Notes to Unaudited Condensed Consolidated
Financial Statements
September 30, 2019
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 the end of the reporting period,
September 30, 2019, 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.
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.
During October 2018, the Company signed
a Letter of Intent to acquire Sky Unlimited, LLC doing business as Athena United, a Southern California-based, supplier of
hydroponic cultivation supplies to the wholesale sector and to large commercial cultivators. Athena United operates its
ecommerce website at www.AthenaUnited.com. Under the terms of the Agreement, which contains both binding and non-binding
elements, Sugarmade will acquire all of the outstanding capital stock and the business operations for a combination of cash
and common shares of Sugarmade. Athena United, and its associated operations, is believed to be one of the larger operators
in this market sector and is producing revenues of approximately $40 million per year, is profitable, and cash flow positive.
Should the Company be successful in its acquisition efforts, the operation would be integrated under the Sugarmade corporate
umbrella with Sugarmade assuming all operations and recognizing all revenues and profits.
Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated
Financial Statements
September 30, 2019
|
1.
|
Nature
of Business (continued)
|
During January
of 2019, the Company announced its intention to acquire a retail location of Washington State-based Hydro4Less. The operation is
expected to produce approximately $5 million in revenues and to be profitable during calendar 2019. Additionally, via the pending
transaction, Sugarmade will gain an option to purchase two additional Hydro4Less retail operations, which are currently producing
in excess of $20 million annually. Should all three Hydro4Less acquisitions close, Sugarmade will increase its annual revenues
by approximately $25 million per year.
|
2.
|
Summary of Significant Accounting
|
Policies Basis of presentation
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
and the rules and regulations of the United States Securities and Exchange Commission for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes
necessary for a comprehensive presentation of financial position, results of operations, or cash flows. It is management’s
opinion however, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary
for a fair financial statement presentation.
These interim condensed consolidated financial
statements should be read in conjunction with our Company’s Annual Report on Form 10-K for the year ended June 30, 2019,
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 year ended June 30, 2019. The interim results for the period
ended September 30, 2019 are not necessarily indicative of the results for the full fiscal year.
Principles of consolidation
The condensed consolidated unaudited financial
statements include the accounts of our Company and its wholly-owned subsidiaries, SWC Group Inc. All significant intercompany transactions
and balances have been eliminated in consolidation.
Going concern
The Company sustained continued losses from
operations during the three months ended September 30, 2019 and for the fiscal year ended June 30, 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.
Our condensed consolidated financial statements
have been prepared assuming that we will continue as a going concern. Such assumption contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. These condensed consolidated financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications
of liabilities that may result should the Company be unable to continue as a going concern.
Management is endeavoring to increase revenue-generating
operations. While priority is on generating cash from operations through the sale of the Company’s products, management is
also seeking to raise additional working capital through various financing sources, including the sale of the Company’s equity
and/or debt securities, which may not be available on commercially reasonable terms to our Company, or which may not be available
at all. If such financing is not available on satisfactory terms, we may be unable to continue our business as desired and our
operating results will be adversely affected. In addition, any financing arrangement may have potentially adverse effects on us
and/or our stockholders. Debt financing (if available
and undertaken) will increase expenses, must be repaid regardless of operating results and may involve restrictions limiting our
operating flexibility. If we issue equity securities to raise additional funds, the percentage ownership of our existing stockholders
will be reduced and the new equity securities may have rights, preferences or privileges senior to those of the current holders
of our common stock.
Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated
Financial Statements
September 30, 2019
|
2.
|
Summary
of Significant Accounting (continued)
|
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.
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 $93,121 as of September 30, 2019 and of $218,145
as of June 30, 2019.
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.
Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated
Financial Statements
September 30, 2019
|
2.
|
Summary
of Significant Accounting (continued)
|
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, 2019 and June 30, 2019, the balance for the inventory totaled $383,136 and $356,285, respectively. Obsolescence
reserve at September 30, 2019 and June 30, 2019 were $8,397 and $120,486, respectively.
