieterich is
independent of us under NASDAQ rules.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934 requires our Company’s directors and officers, and persons who own more than
ten-percent (10%) of our Company’s shares of Common Stock, to file with the SEC reports of ownership on Form 3 and reports
of changes in ownership on Forms 4 and 5. Such officers, directors and ten-percent shareholders are also required to furnish our
Company with copies of all Section 16(a) reports they file. As of the date of this filing, 2020, we believed such reports were
timely filed.
Executive
Compensation
As
of start of January 1, 2019, Mr. Jimmy Chan will receive annual salary of $96,000 in addition to 5,000,000 shares of Common Stock
earned annually. Upon closing of each acquisition, Mr. Chan will get 10% of the purchase price as special bonus.
The
following table summarizes all compensation recorded by us in the past two fiscal years for each of our named executive officers.
2020
SUMMARY COMPENSATION TABLE
|
Name and Principal Position
|
|
Year
|
|
|
Salary
($)
|
|
|
Bonus
(Preferred Shares)
|
|
|
Stock Awards
(Common Stock)
|
|
|
Option Awards
($)
|
|
|
Non-Equity Incentive Plan Compensation
($)
|
|
|
Non-Qualified Deferred Compensation Earnings
($)
|
|
|
All Other Compensation
($)
|
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jimmy Chan,
|
|
|
2020
|
|
|
$
|
108,000
|
*
|
|
|
8,629,950
|
**
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
8,377,950
|
|
|
|
0
|
|
|
|
8,377,950
|
|
|
Chief Executive Officer
|
|
|
2019
|
|
|
$
|
96,000
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96,000
|
|
|
|
0
|
|
|
|
96,000
|
|
*Beginning
on September 1, 2020, Mr. Jimmy Chan will receive annual salary of $150,000. Upon closing of each acquisition, Mr. Chan will get
10% of the purchase price as special bonus.
**Out
of 2,500,000 Series B preferred owned, on April 21, 2002 Form 8-K. Mr. Jimmy Chan agreed to waive the rights to convert 1,500,000
to common shares.
As
of the date of this offering circular, Mr. Christopher Dieterich’s compensation has not been determined.
Employment
Agreements
We
do not have contracts in writing with our officers. However, beginning on January 1, 2019, Mr. Jimmy Chan received an annual salary
of $96,000 in cash and 5,000,000 common shares annually. In addition, upon closing of each acquisition, Mr. Chan will get 10%
of the purchase price as a special bonus. As of January 1, 2020, Mr. Chan receives an annual salary of $108,000 and the salary
increased to $150,000 starting September 1, 2020 with 50,000,000 commons shares at the end of Calendar year 2020. In addition,
upon closing of each acquisition, Mr. Chan will receive 10% of the purchase price as a special bonus. As of October 13, 2020,
5,000,000 common shares have been issued to Mr. Chan for 2019 and 2020. In the future, the Company expects to develop and adopt
a compensation plan for all directors, officers and employees.
Grants
of Stock and Other Equity Awards
On
March 30, 2017, the company filed with the SEC a Form S-8 Plan for 20,000,000 shares issuable to employees and consultants. From
March 30, 2017 to June 24, 2020, approximately 17,903,554 shares were issued under the plan. As of the date of this offering
circular, there are approximately 2,096,446 shares available under the plan.
Option
Exercises
During
the fiscal years ending June 30, 2020 and 2019, there were no option exercises by our named executive officers.
Long-Term
Incentive Plans
We
currently do not have any Long-Term Incentive Plans.
RELATIONSHIPS
AND RELATED PARTY TRANSACTIONS
Transactions
with Related Persons
Our
Company reviews transactions between our Company and persons or entities considered to be related parties (collectively “related
parties”). Our Company considers entities to be related parties where an executive officer, director or a 5% or more beneficial
owner of our shares of Common Stock (or an immediate family member of these persons) has a direct or indirect material interest.
Transactions of this nature require the approval of our Board.
Other
Transactions with Related Persons, Promoters and Certain Control Persons
The
following includes a summary of any transaction occurring since July 1, 2018, or any proposed transaction, in which we were or
are to be a participant and the amount involved exceeded or exceeds the lesser of $120,000 or one percent of our average total
assets at year-end for the two most recently completed fiscal years, and in which any related person had or will have a direct
or indirect material interest (other than compensation described under “Executive Compensation” above). We believe
the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below
were comparable to terms available or the amounts that would be paid or received, as applicable, in arm’s-length transactions.
From
time to time, SWC Group would receive short-term loans from LMK Capital, LLC (“LMK’’) for its working capital
needs. As of June 30, 2020, the Company’s outstanding balance to LMK is zero.
On
January 23, 2013, the Company entered into a promissory note with its former employee who owns less than 5% of the Company’s
stock. The original principal amount was $40,000 and the note bore no interest. The note was payable upon demand. As of June 30,
2020 and June 30, 2019, this note had a balance of $15,427.
On
January 14, 2015, the Company entered into a promissory note with Richard Ko (an employee of the Company, who owns less than 5%
of the Company’s stock). The principle amount was $30,000 and the note bore no interest. The note had a term of one (1)
year and was due on January 14, 2016, and became payable upon demand after January 14, 2016. As of June 30, 2020 and June 30,
2019, this note had a balance of $0 and $20,000, respectively.
As
of June 30, 2020 and June 30, 2019, the Company had an outstanding balance of notes payable due to related parties of $15,427
and $38,000, respectively.
On
July 7, 2016, SWC received a loan in total amount of $30,000 from an employee. During the three months ended December 31, 2019,
SWC received additional loan in total amount of 105,000 from a related party. The amount of the loan bear no interest and due
on demand. During the three months ended March 31, 2020, the Company repaid $55,000 to the related party. As of June 30, 2020
and June 30, 2019, the balance of the loan due to related party was $50,000 and $30,000, respectively.
PRINCIPAL
STOCKHOLDERS
The
following table sets forth information as to the shares of Common Stock beneficially owned as of November 16, 2020, by (i) each
person known to us to be the beneficial owner of more than 5% of our Common Stock; (ii) each Director; (iii) each Executive Officer;
and (iv) all of our Directors and Executive Officers as a group. Unless otherwise indicated in the footnotes following
the table, the persons as to whom the information is given had sole voting and investment power over the shares of Common Stock
shown as beneficially owned by them. Beneficial ownership is determined in accordance with Rule 13d-3 under the Exchange Act,
which generally means that shares of Common Stock subject to options currently exercisable or exercisable within 60 days of November
16, 2020 the date hereof are considered to be beneficially owned, including for the purpose of computing the percentage ownership
of the person holding such options, but are not considered outstanding when computing the percentage ownership of each other person.
The footnotes below indicate the amount of unvested options for each person in the table. None of these unvested options vest
within 60 days of November 16, 2020 the date hereof.
|
Shareholder
|
|
Class of Stock
|
|
|
No. of Shares
|
|
|
% of Class
|
|
|
Voting Rights
|
|
|
% of Voting Rights
|
|
|
% Voting Rights After Offering (Low Range)
|
|
|
Jimmy Chan, CEO and Director
|
|
|
Common
|
|
|
|
2,519,063,502
|
|
|
|
62.59
|
%
|
|
|
2,519,063,502
|
|
|
|
44.62
|
%
|
|
|
29.14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher H. Dietrich
|
|
|
n/a
|
|
|
|
0
|
|
|
|
0
|
%
|
|
|
0
|
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Officers and Directors
|
|
|
|
|
|
|
2,519,063,502
|
|
|
|
62.59
|
%
|
|
|
2,5,19,063,502
|
|
|
|
44.62
|
%
|
|
|
29.14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than 5% Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
|
|
|
|
|
|
|
|
As
of November 16, 2020, Jimmy Chan’s holdings represented 44.62% of the company. He is currently employed by LMK Capital LLC
as management consultant and is therefore a beneficial owner of shares owned by LMK Capital LLC. Amy Thai and LMK Capital LLC.’s
holdings are 7,378,066 and 11,266,667 respectively; as of the date of this offering circular the aggregated amount represents
0.37% of the Company’s issued and outstanding shares of Common Stock.
As
a result, as of the date of November 16, 2020, Mr. Chan beneficially owned 44.99% of the Company’s voting rights.
DESCRIPTION
OF CAPITAL
The
following summary is a description of the material terms of our capital stock and is not complete. You should also refer to our
articles of incorporation, as amended and our bylaws, as amended, which are included as exhibits to the registration statement
of which this Offering Circular forms a part.
General
The
Company is authorized to issue 10,000,000,000 shares of $0.001 par value shares of Common Stock and 10,000,000 shares of $0.001
par value Preferred Stock. As of September 30, 2020, the Company had 2,657,061,404 shares of Common Stock outstanding, 2,000,000
shares of Class A Preferred shares outstanding and 2,541,500 shares of Series B Preferred outstanding.
Common
Stock
Our
Board of Directors has created a class of shares of Common Stock designated as the shares of Common Stock.
Each
share of Common Stock entitles the holder to one vote on all matters on which holders are permitted to vote, including the election
of directors. The Company’s shares of Common Stock do not have cumulative voting rights.
Subject
to the preferences that may be applicable to any outstanding classes of stock, the holders of the shares of Common Stock will
share equally on a per share basis any dividends, when and if declared by the Board of Directors out of funds legally available
for that purpose. If the Company is liquidated, dissolved, or wound up, the holders of the shares of Common Stock will be entitled
to a ratable share of any distribution to shareholders, after satisfaction of all the Company’s liabilities and of the prior
rights of any outstanding classes of the Company’s stock. Shares of Common Stock carry no preemptive or other subscription
rights to purchase shares of the Company’s stock and are not convertible, redeemable, or assessable.
A
total of 10,000,000,000 Shares of Common Stock have been authorized, and 2,657,061,404 shares of Common Stock have been issued
and are outstanding as of September 30,2020.
Preferred
Stock
The
Company is authorized to issue up to ten million (10,000,000) shares of preferred stock. Two classes of preferred stock have been
designated by the board of directors, which has been designated as Class A Preferred Stock and Series B Preferred Stock.
Class
A Preferred Stock
Our
Corporation has created a class of preferred stock designated as the Class A Preferred Stock (“Class A Preferred”),
of which two million (2,000,000) have been issued and are outstanding. Shareholders of Class A Preferred shall not be eligible
for dividends. Liquidation, dissolution, or winding-up rights for the Class A Preferred are based on distribution to Class A Preferred
holders on an “as-converted,” basis such that each share of Class A Preferred shall be entitled to receive the amount
distributable to each share of Common Stock times the Conversion Factor on the record date for the distribution. Holders of Series
A Preferred Stock will hold voting rights on all matters put forth to the common shareholders. Each share of Series A Preferred
Stock held will receive one vote as to be on par with a single share of Common Stock in the Corporation. The conversion terms,
which are outlined in detail in the Certificate of Designation for the Class A Preferred are based on the Common Stock “fair
market value” of the holder’s initial investment plus a five (5%) percent annualized return. Fair market value of the
Common Stock equivalent will be determined by averaging the closing sale price of a Common Share for the forty (40) trading days
immediately preceding the date of conversion.
Series
B Preferred Stock
The
Corporation has created a class of preferred stock designated as the Series B Senior Preferred Stock (“Series B Preferred”).
2,541,500 shares of Series B Preferred Stock have been issued and are outstanding. The Series B Preferred Stock will participate
in all dividends and distributions, if any, on an as converted to Common Stock basis. Each holder of shares of the Series B Preferred
shall be entitled to the number of votes equal to the number of shares of Common Stock into which such shares of Series B Preferred
could be converted immediately after the close of business on the record date fixed for such meeting or the effective date of
such written consent and shall have voting rights and powers equal to the voting rights and powers of the Common Stock and shall
be entitled to notice of any stockholders’ meeting in accordance with the bylaws of the Corporation. Each Series B Preferred
Share shall be redeemable into One Thousand (1,000) shares of Common Stock. The Holders of the Series B Preferred Stock shall
have on demand conversion rights at any time Ninety Days (90 Days) after acquisition of any such Series B Preferred Stock. The
Series B Preferred Stock shall provide senior liquidation rights to the holders. In the event of any liquidation, dissolution
or winding up of the Corporation, whether voluntary or involuntary, the holders of the Series B Preferred Stock shall receive
preference in any payment or distribution and shall hold a position that is senior to any other class of common or preferred shares.
Warrants
and Options
Warrant
– On February 4, 2020, the Company entered 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 June 30,
2020, the fair value of the warrant liability was $78,000.
As
of June 30, 2020 and June 30, 2019, the total fair value of the warrant liability was $79,910 and $24,658, respectively.
Options
– On June 1, 2019, the Company entered into a consulting service agreement with a consultant and granted $216,000 of
stock options on June 1, 2019 vesting 25% each on June 1, 2019, September 1, 2019, December 1, 2019 and March 1, 2020. The share
count will be calculated based on average of the three lowest traded prices in the last 22 trading days prior the to the grant
date. These shares can be exercised any time after the grant date but no later than May 31, 2021. The consultant has the right
to exercise on the stock option at the price of $0.001 (par value).
On
November 1, 2019, the Company entered into a settlement agreement with the consultant and amend the original stock options to
$100,000 on November 1, 2019, vesting 1/2 on November 1, 2019, and March 1, 2020. The total number of shares shall be 12,500,000,
which is calculated based on 80% of the lowest traded price in the last 30 trading days prior to the grant date. These shares
can be exercised any time after the grant date but no later than December 31, 2021, at the exercised price of $0.001 per share.
As
of June 30, 2020 and June 30, 2019, the total shares granted to the stock options were 12,544,000 and 54,000, respectively.
Limitations
on Liability and Indemnification of Officers and Directors
Delaware
law authorizes corporations to limit or eliminate (with a few exceptions) the personal liability of directors to corporations
and their stockholders for monetary damages for breaches of directors’ fiduciary duties as directors. Our articles
of incorporation and bylaws include provisions that eliminate, to the extent allowable under Delaware law, the personal liability
of directors or officers for monetary damages for actions taken as a director or officer, as the case may be. Our articles
of incorporation and bylaws also provide that we must indemnify and advance reasonable expenses to our directors and officers
to the fullest extent permitted by Delaware law. We are also expressly authorized to carry directors’ and officers’
insurance for our directors, officers, employees and agents for some liabilities. We currently maintain directors’
and officers’ insurance covering certain liabilities that may be incurred by directors and officers in the performance of
their duties
The
limitation of liability and indemnification provisions in our articles of incorporation and bylaws may discourage stockholders
from bringing a lawsuit against directors for breach of their fiduciary duty. These provisions may also have the effect
of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful,
might otherwise benefit us and our stockholders. In addition, your investment may be adversely affected to the extent
that, in a class action or direct suit, we pay the costs of settlement and damage awards against directors and officers pursuant
to the indemnification provisions in our articles of incorporation and bylaws.
There
is currently no pending litigation or proceeding involving any of directors, officers or employees for which indemnification is
sought.
Transfer
Agent
Our
transfer agent is West Coast Stock Transfer, Inc. with offices at 721 Vulcan Ave., First Floor, Encinitas, CA and can be reached
at 619.664.4780 or by visiting their website www.westcoaststocktransfer.com
SHARES
ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of our Common Stock in the public market after this offering could adversely affect market
prices prevailing from time to time and could impair our ability to raise capital through the sale of our equity securities. We
are unable to estimate the number of shares of Common Stock that may be sold in the future.
Upon
the successful completion of this offering, we will have 7,489,188,855 outstanding shares of Common Stock if we complete the maximum
offering hereunder at the lowest price in our range. All of the shares sold in this offering will be freely tradable
without restriction under the Securities Act unless purchased by one of our affiliates as that term is defined in Rule 144 under
the Securities Act, which generally includes directors, officers or 5% stockholders.
Rule
144
Shares
of our Common Stock held by any of our affiliates, as that term is defined in Rule 144 of the Securities Act, may be resold only
pursuant to further registration under the Securities Act or in transactions that are exempt from registration under the Securities
Act. In general, under Rule 144 as currently in effect, any of our affiliates would be entitled to sell, without further registration,
within any three-month period a number of shares that does not exceed the greater of:
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1%
of the number of shares of Common Stock then outstanding, which will equal about 74,679,251 shares if fully subscribed; or
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the
average weekly trading volume of the unrestricted Common Stock during the four calendar weeks preceding the filing of a Form
144 with respect to the sale.
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Sales
under Rule 144 by our affiliates will also be subject to manner of sale provisions and notice requirements and to the availability
of current public information about us.
PLAN
OF DISTRIBUTION
The
Offering will be sold by our officers and directors.
This
is a self-underwritten offering and there can
be no assurance that all of any of the shares of common stock offered will be subscribed. If less than the maximum proceeds are
available to us, our development and prospects could be adversely affected. The subscriptions, once received, are irrevocable.
This
is a self-underwritten offering. This Offering Circular is part of an exemption under Regulation A that permits our officers and
directors to sell the Shares directly to the public in those jurisdictions where the Offering Circular is approved, with no commission
or other remuneration payable for any Shares sold. There are no plans or arrangements to enter into any contracts or agreements
to sell the Shares with a broker or dealer. After the qualification by the Commission and acceptance by those states where the
offering will occur, the Officer and Directors intends to advertise through personal contacts, telephone, and hold investment
meetings in those approved jurisdictions only. We do not intend to use any mass-advertising methods such as the Internet or print
media. Officers and Directors will also distribute the prospectus to potential investors at meetings, to their business associates
and to his friends and relatives who are interested the Company as a possible investment, so long as the offering is an accordance
with the rules and regulations governing the offering of securities in the jurisdictions where the Offering Circular has been
approved. In offering the securities on our behalf, the Officers and Directors will rely on the safe harbor from broker dealer
registration set out in Rule 3a4-1 under the Securities Exchange Act of 1934.
Terms
of the Offering
The
Company is offering on a best-efforts, self-underwritten basis a maximum of 3,00,000,000 shares of its Common Stock at $0.001,
with the price to be determined upon Qualification. The price shall be fixed for the duration of the offering, unless an amendment
is properly filed with the Commission. There is no minimum investment required from any individual investor. The shares are intended
to be sold directly through the efforts of our officers and directors. The shares are being offered for a period not to exceed
360 days. The offering will terminate on the earlier of: (i) the date when the sale of all shares is completed, or (ii) 360 days
from the effective date of this document. For more information, see the section titled “Plan of Distribution” and
“Use of Proceeds” herein.
We
cannot assure you that all or any of the Shares offered under this offering circular will be sold. No one has committed to purchase
any of the Shares offered. Therefore, we may sell only a nominal amount of Shares, in which case our ability to execute our business
plan might be negatively impacted. We reserve the right to withdraw or cancel this offering and to accept or reject any subscription
in whole or in part, for any reason or for no reason. Subscriptions will be accepted or rejected promptly. All monies from rejected
subscriptions will be returned immediately by us to the subscriber, without interest or deductions.
