Item
1.01 Entry into a Material Definitive Agreement.
On
April 28, 2022, Lemon Glow Company, Inc. (“Lemon Glow”), a wholly owned subsidiary of Sugarmade, Inc. (the “Company”)
and Cannabis Global, Inc. (“Cannabis Global”) entered into a Cultivation and Supply Agreement (the “Agreement”).
Cannabis Global owns a majority stake of Natural Plant Extract of California, Inc. which operates a licensed cannabis manufacturing and
distribution operation in Lynwood, California.
The
Agreement provides that during the Spring 2022 cannabis cultivation season, Lemon Glow will outsource the cultivation of cannabis to
licensed growers in Lake County, California; oversee and co-manage the cultivation; and sell cannabis to Cannabis Global conforming to
its specifications. Lemon Glow will cultivate only the cannabis chemovars (commonly called “strains”) approved by Cannabis
Global. The cultivation will be conducted in accordance with regulations adopted by California’s Department of Cannabis Control;
Lake County, California; and other state and local governmental entities that may have legal jurisdiction over the cultivation.
Under
the terms of the Agreement, Lemon Glow will present a cultivation, harvest, and processing plan to Cannabis Global by May 15, 2022 (the
“Plan”). Lemon Glow will begin executing the Plan as soon as practicable thereafter with the harvest expected to occur mid-October
2022 (the “Harvest”). The Harvest will be stored as “Fresh Frozen” cannabis. Fresh Frozen cannabis is immediately
flash frozen upon harvest, instead of the traditional process of drying and curing cannabis.
Under
the terms of the Agreement, Cannabis Global is obligated to purchase the Harvest, up to 25,000 pounds (the “Target Yield”).
Cannabis Global has an option to increase the Target Yield for subsequent growing seasons by 25% within 45 days of the current Harvest.
Cannabis Global is required to pay Lemon Glow $28.00 per pound for the Fresh Frozen cannabis, up to the Target Yield. If the Target Yield
is achieved, the aggregate purchase price would be $700,000 (the “Purchase Price”). The Purchase Price shall be paid as a
series of cash payments and a convertible promissory note, as more fully described below.
The
cash portion of the Purchase Price will be paid in cash as five $40,000 monthly installments due on the 15th of each month, commencing
May 15, 2022, and a final balloon payment of up to $100,000 on October 15, 2022, depending on the size of the Harvest.
The
other portion of the Purchase Price is a $400,000 convertible promissory note due April 28, 2023, bearing 8% interest per year was irrevocably
issued to Lemon Glow on April 28, 2022 (the “Convertible Note”). At any time after 90 days of issuance, the Convertible Note
is convertible by Lemon Glow into Cannabis Global common stock at 75% of the 10-day average closing price prior to conversion (the “Discount
Price”). Interest paid on the Convertible Note is also convertible by Lemon Glow into Cannabis Global common stock at the Discount
Price. Lemon Glow may not convert any amount due under the Convertible Note if, after giving effect to such conversion, Lemon Glow would
beneficially own in excess of 4.99% of Cannabis Global’s outstanding common stock; provided, however, that Lemon Glow may waive
this limitation on 61 days advanced notice.
Events
of default include, but are not limited to, failure to pay principal or
interest; failure of Cannabis Global common stock to remain listed for trading on OTC Markets or a principal U.S. national securities
exchange for a period of five trading days; notice to Lemon Glow that Cannabis Global cannot or will refuse to convert principal or interest
into common stock; failure by Cannabis Global to convert principal or interest into common stock not remedied for three days; any default
on other indebtedness in excess of $100,000; any default causing acceleration under another Cannabis Global debt obligation; the occurrence
of certain bankruptcy and insolvency events; and the failure of Cannabis Global to instruct the transfer agent to remove restrictive
legends when converted common stock becomes eligible for resale under Rule 144 of the Securities Act of 1933, as amended.
Upon
an event of default, Lemon Glow may declare the entire unpaid principal and interest due to be payable immediately; convert the unpaid
principal and interest due at the Conversion Price; or exercise such other rights as Lemon Glow may have under the Convertible Note,
the Agreement, other transaction documents or applicable law. Lemon Glow may transfer, sell, pledge, hypothecate or otherwise grant a
security interest in the Convertible Note, subject to certain specified restrictions. The choice of law provision provides for Nevada
law to govern the Convertible Note.
Ownership
of harvested cannabis will transfer to Cannabis Global upon receipt of the
cannabis or upon Lemon Glow notifying Cannabis Global that it has packaged the Target Yield (the “Completion Notice”). Upon
receipt of the Completion Notice, Cannabis Global has 30 days to pick up the Target Yield. If Cannabis Global has not taken possession
of the cannabis within 30 days, Cannabis Global will become responsible for the ongoing cost of storage, including utilities and labor.
Cannabis Global is obligated to use its best efforts to take possession of the entire Harvest within 180 days. After the 180-day period,
any remaining amounts of the Harvest not picked up by Cannabis Global are considered abandoned by Cannabis Global and will become Lemon
Glow’s property.
Under
the terms of the Agreement, Lemon Glow warrants it shall have good title, right and authority to sell all of the cannabis, free and clear
of all liens, encumbrances and restrictions of any kind. The parties agree to maintain in confidence all matters and activities relating
to or undertaken pursuant to the Agreement. The Agreement contains a cross-indemnification and hold harmless provision, which includes
attorney fees. The Agreement is non-assignable without mutual consent. Upon the expiration of a 15-day notice period commencing upon
receipt of a notice of default which remains uncured, the non-defaulting party may immediately terminate the Agreement, seek equitable
relief and damages, or cure such default at the defaulting party’s expense. The Agreement also includes an appendix forecasting
future cannabis harvests. The forecasts are not legally binding upon the parties, but the parties have agreed in principle to use them
when entering into renewals or new similar agreements for subsequent growing seasons. The choice of law provision provides for California
law to govern the Agreement.
The
foregoing summaries of the Cultivation and Supply Agreement and the Convertible Note are qualified in their entireties by reference
to the full agreement and convertible promissory note, which are attached hereto as Exhibit 10.1 and Exhibit 10.2, respectively, and
incorporated by reference herein.