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 equipment
|
|
5 years
|
Furniture and equipment
|
|
7 years
|
Vehicles
|
|
7 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, 2019 and 2018.
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, 2019, 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, 2019 and 2018,
respectively.
Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated
Financial Statements
September 30, 2019
|
2.
|
Summary
of Significant Accounting (continued)
|
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. After the adoption, $455,590 of operating lease right-of-use asset and $465,826 of operating lease liabilities
were retroactively reflected to June 30, 2019 financial statements, and $444,229 of operating lease right-of-use asset and $455,591
of
operating lease liabilities were retroactively reflected to September 30, 2019 financial statements.
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
Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated
Financial Statements
September 30, 2019
|
2.
|
Summary
of Significant Accounting (continued)
|
jurisdictions where we are required to file
income tax returns, as well as open tax years in these jurisdictions. We have identified the U.S. federal and California as our
“major” tax jurisdictions and generally, we remain subject to Internal Revenue Service examination of our 2013 U.S.
federal income tax returns. However, we have certain tax attribute carryforwards, which will remain subject to review and adjustment
by the relevant tax authorities until the statute of limitations closes with respect to the year in which such attributes are utilized.
We believe that our income tax filing positions
and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material change to our financial
position. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740. In addition, we did
not record a cumulative effect adjustment related to the adoption of ASC 740. Our policy for recording interest and penalties associated
with income-based tax audits is to record such items as a component of income taxes. We have no interest or penalties as of September
30, 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 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, 2019.
Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated
Financial Statements
September 30, 2019
|
2.
|
Summary
of Significant Accounting (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.
FASB ASC Topic 280 has no effect on the Company’s financial
statements as substantially all of its operations are conducted in one industry segment – paper and paper-based products
such as paper cups, cup lids, food containers, etc.
New
accounting pronouncements
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 adopted this ASU on the consolidated financial statements in the quarter ended September 30, 2019.
Customers
For the three months ended September 30, 2019
and 2018, our Company earned net revenues of $753,974 and $1,445,010 respectively. The vast majority of these revenues for the
period ending September 30, 2019 were derived from a large number of customers, whereas the vast majority of these revenues for
the period ending September 30, 2018 were derived from a limited number of customers. No customers accounted for over 10% of the
Company’s total revenues for the period ended September 30, 2019.
Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated
Financial Statements
September 30, 2019
3.
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Concentration (continued)
|
Suppliers
For the three months ended September 30, 2019,
we purchased products for sale 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 38.38%
and 22.36% of the Company's total inventory purchase for the three months ended September 30, 2019, respectively.
|
4.
|
Equity Transaction - Exclusive License Rights and Acquisition
|
On December 13, 2017, we 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.
Under the terms of the Master Marketing Agreement,
all products procured, developed and imported by BizRight will be sold by the Company. The expected term of the exclusive license
rights is 20 years. BizRight and its owners will be compensated via a combination of cash and common shares in Sugarmade. Effective
the contract date, Bizright will be compensated Two hundred million (200,000,000) common shares. Sugarmade will compensate BizRight
and its owners six million dollars ($6,000,000) in cash. The amount due will be divided over 3 payments equally and are contingent
upon the filing of the S-1 and significant funding.
We began recognizing revenues under this marketing
agreement during April 2018 and stopped recognizing the revenue early 2019 upon exercise of the purchase option under the agreement.
As of June 30, 2019, BizRight had assigned the marketing agreement to its operating entity, BZRTH and the Company had exercised
the option to purchase 100% equity ownership of BZRTH.
As of September 30, 2019 and June 30, 2019,
cash of $870,000 and 200 million shares of the Company’s common stock had been paid and issued in connection with the acquisition.