We
will sell the Shares in this Offering through our officers and directors, who intend to offer them using this Offering Circular
and a subscription agreement as the only materials to offer potential investors. The officers and directors that offer Shares
on our behalf may be deemed to be underwriters of this offering within the meaning of Section 2(11) of the Securities Act. The
officers and directors engaged in the sale of the securities will receive no commission from the sale of the Shares nor will they
register as broker-dealers pursuant to Section 15 of the Exchange Act in reliance upon Rule 3(a)4-1. Rule 3(a)4-1 sets forth those
conditions under which a person associated with an issuer may participate in the Offering of the issuer’s securities and
not be deemed to be a broker-dealer. Our officers and directors satisfy the requirements of Rule 3(a)4-1 in that:
● They are not subject to a statutory
disqualification, as that term is defined in Section 3(a)(39) of the Securities Act, at the time of his or her participation;
● They
are not compensated in connection with their participation by the payment of commissions or other remuneration based either directly
or indirectly on transactions in securities;
● They are not, at the time of their
participation, an associated person of a broker-dealer; and
● They
meet the conditions of Paragraph (a)(4)(ii) of Rule 3(a)4-1 of the Exchange Act, in that they (A) primarily perform, or are intended
primarily to perform at the end of the offering, substantial duties for or on behalf of the issuer otherwise than in connection
with transactions in securities; and (B) are not brokers or dealers, or an associated person of a broker or dealer, within the
preceding 12 months; and (C) do not participate in selling and offering of securities for any issuer more than once every 12 months
other than in reliance on Paragraphs (a)(4)(i) or (a)(4)(iii).
As
long as we satisfy all of these conditions, we believe that we satisfy the requirements of Rule 3(a)4-1 of the Exchange Act.
As
our officers and directors will sell the Shares being offered pursuant to this offering, Regulation M prohibits us and our officers
and directors from certain types of trading activities during the time of distribution of our securities. Specifically, Regulation
M prohibits our officers and directors from bidding for or purchasing any common stock or attempting to induce any other person
to purchase any common stock, until the distribution of our securities pursuant to this offering has ended.
Transfer
Agent and Registrar
West
Coast Stock Transfer, Inc. (“Transfer Agent”) is our transfer agent and registrar for our common stock in this Offering.
The
Transfer Agent’s address is 721 Vulcan Ave., First Floor, Encinitas, CA and its telephone number is (619) 664-4780.
We
will pay certain itemized fees to the Transfer Agent for these transfer agent services, including (i) $2,000 for the first closing
of this Offering and $1,000 per additional closing of this Offering to cover transfer agent closing costs and (ii) an ongoing
account maintenance fee per month depending on the number of holder accounts as set forth below to cover the administration of
services in accordance with that certain Transfer Agent and Registrar Agreement, dated February 10, 2020, between Transfer Agent
and the Company:
Stock
Certificates
Ownership
of the Shares will be “book-entry” only form, meaning that ownership interests shall be recorded by the Transfer Agent,
and kept only on the books and records of Transfer Agent. There will be no cost to the Subscriber to hold the shares, in book
entry, on the books of the company. No physical certificates shall be issued, nor received, by Transfer Agent or any other person.
The Transfer Agent records and maintains securities of Company in book-entry form only. Book-entry form means the Transfer Agent
maintains shares on an investor’s behalf without issuing or receiving physical certificates. Securities that are held in
un-certificated book-entry form have the same rights and privileges as those held in certificate form, but the added convenience
of electronic transactions (e.g. transferring ownership positions between a broker-dealer and the Transfer Agent), as well as
reducing risks and costs required to store, manage, process and replace lost or stolen securities certificates. Transfer Agent
shall send out email confirmations of positions and notifications of changes “from” Company upon each and every event
affecting any person’s ownership interest, with a footer referencing Transfer Agent.
ERISA
Considerations
Special
considerations apply when contemplating the purchase of Shares of our common stock on behalf of employee benefit plans that are
subject to Title I of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), plans, individual
retirement accounts (“IRAs”) and other arrangements that are subject to Section 4975 of the Internal Revenue Code
of 1986, as amended (the “Code”), or provisions under any federal, state, local, non-U.S. or other laws or regulations
that are similar to such provisions of the Code or ERISA, and entities whose underlying assets are considered to include “plan
assets” of any such plan, account or arrangement (each, a “Plan”). A person considering the purchase
of the Shares on behalf of a Plan is urged to consult with tax and ERISA counsel regarding the effect of such purchase and, further,
to determine that such a purchase will not result in a prohibited transaction under ERISA, the Code or a violation of some other
provision of ERISA, the Code or other applicable law. We will rely on such determination made by such persons, although no Shares
of our common stock will be sold to any Plans if management believes that such sale will result in a prohibited transaction under
ERISA or the Code.
Foreign
Regulatory Restrictions on Purchase of the Shares
We
have not taken any action to permit a public offering of our Shares outside the United States or to permit the possession or distribution
of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus must
inform themselves about and observe any restrictions relating to this offering of Shares and the distribution of the prospectus
outside the United States.
Investment
Amount Limitations
Generally,
no sale may be made to you in this offering if the aggregate purchase price you pay is more than 10% of the greater of your annual
income or net worth. Different rules apply to accredited investors and non-natural persons. Before making any representation that
your investment does not exceed applicable thresholds, we encourage you to review Rule 251(d)(2)(i)(C) of Regulation A. For general
information on investing, we encourage you to refer to www.investor.gov.
As
a Tier 2, Regulation A offering, investors must comply with the 10% limitation to investment in the offering. The only investor
in this offering exempt from this limitation is an accredited investor, an “Accredited Investor,” as defined under
Rule 501 of Regulation D. If you meet one of the following tests you should qualify as an Accredited Investor:
(i)
You are a natural person who has had individual income in excess of $200,000 in each of the two most recent years, or joint
income with your spouse in excess of $300,000 in each of these years, and have a reasonable expectation of reaching the same
income level in the current year;
(ii)
You are a natural person and your individual net worth, or joint net worth with your spouse, exceeds $1,000,000 at the time
you purchase Shares (please see below on how to calculate your net worth);
(iii)
You are an executive officer or general partner of the issuer or a manager or executive officer of the general partner of the
issuer;
(iv)
You are an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended, or the Code, a
corporation, a Massachusetts or similar business trust or a partnership, not formed for the specific purpose of acquiring the
Shares, with total assets in excess of $5,000,000;
(v)
You are a bank or a savings and loan association or other institution as defined in the Securities Act, a broker or dealer
registered pursuant to Section 15 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, an insurance
company as defined by the Securities Act, an investment company registered under the Investment Company Act of 1940, as
amended, or the Investment Company Act, or a business development company as defined in that act, any Small Business
Investment Company licensed by the Small Business Investment Act of 1958 or a private business development company as defined
in the Investment Advisers Act of 1940;
(vi)
You are an entity (including an Individual Retirement Account trust) in which each equity owner is an accredited
investor;
(vii)
You are a trust with total assets in excess of $5,000,000, your purchase of Shares is directed by a person who either alone
or with his purchaser representative(s) (as defined in Regulation D promulgated under the Securities Act) has such knowledge
and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective
investment, and you were not formed for the specific purpose of investing in the Shares; or
(viii)
You are a plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state
or its political subdivisions, for the benefit of its employees, if such plan has assets in excess of $5,000,000.
Procedures
for Subscribing
After
the qualification by the SEC of the Offering Statement of which this Offering Circular is a part, if you decide to subscribe for
any Shares in this Offering, you should:
Go
to the Investor Relations page of our website at www.sugarmade.com and click on the “Invest” button (our website will
redirect you, as an investor, via the “Invest” button to our online platform landing page on the website) and follow
the links and procedures as described on the website to invest or email Invest@Sugarmade.com.
1.
Electronically receive, review, execute and deliver to us a Subscription Agreement; and
2. Deliver
funds via ACH or wire transfer (or by such alternative payment method as may be indicated on our online platform) for
the amount set forth in the Subscription Agreement directly to an account designated by the Company.
The
website will direct interested investors to receive (upon their acknowledgement that they have had the opportunity to review this
Offering Circular), review, execute and deliver subscription agreements electronically.
Any
potential investor will have ample time to review the Subscription Agreement, along with their counsel, prior to making any final
investment decision. We will not accept any money until the SEC declares the Offering Statement of which this Offering Circular
forms a part as qualified.
We
anticipate that we may hold one or more closings for purchases of the Shares until the offering is fully subscribed or we terminate
the Offering. Participating broker-dealers will submit a subscriber’s form(s) of payment generally by noon of the next business
day following receipt of the subscriber’s subscription agreement and form(s) of payment.
You
will be required to represent and warrant in your subscription agreement that you are an accredited investor as defined under
Rule 501 of Regulation D or that your investment in the shares of common stock does not exceed 10% of your net worth or annual
income, whichever is greater, if you are a natural person, or 10% of your revenues or net assets, whichever is greater, calculated
as of your most recent fiscal year if you are a non-natural person. By completing and executing your subscription agreement you
will also acknowledge and represent that you have received a copy of this Offering Circular, you are purchasing the shares of
common stock for your own account and that your rights and responsibilities regarding your shares of common stock will be governed
by our chart and bylaws, each filed as an exhibit to the Offering Circular of which this Offering Circular is a part.
Right
to Reject Subscriptions. After we receive your complete, executed subscription agreement and the funds required under the
subscription agreement have been transferred to an account designated by the Company, we have the right to review and accept or
reject your subscription in whole or in part, for any reason or for no reason. We will return all monies from rejected subscriptions
immediately to you, without interest or deduction.
Acceptance
of Subscriptions. Upon our acceptance of a subscription agreement, we will countersign the subscription agreement and issue
the shares subscribed at closing. Once you submit the subscription agreement and it is accepted, you may not revoke or change
your subscription or request your subscription funds. All accepted subscription agreements are irrevocable.
Under
Rule 251 of Regulation A, non-accredited, non-natural investors are subject to the investment limitation and
may only invest funds which do not exceed 10% of the greater of the purchaser’s revenue or net assets (as of the purchaser’s
most recent fiscal year end). A non-accredited, natural person may only invest funds which do not exceed
10% of the greater of the purchaser’s annual income or net worth (please see below on how to calculate your net worth).
NOTE:
For the purposes of calculating your Net Worth, it is defined as the difference between total assets and total liabilities. This
calculation must exclude the value of your primary residence and may exclude any indebtedness secured by your primary residence
(up to an amount equal to the value of your primary residence). In the case of fiduciary accounts, net worth and/or income suitability
requirements may be satisfied by the beneficiary of the account or by the fiduciary, if the fiduciary directly or indirectly provides
funds for the purchase of the Shares.
In
order to purchase Shares and prior to the acceptance of any funds from an investor, an investor will be required to represent,
to the Company’s satisfaction, that he is either an accredited investor or is in compliance with the 10% of net worth or
annual income limitation on investment in this offering.
CERTAIN
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS
The
following is a summary of certain United States federal income tax consequences generally applicable to the ownership and disposition
of our common stock by a non-U.S. holder (as defined below) that purchases our common stock pursuant to this offering and holds
such common stock as a “capital asset” within the meaning of the Code. This discussion is based on currently existing
provisions of the Code, applicable United States Treasury regulations promulgated thereunder, judicial decisions, and rulings
and pronouncements of the United States Internal Revenue Service (the “IRS”) all as in effect on the date hereof and
all of which are subject to change, possibly with retroactive effect, or subject to different interpretation. This discussion
does not address all the tax consequences that may be relevant to specific holders in light of their particular circumstances
or to holders subject to special treatment under United States federal income tax laws (such as financial institutions, insurance
companies, tax-exempt organizations, controlled foreign corporations, passive foreign investment companies, retirement plans,
partnerships and their partners, dealers in securities, brokers, United States expatriates, persons who have acquired our common
stock as compensation or otherwise in connection with the performance of services, or persons who have acquired our common stock
as part of a straddle, hedge, conversion transaction or other integrated investment). This discussion does not address the state,
local, or foreign tax or United States federal estate or alternative minimum tax consequences relating to the ownership and disposition
of our common stock. Prospective investors should consult their tax advisors regarding the United States federal tax consequences
of owning and disposing of our common stock, as well as the applicability and effect of any state, local or foreign tax laws.
As
used in this discussion, the term “non-U.S. holder” refers to a beneficial owner of our common stock that is not,
for United States federal income tax purposes, any of the following:
● an
individual who is a citizen or resident of the United States;
● a corporation (or other entity or arrangement taxable
as a corporation for United States federal income tax purposes) created or organized in or under the laws of the United States
or any state thereof, including the District of Columbia;
● any
entity or arrangement treated as a partnership for United States federal income tax purposes;
● an
estate the income of which is subject to United States federal income tax regardless of its source; or
●
a trust (i) if a court within the United States is able to exercise primary supervision over its administration and one or
more United States persons have the authority to control all of its substantial decisions, or (ii) that has in effect a valid
election under applicable Treasury regulations to be treated as a United States person.
If
a partnership or other entity or arrangement treated as a partnership for United States federal income tax purposes holds our
common stock, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership.
A partnership that holds our common stock and any partner who owns an interest in such a partnership should consult their tax
advisors regarding the United States federal income tax consequences of an investment in our common stock.
You
should consult your tax advisors concerning the particular United States federal income tax consequences to you of the purchase,
ownership, and disposition of our common stock as well as the consequences to you arising under the laws of any other applicable
taxing jurisdiction in light of your particular circumstances.
Distributions
on Common Stock
As
discussed under “Dividend Policy” above, we do not currently expect to make distributions on our stock. If we do make
a distribution of cash or other property (other than certain distributions of our stock or rights to acquire our stock) in respect
of our common stock, the distribution generally will be treated as a dividend to the extent of our current or accumulated earnings
and profits as determined under United States federal income tax principles. Any portion of a distribution that exceeds our current
and accumulated earnings and profits will generally be treated first as a tax-free return of capital, on a share-by-share basis,
to the extent of the non-U.S. holder’s tax basis in our common stock, and, to the extent such portion exceeds the non-U.S.
holder’s tax basis in our common stock, the excess will be treated as gain from the disposition of the common stock, the
tax treatment of which is discussed below under “—Sale, Exchange or Other Taxable Disposition.”
The
gross amount of dividends paid to a non-U.S. holder with respect to our common stock generally will be subject to United States
federal withholding tax at a rate of 30%, unless (i) an applicable income tax treaty reduces or eliminates such tax, and the non-U.S.
holder certifies that it is eligible for the benefits of such treaty in the manner described below, or (ii) the dividends are
effectively connected with the non-U.S. holder’s conduct of a trade or business in the United States (and, if required by
an applicable income tax treaty, are attributable to a permanent establishment maintained by the non-U.S. holder in the United
States) and the non-U.S. holder satisfies certain certification and disclosure requirements. In the latter case, generally, a
non-U.S. holder will be subject to United States federal income tax with respect to such dividends on a net income basis at regular
graduated United States federal income tax rates in the same manner as a United States person (as defined under the Code). Additionally,
a non-U.S. holder that is a corporation may be subject to a branch profits tax equal to 30% (or such lower rate as may be specified
by an applicable income tax treaty) of its effectively connected earnings and profits for the taxable year, as adjusted for certain
items.
A
non-U.S. holder that wishes to claim the benefit of an applicable income tax treaty with respect to dividends on our common stock
will be required to provide the applicable withholding agent with a valid IRS Form W-8BEN or W-8BEN-E (or other applicable form)
and certify under penalties of perjury that such holder (i) is not a United States person (as defined under the Code) and (ii)
is eligible for the benefits of such treaty, and the withholding agent must not have actual knowledge or reason to know that the
certification is incorrect. This certification must be provided to the applicable withholding agent prior to the payment of dividends
and may be required to be updated periodically. If our common stock is held through a non-United States partnership or non-United
States intermediary, such partnership or intermediary will also be required to comply with additional certification requirements
under applicable Treasury regulations. A non-U.S. holder eligible for a reduced rate of United States federal withholding tax
pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for
refund with the IRS.
Prospective
investors, and in particular prospective investors engaged in a United States trade or business, are urged to consult their tax
advisors regarding the United States federal income tax consequences of owning our common stock.
Sale,
Exchange, or Other Taxable Disposition
Generally,
a non-U.S. holder will not be subject to United States federal income tax on gain realized upon the sale, exchange, or other taxable
disposition of our common stock unless (i) the gain is effectively connected with such non-U.S. holder’s conduct of a trade
or business in the United States (and, if required by an applicable income tax treaty, is attributable to a permanent establishment
maintained by the non-U.S. holder in the United States), (ii) such non-U.S. holder is an individual present in the United States
for 183 days or more in the taxable year of the sale, exchange, or other taxable disposition and certain other conditions are
satisfied, or (iii) we are or become a “United States real property holding corporation” (as defined in Section 897(c)
of the Code) at any time during the shorter of the five-year period ending on the date of disposition or the non-U.S. holder’s
holding period for our common stock and either (a) our common stock has ceased to be traded on an established securities market
prior to the beginning of the calendar year in which the sale, exchange or other taxable disposition occurs, or (b) the non-U.S.
holder owns (actually or constructively) more than five percent of our common stock at some time during the shorter of the five-year
period ending on the date of disposition or such holder’s holding period for our common stock. Although there can be no
assurances in this regard, we believe that we are not a United States real property holding corporation, and we do not expect
to become a United States real property holding corporation.
Generally,
gain described in clause (i) of the immediately preceding paragraph will be subject to tax on a net income basis at regular graduated
United States federal income tax rates in the same manner as if the non-U.S. holder were a United States person (as defined under
the Code). A non-U.S. holder that is a corporation may also be subject to a branch profits tax equal to 30% (or such lower rate
as may be specified by an applicable income tax treaty) of its effectively connected earnings and profits for the taxable year,
as adjusted for certain items. An individual non-U.S. holder described in clause (ii) of the immediately preceding paragraph will
be required to pay (subject to applicable income tax treaties) a flat 30% tax on the gain derived from the sale, exchange, or
other taxable disposition, which may be offset by certain United States source capital losses, even though the individual is not
considered a resident of the United States.
Foreign
Account Tax Compliance Act
Withholding
at a rate of 30% is required on dividends in respect of our common stock, and, after December 31, 2016 will be required on gross
proceeds from the sale or other disposition of our common stock, in each case, held by or through certain foreign financial institutions
(including investment funds), unless such institution enters into an agreement with the United States Treasury Department to report,
on an annual basis, information with respect to interests in, and accounts maintained by, the institution that are owned by certain
United States persons and by certain non-United States entities that are wholly or partially owned by United States persons and
to withhold on certain payments. An intergovernmental agreement between the United States and an applicable foreign country, or
future Treasury regulations, may modify these requirements. Accordingly, the entity through which our common stock is held will
affect the determination of whether such withholding is required. Similarly, dividends in respect of, and gross proceeds from
the sale or other disposition of, our common stock held by an investor that is a non-financial non-United States entity that does
not qualify under certain exemptions will be subject to withholding at a rate of 30%, unless such entity either (i) certifies
that such entity does not have any substantial United States owners or (ii) provides certain information regarding the entity’s
substantial United States owners. Prospective investors should consult their tax advisors regarding the possible implications
of these rules on their investment in our common stock.