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 date of this filing, there were no legal claims currently
pending or, to our knowledge, threatened against our 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, except as follows:
-
On December 11, 2013, the Company
was served with a complaint from two Convertible Note Holders and investors in the Company, Lovitt & Hannan, Inc. Salary Deferral Plan FBO J. Thomas Hannan, Attorney at Law 401K Plan and Trust, and Kevin M. Kearney.
The Company's former CEO, Scott Lantz, was also named in the suit. On February 21, 2017, the Company signed a settlement agreement
with the plaintiffs. Under the terms of the settlement agreement, the Company agreed to pay the plaintiffs $307,000 to settle
all claims against the Company, which included the payoff of the two notes outstanding within one (1) week. Upon receipt of all
payments, plaintiffs will surrender for cancellation 230,000 of the Company's shares within ten (10) days. The parties agreed
that all claims against the Company would be satisfied through such payments and that the matter would be fully resolved. As of
June 30, 2018, third-parties had purchased two (2) notes of approximately $80,000, reducing the Company's exposure by $80,000. As of the date of this filing the balance
for accrued legal settlement for Hannan vs Sugarmade has been reduced to $227,000, plus interest until the date of complete payoff.
-
On
August 13, 2019, a lawsuit was filed against the Company for unpaid legal fees of $50,000.00, which originates from the Company’s
former chairman and CEO. The Company was served in or around September 2019. The Company has filed a response to the
underlying complaint to preserve its rights to defend the lawsuit should it become necessary. However, the Company plans to amicably
resolve this matter and anticipates that it will be settled and dismissed.
There can be no assurances the ultimate liability
relative to these lawsuits will not exceed what is outlined above.
Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated
Financial Statements
September 30, 2019
As of September 30, 2019 and June 30, 2019,
other current assets consisted of the following:
|
|
For the periods ended
|
|
|
September 30, 2019
|
|
June 30, 2019
|
Prepaid Deposit
|
|
$
|
2,241,000
|
|
|
$
|
2,145,000
|
|
Prepaid Inventory
|
|
|
196,431
|
|
|
|
172,045
|
|
Employees Advance
|
|
|
|
|
|
|
16,052
|
|
Prepaid Expenses
|
|
|
19,432
|
|
|
|
358,702
|
|
Other
|
|
|
6,016
|
|
|
|
28,075
|
|
Total:
|
|
$
|
2,462,879
|
|
|
$
|
2,719,875
|
|
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 periods
ended September 30, 2019 and June 30, 2019, respectively.
8.
|
Property
and Equipment, net
|
As of September 30, 2019 and June 30, 2019,
the property, plant and equipment, net of accumulated depreciation expenses were $453,443 and $476,585, respectively.
For the three months ended September 30, 2019
and 2018, depreciation expenses amounted to $23,142 and $11,804, 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 three months ended September 30, 2019 and 2018.
Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated
Financial Statements
September 30, 2019
As of September 30, 2019 and June 30, 2019,
the balance owing on convertible notes, net of debt discount, with terms as described below was $1,332,410
and $1,046,909, respectively.
Convertible notes issued as of September
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 September 30, 2019, 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, 2019, 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, 2019, 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 September 30, 2019, the remaining balance of note was $60,751.
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 September 30, 2019, the original principal
balance has been fully converted, the remaining default charge balance of the note was $250,000, and the new convertible note balance
was $200,000.
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 September 30, 2019, the principal
balance of 245,000 has been converted into the Company’s common stock, and the remaining balance of the note was $22,500
as of September 30, 2019.
Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated
Financial Statements
September 30, 2019
9.
|
Convertible
Notes (continued)
|
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.
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.
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.
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.
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 September 30, 2019, 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 September 30, 2019, 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 September 30, 2019, 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 September 30, 2019, 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 September 30, 2019, 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 September 30, 2019, 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.
Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated
Financial Statements
September 30, 2019
9.
|
Convertible
Notes (continued)
|
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated
Financial Statements
September 30, 2019
9.
|
Convertible
Notes (continued)
|
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.
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.
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.
In connection with the convertible debt, debt
discount balance as of September 30, 2019 and June 30, 2019 were $1,625,841 and $1,189,341, respectively, and were being amortized and recorded
as interest expenses over the term of the convertible debt.
10.
|
Derivative liabilities
|
The derivative liability is derived from the
conversion features in note 9 and stock warrant in note 11. All were valued using the Binomial option pricing model using the assumptions
detailed below. As of September 30, 2019 and June 30, 2019, the derivative liability was $3,203,751 and $2,991,953, respectively.
The Company recorded $1,022,878 and $1,641,457 loss from changes in derivative liability during the three
months ended September 30, 2019 and 2018, respectively. The Binomial Option Price Model with the following assumption inputs:
|
|
September 30, 2019
|
Annual dividend yield
|
|
|
—
|
|
Expected life (years)
|
|
|
0.5-1.00
|
|
Risk-free interest rate
|
|
|
1.74-2.08
|
%
|
Expected volatility
|
|
|
113-151
|
%
|
|
|
September 30, 2018
|
Annual dividend yield
|
|
|
—
|
|
Expected life (years)
|
|
|
0.5-1.00
|
|
Risk-free interest rate
|
|
|
2.15-2.37
|
%
|
Expected volatility
|
|
|
87-123
|
%
|
Fair value of the derivative is summarized as below:
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)
|
Balance, September 30, 2018
|
$3,203,751
|
Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated
Financial Statements
September 30, 2019
On May 17, 2017, the Company entered a promissory
note with an accredited 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. 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 an exercise price of $0.15 per share
and have cashless exercise option. The fair value of the warrants at the grant date was $40,400. 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.
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 September 30, 2019 and June 30, 2019, the fair value of the warrant liability
was $15,663 and $19,103, respectively.
As of September 30, 2019 and June 30, 2019,
the total fair value of the warrant liability was $15,663 and $24,658, respectively.
12.
|
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, 2019 and June 30, 2019, the loan principal balance
was $25,982. As of September 30, 2019, the note is in default.
13.
|
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 September 30, 2019 and June 30, 2019, this note
had a balance of $18,000.
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 September 30, 2019 and June 30, 2019, this note had a balance of $0 and $20,000,
respectively.
As of September 30, 2019 and June 30, 2019,
the Company had an outstanding balance of notes payable due to related parties of $18,000 and $38,000, respectively.
On July 7, 2016, SWC received a loan in total
amount of $30,000 from an employee. The amount of the loan bear no interest and due on demand. As of September 30, 2019 and June
30, 2019, the balance of the loan due to related party were $30,000 and $30,000, respectively.
From
time to time, SWC would receive short-term loans from company former director for its working capital needs.
Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated
Financial Statements
September 30, 2019
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, 2019 and June 30, 2019, the note was in default and the outstanding
balance under this note was $63,924 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 September 30, 2019 and June 30, 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 September 30, 2019 and June 30, 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 September 30, 2019 and June 30, 2019, the Company has
an outstanding balance of $17,834 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 September 30, 2019 and
June 30, 2019, the outstanding balance under this loan were $29,243 and $29,243, respectively.
As of June 30, 2019 and 2018, the Company had
an outstanding loan balance of $209,058 and $214,585, respectively.
The Company is authorized to issue 1,990,000,000 shares of $.001
par value common stock and 10,000,000 shares of $.001 par value preferred stock.
During the three months ended September 30,
2019, the Company issued 1,000,000 shares of common stock to settle the old liability to be issued in total amount of $29,000.
During the three months ended September 30,
2019, the Company issued 71,915,557 shares of common stock for debt conversions in total amount of $547,833.
During the three months ended September 30,
2019, the Company issued 11,348,591 shares of common stock for cash in total amount of $100,000.