ADDITIONAL
REQUIREMENTS AND RESTRICTIONS
Broker-Dealer
Requirements
Each
of the participating broker-dealers, authorized registered representatives or any other person selling Shares on our behalf is
required to:
● make every reasonable effort
to determine that the purchase of Shares is a suitable and appropriate investment for each investor based on information provided
by such investor to the broker-dealer, including such investor’s age, investment objectives, income, net worth, financial
situation and other investments held by such investor; and
● maintain,
for at least six (6) years, records of the information used to determine that an investment in our Shares is suitable and appropriate
for each investor.
In
making this determination, your participating broker-dealer, authorized registered representative or other person selling Shares
on our behalf will, based on a review of the information provided by you, consider whether you:
● meet the minimum suitability
standards established by us and the investment limitations established under Regulation A;
● can
reasonably benefit from an investment in our Shares based on your overall investment objectives and portfolio structure;
● are
able to bear the economic risk of the investment based on your overall financial situation; and
● have
an apparent understanding of:
● the
fundamental risks of an investment in the Shares;
● the
risk that you may lose your entire investment;
● the
lack of liquidity of the Shares;
● the
restrictions on transferability of the Shares;
● the
background and qualifications of our management; and
● our
business.
Stock
Certificates
Ownership
of the Shares will be “book-entry” only form, meaning that ownership interests shall be recorded by the Transfer Agent,
and kept only on the books and records of Transfer Agent. There will be no cost to the Subscriber to hold the shares, in book
entry, on the books of the company. No physical certificates shall be issued, nor received, by Transfer Agent or any other person.
The Transfer Agent records and maintains securities of Company in book-entry form only. Book-entry form means the Transfer Agent
maintains shares on an investor’s behalf without issuing or receiving physical certificates. Securities that are held in
un-certificated book-entry form have the same rights and privileges as those held in certificate form, but the added convenience
of electronic transactions (e.g. transferring ownership positions between a broker-dealer and the Transfer Agent), as well as
reducing risks and costs required to store, manage, process and replace lost or stolen securities certificates. Transfer Agent
shall send out email confirmations of positions and notifications of changes “from” Company upon each and every event
affecting any person’s ownership interest, with a footer referencing Transfer Agent.
Restrictions
Imposed by the USA PATRIOT Act and Related Acts
In
accordance with the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
Act of 2001, or the USA PATRIOT Act, the securities offered hereby may not be offered, sold, transferred or delivered, directly
or indirectly, to any “unacceptable investor,” which means anyone who is:
● a
“designated national,” “specially designated national,” “specially designated terrorist,”
“specially designated global terrorist,” “foreign terrorist organization,” or “blocked person”
within the definitions set forth in the Foreign Assets Control Regulations of the United States, or U.S., Treasury Department;
● acting on behalf of, or an entity
owned or controlled by, any government against whom the U.S. maintains economic sanctions or embargoes under the Regulations of
the U.S. Treasury Department;
● within
the scope of Executive Order 13224 — Blocking Property and Prohibiting Transactions with Persons who Commit, Threaten to
Commit, or Support Terrorism, effective September 24, 2001;
● a
person or entity subject to additional restrictions imposed by any of the following statutes or regulations and executive orders
issued thereunder: the Trading with the Enemy Act, the National Emergencies Act, the Antiterrorism and Effective Death Penalty
Act of 1996, the International Emergency Economic Powers Act, the United Nations Participation Act, the International Security
and Development Cooperation Act, the Nuclear Proliferation Prevention Act of 1994, the Foreign Narcotics Kingpin Designation Act,
the Iran and Libya Sanctions Act of 1996, the Cuban Democracy Act, the Cuban Liberty and Democratic Solidarity Act and the Foreign
Operations, Export Financing and Related Programs Appropriations Act or any other law of similar import as to any non-U.S. country,
as each such act or law has been or may be amended, adjusted, modified or reviewed from time to time; or
● designated
or blocked, associated or involved in terrorism, or subject to restrictions under laws, regulations, or executive orders as may
apply in the future similar to those set forth above.
ERISA
CONSIDERATIONS
An
investment in us by an employee benefit plan is subject to additional considerations because the investments of these plans are
subject to the fiduciary responsibility and prohibited transaction provisions of ERISA and restrictions imposed by Section 4975
of the Code. For these purposes the term “employee benefit plan” includes, but is not limited to, qualified pension,
profit-sharing and stock bonus plans, Keogh plans, simplified employee pension plans and tax deferred annuities or IRAs established
or maintained by an employer or employee organization. Among other things, consideration should be given to:
● whether
the investment is prudent under Section 404(a)(1)(B) of ERISA;
●
whether in making the investment, that plan will satisfy the diversification requirements of Section 404(a)(1)(C) of ERISA;
and
● whether
the investment will result in recognition of unrelated business taxable income by the plan and, if so, the potential after-tax
investment returns.
The
person with investment discretion with respect to the assets of an employee benefit plan, often called a fiduciary, should determine
whether an investment in us is authorized by the appropriate governing instrument and is a proper investment for the plan.
Section
406 of ERISA and Section 4975 of the Code prohibit employee benefit plans from engaging in specified transactions involving “plan
assets” with parties that are “parties in interest” under ERISA or “disqualified persons” under
the Code with respect to the plan.
In
addition to considering whether the purchase of Shares is a prohibited transaction, a fiduciary of an employee benefit plan should
consider whether the plan will, by investing in us, be deemed to own an undivided interest in our assets, with the result that
our operations would be subject to the regulatory restrictions of ERISA, including its prohibited transaction rules, as well as
the prohibited transaction rules of the Code.
The
Department of Labor regulations provide guidance with respect to whether the assets of an entity in which employee benefit plans
acquire equity interests would be deemed “plan assets” under some circumstances. Under these regulations, an entity’s
assets would not be considered to be “plan assets” if, among other things:
(1)
the equity interests acquired by employee benefit plans are publicly offered securities - i.e., the equity interests are widely
held by 100 or more investors independent of the issuer and each other, freely transferable and registered under some provisions
of the federal securities laws;
(2)
the entity is an “operating company”—i.e., it is primarily engaged in the production or sale of a product or
service other than the investment of capital either directly or through a majority-owned subsidiary or subsidiaries; or
(3)
there is no significant investment by benefit plan investors, which is defined to mean that less than 25% of the value of each
class of equity interest is held by the employee benefit plans referred to above.
We
do not intend to limit investment by benefit plan investors in us because we anticipate that we will qualify as an “operating
company”. If the Department of Labor were to take the position that we are not an operating company and we had significant
investment by benefit plans, then we may become subject to the regulatory restrictions of ERISA which would likely have a material
adverse effect on our business and the value of our common stock.
Plan
fiduciaries contemplating a purchase of Shares should consult with their own counsel regarding the consequences under ERISA and
the Code in light of the serious penalties imposed on persons who engage in prohibited transactions or other violations.
ACCEPTANCE
OF SUBSCRIPTIONS ON BEHALF OF PLANS IS IN NO RESPECT A REPRESENTATION BY OUR BOARD OF DIRECTORS OR ANY OTHER PARTY RELATED TO
US THAT THIS INVESTMENT MEETS THE RELEVANT LEGAL REQUIREMENTS WITH RESPECT TO INVESTMENTS BY ANY PARTICULAR PLAN OR THAT THIS
INVESTMENT IS APPROPRIATE FOR ANY PARTICULAR PLAN. THE PERSON WITH INVESTMENT DISCRETION SHOULD CONSULT WITH HIS OR HER ATTORNEY
AND FINANCIAL ADVISERS AS TO THE PROPRIETY OF AN INVESTMENT IN US IN LIGHT OF THE CIRCUMSTANCES OF THE PARTICULAR PLAN.
VALIDITY
OF COMMON STOCK
The
validity of the securities offered hereby will be passed upon by Eilers Law Group, P.A.
EXPERTS
L&L
CPAS, PA, our independent registered public accountant, has audited our financial statements included in this Form 1A to the extent
and for the periods set forth in their audit report. L&L CPAS, PA has presented its report with respect to our audited financial
statements.
WHERE
YOU CAN FIND MORE INFORMATION
We
have filed an offering statement on Form 1-A with the Commission under Regulation A of the Securities Act with respect to the
common stock offered by this Offering Circular. This Offering Circular, which constitutes a part of the offering statement, does
not contain all of the information set forth in the offering statement or the exhibits and schedules filed therewith. For further
information with respect to us and our common stock, please see the offering statement and the exhibits and schedules filed with
the offering statement. Statements contained in this Offering Circular regarding the contents of any contract or any other document
that is filed as an exhibit to the offering statement are not necessarily complete, and each such statement is qualified in all
respects by reference to the full text of such contract or other document filed as an exhibit to the offering statement. The offering
statement, including its exhibits and schedules, may be inspected without charge at the public reference room maintained by the
Commission, located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549, and copies of all or any part of the offering statement
may be obtained from such offices upon the payment of the fees prescribed by the Commission. Please call the Commission at 1-800-SEC-0330
for further information about the public reference room. The Commission also maintains an Internet website that contains reports,
proxy and information statements and other information regarding registrants that file electronically with the Commission. The
address of the site is www.sec.gov.
We
also maintain a website at www.sugarmade.com. After the completion of this offering, you may access these materials at our website
free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the Commission. Information
contained on our website is not a part of this Offering Circular and the inclusion of our website address in this Offering Circular
is an inactive textual reference only.
After
the completion of this Tier II , Regulation A offering, we intend to continue to file reports under Section 15(d) of the
Exchange Act, which, in accordance with Rule 257(b)(6) of Regulation A, will satisfy our reporting obligations under Regulation
A. Such reports and other information will be available for inspection and copying at the public reference room and on the Commission’s
website referred to above.
If
we no longer file reports under Section 15(d) of the Exchange Act, we will be required to furnish the following reports, statements,
and tax information to each stockholder:
|
|
1.
|
Reporting
Requirements under Tier II of Regulation A. If we no longer file reports under
Section 15(d) of the Exchange Act, we will be required under Rule 257 of Regulation A
to file: an annual report with the SEC on Form 1-K; a semi-annual report with the SEC
on Form 1-SA; current reports with the SEC on Form 1-U; and a notice under cover of Form
1-Z. The necessity to file current reports will be triggered by certain corporate events,
similar to the ongoing reporting obligation faced by issuers under the Exchange Act,
however the requirement to file a Form 1-U is expected to be triggered by significantly
fewer corporate events than that of the Form 8-K. Such reports and other information
will be available for inspection and copying at the public reference room and on the
Commission’s website referred to above. Parts I & II of Form 1-Z will be filed
by us if and when we decide to and are no longer obligated to file and provide annual
reports pursuant to the requirements of Regulation A.
|
|
|
2.
|
Annual
Reports. As soon as practicable, but in no event later than one hundred twenty
(120) days after the close of our fiscal year, ending on the last Sunday of a calendar
year, our board of directors will cause to be mailed or made available, by any reasonable
means, to each Stockholder as of a date selected by the board of directors, an annual
report containing financial statements of the Company for such fiscal year, presented
in accordance with GAAP, including a balance sheet and statements of operations, company
equity and cash flows, with such statements having been audited by an accountant selected
by the board of directors. The board of directors shall be deemed to have made a report
available to each stockholder as required if it has either (i) filed such report with
the SEC via its Electronic Data Gathering, Analysis and Retrieval, or EDGAR, system and
such report is publicly available on such system or (ii) made such report available on
any website maintained by the Company and available for viewing by the stockholders.
|
|
|
3.
|
Tax
Information. On or before the last day of the month immediately following our
fiscal year, which is currently July 1st through June 30th, we
will send to each stockholder such tax information as shall be reasonably required for
federal and state income tax reporting purposes.
|
INDEX
TO FINANCIAL STATEMENTS
INDEX
TO SEPTEMBER 30, 2020 UNAUDITED FINANCIAL STATEMENTS
PART
1: Financial Information
Item
1 Financial Statements
Sugarmade,
Inc. and Subsidiary
Condensed Consolidated Balance Sheets
|
|
|
As of
|
|
|
|
|
September 30, 2020
|
|
|
June 30, 2020
|
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
681,093
|
|
|
$
|
441,004
|
|
|
Accounts receivable, net
|
|
|
156,425
|
|
|
|
134,517
|
|
|
Inventory, net
|
|
|
606,090
|
|
|
|
679,471
|
|
|
Loan receivables, current
|
|
|
10,344
|
|
|
|
1,365
|
|
|
Loan receivables - related party, current
|
|
|
124,774
|
|
|
|
122,535
|
|
|
Other current assets
|
|
|
868,723
|
|
|
|
263,404
|
|
|
Right of use asset, current
|
|
|
277,204
|
|
|
|
270,363
|
|
|
Total current assets
|
|
|
2,724,653
|
|
|
|
1,912,659
|
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
|
Equipment, net
|
|
|
496,024
|
|
|
|
499,047
|
|
|
Intangible asset, net
|
|
|
9,450
|
|
|
|
9,800
|
|
|
Other assets
|
|
|
54,163
|
|
|
|
54,163
|
|
|
Loan receivables - related party, non-current
|
|
|
196,000
|
|
|
|
196,000
|
|
|
Right of use asset, non-current
|
|
|
763,447
|
|
|
|
835,393
|
|
|
Total non-current assets
|
|
|
1,519,084
|
|
|
|
1,594,403
|
|
|
Total assets
|
|
|
4,243 ,737
|
|
|
|
3,507,062
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Deficiency
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Note payable due to bank
|
|
|
25,982
|
|
|
|
25,982
|
|
|
Accounts payable and accrued liabilities
|
|
|
1,510,634
|
|
|
|
1,583,228
|
|
|
Customer deposits
|
|
|
600,357
|
|
|
|
466,337
|
|
|
Customer overpayment
|
|
|
50,684
|
|
|
|
47,890
|
|
|
Unearned revenue
|
|
|
47,536
|
|
|
|
53,248
|
|
|
Other payables
|
|
|
851,681
|
|
|
|
691,801
|
|
|
Accrued interest
|
|
|
460,621
|
|
|
|
494,740
|
|
|
Accrued compensation and personnel related payables
|
|
|
30,778
|
|
|
|
35,361
|
|
|
Notes payable - Current
|
|
|
20,000
|
|
|
|
20,000
|
|
|
Notes payable - Related Parties, Current
|
|
|
15,427
|
|
|
|
15,427
|
|
|
Lease liability - Current
|
|
|
279,750
|
|
|
|
372,285
|
|
|
Loans payable - Current
|
|
|
271,768
|
|
|
|
319,314
|
|
|
Due to related parties
|
|
|
655,337
|
|
|
|
35,943
|
|
|
Convertible notes payable, Net, Current
|
|
|
1,470,221
|
|
|
|
1,740,122
|
|
|
Derivative liabilities, net
|
|
|
1,470,894
|
|
|
|
5,597,095
|
|
|
Warrants liabilities
|
|
|
13,695
|
|
|
|
79,910
|
|
|
Shares to be issued
|
|
|
120,327
|
|
|
|
101,577
|
|
|
Total liabilities
|
|
|
7,895,692
|
|
|
|
11,680,260
|
|
|
Non-Current liabilities:
|
|
|
|
|
|
|
|
|
|
Loans payable
|
|
|
356,431
|
|
|
|
197,946
|
|
|
Lease liability
|
|
|
795,863
|
|
|
|
767,729
|
|
|
Total liabilities
|
|
|
9,047,986
|
|
|
|
12,645,935
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficiency:
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 10,000,000 shares authorized 3,541,500 and 3,541,500 shares issued outstanding at September 30, 2020 and June 30, 2020, respectively
|
|
|
3,542
|
|
|
|
3,542
|
|
|
Common stock, $0.001 par value, 10,000,000,000 shares authorized, 2,844,688,836 and 1,763,277,230 shares issued and outstanding at September 30, 2020 and June 30, 2020, respectively
|
|
|
2,844,690
|
|
|
|
1,763,278
|
|
|
Additional paid-in capital
|
|
|
59,305,003
|
|
|
|
57,307,767
|
|
|
Common Stock Subscribed
|
|
|
236,008
|
|
|
|
236,008
|
|
|
Accumulated deficit
|
|
|
(67,159,520
|
)
|
|
|
(68,438,332
|
)
|
|
Total stockholders’ deficiency
|
|
|
(4,770,277
|
)
|
|
|
(9,127,737
|
)
|
|
Non-Controlling Interest
|
|
|
(33,971
|
)
|
|
|
(11,136
|
)
|
|
Total stockholders’ deficiency
|
|
|
(4,804,249
|
)
|
|
|
(9,138,873
|
)
|
|
Total liabilities and stockholders’ deficiency
|
|
|
4,243,737
|
|
|
|
3,507,062
|
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements
Sugarmade,
Inc. and Subsidiary
Consolidated Statements of Operations
(Unaudited)
|
|
|
For the Three Months Ended,
|
|
|
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
|
Revenues, net
|
|
$
|
2,146,326
|
|
|
$
|
753,974
|
|
|
Cost of goods sold
|
|
|
1,028,815
|
|
|
|
492,168
|
|
|
Gross profit
|
|
|
1,117,512
|
|
|
|
261,806
|
|
|
Selling, general and administrative expenses
|
|
|
602,805
|
|
|
|
335,830
|
|
|
Advertising and Promotion Expense
|
|
|
277,806
|
|
|
|
41,356
|
|
|
Marketing and Research Expense
|
|
|
222,348
|
|
|
|
4,971
|
|
|
Professional Expense
|
|
|
503,430
|
|
|
|
680,096
|
|
|
Salaries and Wages
|
|
|
362,524
|
|
|
|
129,376
|
|
|
Stock Compensation Expense
|
|
|
18,750
|
|
|
|
12,000
|
|
|
Total selling, general and administrative expenses
|
|
|
1,987,763
|
|
|
|
1,203,629
|
|
|
Loss from operations
|
|
|
(870,251
|
)
|
|
|
(941,823
|
)
|
|
Non-operating income (expense):
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
—
|
|
|
|
1,231
|
|
|
Interest expense
|
|
|
(466,774
|
)
|
|
|
(584,604
|
)
|
|
Bad debts
|
|
|
(3,517
|
)
|
|
|
—
|
|
|
Change in fair value of derivative liabilities
|
|
|
3,495,147
|
|
|
|
1,022,878
|
|
|
Warrant Expense
|
|
|
66,216
|
|
|
|
(55,278
|
)
|
|
Loss on settlement
|
|
|
(75,000
|
)
|
|
|
(149,859
|
)
|
|
Loss on asset disposal
|
|
|
—
|
|
|
|
7,000
|
|
|
Amortization of debt discount
|
|
|
(814,545
|
)
|
|
|
(1,155,000
|
)
|
|
Debt forgiveness
|
|
|
—
|
|
|
|
(172,096
|
)
|
|
Other expenses
|
|
|
(51,299
|
)
|
|
|
—
|
|
|
Total non-operating income (expenses), net
|
|
|
2,150,227
|
|
|
|
(1,085,728
|
)
|
|
Net income (loss)
|
|
$
|
1,279,977
|
|
|
$
|
(2,027,551
|
)
|
|
Less: net loss attributable to the noncontrolling interest
|
|
$
|
1,165
|
|
|
$
|
—
|
|
|
Net income (loss) attributable to Sugarmade, Inc.
|
|
$
|
1,278,812
|
|
|
$
|
(2,027,551
|
)
|
|
Basic net income (loss) per share
|
|
$
|
0.00
|
|
|
$
|
(0.00
|
)
|
|
Diluted net income (loss) per share
|
|
$
|
0.00
|
|
|
$
|
(0.00
|
)
|
|
Basic and diluted weighted average common shares outstanding *
|
|
|
2,422,975,968
|
|
|
|
777,839,270
|
|
*
Shares issuable upon conversion of convertible debts and exercising of warrants were excluded in calculating diluted loss per
share
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements
Sugarmade,
Inc. and Subsidiary
Condensed
Consolidated Statements of Equity
(Unaudited)
|
Three
Months Ended September 30, 2020 & 2019 Equity Statements
|
|
|
|
|
|
|
|
|
|
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, 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
|
|
|
|
|
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
Income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
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
|
|
|
|
(67,155,519
|
)
|
|
|
(33,971
|
)
|
|
|
(4,804,249
|
)
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements
Sugarmade,
Inc. and Subsidiary
Condensed
Consolidated Statements of Cash Flows For
The
Three Months Ended September 30, 2020 and 2019
(Unaudited)
|
|
|
For The Three Months Ended
|
|
|
|
|
September 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
1,278,812
|
|
|
$
|
(2,027,551
|
)
|
|
Non-controlling interest
|
|
|
1,165
|
|
|
|
—
|
|
|
Adjustments to reconcile net loss to cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Loss on settlement
|
|
|
—
|
|
|
|
149,859
|
|
|
Amortization of debt discount
|
|
|
814,545
|
|
|
|
302,801
|
|
|
Stock based compensation
|
|
|
18,750
|
|
|
|
12,000
|
|
|
Change in fair value of derivative liability
|
|
|
(3,495,147
|
)
|
|
|
332,024
|
|
|
Warrant expense
|
|
|
(66,215
|
)
|
|
|
67,387
|
|
|
Depreciation
|
|
|
41,617
|
|
|
|
23,142
|
|
|
Amortization of intangible assets
|
|
|
350
|
|
|
|
350
|
|
|
Interest Expense – excess of debt discount
|
|
|
278,488
|
|
|
|
—
|
|
|
Bad Debt
|
|
|
3,517
|
|
|
|
—
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(25,425
|
)
|
|
|
125,024
|
|
|
Inventory
|
|
|
73,381
|
|
|
|
(26,851
|
)
|
|
Prepayment, deposits and other receivables
|
|
|
(605,319
|
)
|
|
|
256,996
|
|
|
Loan receivable
|
|
|
—
|
|
|
|
—
|
|
|
Other payables
|
|
|
155,297
|
|
|
|
(420,450
|
)
|
|
Accounts payable and accrued liabilities
|
|
|
(72,594
|
)
|
|
|
269,604
|
|
|
Customer deposits
|
|
|
136,814
|
|
|
|
(29,171
|
)
|
|
Unearned revenue
|
|
|
(5,712
|
)
|
|
|
(23,024
|
)
|
|
Right of use assets
|
|
|
65,104
|
|
|
|
11,361
|
|
|
Lease liability
|
|
|
(64,401
|
)
|
|
|
(10,236
|
)
|
|
Interest Payable
|
|
|
37,640
|
|
|
|
72,885
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(1,429,333
|
)
|
|
|
(913,850
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Payment for property and equipment
|
|
|
(38,594
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(38,594
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from shares issuance
|
|
|
—
|
|
|
|
100,000
|
|
|
Loan receivable
|
|
|
(8,979
|
)
|
|
|
75,033
|
|
|
Loan receivable - related parties
|
|
|
(2,239
|
)
|
|
|
—
|
|
|
Proceeds from advanced shares issuance
|
|
|
—
|
|
|
|
96,000
|
|
|
Proceeds from loans - related parties
|
|
|
619,394
|
|
|
|
—
|
|
|
Proceeds from convertible notes
|
|
|
1,240,900
|
|
|
|
840,806
|
|
|
Repayment of convertible notes
|
|
|
(228,000
|
)
|
|
|
—
|
|
|
Repayment of capital to noncontrolling minority
|
|
|
(24,000
|
)
|
|
|
—
|
|
|
Proceeds from (repayment of) loans
|
|
|
110,939
|
|
|
|
(5,527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
1,708,015
|
|
|
|
1,106,312
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
240,089
|
|
|
|
192,462
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
Cash, beginning of period
|
|
|
441,004
|
|
|
|
34,371
|
|
|
Cash, end of period
|
|
$
|
681,093
|
|
|
$
|
226,833
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid interest
|
|
|
81,244
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash financing activities —
|
|
|
|
|
|
|
|
|
|
Shares issued for conversion of convertible debt
|
|
|
1,805,188
|
|
|
|
547,833
|
|
|
Reduction in derivative liability due to conversion
|
|
|
1,273,460
|
|
|
|
659,526
|
|
|
Debt discount related to convertible debt
|
|
|
918,600
|
|
|
|
539,300
|
|
|
Debts settled through shares issuance
|
|
|
—
|
|
|
|
229,000
|
|
|
Shares issued for advanced payments
|
|
|
—
|
|
|
|
14,132
|
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
September
30, 2020
Sugarmade,
Inc. (hereinafter referred to as “we’ ‘us” or “the/our Company’’) is a publicly-traded
company incorporated in the state of Delaware. Our previous legal name was Diversified Opportunities, Inc. Our Company, Sugarmade,
Inc. operates much of its business activities through our subsidiary, 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 September 30, 2020, we are involved in two main business areas including:
1)
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, and,
2)
As an investor in the Budcars licensed cannabis delivery service brand (“Budcars” or the “Budcars Brand”)
and as a joint owner and joint operator in Budcar’s first operating location in Sacramento, California. 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 which will provide the Company with a controlling interest. As of the date of this filing, the option
has not yet been exercised and the Company’s stake in Budcars is at 40%.
Our
legacy business operation, CarryOutSupplies.com, is a producer and wholesaler of custom printed and generic supplies, servicing
more than 2,000 quick-service restaurants (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. We have recently expanded the CarryOutSupplies.com operation to include non-medical
personal protective equipment, which we also offer via our website.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
September
30, 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 September 30, 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., a variable interest entity (“VIE”). 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.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
September
30, 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 three months ended September 30, 2020
and 2019.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
September
30, 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 $350 for the three months
ended September 30, 2020 and 2019, respectively.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
September
30, 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 $1,040,651 of operating lease right-of-use asset and $1,075,612 of operating lease liabilities were reflected on
the Company’s September 30, 2020 financial statements.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
September
30, 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 three months ended September 30, 2020.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
September
30, 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.
The
Company’s financial statements as of September 30, 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; (3) cannabis products delivery service and sales, which accounts for approximately 73%
of the Company’s total revenues.
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.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
September
30, 2020
Customers
For
the three months ended September 30, 2020 and 2019, our Company earned net revenues of $2,146,326 and $753,974 respectively. The
vast majority of these revenues for the period ending September 30, 2020 were derived from a large number of customers, whereas
the vast majority of these revenues for the period ending September 30, 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 September
30, 2020.
Suppliers
For
the period ended September 30, 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
September 30, 2020.
For
the period ended September 30, 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 September 30, 2019, respectively.
|
4.
|
Equity
Transaction - Exclusive License Rights and Acquisition
|
During
December 2017, the Company entered into a master marketing agreement with BizRight, LLC, a leading marketer and manufacturer of
hydroponic growth supplies, which offers a range of hydroponics-related products including: HPS grow lights, electronic ballasts,
HPS Bulbs, nutrient mixes, environmental control products, pH measurement and calibration solutions and other grow and storage
products. BizRight operates the ZenHydro.com website and other e-commerce properties, and sells various products to distributors
and retailers. On April 11, 2018, the same rights under the master marketing agreement were assigned to BZRTH Inc. On February
5, 2019, the Company exercised its option to acquire BZRTH and the transaction closed on October 30, 2019. On January 15, 2020,
the Company entered into a Rescission and Mutual Release Agreement (“Agreement”) with each of the parties agreeing
to rescind the transaction and return all consideration exchanged pursuant to the Stock Exchange Agreement.
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.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
September
30, 2020
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 will obtain control over Indigo.
Since
late May 2020, the Company has been 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.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
September
30, 2020
Presented
below are condensed financial position data and operating results of the Indigo’s business segments for the period ended
September 30, 2020.
|
As of September 30, 2020
|
|
Current Assets
|
|
$
|
935,593
|
|
|
Non-Current Assets
|
|
|
257,060
|
|
|
Total Assets
|
|
|
1,192,653
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
623,123
|
|
|
Total Equity
|
|
|
569,530
|
|
|
Total Liabilities & Equity
|
|
$
|
1,192,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
1,571,356
|
|
|
Cost of Goods Sold
|
|
|
(647,460
|
)
|
|
Gross Profit
|
|
|
923,896
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
(921,954
|
)
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
1,942
|
|
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
September
30, 2020
From
time to time and in the course of business, we may become involved in various legal proceedings seeking monetary damages and other
relief. The amount of the ultimate liability, if any, from such claims cannot be determined. As of September 30, 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 September 30, 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 September 30, 2020, there remains a balance, plus accrued interest on the $227,000 and on the $80,000 due under the notes.
|
|
|
●
|
On
August 13, 2019, a lawsuit was filed against the Company for unpaid legal fees of $50,000 which originated from the Company’s
former chairman and CEO. The Company entered into a settlement and owes a remaining total of $30,000, payable at the rate
of $10,000 per month under this agreement.
|
There
can be no assurances the ultimate liability relative to these lawsuits will not exceed what is outlined above.
Cash
and cash equivalents consist of amounts held as bank deposits and highly liquid debt instruments purchased with an original maturity
of three months or less.
From
time to time, we may maintain bank balances in interest bearing accounts in excess of the $250,000 currently insured by the Federal
Deposit Insurance Corporation for interest bearing accounts (there is currently no insurance limit for deposits in noninterest
bearing accounts). We have not experienced any losses with respect to cash. Management believes our Company is not exposed to
any significant credit risk with respect to its cash.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
September
30, 2020
Accounts
receivable are carried at their estimated collectible amounts, net of any estimated allowances for doubtful accounts. We grant
unsecured credit to our customer’s deemed credit worthy. Ongoing credit evaluations are performed and potential credit losses
estimated by management are charged to operations on a regular basis. At the time any particular account receivable is deemed
uncollectible, the balance is charged to the allowance for doubtful accounts. The Company had accounts receivable net of allowances
of $156,425 as of September 30, 2020 and of $134,517 as of June 30, 2020.
Loans
receivable amounted $10,344 and $1,365 as of September 30, 2020 and June 30, 2020, respectively. Loan receivables are mainly advanced
payments to the other companies.
|
10.
|
Loans
Receivable – Related Parties
|
Loan
receivables – related parties amounted $320,774 and $318,535 as of September 30, 2020 and June 30, 2020, respectively. Loan
receivables – related parties are mainly advanced payments to the related party companies for business expense.
Inventory
consists of finished goods paper and paper-based products such as paper cups and food containers ready for sale and is stated
at the lower of cost or market. We value our inventory using the weighted average costing method. Our Company’s policy is
to include as a part of inventory any freight incurred to ship the product from our contract manufacturers to our warehouses.
Outbound freights costs related to shipping costs to our customers are considered period costs and are reflected in selling, general
and administrative expenses. We regularly review inventory and consider forecasts of future demand, market conditions and product
obsolescence.
If
the estimated realizable value of our inventory is less than cost, we make provisions in order to reduce its carrying value to
its estimated market value. On a consolidated basis, as of September 30, 2020 and June 30, 2020, the balance for the inventory
totaled $606,090 and $679,471, respectively. Obsolescence reserve at September 30, 2020 and June 30, 2020 were $185,312 and $15,445,
respectively.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
September
30, 2020
As
of September 30, 2020 and June 30, 2020, other current assets consisted of the following:
|
|
|
For the periods ended
|
|
|
|
|
September 30, 2020
|
|
|
June 30, 2020
|
|
|
Prepaid Deposit
|
|
$
|
8,483
|
|
|
$
|
48,483
|
|
|
Prepaid Inventory
|
|
|
585,957
|
|
|
|
65,449
|
|
|
Employees Advance
|
|
|
2,397
|
|
|
|
324
|
|
|
Prepaid Expenses
|
|
|
93,580
|
|
|
|
35,157
|
|
|
Undeposited Funds
|
|
|
123,924
|
|
|
|
71,550
|
|
|
Other
|
|
|
54,382
|
|
|
|
42,441
|
|
|
Total:
|
|
$
|
868,723
|
|
|
$
|
263,404
|
|
On
August 21, 2017, the Company entered into an intellectual property assignment agreement with Sound Decisions to revamp the Company’s
shoplifty website to generate and attract more traffic from potential customers. The Company made a payment of $14,000 for the
website (intellectual property). The Company amortized this use right as intangible asset over ten years, and recorded amortization
expense of $350 for the three months ended September 30, 2020 and 2019, respectively.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
September
30, 2020
|
14.
|
Property
and Equipment, net
|
As
of September 30, 2020 and June 30, 2020, property, plant and equipment consisted of the following:
|
Fixed Assets
|
|
September 30, 2020
|
|
|
June 30, 2020
|
|
|
Office and equipment
|
|
$
|
739,447
|
|
|
$
|
739,447
|
|
|
Motor vehicles
|
|
|
202,839
|
|
|
|
164,244
|
|
|
Leasehold Improvement
|
|
|
24,470
|
|
|
|
24,470
|
|
|
Total
|
|
|
966,756
|
|
|
|
928,161
|
|
|
Less: accumulated depreciation
|
|
|
(470,733
|
)
|
|
|
(429,116
|
)
|
|
Plant and Equipment, net
|
|
$
|
496,024
|
|
|
$
|
499,045
|
|
For
the periods ended September 30, 2020 and June 30, 2020, depreciation expenses amounted to $41,617 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 September 30, 2020 and June 30, 2020.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
September
30, 2020
Unearned
revenue amounted to $47,536 and $53,248 as of September 30, 2020 and June 30, 2020, respectively. Unearned revenues are mainly
due to contracts with extended payment terms, acceptance provisions and future delivery obligation.
Other
payable amounted to $851,681 and $691,801 as of September 30, 2020 and June 30, 2020, respectively. Other
payables are mainly credit card payables and taxes payables. As of September 30, 2020, the Company had 8 credit cards, one
American Express is a charge card with no limit and zero interest. The remaining 7 cards had total credit limit of $85,000, and
APR from 11.24% to 29.99%.
As
of September 30, 2020 and June 30, 2020, the balance owing on convertible notes, net of debt discount, with terms as described
below was $1,470,894 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 September 30, 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 September 30, 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 September 30, 2020, the note is in default.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
September
30, 2020
|
17.
|
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 September 30, 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 September 30, 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 September 30, 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 September 30, 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 September 30, 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 September 30, 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 September 30, 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 September 30, 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 September 30, 2020, the
note has been fully converted.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
September
30, 2020
|
17.
|
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 September 30, 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 September 30, 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.
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.
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 September 30, 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
September 30, 2020, the note principal and unpaid interest has been fully repaid by cash.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
September
30, 2020
|
17.
|
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 September 30, 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. During
the three months ended September 30, 2020, the note holder converted $50,000 principal into 42,444,821 shares of the Company’s
common stock.
Convertible
note 24: On April 24, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of
$75,000 (includes $2,000 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is
38% discount to average of three lowest trading prices for the 10 consecutive trading days prior to the conversion date.
Convertible
note 25: On June 10, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of
$36,300 (includes $3,300 OID and $3,000 legal expense). The note is due 360 days and bear an interest rate of 8%. The conversion
price for the note is 60% of the lowest trading bid for the 20 consecutive trading days prior to the conversion date.
Convertible
note 26: On June 18, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of
$36,300 (includes $3,300 OID and $3,000 legal expense). The note is due 360 days and bear an interest rate of 8%. The conversion
price for the note is 60% of the lowest closing bid for the 20 consecutive trading days prior to the conversion date.
Convertible
note 27: On July 6, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of
$77,000 (includes $2,000 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is
38% discount to average of three lowest trading prices for the 10 consecutive trading days prior to the conversion date.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
September
30, 2020
|
17.
|
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.
In
connection with the convertible debt, debt discount balance as of September 30, 2020 and June 30, 2020 were $961,980 and $880,879,
respectively, and were being amortized and recorded as interest expenses over the term of the convertible debt.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
September
30, 2020
|
18.
|
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 September 30, 2020 and June 30, 2020,
the derivative liability was $1,416,409 and $5,597,095, respectively. The Company recorded $3,788,146 gain and $1,442,295 loss
from changes in derivative liability during the period ended September 30, 2020 and June 30, 2020, respectively. The Binomial
model with the following assumption inputs:
|
|
|
|
September 30, 2020
|
|
|
Annual dividend yield
|
|
|
—
|
|
|
Expected life (years)
|
|
|
0.5-1.00
|
|
|
Risk-free interest rate
|
|
|
0.09-0.16
|
%
|
|
Expected volatility
|
|
|
89-176
|
%
|
|
|
|
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
|
|
$
|
5,597,097
|
|
|
Additions
|
|
|
1,174,134
|
|
|
Cancellation of Derivative Liabilities Due to Cash Repayment
|
|
|
(228,489
|
)
|
|
Mark to Market
|
|
|
(3,266,657
|
)
|
|
Reclassification to APIC due to conversions
|
|
|
(1,805,189
|
)
|
|
Ending Balance, September 30, 2020
|
|
$
|
1,470,894
|
|
|
Beginning Balance, June 30, 2019
|
|
$
|
2,991,953
|
|
|
Additions
|
|
|
1,894,203
|
|
|
Mark to Market
|
|
|
1,022,879
|
|
|
Reclassification to APIC due to conversions
|
|
|
(659,526
|
)
|
|
Ending Balance, September 30, 2019
|
|
$
|
3,203,751
|
|
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
September
30, 2020
On
September 7, 2018, the Company entered into a settlement agreement with several investors to settle all disputes by issues additional
unrestricted shares. In connection with the note each individual investor will also receive warrants equal to the number of the
shares the investors own as of the effective date of the settlement agreement. The warrants have a life of five years with an
exercise price as of the date of exchange. The fair value of the warrants at the grant date was $56,730. As of September 30, 2020
and June 30, 2020, the fair value of the warrant liability was $695 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 September 30, 2020 and June
30, 2020, the fair value of the warrant liability was $13,000 and $78,000, respectively.
As
of September 30, 2020 and June 30, 2020, the total fair value of the warrant liability was $13,695 and $79,910, respectively.