During the three months ended September 30,
2019, the Company issued 28,381,818 shares of common stock for warrant exercise in total amount of $14,132.
As of September 30, 2019 and June 30, 2019,
the Company had 2,000,000 share of its preferred stock, 810,254,536 and 697,608,570 shares of its common stock, respectively, issued
and outstanding.
Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated
Financial Statements
September 30, 2019
16.
|
Shares to be issued – liability
|
During the year ended June 30, 2019, the Company
had entered into multiple private placement agreements and had shares to be issued under liability in total amount of $100,000.
During the three months ended September 30,
2019, the Company had entered into a private placement agreement and had increased shares to be issued for total amount of $96,000.
During the three months ended September 30,
2019, the Company had entered into an employee compensation plan and had increased shares to be issued for total amount of $12,000.
As of September 30, 2019 and June 30, 2019,
the Company had balance of $208,000 and $100,000 share to be issued.
17.
|
Shares to be issued –equity
|
As of the year ended June 30, 2019, the Company
had potential shares to be issued under common stock in total amount of $29,000.
During the three months ended September 30,
2019, the Company issued the $29,000 share to be issued – equity by 1,000,000 shares of the Company’s common stock.
As of September 30, 2019 and June 30, 2019,
the Company had total potential shares to be issued under common stock and preferred stock in total amount of $0 and $29,000, respectively.
18.
|
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.
Three Months Ended
|
|
|
September 30, 2019
|
|
Lease Cost
|
|
|
|
Operating lease cost (included in general and administration in the Company’s unaudited condensed statement of operations)
|
|
$
|
37,494
|
|
|
|
|
Other Information
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities for the quarter ended September 30, 2019
|
|
$
|
36,369
|
Remaining lease term – operating leases (in years)
|
|
|
3.42
|
Average discount rate – operating leases
|
|
|
10%
|
The supplemental balance sheet information related to leases for the period is as follows:
|
|
|
|
Operating leases
|
|
|
|
Right-of-use assets
|
|
$
|
444,229
|
Total operating lease assets
|
|
$
|
444,229
|
|
|
|
|
Short-term operating lease liabilities
|
|
$
|
108,073
|
Long-term operating lease liabilities
|
|
$
|
347,518
|
Total operating lease liabilities
|
|
$
|
455,590
|
|
|
|
|
Maturities of the Company’s lease liabilities are as follows:
|
|
|
|
|
|
|
|
Period ending June 30,
|
|
Operating
|
Lease
|
2020
|
|
|
$ 146,932
|
2021
|
|
|
151,344
|
2022
|
|
|
155,888
|
2023
|
|
|
105,984
|
Total lease payments
|
|
|
560,148
|
|
|
|
|
Less: Imputed interest/present value discount
|
|
|
104,558
|
Present value of lease liabilities
|
|
|
$ 455,590
|
On October 17, 2019, the Company issued 3,576,752
shares of the Company’s common stock for debt conversions in total amount of $20,000.
On October 23, 2019, the Company issued 14,542,358
shares of the Company’s common stock for debt conversions in total amount of $80,000.
On October 30, 2019, the Company
closed the previously announced acquisition of BZRTH, Inc., a Nevada corporation (“BZRTH”) pursuant to a Stock Exchange
Agreement. BZRTH is headquartered in Irwindale, California and is a leading marketer and manufacturer of hydroponic growth supplies
and related products to distributors and retailers. The total consideration to be paid by the Company to acquire BZRTH is 650,000,000
shares of the Company’s common stock, 3,500,000 shares of Series B convertible preferred stock, $870,000 in cash, and 5%
promissory notes in the sum of $7,130,000.00 due on or before October 31, 2021 to the BZRTH shareholders. $870,000 of cash had
been paid and 200,000,000 shares of the Company’s common stock had been issued as deposit pursuant to a master marketing
agreement of December 13, 2017.
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
N/A