Note
Payable Due to Bank –
During
October 2011, we entered into a revolving demand note (line of credit) arrangement with HSBC Bank USA, with a revolving borrowing
limit of $150,000. The line of credit bears a variable interest rate of one quarter percent (0.25%) above the prime rate (5.5%
as of December 20, 2018). In the event the deposit account is not established or minimum balance maintained, HSBC can charge a
higher rate of interest of up to 4.0% above prime rate. As of September 30, 2020 and June 30, 2020, the loan principal balance
was $25,982. As of September 30, 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 September 30, 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 September 30, 2020 and June 30, 2020, this note had a balance of $15,427 and $15,427, respectively.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
September
30, 2020
On
October 1, 2017, SGMD entered a straight promissory note with Greater Asia Technology Limited (Greater Asia) for borrowing $100,000
with maturity date on June 30, 2018; the note bears an interest rate of 33.33%. As of September 30, 2020 and June 30, 2020, the
note was in default and the outstanding balance under this note was $85,332 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 September 30, 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 September 30, 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 September 30, 2020 and June 30, 2020, the outstanding balance under this loan were $22,594 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 September 30, 2020 and June 30, 2020, the outstanding balance under this loan were $69,230 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
September 30, 2020 and June 30, 2020, the outstanding balance under this loan were $8,000.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
September
30, 2020
|
21.
|
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 September 30, 2020 and June 30, 2020, the Company had an outstanding loan balance of $628,199 and $517,260, respectively.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
September
30, 2020
|
22.
|
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 September 30, 2020 and June 30, 2020, the balance of the loan was $30,000 and $30,000, 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 September 30, 2020, the balance of the loan was $655,337 and $0, respectively.
During
the year ended June 30, 2020, the Company had entered into one consulting service agreement and one employment agreement,
which had potential shares to be issued in total amount of $101,577.
During
the three months ended September 30, 2020, the Company had potential shares to be issued to one employment agreement of $18,750.
As
of September 30, 2020 and June 30, 2020, the Company had balance of $120,327 and $101,577 share to be issued, respectively.
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 shall be designated common stock, par $0.001 per share and 10,000,000 shares shall be 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.
As
of September 30, 2020 and June 30, 2020, the Company had 3,541,500 share of its preferred stock, 2,844,688,836 and 1,763,277,230
shares of its common stock, respectively, issued and outstanding.
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
September
30, 2020
|
25.
|
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.
|
Three Months Ended
|
|
|
|
|
September 30, 2020
|
|
|
|
|
Lease Cost
|
|
|
|
|
|
Operating lease cost (included in general and administration in the Company’s unaudited condensed statement of operations)
|
|
$
|
93,071
|
|
|
|
|
|
|
|
|
Other Information
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities for the nine months ended September 30, 2020
|
|
$
|
65,105
|
|
|
Remaining lease term – operating leases (in years)
|
|
|
3.06
|
|
|
Average discount rate – operating leases
|
|
|
10
|
%
|
|
The supplemental balance sheet information related to leases for the periods are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
|
|
|
Right-of-use assets
|
|
$
|
1,040,651
|
|
|
Total operating lease assets
|
|
$
|
1,040,651
|
|
|
|
|
|
|
|
|
Short-term operating lease liabilities
|
|
$
|
279,749
|
|
|
Long-term operating lease liabilities
|
|
$
|
795,863
|
|
|
Total operating lease liabilities
|
|
$
|
1,075,612
|
|
|
|
|
|
|
|
|
Maturities of the Company’s lease liabilities are as follows:
|
|
|
|
|
|
|
|
Operating
|
|
|
Period ending June 30,
|
|
Lease
|
|
|
2021
|
|
$
|
280,166
|
|
|
2022
|
|
|
368,400
|
|
|
2023
|
|
|
326,225
|
|
|
2024
|
|
|
172,465
|
|
|
2025
|
|
|
147,446
|
|
|
Total lease payments
|
|
|
1,294,701
|
|
|
|
|
|
|
|
|
Less: Imputed interest/present value discount
|
|
|
(219,089
|
)
|
|
Present value of lease liabilities
|
|
$
|
1,075,612
|
|
Sugarmade,
Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
September
30, 2020
Convertible
Notes
On
October 9, 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.
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.
Conversions
Subsequent
to November 20, 2020, there were multiple accredited investors converted approx. $187,200 of the convertible notes with $13,047
accrued interest into 256,515,904 shares of the Company’s common stocks.
Lease
On
September 28, 2020, the Company and LMK Capital LLC (“LMK”) entered into a Residential Lease (the “Lease”)
pursuant to which LMK agreed to lease to the Company five acres located in Northern California and owned by LMK (the “Property”).
Jimmy Chan, Chairman of the Board, Chief Executive Officer, Chief Financial Officer and majority stockholder of the Company, is
majority owner of LMK. The term of the Lease begins on October 1, 2020 and ends on September 30, 2023; provided, however, that
at the end of the term, the Lease will continue on a month-to-month basis. in the Pursuant to the terms of the Lease, the Company
will pay rent in the amount of $20,000 per month. The Lease also provides that the Company will pay a $250,000 security deposit
to LMK. Pursuant to the terms of the Lease, the monthly rent will increase to $0.50 per sq. ft. on cultivation area upon approval
of certificate of occupancy with a 3% increase each subsequent year. The lease will not be executed until the patents approved.
INDEX
TO FINANCIAL STATEMENTS
INDEX
TO JUNE 30, 2020 AUDITED FINANCIAL STATEMENTS
|
|
19720
Jetton Road, 3rd Floor
Cornelius,
NC 28031
Tel:
704-897-8336
Fax:
704-919-5089
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of
Sugarmade,
Inc. and Subsidiary
Opinion
on the Financial Statements
We
have audited the accompanying consolidated balance sheets of Sugarmade, Inc. and Subsidiary (“the Company”) as of
June 30, 2020 and 2019 and the related statements of operations, stockholders’ deficit, cash flows and the related notes
to consolidated financial statements (collectively referred to as the consolidated financial statements)for the years ended June
30, 2020 and 2019. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of the Company as of June 30, 2020 and 2019, and the results of its operations, changes in stockholders’
deficit and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States
of America.
Basis
for Opinion
These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to
the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
The
Company’s Ability to Continue as a Going Concern
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
As discussed in Note 2 to the consolidated financial statements, the Company has an accumulated deficit, recurring losses, and
expects continuing future losses, and has stated that substantial doubt exists about the Company’s ability to continue as
a going concern. Management’s evaluation of the events and conditions and management’s plans regarding these matters
are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/
L&L CPAS, PA
L&L
CPAS, PA
Certified
Public Accountants
Plantation,
FL
The
United States of America
October
15, 2020
We
have served as the Company’s auditor since March 2018.
Sugarmade,
Inc. and Subsidiary
Consolidated
Balance Sheets
|
|
|
As of June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
441,004
|
|
|
$
|
34,371
|
|
|
Accounts Receivables, Net
|
|
|
134,517
|
|
|
|
218,145
|
|
|
Inventory, Net
|
|
|
679,471
|
|
|
|
356,285
|
|
|
Loan Receivable, current
|
|
|
1,365
|
|
|
|
85,533
|
|
|
Loan Receivable – related parties, current
|
|
|
122,535
|
|
|
|
—
|
|
|
Other Current Assets
|
|
|
263,404
|
|
|
|
2,719,875
|
|
|
Right of use assets, current
|
|
|
270,363
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
1,912,659
|
|
|
|
3,414,209
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment, Net
|
|
|
499,047
|
|
|
|
476,585
|
|
|
Intangible Assets
|
|
|
9,800
|
|
|
|
11,200
|
|
|
Other Assets
|
|
|
54,163
|
|
|
|
23,970
|
|
|
Loan Receivable – related parties, noncurrent
|
|
|
196,000
|
|
|
|
|
|
|
Right of use assets
|
|
|
835,392
|
|
|
|
—
|
|
|
Advanced to Investments
|
|
|
—
|
|
|
|
18,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
3,507,062
|
|
|
$
|
21,925,965
|
|
|
Liabilities and Stockholders’ Deficit
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
Note Payable Due to Bank
|
|
|
25,982
|
|
|
|
25,982
|
|
|
Accounts Payable and Accrued Liabilities
|
|
|
1,583,228
|
|
|
|
1,431,379
|
|
|
Customer Deposits
|
|
|
466,337
|
|
|
|
287,789
|
|
|
Customer Overpayment
|
|
|
47,890
|
|
|
|
42,307
|
|
|
Unearned Revenue
|
|
|
53,248
|
|
|
|
61,672
|
|
|
Other Payables
|
|
|
691,801
|
|
|
|
420,450
|
|
|
Accrued Interest
|
|
|
494,740
|
|
|
|
507,218
|
|
|
Accrued Compensation and Personnel Related Payables
|
|
|
35,361
|
|
|
|
24,528
|
|
|
Note Payable – Current
|
|
|
20,000
|
|
|
|
20,000
|
|
|
Note Payable – Related Parties, Current
|
|
|
15,427
|
|
|
|
18,000
|
|
|
Lease Liability – Current
|
|
|
372,285
|
|
|
|
—
|
|
|
Loan Payable, current
|
|
|
319,314
|
|
|
|
214,585
|
|
|
Loan Payable – Related Parties, Current
|
|
|
35,943
|
|
|
|
30,000
|
|
|
Convertible Note Payables, Net, Current
|
|
|
1,740,122
|
|
|
|
1,046,909
|
|
|
Derivative Liabilities
|
|
|
5,597,095
|
|
|
|
2,991,953
|
|
|
Warrant Liabilities
|
|
|
79,910
|
|
|
|
24,658
|
|
|
Share to Be Issued
|
|
|
101,577
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
11,680,260
|
|
|
|
7,247,431
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Payable
|
|
|
197,946
|
|
|
|
—
|
|
|
Lease Liability
|
|
|
767,729
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
12,645,935
|
|
|
|
7,247,431
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Deficit:
|
|
|
|
|
|
|
|
|
|
Preferred Stock, $0.001 Par Value, 10,000,000 Shares
Authorized, 3,541,500 and 2,000,000 Shares Issued and Outstanding at June 30, 2020 and June 2019, respectively
|
|
|
3,542
|
|
|
|
2,000
|
|
|
Common Stock, $0.001 Par Value, 10,000,000,000 Shares Authorized, 1,763,277,230 and 697,608,570 Shares Issued and Outstanding at June 30, 2020 and 2019
|
|
|
1,763,278
|
|
|
|
697,610
|
|
|
Additional Paid-In Capital
|
|
|
57,307,767
|
|
|
|
61,038,875
|
|
|
Common Stock Subscribed
|
|
|
236,008
|
|
|
|
—
|
|
|
Shares to Be Issued, Common Shares
|
|
|
—
|
|
|
|
29,000
|
|
|
Accumulated Deficit
|
|
|
(68,438,332
|
)
|
|
|
(47,088,950
|
)
|
|
Total Stockholders’ Deficit
|
|
|
(9,127,737
|
)
|
|
|
(14,678,534
|
)
|
|
Non-Controlling Interest
|
|
|
(11,136
|
)
|
|
|
—
|
|
|
Total Stockholders’ Deficit of Sugarmade Inc.
|
|
|
(9,138,875
|
)
|
|
|
(14,678,534
|
)
|
|
Total Liabilities and Stockholders’ Equity (Deficit)
|
|
$
|
3,507,062
|
|
|
$
|
21,925,965
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
Sugarmade,
Inc. and Subsidiary
Consolidated
Statements of Operations
|
|
|
For the Years Ended June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Revenues, Net
|
|
$
|
4,362,585
|
|
|
$
|
4,367,644
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Goods Sold
|
|
|
2,851,940
|
|
|
|
3,368,659
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
1,510,645
|
|
|
|
1,268,985
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative Expenses
|
|
|
1,734,830
|
|
|
|
1,627,713
|
|
|
Advertising and Promotion Expense
|
|
|
430,141
|
|
|
|
203,213
|
|
|
Marketing and Research Expense
|
|
|
514,394
|
|
|
|
44,883
|
|
|
Professional Expense
|
|
|
1,128,896
|
|
|
|
848,158
|
|
|
Salaries and Wages
|
|
|
572,683
|
|
|
|
337,609
|
|
|
Stock Compensation Expense
|
|
|
9,255,277
|
|
|
|
3,122,486
|
|
|
Total Selling, General and Administrative Expenses
|
|
|
13,636,221
|
|
|
|
6,184,062
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss From Operations
|
|
|
(12,125,567
|
)
|
|
|
(4,915,077
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Non-Operating Income (Expense):
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
(1,613,044
|
)
|
|
|
(1,418,754
|
)
|
|
Warrant Expense
|
|
|
(119,526
|
)
|
|
|
15,742
|
|
|
Change in Fair Value of Derivative Liabilities
|
|
|
(1,442,295
|
)
|
|
|
(4,191,727
|
)
|
|
Stock Based Compensation
|
|
|
|
|
|
|
—
|
|
|
Amortization of Debt Discount
|
|
|
(3,823,500
|
)
|
|
|
(1,026,324
|
)
|
|
Bad Debt
|
|
|
(240,157
|
)
|
|
|
—
|
|
|
Debt Forgiveness
|
|
|
590,226
|
|
|
|
(298,510
|
|
|
Other Income (Expense)
|
|
|
3,064
|
|
|
|
34,473
|
|
|
Gain on debt conversion
|
|
|
(184,626
|
)
|
|
|
8,763
|
|
|
Loss on settlement
|
|
|
(393,135
|
)
|
|
|
(432,495
|
)
|
|
Loss on Impairment
|
|
|
(2,066,958
|
)
|
|
|
—
|
|
|
Loss on asset disposal
|
|
|
(119,044
|
)
|
|
|
(5,242
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Operating Income (Expense)
|
|
|
(9,408,994
|
)
|
|
|
(7,314,073
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Expense
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
(21,534,562
|
)
|
|
$
|
(12,229,151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Less: net loss attributable to the noncontrolling interest
|
|
|
(195,416
|
)
|
|
|
—
|
|
|
Net loss attributable to SugarMade Inc.
|
|
|
(21,339,146
|
)
|
|
|
(12,229,151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic Net Income (Loss) Per Share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
Diluted Net Income (Loss) Per Share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Weighted Average Common Shares Outstanding*
|
|
|
939,171,416
|
|
|
|
496,507,241
|
|
|
*
|
|
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 consolidated financial statements.
Sugarmade,
Inc. and Subsidiary
Consolidated
Statements of Changes in Stockholders’ Equity
|
|
|
Preferred
Stock
|
|
|
Common
stock
|
|
|
Additional
paid-in
|
|
|
Shares
to be issued, preferred
|
|
|
Common
Stock
|
|
|
Shares
to be issued, common
|
|
|
Accumulated
|
|
|
Non
Controlling
|
|
|
Total
Shareholders’
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
shares
|
|
|
Subscribed
|
|
|
shares
|
|
|
deficit
|
|
|
Interest
|
|
|
Equity
|
|
|
Balance at June 30, 2017
|
|
|
—
|
|
|
$
|
—
|
|
|
|
226,734,372
|
|
|
$
|
226,735
|
|
|
$
|
20,768,187
|
|
|
$
|
2,000,000
|
|
|
$
|
—
|
|
|
$
|
467,996
|
|
|
$
|
(28,563,409
|
)
|
|
$
|
—
|
|
|
$
|
(5,100,492
|
)
|
|
Shares issued for debts settlement
|
|
|
—
|
|
|
|
—
|
|
|
|
12,754,812
|
|
|
|
12,755
|
|
|
|
272,661
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
285,416
|
|
|
Reclass Derivative liability from conversion
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
509,323
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
509,323
|
|
|
Initial valuation of BCF
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
125,642
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
125,642
|
|
|
Shares issued for compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
4,736,842
|
|
|
|
4,737
|
|
|
|
175,263
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
180,000
|
|
|
Shares issued for debts settlement
|
|
|
—
|
|
|
|
—
|
|
|
|
737,748
|
|
|
|
738
|
|
|
|
20,656
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21,394
|
|
|
Share issued for Cash
|
|
|
—
|
|
|
|
—
|
|
|
|
1,171,429
|
|
|
|
1,171
|
|
|
|
80,829
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
82,000
|
|
|
Net Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,296,390
|
)
|
|
|
—
|
|
|
|
(6,296,390
|
)
|
|
Balance at June 30, 2018
|
|
|
—
|
|
|
|
—
|
|
|
|
246,135,203
|
|
|
$
|
246,136
|
|
|
$
|
21,952,561
|
|
|
$
|
2,000,000
|
|
|
$
|
—
|
|
|
$
|
467,996
|
|
|
$
|
(34,859,799
|
)
|
|
$
|
—
|
|
|
$
|
(10,193,106
|
)
|
|
Shares issued for debts settlement
|
|
|
—
|
|
|
|
—
|
|
|
|
8,658,685
|
|
|
|
8,659
|
|
|
|
717,426
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(60,166
|
)
|
|
|
|
|
|
|
—
|
|
|
|
665,918
|
|
|
Reclass Derivative liability from conversion
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,335,771
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,335,771
|
|
|
Shares issued for conversions
|
|
|
—
|
|
|
|
—
|
|
|
|
121,332,262
|
|
|
|
121,332
|
|
|
|
2,661,905
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,783,237
|
|
|
Initial valuation of BCF
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
149,143
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
149,143
|
|
|
Share issued for Cash
|
|
|
—
|
|
|
|
—
|
|
|
|
14,842,857
|
|
|
|
14,843
|
|
|
|
500,157
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(125,000
|
)
|
|
|
|
|
|
|
—
|
|
|
|
390,000
|
|
|
Shares issued for service compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
96,639,563
|
|
|
|
96,640
|
|
|
|
6,757,834
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(253,830
|
)
|
|
|
|
|
|
|
—
|
|
|
|
6,600,643
|
|
|
Shares issued for LOI
|
|
|
—
|
|
|
|
—
|
|
|
|
10,000,000
|
|
|
|
10,000
|
|
|
|
1,165,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,175,000
|
|
|
Shares issued for Award - Bizright
|
|
|
—
|
|
|
|
—
|
|
|
|
200,000,000
|
|
|
|
200,000
|
|
|
|
17,800,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,000,000
|
|
|
Shares issued for EB-5
|
|
|
2,000,000
|
|
|
|
2,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,998,000
|
|
|
|
(2,000,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Option for Service
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,080
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,080
|
|
|
Net Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(12,229,151
|
)
|
|
|
—
|
|
|
|
(12,229,151
|
)
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share issued for cash
|
|
|
—
|
|
|
|
—
|
|
|
|
138,461,538
|
|
|
|
138,462
|
|
|
|
551,817
|
|
|
|
—
|
|
|
|
236,008
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
926,287
|
|
|
Shares issued for conversions note of principal and interest
|
|
|
—
|
|
|
|
—
|
|
|
|
1,077,643,486
|
|
|
|
1,077,642
|
|
|
|
971,128
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,048,771
|
|
|
Reclass Derivative liability from conversion
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,819,825
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,819,825
|
|
|
Share issued for warrant exercises
|
|
|
—
|
|
|
|
—
|
|
|
|
28,381,818
|
|
|
|
28,382
|
|
|
|
(14,249
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,133
|
|
|
Option granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
118,750
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
118,750
|
|
|
Share issued for services compensation
|
|
|
415,000
|
|
|
|
415
|
|
|
|
1,500,000
|
|
|
|
1,500
|
|
|
|
5,945,835
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,947,750
|
|
|
Share issued for officer’s compensation
|
|
|
1,126,500
|
|
|
|
1,127
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,927,773
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,928,900
|
|
|
Shares issued for debts settlement
|
|
|
—
|
|
|
|
—
|
|
|
|
19,181,818
|
|
|
|
19,182
|
|
|
|
300,273
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(29,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
290,455
|
|
|
Initial valuation of BCF
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
449,301
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
449,301
|
|
|
Shares issued/cancelled for Award - Bizright
|
|
|
—
|
|
|
|
—
|
|
|
|
(199,500,000
|
)
|
|
|
(199,500
|
)
|
|
|
(17,786,542
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(17,986,042
|
)
|
|
Indigo & Budcars Investment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
169,262
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
169,262
|
|
|
Changes in non-controlling interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(184,280
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
184,280
|
|
|
|
—
|
|
|
Cumulative effect of ASU 2016-02
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10,236
|
)
|
|
|
—
|
|
|
|
(10,236
|
)
|
|
Net Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(21,534,562
|
)
|
|
|
(195,416
|
)
|
|
|
(21,577,533
|
)
|
|
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
|
)
|
The
accompanying notes are an integral part of these consolidated financial statements.
Sugarmade,
Inc. and Subsidiary
Consolidated
Statements of Cash Flows
|
|
|
For the year ended June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(21,339,146
|
)
|
|
$
|
(12,229,151
|
)
|
|
Non-controlling interest
|
|
|
(195,416
|
)
|
|
|
—
|
|
|
Adjustments to reconcile net loss to cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Excess of debt discount
|
|
|
449,301
|
|
|
|
149,143
|
|
|
Loss on settlement
|
|
|
393,135
|
|
|
|
295,963
|
|
|
Gain on debt forgiveness
|
|
|
590,226
|
|
|
|
(16,649
|
)
|
|
Amortization of debt discount
|
|
|
3,823,500
|
|
|
|
1,026,324
|
|
|
Stock based compensation
|
|
|
9,225,076
|
|
|
|
4,280,136
|
|
|
Change in fair value of derivative liability
|
|
|
2,109,930
|
|
|
|
4,040,237
|
|
|
Change in exercise of warrant
|
|
|
119,525
|
|
|
|
(15,742
|
)
|
|
Depreciation
|
|
|
110,032
|
|
|
|
71,390
|
|
|
Amortization of intangible assets
|
|
|
1,400
|
|
|
|
—
|
|
|
Impairment loss
|
|
|
2,066,958
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
83,628
|
|
|
|
235,478
|
|
|
Inventory
|
|
|
(323,186
|
)
|
|
|
173,915
|
|
|
Prepayment, deposits and other receivables
|
|
|
403,471
|
|
|
|
(788,308
|
)
|
|
Loan receivable
|
|
|
—
|
|
|
|
72,339
|
|
|
Other assets
|
|
|
(30,193
|
)
|
|
|
14,781
|
|
|
Accounts payable and accrued liabilities
|
|
|
423,199
|
|
|
|
108,581
|
|
|
Customer deposits
|
|
|
184,131
|
|
|
|
587
|
|
|
Unearned revenue
|
|
|
(8,424
|
)
|
|
|
(48,470
|
)
|
|
Right of use assets
|
|
|
(650,165
|
)
|
|
|
—
|
|
|
Lease liability
|
|
|
674,188
|
|
|
|
—
|
|
|
Interest Payable
|
|
|
(96,046
|
)
|
|
|
306,214
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(1,984,876
|
)
|
|
|
(2,323,231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Payment for property and equipment
|
|
|
(132,494
|
)
|
|
|
(351,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(132,494
|
)
|
|
|
(351,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from shares issuance
|
|
|
690,280
|
|
|
|
100,000
|
|
|
Loan receivable
|
|
|
84,168
|
|
|
|
—
|
|
|
Loan receivable - related parties
|
|
|
(318,535
|
)
|
|
|
—
|
|
|
Proceeds from advanced shares issuance
|
|
|
136,000
|
|
|
|
205,000
|
|
|
Proceeds (Repayment) from(to) loans - related parties
|
|
|
5,943
|
|
|
|
—
|
|
|
Proceeds from convertible notes
|
|
|
1,626,045
|
|
|
|
2,330,500
|
|
|
Payment to Note payable-related parties
|
|
|
(2,573
|
)
|
|
|
(5,000
|
)
|
|
Proceeds (Repayment) from(to) loans
|
|
|
302,675
|
|
|
|
36,376
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
2,524,003
|
|
|
|
2,666,876
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
406,633
|
|
|
|
(7,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
Cash, beginning of period
|
|
|
34,371
|
|
|
|
42,121
|
|
|
Cash, end of period
|
|
$
|
441,004
|
|
|
$
|
34,371
|
|
|
Cash paid interest
|
|
|
47,614
|
|
|
|
—
|
|
|
Supplemental disclosure of non-cash financing activities —
|
|
|
|
|
|
|
|
|
|
Shares issued for conversion of convertible debt
|
|
|
1,959,497
|
|
|
|
564,051
|
|
|
Reduction in derivative liability due to conversion
|
|
|
2,819,825
|
|
|
|
7,335,771
|
|
|
Debt discount related to convertible debt
|
|
|
3,315,037
|
|
|
|
2,783,235
|
|
|
Debts settled through shares issuance
|
|
|
229,000
|
|
|
|
3,217,870
|
|
|
Shares issued for advanced payments
|
|
|
—
|
|
|
|
2,641,000
|
|
|
Shares issued for warrant exercise
|
|
|
28,381
|
|
|
|
—
|
|
|
CS issued for reward to Bizright
|
|
|
(32,291,060
|
)
|
|
|
—
|
|
|
CS cancelled to terminate Bizright Acquisition
|
|
|
32,283,910
|
|
|
|
—
|
|
|
Reclassification from prepaid deposit to BZRTH investment
|
|
|
(883,958
|
)
|
|
|
—
|
|
|
Advanced to investment
|
|
|
—
|
|
|
|
18,000,000
|
|
The
accompanying notes are an integral part of these consolidated financial statements
Notes
to Consolidated Financial Statements
1.
Nature of Business
Sugarmade,
Inc. (hereinafter referred to as “we”, “us” or “the/our Company’’) is a publicly traded
company incorporated in the state of Delaware. Our previous legal name was Diversified Opportunities, Inc. Our Company, Sugarmade,
Inc. operates 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 June 30, 2020, we were involved in two businesses including the supply of products to the quick service restaurant sub-sector
of the restaurant industry and as an importer, distributor and marketer of hydroponic supplies to various agricultural sectors.
We had previously been a marketer of culinary seasoning products Seasoning Stix and Sriracha Seasoning Stix and a marketer of
tree-free paper products. These products were discontinued during 2018 in order to focus the majority of our corporate resources
on the marketing of hydroponic supplies.
The
marketplace in which we plan to be mainly engaged is generally referred to as hydroponic agricultural supplies. While some of
our customers are engaged in the legal cultivation, processing and/or distribution of cannabis or cannabis containing products,
our Company neither sells any products containing cannabis nor do we handle, process, or distribute any products containing cannabis.
Our
legacy business operation, CarryOutSupplies.com, is a producer and wholesaler of custom printed and generic supplies servicing
more than 2,000 quick service restaurants. Our products include double poly paper cups for cold beverage; disposable, clear, plastic
cold cups, paper coffee cups, yogurt cups, ice cream cups, cup lids, cup sleeves, food containers, soup containers, plastic spoons
and many other similar products for this market sector. CarryOutSupplies.com was founded in 2009 when the founders gained first-hand
experience within the restaurant industry of the difficulty for restaurant owners to acquire custom printed supplies at a reasonable
cost. Many quick service restaurants wish to acquire custom printed products, such as those embossed with logos, but the minimum
order size for such customization had been cost prohibitive. With that in mind, carry out supplies was founded to provide products
to this underserved section of the market. Since that time, the company has become a key supplier to many popular U.S. franchises,
particularly in the frozen dessert segments.
In
December 2017, the Company entered into a master marketing agreement with BizRight, LLC (“BizRight”), a leading marketer
and manufacturer of hydroponic growth supplies, which offers a range of hydroponics-related products including: HPS grow
lights, electronic ballasts, HPS Bulbs, nutrient mixes, environmental control products, pH measurement and calibration solutions
and other grow and storage products. BizRight operates the ZenHydro.com website and other e-commerce properties, and sells various
products to distributors and retailers. On April 11, 2018, the same rights under the master marketing agreement were assigned
to BZRTH. On February 5, 2019, the Company exercised its option to acquire BZRTH and the transaction closed on October 30, 2019.
On January 15, 2020, the Company entered into a Rescission and Mutual Release Agreement (“Agreement”) with each of
the parties agreeing to rescind the transaction and return all consideration exchanged pursuant to the Stock Exchange Agreement.
On
February 7, 2020, the Company entered into a share sale and purchase agreement with Indigo Dye Group Corp. (“Indigo”).
Indigo carries on business as a cannabis delivery business under the name BudCars and the Company has an interest in making an
investment in Indigo in order to further its corporate growth goals. Pursuant to the terms of the share sale and purchase agreement:
Sugarmade
agreed 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.
Sugarmade
receive a 40% of Indigo’s issued shares. The value used for this transaction is $1,750,000. 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 share purchase agreement (option provisions), the Company may acquire an
additional 30% interest in Indigo. Upon exercise of the option, the Company will obtain control over Indigo.
Since
late May 2020, the Company has been 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 considered an VIE of the Company.
2.
Summary of Significant Accounting Policies
Basis
of presentation
The
accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America.
Principles
of consolidation
The
consolidated financial statements include the accounts of our Company, its wholly-owned subsidiary, SWC Group Inc., and Indigo
Dye Group Corp., a variable interest entity (“VIE”). All significant intercompany transactions and balances have been
eliminated in consolidation.
Going
concern
The
Company’s continuation as a going concern is dependent on its ability to generate sufficient cash flows from operations
to meet its obligations, in which it has not been successful, and/or obtaining additional financing from its shareholders or other
sources, as may be required.
Our
consolidated financial statements have been prepared assuming that we will continue as a going concern. Such assumption contemplates
the realization of assets and satisfaction of liabilities in the normal course of business. These consolidated financial statements
do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the
amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.
Management
is endeavoring to increase revenue-generating operations. While priority is on generating cash from operations through the sale
of the Company’s products, management is also seeking to raise additional working capital through various financing sources,
including the sale of the Company’s equity and/or debt securities, which may not be available on commercially reasonable
terms to our Company, or which may not be available at all. If such financing is not available on satisfactory terms, we may be
unable to continue our business as desired and our operating results will be adversely affected. In addition, any financing arrangement
may have potentially adverse effects on us and/or our stockholders. Debt financing (if available and undertaken) will increase
expenses, must be repaid regardless of operating results and may involve restrictions limiting our operating flexibility. If we
issue equity securities to raise additional funds, the percentage ownership of our existing stockholders will be reduced, and
the new equity securities may have rights, preferences or privileges senior to those of the current holders of our common stock.
Use
of estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ significantly from those estimates.
Revenue
recognition
We
recognize revenue in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC’’)
No. 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.
Leases
In
February 2016, the FASB established Topic 842, Leases, by issuing 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. Since the Company elected not to recast the prior year
financial statements, $455,590 of operating lease right-of-use asset and $465,826 of operating lease liabilities were not retroactively
reflected to June 30, 2019 financial statements after the new adoption, and $1,105,755 of operating lease right-of-use asset and
$1,140,041 of operating lease liabilities were reflected to June 30, 2020 financial statements due to the Company entered into
new lease contracts during the year ended June 30, 2020.
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 believes that, as of June 30, 2020, there was 2,066,958 impairment
loss of its long-lived assets.
Income
taxes
We
account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and
their perspective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances
are recorded, when necessary, to reduce deferred tax assets to the amount expected to be realized.
As
a result of the implementation of certain provisions of ASC 740, Income Taxes (“ASC 740’’), which clarifies
the accounting and disclosure for uncertainty in tax position, as defined, ASC 740 seeks to reduce the diversity in practice associated
with certain aspect of the recognition and measurement related to accounting for income taxes.
We
adopted the provisions of ASC 740 as of October 2, 2008 and have analyzed filing positions in each of the federal and state jurisdictions
where we are required to file income tax returns, as well as open tax years in these jurisdictions. We have identified the U.S.
federal and California as our ‘major’ tax jurisdictions and generally, we remain subject to Internal Revenue Service
examination after our 2013 U.S. federal income tax returns. However, we have certain tax attribute carryforwards, which will remain
subject to review and adjustment by the relevant tax authorities until the statute of limitations closes with respect to the year
in which such attributes are utilized.
We
believe that our income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that
will result in a material change to our financial position. Therefore, no reserves for uncertain income tax positions have been
recorded pursuant to ASC 740. In addition, we did not record a cumulative effect adjustment related to the adoption of ASC 740.
Our policy for recording interest and penalties associated with income-based tax audits is to record such items as a component
of income taxes. We have not taken any uncertain positions that would necessitate recording of tax related liability as of June
30, 2020 and 2019.
Stock
based compensation
Stock
based compensation cost to employees is measured at the date of grant, based on the calculated fair value of the stock-based award,
and will be recognized as expense over the employee’s requisite service period (generally the vesting period of the award).
We estimate the fair value of employee stock options granted using the Binomial Option Pricing Model. Key assumptions used to
estimate the fair value of stock options will include the exercise price of the award, the fair value of our common stock on the
date of grant, the expected option term, the risk-free interest rate at the date of grant, the expected volatility and the expected
annual dividend yield on our common stock. We use our company’s own data among other information to estimate the expected
price volatility and the expected forfeiture rate. Share-based compensation awards issued to non-employees for services rendered
are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more
readily determinable.
Loss
per share
We
calculate basic earnings per share (“EPS”) by dividing our net loss by the weighted average number of common shares
outstanding for the period, without considering common stock equivalents. Diluted BPS is computed by dividing net income or net
loss by the weighted average number of common shares outstanding for the period and the weighted average number of dilutive common
stock equivalents, such as options and warrants. Options and warrants are only included in the calculation of diluted EPS when
their effect is dilutive.
Fair
value of financial instruments
ASC
Topic 820 defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy
for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy
is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels
are defined as follows:
Level
1- observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level
2 - include other inputs that are directly or indirectly observable in the marketplace.
Level
3 - unobservable inputs which are supported by little or no market activity.
The
Company used Level 2 inputs for its valuation methodology for the derivative liabilities for conversion feature of the convertible
notes and warrants in determining the fair value using Lattice Binomial model with the following assumption inputs:
Derivative
instruments
The
fair value of derivative instruments is recorded and shown separately under liabilities. Changes in the fair value of derivatives
liability are recorded in the consolidated statement of operations under non-operating income (expense).
Our
Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify
as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument
is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported
in the consolidated statements of operations. For stock-based derivative financial instruments, the Company uses a weighted average
Black-Scholes- Merton option-pricing model to value the derivative instruments at inception and on subsequent valuation dates.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity,
is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current
or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 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 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 approx. 42% of the Company’s
revenues; (2) Non-medical supplies such as non-medical fascial mask, which accounts approx. 25% of the Company’s total revenues;
(3) Cannabis products delivery service and sales, which accounts approx. 33% of the Company’s total revenues.
New
accounting pronouncements
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (“ROU”)
model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer
than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense
recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including
interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and
operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial
statements, with certain practical expedients available. The Company have adopted this ASU on the consolidated financial statements
in the quarter ended September 30, 2019.
In
December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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.
Prior
period reclassification
Certain
prior period balance sheet accounts have been reclassified in conformity with current period presentation including reclassification
of $4,000 from derivative liability to warrant liability. The reclassification had no effect to the company’s consolidated
statement of operations, statement of cash flow or statement of shareholder’s equity.
3. Concentration
Customer
For
the year ended June 30, 2020, our Company earned net revenues of $4,362,585. The company does not have any concentration of revenue
with any customer that represent over 10% of overall revenue. The highest revenue from (2) customers accounted for 5.90% and 5.1%
respectively, as percentage of overall revenue for the year ended June 30, 2020.
For
the year ended June 30, 2019, our Company earned net revenues of $4,347,644. The company does not have any concentration of revenue
with any customer that represent over 10% of overall revenue. The highest revenue from (2) customers accounted for 7.90% and 7.69%
respectively, as percentage of overall revenue for the year ended June 30, 2019.
Suppliers
For
the year ended June 30, 2020, 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 25.5% and 16.20% of the Company’s total inventory purchase
for the year ended June 30, 2020, respectively.
For
the year ended June 30, 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 year ended June 30, 2019, respectively.
Concentration
of risk
The
Company sells non-medical facial mask during the year ended June 30, 2020, which accounts approx. 25% of the total revenue of
the Company for the year ended June 30, 2020. Because of the demanding of non-medical facial mask is declining, the masks are
not selling at a profitable price, and the sales of the non-medical facial mask may decrease in the future.
4.
Equity Transaction – Exclusive License Rights
During
December 2017, the Company entered into a master marketing agreement with BizRight, LLC, a leading marketer and manufacturer of
hydroponic growth supplies, which offers a range of hydroponics-related products including: HPS grow lights, electronic ballasts,
HPS Bulbs, nutrient mixes, environmental control products, pH measurement and calibration solutions and other grow and storage
products. BizRight operates the ZenHydro.com website and other e-commerce properties, and sells various products to distributors
and retailers. On April 11, 2018, the same rights under the master marketing agreement were assigned to BZRTH Inc. On February
5, 2019, the Company exercised its option to acquire BZRTH and the transaction closed on October 30, 2019. On January 15, 2020,
the Company entered into a Rescission and Mutual Release Agreement (“Agreement”) with each of the parties agreeing
to rescind the transaction and return all consideration exchanged pursuant to the Stock Exchange Agreement.
5.
VIE
On
February 7, 2020, the Company entered into a share sale and purchase 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
prodicuts are finished goods. In addition, Indigo is operating a non-store front retail delivery business (Type-9 License# C9-0000286)
in California.
The
Company has an interest in making an investment in Indigo in order to further its corporate growth goals. All the parties agree
as follows:
The
Company will invest Seven Hundred Thousand Dollars ($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.
The
Company will receive a Forty Percent (40%) of the issued shares in Indigo Dye. 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 share purchase agreement (three years option provisions), the Company will
take considerations to acquire an additional 30% interest in Indigo. Upon exercise of the option, the Company will obtain control
over Indigo.
Since
late May 2020, the Company has been 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.
Presented
below are condensed financial position data and operating results of the Indigo’s business segments for the four months
ended June 30, 2020.
|
|
|
As of June 30, 2020
|
|
|
Current Assets
|
|
|
647,554
|
|
|
Non-Current Assets
|
|
|
94,017
|
|
|
Total Assets
|
|
|
741,571
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
389,349
|
|
|
Total Equity
|
|
|
352,222
|
|
|
Total Liabilities & Equity
|
|
|
741,571
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
656,933
|
|
|
|
|
|
|
|
|
Expense
|
|
|
923,139
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
280,604
|
|
6. Litigation
From
time to time and in the course of business, we may become involved in various legal proceedings seeking monetary damages and other
relief. The amount of the ultimate liability, if any, from such claims cannot be determined. As of June 30, 2019, there were no
legal claims pending or threatened against the Company; the opinion of our management would be likely to have a material adverse
effect on our financial position, results of operations or cash flows. However, as of the date of this filing, we were involved
in the following legal proceedings.
|
●
|
Outstanding
Litigation 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 $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 the
date of this filing, there remains a balance, plus accrued interest on the $227,000 and on the $80,000 due under the notes.
|
|
●
|
On
August 13, 2019, a lawsuit was filed against the Company for unpaid legal fees of $50,000 which originated from the Company’s
former chairman and CEO. The Company was served in or around September 2019. The Company entered into a settlement and owes
a remaining total of $30,000, payable at the rate of $10,000 per month under this agreement.
|
There
can be no assurances the ultimate liability relative to these lawsuits will not exceed what is outlined above.
7.
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.
8.
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 allowance,
of $134,517 and $218,145 as of June 30, 2020 and 2019, respectively; and allowance for doubtful accounts of $447,498 and 412,666
as of June 30, 2020 and 2019, respectively.
9.
Loan Receivable
Loan
receivables amounted $1,365 and $85,533 as of June 30, 2020 and 2019, respectively. Loan receivables are mainly advanced payments
to the other companies.
10.
Loan Receivable – Related Parties
Loan
receivables – related parties amounted $122,535 and $0 as of June 30, 2020 and 2019, respectively. Loan receivables –
related parties are mainly advanced payments to the related party companies for business expense.
11.
Inventory
Inventory
consists of finished goods paper and paper-based products such as paper cups and food containers ready for sale and is stated
at the lower of cost or market. We value our inventory using the weighted average costing method. Our Company’s policy is
to include as a part of inventory any freight incurred to ship the product from our contract manufacturers to our warehouses.
Outbound freights costs related to shipping costs to our customers are considered period costs and reflected in selling, general
and administrative expenses. We regularly review inventory and consider forecasts of future demand, market conditions and product
obsolescence. The total inbound freight costs are $274,475 & $247,263 as of June 30, 2020 and 2019, respectively.
If
the estimated realizable value of our inventory is less than cost, we make provisions in order to reduce its carrying value to
its estimated market value. On a consolidated basis, as of June 30, 2020 and 2019, the balance for the inventory totaled $679,471
and $356,285, respectively. $15,445 were reserved for obsolescent inventory for the year ended June 30, 2020, and $14,548 were
reserved for obsolescent inventory for the year ended June 30, 2019.
12.
Other Current Assets
As
of June 30, 2020 and 2019, other current assets consisted of the following:
|
|
|
For the years ended June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Prepaid Deposit
|
|
$
|
48,483
|
|
|
$
|
2,145,000
|
|
|
Prepaid Inventory
|
|
|
65,449
|
|
|
|
172,045
|
|
|
Employees Advance
|
|
|
324
|
|
|
|
16,052
|
|
|
Prepaid Expenses
|
|
|
35,157
|
|
|
|
358,702
|
|
|
Others
|
|
|
113,991
|
|
|
|
28,075
|
|
|
Total
|
|
$
|
263,404
|
|
|
$
|
2,719,875
|
|
13.
Intangible Asset
On
April 1, 2017, the Company entered into a distribution and intellectual property assignment agreement with Wagner Bartosch, Inc.
(“Wagner’’) for use of their Divider’™ used in frozen desserts and other related uses. In lieu of
cash payment under the agreement, the Company was obliged to issue common shares of the Company valued at $75,000 for acquiring
the use right of the distribution and intellectual property. The Company amortized this use right as intangible asset over ten
years, and recorded $1,400 and $1,400 amortization expense for the years ended June 30, 2020 and 2019, respectively.
14.
Property, Plant and Equipment
As
of June 30, 2020 and 2019, property, plant and equipment consisted of the following:
|
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
|
Office and equipment
|
|
$
|
739,447
|
|
|
$
|
709,745
|
|
|
Motor vehicles
|
|
|
164,244
|
|
|
|
96,265
|
|
|
Leasehold Improvement
|
|
|
24,742
|
|
|
|
21,970
|
|
|
Total
|
|
|
928,163
|
|
|
|
827,980
|
|
|
Less: accumulated depreciation
|
|
|
(429,116
|
)
|
|
|
(351,395
|
)
|
|
Plant and Equipment, net
|
|
$
|
499,047
|
|
|
$
|
476,585
|
|
For
the years ended June 30, 2020 and 2019, depreciation expenses amounted to $110,032 and $71,390, 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 years ended June 30, 2020 and 2019.
15.
Advanced to Investment
During
December 2017, the Company entered into a master marketing agreement with BizRight, LLC, a leading marketer and manufacturer of
hydroponic growth supplies, which offers a range of hydroponics-related products including: HPS grow lights, electronic ballasts,
HPS Bulbs, nutrient mixes, environmental control products, pH measurement and calibration solutions and other grow and storage
products. BizRight operates the ZenHydro.com website and other e-commerce properties, and sells various products to distributors
and retailers. On April 11, 2018, the same rights under the master marketing agreement were assigned to BZRTH Inc. On February
5, 2019, the Company exercised its option to acquire BZRTH and the transaction had been closed on October 30, 2019 in total fair
value of $18,000,000. On January 15, 2020, the Company entered into a Rescission and Mutual Release Agreement (“Agreement”)
with each of the parties agreeing to rescind the transaction and return all consideration exchanged pursuant to the Stock Exchange
Agreement.
As
of June 30, 2020 and June 30, 2019, the advanced to investments were $0 and $18,000,000.
16.
Unearned Revenue
Unearned
revenue amounted $53,248 and $61,672 as of June 30, 2020 and 2019, respectively. Unearned revenues are mainly due to contracts
with extended payment terms, acceptance provisions and future delivery obligation.
17.
Other Payable
Other
payable amounted $691,801 and $420,450 as of June 30, 2020 and 2019, respectively. Other payables are mainly credit
card payables and taxes payables. As of June 30, 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 June 30, 2020 and June 30, 2019, the balance owing on convertible notes, net of debt discount, with terms as described below
was $1,740,122 and $1,046,909, respectively.
Convertible
notes issued prior to the year ended June 30, 2019 were as follows:
Convertible
note 1: On August 24, 2012, the Company entered into a convertible promissory note with an accredited investor for $25,000. The
note has a term of six (6) months with an interest rate of 10% and is convertible to common shares at a 25% discount of the average
of 30 days prior to the conversion date. As of June 30, 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 June 30, 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 June 30, 2020, the note is in default.
Convertible
note 4: On March 1, 2017, the Company entered into a convertible promissory note with an accredited investor for $100,000. The
note has been purchased by other investor in total amount of $156,067 with a term of nine (9) months with an interest rate of
10% and is convertible to common shares at a 45% discount to the then current market price of our shares. As of June 30, 2020,
the note has been fully converted.
Convertible
note 5: On May 17, 2017, the Company entered a convertible promissory note with an investor for a total amount of $1,375,000 (after
$10,000 legal and due diligence fee) with an OID of $125,000, the note will be fulfilled through a series of funding. The note
is due 12 months after each funding date and bears an interest rate of 10%. The conversion price for the note is 55% of the lowest
closing bid for the 20 consecutive trading days prior to the conversion date. In connection with the note, the investor will also
receive warrants and is calculated based on 15% of the maturity amount. The warrants have a life of four years with exercise price
of $0.15 per share and have cashless exercise option. During the three months ended September 30, 2019, the holder exercised 1,766,544
cashless warrant shares into 28,381,818 shares of the Company’s common stock. On September 23, 2019, the remaining warrant
shares were settled by exchange $200,000 convertible note with interest of 10% per annum, due on September 23, 2020, with conversion
price of 55% of the lowest closing bid for the 20 consecutive trading days prior to the conversion date. As of June 30, 2020,
the original principal balance has been fully converted, the remaining default charge balance of $250,000 has been forgave.
Convertible
note 6: On September 20, 2018, the Company entered a convertible promissory note with an accredited investor for a total amount
of $267,500 (includes $5,000 legal fee and an OID of $12,500). The note is due 360 days and bears 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.
As of June 30, 2020, the principal balance of 245,000 has been fully converted into the Company’s common stock.
Convertible
note 7: 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 June 30, 2020, the note is in default.
Convertible
note 8: 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 June 30, 2020, the note is in default.
Convertible
note 9: 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 June 30, 2020, the note is in default.
Convertible
note 10: 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 June 30, 2020, the note is in default.
Convertible
note 11: On December 26, 2018, the Company entered a convertible promissory note with an accredited investor for a total amount
of $250,000 (includes $5,000 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note
is 45% of average three lowest closing bid for the 20 consecutive trading days prior to the conversion date. As of June 30, 2020,
the note has been fully converted.
Convertible
note 12: On January 8, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount
of $105,000. The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 35% of average two
lowest closing bid for the 20 consecutive trading days prior to the conversion date. As of June 30, 2020, the note has been fully
converted.
Convertible
note 13: On January 22, 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 42% of average three
lowest closing bid for the 20 consecutive trading days prior to the conversion date. As of June 30, 2020, the note has been fully
converted.
Convertible
note 14: On January 24, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount
of $53,000. The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 35% of average two
lowest closing bid for the 20 consecutive trading days prior to the conversion date. As of June 30, 2020, the note has been fully
converted.
Convertible
note 15: On February 26, 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 42% of average three
lowest closing bid for the 20 consecutive trading days prior to the conversion date. As of June 30, 2020, the note has been fully
converted.
Convertible
note 16: On March 4, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of
$250,000 (includes $7,000 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is
58% of average two lowest closing bid for the 20 consecutive trading days prior to the conversion date. As of June 30, 2020, the
note has been fully converted.
Convertible
note 17: On April 2, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of
$100,000 (includes $2,000 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is
40% of average three lowest closing bid for the 10 consecutive trading days prior to the conversion date. As of June 30, 2020,
the note has been fully repaid by cash.
Convertible
note 18: On April 4, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of
$100,000 (includes $2,000 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is
58% of average two lowest closing bid for the 20 consecutive trading days prior to the conversion date. As of June 30, 2020, the
note has been fully converted.
Convertible
note 19: On May 2, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of $125,000
(includes $2,000 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 40% of average
three lowest closing bid for the 10 consecutive trading days prior to the conversion date. As of June 30, 2020, the note has been
fully repaid by cash.
Convertible
note 20: On May 7, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of $125,000
(includes $2,500 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is 58% of average
two lowest closing bid for the 20 consecutive trading days prior to the conversion date. As of June 30, 2020, the note has been
fully repaid by cash.
Convertible
note 21: On May 29, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of
$125,000 (includes $2,000 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is
40% of average three lowest closing bid for the 10 consecutive trading days prior to the conversion date. As of June 30, 2020,
the note has been fully repaid by cash.
Convertible
note 22: On June 12, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of
$125,000 (includes $2,500 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is
58% of average two lowest closing bid for the 20 consecutive trading days prior to the conversion date. As of June 30, 2020, the
note has been fully repaid by cash.
Convertible
notes issued during the year ended June 30, 2020 were as follows:
Convertible
note 23: On July 3, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of
$125,000 (includes $2,000 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is
40% discount of average three lowest closing bid for the 10 consecutive trading days prior to the conversion date. As of June
30, 2020, the note has been fully repaid by cash.
Convertible
note 24: On July 30, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of
$162,000 (includes $7,000 OID). The note is due 360 days and bear an interest rate of 8%. The conversion price for the note is
40% discount of the lowest closing bid for the 20 consecutive trading days prior to the conversion date. As of June 30, 2020,
the note has been fully converted.
Convertible
note 25: On August 14, 2019, 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 65% of the average of lowest two closing bid for the 20 consecutive trading days prior to the conversion date. As of June 30,
2020, the note has been fully converted.
Convertible
note 26: On August 29, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount
of $275,000 (includes $37,500 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 June 30, 2020, the note
has been fully converted.
Convertible
note 27: On August 29, 2019, 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 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 June 30, 2020, the note
has been fully converted.
Convertible
note 28: On September 23, 2019, the Company entered a warrant settlement agreement to exchange convertible promissory note for
a total amount of $200,000. The note is due 360 days and bear an interest rate of 10%. The conversion price for the note is 55%
of the lowest closing bid for the 20 consecutive trading days prior to the conversion date. As of June 30, 2020, the note has
been fully settled by $127,321 of cash and 18,181,818 shares of common stock.
Convertible
note 29: 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 60% of the lowest closing bid for the 20 consecutive trading days prior to the conversion date. As of June 30, 2020, the note
has been fully converted.
Convertible
note 30: 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 June 30, 2020, the remaining note balance was $115,000.
Convertible
note 31: 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.
Convertible
note 32: 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.
Convertible
note 33: On November 14, 2019, 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 60% of the average three lowest closing bid for the 10 consecutive trading days prior to the conversion date. As of June 30,
2020, the note has been fully converted.
Convertible
note 34: 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.
Convertible
note 35: 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.
Convertible
note 36: 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.
Convertible
note 37: 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.
Convertible
note 38: 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.
Convertible
note 39: 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 40: 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 41: 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.
Convertible
note 42: 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.
Convertible
note 43: 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.
Convertible
note 44: 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.
Convertible
note 45: 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 46: 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.
Convertible
note 47: 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 closing prices for the 10 consecutive trading days prior to the conversion date.
Convertible
note 48: 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 closing bid for the 20 consecutive trading days prior to the conversion date.
Convertible
note 49: 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.
In
connection with the convertible debt, debt discount balance as of June 30, 2020 and June 30, 2019 were $880,879 and $1,189,341,
respectively, and were being amortized and recorded as interest expenses over the term of the convertible debt.
As
of the year ended June 30, 2020, the Company’s convertible notes consisted of following:
|
Start Date
|
|
End Date
|
|
Debt Discount
As of 6/30/2019
|
|
|
Addition
|
|
|
Amortization
|
|
|
Debt Discount
As of 6/30/2020
|
|
|
9/27/2019
|
|
9/25/2019
|
|
$
|
—
|
|
|
$
|
148,750
|
|
|
$
|
(113,197
|
)
|
|
$
|
35,553
|
|
|
9/27/2019
|
|
9/25/2019
|
|
$
|
—
|
|
|
$
|
16,250
|
|
|
$
|
(12,366
|
)
|
|
$
|
3,884
|
|
|
10/28/2019
|
|
10/27/2020
|
|
$
|
—
|
|
|
$
|
202,500
|
|
|
$
|
(137,431
|
)
|
|
$
|
65,069
|
|
|
10/28/2019
|
|
10/27/2020
|
|
$
|
—
|
|
|
$
|
23,000
|
|
|
$
|
(15,503
|
)
|
|
$
|
7,497
|
|
|
10/28/2019
|
|
10/27/2020
|
|
$
|
—
|
|
|
$
|
202,500
|
|
|
$
|
(137,431
|
)
|
|
$
|
65,069
|
|
|
10/28/2019
|
|
10/27/2020
|
|
$
|
—
|
|
|
$
|
23,000
|
|
|
$
|
(15,501
|
)
|
|
$
|
7,499
|
|
|
11/29/2020
|
|
11/30/2020
|
|
$
|
—
|
|
|
$
|
95,000
|
|
|
$
|
(55,395
|
)
|
|
$
|
39,605
|
|
|
11/29/2020
|
|
11/30/2020
|
|
$
|
—
|
|
|
$
|
11,150
|
|
|
$
|
(6,502
|
)
|
|
$
|
4,648
|
|
|
11/29/2020
|
|
11/30/2020
|
|
$
|
—
|
|
|
$
|
95,000
|
|
|
$
|
(55,395
|
)
|
|
$
|
39,605
|
|
|
11/29/2020
|
|
11/30/2020
|
|
$
|
—
|
|
|
$
|
11,150
|
|
|
$
|
(6,502
|
)
|
|
$
|
4,648
|
|
|
12/10/2019
|
|
12/10/2020
|
|
$
|
—
|
|
|
$
|
95,000
|
|
|
$
|
(52,691
|
)
|
|
$
|
42,309
|
|
|
12/10/2019
|
|
12/10/2020
|
|
$
|
—
|
|
|
$
|
11,700
|
|
|
$
|
(6,489
|
)
|
|
$
|
5,211
|
|
|
12/10/2019
|
|
12/10/2020
|
|
$
|
—
|
|
|
$
|
95,000
|
|
|
$
|
(52,691
|
)
|
|
$
|
42,309
|
|
|
12/10/2019
|
|
12/10/2020
|
|
$
|
—
|
|
|
$
|
11,700
|
|
|
$
|
(6,489
|
)
|
|
$
|
5,211
|
|
|
12/27/2019
|
|
12/27/2020
|
|
$
|
—
|
|
|
$
|
100,000
|
|
|
$
|
(50,820
|
)
|
|
$
|
49,180
|
|
|
12/27/2019
|
|
12/27/2020
|
|
$
|
—
|
|
|
$
|
12,200
|
|
|
$
|
(6,200
|
)
|
|
$
|
6,000
|
|
|
1/3/2020
|
|
12/27/2020
|
|
$
|
—
|
|
|
$
|
100,000
|
|
|
$
|
(49,861
|
)
|
|
$
|
50,139
|
|
|
1/3/2020
|
|
12/27/2020
|
|
$
|
—
|
|
|
$
|
12,200
|
|
|
$
|
(6,083
|
)
|
|
$
|
6,117
|
|
|
1/14/2020
|
|
1/14/2021
|
|
$
|
—
|
|
|
$
|
147,000
|
|
|
$
|
(67,475
|
)
|
|
$
|
79,525
|
|
|
1/14/2020
|
|
1/14/2021
|
|
$
|
—
|
|
|
$
|
3,000
|
|
|
$
|
(1,377
|
)
|
|
$
|
1,623
|
|
|
1/22/2020
|
|
1/22/2021
|
|
$
|
—
|
|
|
$
|
94,746
|
|
|
$
|
(41,419
|
)
|
|
$
|
53,327
|
|
|
1/22/2020
|
|
1/22/2021
|
|
$
|
—
|
|
|
$
|
3,000
|
|
|
$
|
(1,311
|
)
|
|
$
|
1,689
|
|
|
2/4/2020
|
|
8/4/2020
|
|
$
|
—
|
|
|
$
|
110,000
|
|
|
$
|
(88,846
|
)
|
|
$
|
21,154
|
|
|
2/18/2020
|
|
8/18/2020
|
|
$
|
—
|
|
|
$
|
100,000
|
|
|
$
|
(73,077
|
)
|
|
$
|
26,923
|
|
|
3/5/2020
|
|
3/5/2021
|
|
$
|
—
|
|
|
$
|
122,000
|
|
|
$
|
(39,107
|
)
|
|
$
|
82,893
|
|
|
3/5/2020
|
|
3/5/2021
|
|
$
|
—
|
|
|
$
|
3,000
|
|
|
$
|
(962
|
)
|
|
$
|
2,038
|
|
|
4/24/2020
|
|
4/24/2021
|
|
$
|
—
|
|
|
$
|
73,000
|
|
|
$
|
(13,400
|
)
|
|
$
|
59,600
|
|
|
4/24/2020
|
|
4/24/2021
|
|
$
|
—
|
|
|
$
|
2,000
|
|
|
$
|
(367
|
)
|
|
$
|
1,633
|
|
|
6/10/2020
|
|
6/10/2021
|
|
$
|
—
|
|
|
$
|
30,000
|
|
|
$
|
(1,644
|
)
|
|
$
|
28,356
|
|
|
6/10/2020
|
|
6/10/2021
|
|
$
|
—
|
|
|
$
|
6,300
|
|
|
$
|
(476
|
)
|
|
$
|
6,776
|
|
|
6/18/2020
|
|
6/18/2021
|
|
$
|
—
|
|
|
$
|
30,000
|
|
|
$
|
(986
|
)
|
|
$
|
29,014
|
|
|
6/18/2020
|
|
6/18/2021
|
|
$
|
—
|
|
|
$
|
6,300
|
|
|
$
|
(476
|
)
|
|
$
|
6,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
$
|
880,879
|
|
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 June 30, 2020 and 2019, the derivative
liability was $5,597,095 and $2,991,953, respectively. The Company recorded $1,442,295 and $4,191,727 loss from changes in derivative
liability during the year ended June 30, 2020 and 2019, respectively. The Binomial model with the following assumption inputs:
|
|
|
June
30, 2019
|
|
Annual
Dividend Yield
|
|
|
—
|
|
|
Expected
Life (Years)
|
|
|
0.50-1.00
|
|
|
Risk-Free
Interest Rate
|
|
|
1.92-2.64
|
%
|
|
Expected
Volatility
|
|
|
87-150
|
%
|
|
|
|
|
|
|
|
|
|
|
June
30, 2020
|
|
|
Annual
Dividend Yield
|
|
|
—
|
|
|
Expected
Life (Years)
|
|
|
0.50-1.00
|
|
|
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, 2019
|
|
$
|
2,991,953
|
|
|
Additions
|
|
$
|
4,522,428
|
|
|
Mark to Market
|
|
$
|
1,442,295
|
|
|
Cancellation of Derivative Liabilities Due to Cash Repayment
|
|
$
|
(345,582
|
)
|
|
Reclassification to APIC Due to Conversions
|
|
$
|
(3,013,999
|
)
|
|
Ending Balance, June 30, 2020
|
|
|
5,597,095
|
|
20.
Stock Warrants
On
September 7, 2018, the Company entered 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 June 30, 2020 and
June 30, 2019, the fair value of the warrant liability was $1,910 and $19,103, respectively.
On
February 4, 2020, the Company entered 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 June 30, 2020, the fair
value of the warrant liability was $78,000.
As
of June 30, 2020 and June 30, 2019, the total fair value of the warrant liability was $79,910 and $24,658, respectively.
The
Binomial model with the following assumption inputs:
|
Warrants
liability:
|
|
|
June
30, 2019
|
|
|
Annual
dividend yield
|
|
|
—
|
|
|
Expected
life (years)
|
|
|
5.0
|
|
|
Risk-free
interest rate
|
|
|
1.76
|
%
|
|
Expected
volatility
|
|
|
351
|
%
|
|
|
|
|
|
|
|
Warrants
issued in May 2017:
|
|
|
June
30, 2020
|
|
|
Annual
dividend yield
|
|
|
—
|
|
|
Expected
life (years)
|
|
|
3.0-5.0
|
|
|
Risk-free
interest rate
|
|
|
0.18-1.69
|
%
|
|
Expected
volatility
|
|
|
137-318
|
%
|
|
|
|
Number of Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining contractual life
|
|
|
Outstanding at June 30, 2016
|
|
|
131,250
|
|
|
|
0.20
|
|
|
|
|
|
|
Expired
|
|
|
131,250
|
|
|
|
0.20
|
|
|
|
|
|
|
Granted
|
|
|
505,000
|
|
|
$
|
0.15
|
|
|
|
4
|
|
|
Outstanding at June 30, 2017
|
|
|
505,000
|
|
|
$
|
0.15
|
|
|
|
3.86
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
|
505,000
|
|
|
$
|
0.15
|
|
|
|
0.5
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
578,880
|
|
|
|
0.034
|
|
|
|
5
|
|
|
Outstanding at June 30, 2019
|
|
|
1,083,880
|
|
|
$
|
0.034
|
|
|
|
5
|
|
|
Expired
|
|
|
(505,000
|
)
|
|
|
0.15
|
|
|
|
|
|
|
Granted
|
|
|
1,000,000
|
|
|
|
0.008
|
|
|
|
5
|
|
|
Outstanding at June 30, 2020
|
|
|
1,578,880
|
|
|
$
|
0.021
|
|
|
|
5
|
|
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 (3.25%
as of September 30, 2013). In the event the deposit account is not established or minimum balance maintained, HSBC can charge
a higher rate of interest of up to 4.0% above prime rate. As of June 30, 2020 and 2019, the loan principal balance was $25,982.
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 June 30, 2020 and 2019, 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 June 30, 2020 and 2019, this note had a balance of $15,427 and $18,000, respectively.
22.
Related Party Transactions
As
of June 30, 2020 and 2019, the Company had outstanding balance of $71,369 and $78,000 owed to various related parties, respectively.
See note 11 and 15 for the details.
23.
Loans Payable
On
October 1, 2017, SGMD entered a straight promissory note with Greater Asia Technology Limited (Greater Asia) for borrowing $100,000
with maturity date on June 30, 2018; the note bears an interest rate of 33.33%. As of June 30, 2020 and 2019, the note was in
default and the outstanding balance under this note was $96,401 and $63,924, 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 June 30, 2020 and 2019,
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 June 30, 2020 and 2019, the Company has an outstanding balance of $3,584 and $3,584.
On
December 17, 2018, the Company entered into a repayment agreement with an individual for $100,000 at no interest. As of June 30,
2020 and 2019, the Company has an outstanding balance of $0 and $17,834, respectively.
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 June 30, 2020 and 2019, the outstanding balance under this loan were $24,524 and $29,243, 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 June 30, 2020, the outstanding balance under this loan were $117,635.
On
June 26, 2020, the Company entered into a government loan agreement for $8,000 with maturity date on December 26, 2020. As of
June 30, 2020, the outstanding balance under this loan were $8,000.
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.
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 June 30, 2020 and 2019, the Company had an outstanding loan balance of $517,260 and $214,585, respectively.
24.
Loans Payable – Related Parties
On
June 26, 2017, SGMD entered a straight promissory note with a company (whose major shareholder is the former director of the Company)
for borrowing $180,820 with maturity date on March 31, 2018; the note bears an interest rate of 12%, commencing on October 31,
2017, and on the last day of each moth thereafter until the notes is paid in full, the Company shall make an interest payment.
During the year ended June 30, 2019, all the principles have been converted into the Company’s common stocks. As of June
30, 2020 and 2019, the outstanding balance under this note was $0 and $0, respectively.
On
July 7, 2016, SWC received a loan from an employee. The amount of the loan bore no interest and amortized on a monthly basis over
the life of the loan. As of June 30, 2020 and 2019, the balance of the loan were $30,000 and $30,000, respectively.
25.
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.
As
of June 30, 2020 and 2019, the Company had balance of $101,577 and $100,000 share to be issued.
26.
Equity transactions
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 increased the total authorized shares to 10,010,000,000
– 10,000,000,000 shall be designated common stock, par $0.001 per share and 10,000,000 shares shall be designated as preferred
stock, par value $0.001 per share.
During
the year ended June 30, 2018, the Company issued 1,171,429 shares of common stock for cash in total amount of $82,000.
During
the year ended June 30, 2018, the Company issued 4,736,842 shares of common stock for services in total amount of $180,000.
During
the year ended June 30, 2018, the Company issued 13,492,560 shares of common stock to settle the old debt in total amount of $306,810.
During
the year ended June 30, 2019, the Company issued 8,658,685 shares of common stock to settle the old debt in total amount of $665,918.
During
the year ended June 30, 2019, the Company issued 121,332,262 shares of common stock to convert the convertible notes in total
amount of $2,783,237.
During
the year ended June 30, 2019, the Company issued 14,842,857 shares of common stock for cash in total amount of $390,000.
During
the year ended June 30, 2019, the Company issued 96,639,563 shares of common stock for services in total amount of $6,660,643.
During
the year ended June 30, 2019, the Company (buyer) signed a letter of intent (LOI) regarding a potential acquisition of all the
outstanding capital stock, assets and assumption of liabilities of a company (seller). The Company issued 10,000,000 shares of
common stock as the stock compensations upon the signing of the LOI in total amount of $1,175,000. The share is non-refundable
and vested immediately, but was issued on a restricted basis with a restrictive legend and will be subject to normal restrictions
imposed by the financial industry and governmental agencies.
During
the year ended June 30, 2019, the Company issued 200,000,000 shares of common stock as deposit for acquisition of BZRTH with a
total value of $18,000,000. See Note 4 for details.
During
the year ended June 30, 2019, the Company issued 2,000,000 shares of Series A preferred stock to multiple investors for EB-5 project
to be issued in prior years.
As
of June 30, 2019, the Company had 697,608,570 shares of its common stock issued and outstanding and 2,000,000 shares of its Series
A preferred stock issued and outstanding.
During
the year ended June 30, 2020, the Company issued 138,461,538 shares of common stock for cash in total amount of $690,287.
During
the year ended June 30, 2020, the Company issued 1,077,643,486 shares of common stock to convert the convertible notes in total
amount of $1,959,527.
During
the year ended June 30, 2020, the Company issued 28,381,818 shares of common stock for warrant exercise in total fair value of
$690,287.
During
the year ended June 30, 2020, the Company issued 1,500,000 shares of common stock for service in total fair value of $81,200.
During
the year ended June 30, 2020, the Company issued 19,181,818 shares of common stock to settle the old debt in total fair value
of $290,455.
During
the year ended June 30, 2020, the Company issued 249,373,817 shares of common stock for acquisition of BZRTH in total fair value
of $3,566,046. The shares were cancelled pursuant to the rescission on January 15, 2020.
During
the year ended June 30, 2020, the Company issued 750,001 shares of preferred stock for acquisition of BZRTH in total fair value
of $10,725,014. The shares of preferred stock were cancelled pursuant to the rescission on January 15, 2020.
During
the year ended June 30, 2020, the Company issued 415,000 shares of series B preferred stock for award to employee bonus in total
fair value of $5,934,500.
During
the year ended June 30, 2020, the Company issued 1,126,500 shares of series B preferred stock for award to officer’s compensation
in total fair value of $2,928,900.
On
April 17, 2020, the Company entered into a Series B Waiver Agreement (the “Waiver Agreement”) with its chief executive
officer and corporate chairman of its board of directors, Jimmy Chan (“Chan”) relating to Chan’s ownership of
One Million Five Hundred Thousand (1,500,000) of Series B Convertible Preferred Stock. Under the terms of the Waiver Agreement,
Chan waives his rights (a) to the conversion rights granted to him in the Series B Convertible Preferred Stock and (b) the rights
to proceeds in the event of any liquidation, dissolution or winding up as may be provided in the Certificate of Incorporation
pertaining to said Series B Preferred Stock, if any. In the event that there is a merger or consolidation (other than one in which
stockholder of the Company own a majority by voting power of the outstanding shares of the surviving or acquiring corporation)
or a sale, lease, transfer, exclusive license or other disposition of all or substantially all of the assets of the Company, this
event will be treated as a liquidation event. The Series B Convertible Preferred Stock continues to vote or have the right to
vote, together with the Common Stock as if it were on an as-converted basis, and not as a separate class, subject to any adjustments
for stock dividends, splits, combinations and similar events.
As
of June 30, 2020, the Company had 1,763,277,230 shares of its common stock issued and outstanding.
As
of June 30, 2020, the Company had 3,541,500 shares of its Series B preferred stock issued and outstanding.
27.
Commitments and Contingencies
On
February 23, 2018 the Company entered into lease agreement for a new office space as part of the plan to expand operation, the
lease is set to commence Commencing March 1, 2018. The term of the lease is for a (5) Five Years with 1 month free on the 1st year
of the term. The monthly rent on the 1st year will be $11,770 with a 3% increase for each subsequent year. Total commitment
for the full term of the lease will be $737,367. As of the date of this filing, this property became the headquarter of the company.
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.
|
For The Year Ended
|
|
|
|
|
June 30, 2020
|
|
|
|
|
Lease Cost
|
|
|
|
|
|
Operating lease cost (included in general and administration in the Company’s unaudited condensed statement of operations)
|
|
$
|
149,976
|
|
|
|
|
|
|
|
|
Other Information
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities for the year ended June 30, 2020
|
|
$
|
108,073
|
|
|
Remaining lease term – operating leases (in years)
|
|
|
2.67
|
|
|
Average discount rate – operating leases
|
|
|
10
|
%
|
|
The supplemental balance sheet information related to leases for the periods are as follows:
|
|
|
|
|
|
Operating leases
|
|
|
|
|
|
Right-of-use assets
|
|
$
|
1,105,755
|
|
|
Total operating lease assets
|
|
$
|
1,105,755
|
|
|
|
|
|
|
|
|
Short-term operating lease liabilities
|
|
$
|
120,645
|
|
|
Long-term operating lease liabilities
|
|
$
|
1,019,369
|
|
|
Total operating lease liabilities
|
|
$
|
1,140,014
|
|
|
|
|
|
|
|
|
Maturities of the Company’s lease liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Period ending June 30,
|
|
|
Operating
|
|
|
|
|
|
Lease
|
|
|
2021
|
|
|
370,971
|
|
|
2022
|
|
|
375,515
|
|
|
2023
|
|
|
315,051
|
|
|
2024
|
|
|
156,267
|
|
|
2025
|
|
|
130,222
|
|
|
Total lease payments
|
|
|
1,348,026
|
|
|
|
|
|
|
|
|
Less: Imputed interest/present value discount
|
|
|
(208,012
|
)
|
|
Present value of lease liabilities
|
|
$
|
1,140,014
|
|
28.
Income Tax
The
deferred tax asset as of June 30, 2020 and 2019 consisted of the following:
|
|
|
2020
|
|
|
2019
|
|
|
Net Operating Loss Carryforwards
|
|
$
|
12,028,883
|
|
|
$
|
11,909,744
|
|
|
Less Valuation Allowance
|
|
|
(12,028,883
|
)
|
|
|
(11,909,744
|
)
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Management
provided a deferred tax asset valuation allowance equal to the potential benefit due to the Company’s loss. When the Company
demonstrates the ability to generate taxable income, management will re-evaluate the allowance.
As
of June 30, 2020, the Company has net operating loss carryforward of $56,139,045 which is available to offset future taxable income
that expires by year 2036.
TCJA
modified net operating loss (NOL) rules. For most taxpayers, NOLs arising in tax years ending after 2017 can only be carried forward.
Exceptions apply to certain farming losses and NOLs of insurance companies other than a life insurance company.
For
losses arising in taxable years beginning after Dec. 31, 2017, the new law limits the NOL deduction to 80% of taxable income.
Reconciliation
between the provision for income taxes and the expected tax benefit using the federal statutory rate of 21% for 2020 and 2018
is as follows:
|
|
|
2020
|
|
|
2019
|
|
|
US federal statutory income tax rate
|
|
|
(21
|
)%
|
|
|
(21
|
)%
|
|
State tax – net of benefit
|
|
|
(7
|
)%
|
|
|
(7
|
)%
|
|
Non-deductible expenses, net of federal benefit
|
|
|
7
|
%
|
|
|
7
|
%
|
|
Increase in valuation allowance
|
|
|
21
|
%
|
|
|
21
|
%
|
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
29.
Subsequent Events
Convertible
Notes
On
July 16, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of $260,700. The
note is due 365 days and bear an interest rate of 8%. The conversion price for the note is 60% of the lowest price of the common
stock traded in the 20 trading days prior to the conversion date.
On
July 21, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of $200,200. The
note is due 365 days and bear an interest rate of 8%. The conversion price for the note is 60% of the lowest price of the common
stock traded in the 20 trading days prior to the conversion date.
On
September 9, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of $110,000.
The note is due on March 10, 2021 and bear an interest rate of 12%. The conversion price for the note is a fixed price of $0.01
per share. After the 6 month anniversary of this Note, the Conversion Price shall be equal to the lower of the Fixed Price or
65% of the lowest trading price of the Common Stock as reported on the National Quotations Bureau OTC Marketplace exchange which
the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future (“Exchange”),
for the twenty prior trading days including the day upon which a Notice of Conversion is received by the Company or its transfer
agent.
On
September 10, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of $227,700.
The note is due 365 days and bear an interest rate of 8%. The conversion price for the note is 60% of the lowest price of the
common stock traded in the 20 trading days prior to the conversion date.
On
September 24, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of $212,300.
The note is due on March 25, 2021 and bear an interest rate of 12%. The conversion price for the note is a fixed price of $0.01
per share. After the 6 month anniversary of this Note, the Conversion Price shall be equal to the lower of the Fixed Price or
65% of the lowest trading price of the Common Stock as reported on the National Quotations Bureau OTC Marketplace exchange which
the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future (“Exchange”),
for the twenty prior trading days including the day upon which a Notice of Conversion is received by the Company or its transfer
agent.
On
October 8, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of $231,000.
The note is due on April 9, 2021 and bear an interest rate of 12%. The conversion price for the note is a fixed price of $0.01
per share. After the 6 month anniversary of this Note, the Conversion Price shall be equal to the lower of the Fixed Price or
65% of the lowest trading price of the Common Stock as reported on the National Quotations Bureau OTC Marketplace exchange which
the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future (“Exchange”),
for the twenty prior trading days including the day upon which a Notice of Conversion is received by the Company or its transfer
agent.
Convertible
note conversions
Subsequent
to October 11, 2020, there were multiple accredited investors converted approx. $1,301,700 of the convertible notes with $64,532
accrued interest into 1,081,411,606 shares of the Company’s common stocks.
Lease
On
September 28, 2020, the Company and LMK Capital LLC (“LMK”) entered into a Residential Lease (the “Lease”)
pursuant to which LMK agreed to lease to the Company five acres located in Northern California and owned by LMK (the “Property”).
Jimmy Chan, Chairman of the Board, Chief Executive Officer, Chief Financial Officer and majority stockholder of the Company, is
majority owner of LMK. The term of the Lease begins on October 1, 2020 and ends on September 30, 2023; provided, however, that
at the end of the term, the Lease will continue on a month-to-month basis. in the Pursuant to the terms of the Lease, the Company
will pay rent in the amount of $20,000 per month. The Lease also provides that the Company will pay a $250,000 security deposit
to LMK. Pursuant to the terms of the Lease, the monthly rent will increase to $0.50 per sq. ft. on cultivation area upon approval
of certificate of occupancy with a 3% increase each subsequent year.
Sugarmade,
Inc.
Best
Efforts Offering of
Up
to 3,000,000,000 Shares of Common Stock
OFFERING
CIRCULAR
February
24, 2021
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